Bluechip: S&N seeks a profits graft

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The Independent Online
Smith & Nephew is one of those unsung companies that plods along, quietly making money, but rarely making waves.

However, the City has begun to turn against the healthcare concern, whose products range from Nivea cream and Li-Lets tampons to orthopaedic implants. A year ago it signed an ambitious alliance with Advanced Tissue Sciences, a Californian bio-tech concern which makes artificial skin. There were hopes S&N would reap the benefits of joining the hi-tech pharmaceuticals game.

The shares rose from 180p to 216p by October last year, only to plunge to a two-year low of 163p earlier this month. They have since staggered to 172.5p, but they remain poorly.

Three factors are largely to blame: the rise of sterling, pricing pressure in the US on S&N's hospital business, and the launch costs of Dermagraft, the skin product. Analysts see pre-tax profits falling to pounds 160m this year from pounds 179m in 1996.

Chairman John Robinson has said Dermagraft launch costs will also dent profits - the City expects damage of pounds 8m over the next two years, with the product due on the market later this year.

S&N has sought a way out of the share doldrums. Chief executive Chris O'Donnell is keen on more acquisitions, and has made Roche, the Swiss giant, an offer for its US artificial limb maker DePuy, but has yet to receive a response. He has said he would like to buy US orthopaedic businesses such as Zimmer or quoted groups Stryker and Biomet.

While there may be sector consolidation, can S&N make money for its shareholders through acquisitions? In 1995 it had to write off pounds 148m on the sale of Ioptex, the eye implant business it bought in 1988.

The company has built up envious distribution systems, but efficiency, better margins and profit growth have been uphill struggles since 1993. Dermagraft could be the key. It will be used initially to treat the foot ulcers of chronic diabetics: two million patients worldwide suffer from venous ulcers, so there is a market. Salomon Brothers reckons S&N can make sales of pounds 4m this year, but rising to pounds 70m next year, and pounds 132m by 2000 for an operating profit of pounds 13m. Dermagraft could be the boost S&N needs, but the shares are high enough for now.

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