Elastoplast to skin graft

Blue Chip: Smith & Nephew is trying to revamp its 'dull but worthy' image by entering the futuristic biotech market

Smith & Nephew, the Elastoplast to Simple Soap medical products group, has been rather bypassed in the return to favour of health and pharmaceuticals stocks over the past year or so. Although the shares are up 29 per cent since the beginning of 1995, they have underperformed both the healthcare and pharmaceutical sectors and only barely outperformed the growth in the general market.

But all that could be about to change. This week Smith & Nephew's shares caught a whiff of the boom in fledgling biotech companies when it signed a deal with Advanced Tissue Sciences, a California-based bio-tech group which is developing what is claimed to be world's first "off the shelf" artificial skin. Since the announcement of the link-up, the share price has risen 6 per cent to 196p as the market has woken up to the possibilities of the deal.

That was an eye-catching transaction - not just because the prime source of the raw material is babies' foreskins, one of which can provide the basis for enough skin to cover six football pitches. The skin replacement, trade-named Dermagraft, is initially targeted at the $2.5bn market for the treatment of chronic diabetic foot ulcers.

Dermagraft could provide relief to a substantial part of that market. After eight weeks, the skin is said to be indistinguishable from the original, providing a more cost-effective and successful substitute for existing methods of treatment. Smith & Nephew chief executive John Robinson believes sales could be $500m, but cautiously suggests, based on past experience, that it could take 10 years to get there.

Even so, Stephen Putnam of the group's brokers Kleinwort Benson suggests sales could be breaking through the pounds 100m mark by the year 2000, with margins well over 20 per cent. He believes the potential of Dermagraft could be worth up to an extra 2 per cent to the group's growth rate over time. Smith & Nephew will share the profits with ATS, but its capital payments to the Californian group are limited to a maximum of $70m and even that is dependent on sales targets being achieved.

The Dermagraft deal is just the latest manifestation of Smith & Nephew's attempt to cast off its "dull-but-worthy" image. It follows an earlier development joint venture with ATS, signed nearly two years ago, for artificial cartilage for knee and, possibly, spine injuries. That project involves greater risks. Cartilage is still 10 years away, whereas Dermagraft could be available for use at the end of next year. But the prize is glittering none the less: the knee-injury market alone is worth $1bn.

All this is not just science fiction. Smith & Nephew has already launched an artificial bone material in the US which will initially be used for repairs to the middle ear, but could eventually provide more durable hip joints, opening up a substantial market.

Such moves are helping to change the market's perception of the group. Smith & Nephew is not a drugs company, so apart from speculation last summer when Johnson & Johnson were touted as showing interest, it has not really participated in the frenzy surrounding pharmaceuticals over the past 18 months.

At the same time, many of the group's businesses have been hard hit by the pressure on healthcare budgets which has emerged this decade in reaction to the freewheeling 1980s, when drug companies' sales expanded on the back of apparently limitless expenditure on health. Growth has been further diluted by less hi-tech, "commodity" businesses, including the manufacture of surgeons' gloves. So, while respectable, recent sales growth has been no match for that of the of the big drugs groups which have been less affected by the spending squeeze.

But Mr Robinson has been slowly and determinedly refocusing the group on higher-margin areas where it has strong positions. Last year the group walked away from the last of its pharmaceuticals businesses and also got out of surgeons' gloves. At the same time, acquisitions last year strengthened the group's already powerful position in equipment for keyhole surgery and therapeutic and rehabilitation devices.

Despite these signs, there remains a degree of scepticism. Its record on acquisitions is still coloured by the huge pounds 148m write off it took last year on the disposal of Ioptex, the eye implant business, bought in 1988 just before the market peaked.

If profits hit pounds 190m this year, rising to around pounds 205m in 1997, the forward price/earnings multiple falls from 17 to 16 over the next couple of accounting periods. Given the pressures still surrounding the group, that probably represents fair value.

Smith & Nephew

Share price 197.5p

Prospective p/e* 17

Gross dividend yield 3.8%

Year to 31 July

1993 1994 1995 1996* 1997*

Turnover pounds 949m pounds 965m pounds 1.026bn pounds 1.1bn pounds 1.17bn

Pre-tax profit/(loss) pounds 165m (pounds 5.5m) pounds 177m pounds 190m pounds 205m

Earnings per share 10.6p (4.96p) 10.3p 11.6p 12.5p

Dividend per share 4.91p 5.28p 5.65p 6.05p 6.50p

* Kleinwort Benson Securities forecast

News
Shoppers at Selfridges department store in central London
news

News
Jeremy Paxman has admitted he is a 'one-nation Tory' and complained that Newsnight is made by idealistic '13-year-olds' who foolishly think they can 'change the world'.
peopleFormer Newsnight presenter is being touted for a brand new role
News
Michael Buerk in the I'm A Celebrity jungle 2014
people
Voices
File: David Cameron offers a toast during a State Dinner in his honour March 14, 2012
voicesAnd nobody from Ukip said babies born to migrants should be classed as migrants, says Nigel Farage
PROMOTED VIDEO
Arts and Entertainment
Avatar grossed $2.8bn at the box office after its release in 2009
filmJames Cameron is excited
Arts and Entertainment
Stik on the crane as he completed the mural
art
News
Happy in his hat: Pharrell Williams
people
Arts and Entertainment
Stella Gibson is getting closer to catching her killer
tvReview: It's gripping edge-of-the-seat drama, so a curveball can be forgiven at such a late stage
News
Brazilian football legend Pele pictured in 2011
peopleFans had feared the worst when it was announced the Brazil legand was in a 'special care' unit
News
i100(More than you think)
Sport
Brendan Rodgers seems more stressed than ever before as Liverpool manager
FOOTBALLI like Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
News
ebooksNow available in paperback
News
The Magna Carta
archaeologyContemporary account of historic signing discovered
News
Phyllis Dorothy James on stage during a reading of her book 'Death Comes to Pemberley' last year
peopleJohn Walsh pays tribute to PD James, who died today
Sport
Benjamin Stambouli celebrates his goal for Tottenham last night
FOOTBALL
Life and Style
Dishing it out: the head chef in ‘Ratatouille’
food + drinkShould UK restaurants follow suit?
News
peopleExclusive: Maryum and Hana Ali share their stories of the family man behind the boxing gloves
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Argyll Scott International: Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Argyll Scott International: 2x Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Recruitment Genius: Senior Execution Trader

£30000 - £250000 per annum: Recruitment Genius: A global Rolling Spot FX, Comm...

Citifocus Ltd: ACA - Financial Reporting

£Attractive Package: Citifocus Ltd: Chartered accountant (ACA or CPA), must be...

Day In a Page

Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

Christmas Appeal

Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

Is it always right to try to prolong life?

Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

What does it take for women to get to the top?

Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

Knitting pretty: British Christmas Jumpers

Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

French chefs campaign against bullying

A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

Just what you need on a New Year hangover...

Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
Cuba set to stage its first US musical in 50 years

Cuba to stage first US musical in 50 years

Claire Allfree finds out if the new production of Rent will hit the right note in Havana
Christmas 2014: 10 best educational toys

Learn and play: 10 best educational toys

Of course you want them to have fun, but even better if they can learn at the same time
Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

Paul Scholes column

I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

Lewis Moody: Lancaster has made all the right calls – now England must deliver

So what must the red-rose do differently? They have to take the points on offer 
Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game