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

peoplePaper attempts to defend itself
voicesWe desperately need men to be feminists too
Life and Style
food + drink
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
Life and Style
Mike Tyson has led an appalling and sad life, but are we not a country that gives second chances?
peopleFormer boxer 'watched over' crash victim until ambulance arrived
Arts and Entertainment
Geena Davis, founder and chair of the Geena Davis Institute on Gender in Media
Alan Bennett criticised the lack of fairness in British society encapsulated by the private school system
peopleBut he does like Stewart Lee
John Terry, Frank Lampard
footballChelsea captain sends signed shirt to fan whose mum had died
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Rita Ora will replace Kylie Minogue as a judge on The Voice 2015
Life and Style
Life and Style
Alan Turing, who was convicted of gross indecency in 1952, was granted a royal pardon last year
Arts and Entertainment
Sheridan Smith as Cilla Black and Ed Stoppard as her manager Brian Epstein
tvCilla Episode 2 review: Grit under the glamour in part two of biopic series starring Sheridan Smith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

IT Project manager - Web E-commerce

£65000 Per Annum Benefits + bonus: Clearwater People Solutions Ltd: If you are...

Trainee / Experienced Recruitment Consultants

£20000 - £25000 per annum + OTE £40,000: SThree: SThree are a global FTSE 250 ...

Trainee Recruitment Consultant - Soho

£20000 - £25000 per annum + OTE £40000: SThree: As a Recruitment Consultant, y...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Day In a Page

Secret politics of the weekly shop

The politics of the weekly shop

New app reveals political leanings of food companies
Beam me up, Scottie!

Beam me up, Scottie!

Celebrity Trekkies from Alex Salmond to Barack Obama
Beware Wet Paint: The ICA's latest ambitious exhibition

Beware Wet Paint

The ICA's latest ambitious exhibition
Pink Floyd have produced some of rock's greatest ever album covers

Pink Floyd have produced some of rock's greatest ever album covers

Can 'The Endless River' carry on the tradition?
Sanctuary for the suicidal

Sanctuary for the suicidal

One mother's story of how London charity Maytree helped her son with his depression
A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits