Smith & Nephew shares tumble on market slowdown fears

Smith & Nephew, the FTSE 100 manufacturer of artificial hips and knees, saw £500m wiped from its market value yesterday after revealing a slowdown in its markets and a disappointing product launch.

The company's interim results were below even the most conservative forecasts, the first "miss" since Sir Christopher O'Donnell became chief executive and reshaped the historic medical supplier in 1998.

S&N'sshares plunged 52.5p to 481p, valuing the company at £4.5bn. Sir Christopher blamed a skittish market that "will jump at shadows" and said he was "confident" of matching the City's forecasts for the full year.

He said the main factor in the missed forecasts was poor sales of a new cream for ulcers, bed sores and burns. The supplier of S&N's previous product failed regulatory inspections and had to be replaced. "The new product has some slight clinical differences, and take-up has been slow," Sir Christopher said.

Sales in the US woundcare division were down a worse-than-expected 15 per cent. However, investors were also spooked by a slowdown in S&N's largest and fastest-growing division, orthopaedics. The demand for replacement joints has surged because of the ageing population and improvements in product design, but there have been more cautious comments recently from S&N's rivals, Zimmer and Stryker. They have suggested that competition is getting tougher.

S&N shares had fallen 4 per cent earlier this week on fears that the growth of the orthopaedics market had peaked. The company said its US sales of artificial joints grew 18 per cent in the last three months, compared with 23 per cent in the first quarter, but it was still outperforming the market as a whole. It characterised the latest quarter as a "blip" and Sir Christopher said: "We can argue over whether the US market is up 12 per cent or 13 per cent, but the fundamentals haven't changed. Artificial joints is a growing market."

Overall, S&N's sales in the first half of 2004 were up 6 per cent to £609.2m, held back by the weak dollar. Pre-tax profits were 22 per cent higher at £119.4m.

Analysts are forecasting about £260m for the year as a whole and some suggested the company could now struggle to recover lost ground. "They have left themselves with a hell of a lot to do," Seb Jantet, of Investec Securities, said.

Others who met the company, though, were confident new product launches will push up the full-year numbers. Peter Cartwright, of Williams de Broe, said: "Our questioning was sceptical, maybe even hostile...but they gave sensible answers and their confidence for the second half looks plausible."

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