Smith & Nephew becomes casualty of NHS spending cuts

The hips-to-knees maker Smith & Nephew slashed its annual growth forecast yesterday after first-quarter earnings were hit by a restructuring of the business and cutbacks in government healthcare spending. The news sent S&N shares down 9.4 per cent to 462p.

The chief executive, Chris O'Donnell, said: "Conditions have been tougher in the first quarter, not only in the US, but also in the UK and Germany where we have been affected by healthcare budget constraints."

A move to split the company's orthopaedics division into separate reconstruction and trauma businesses also held back revenue growth in the first quarter, it said. That effect will still be felt in the second quarter.

Revenues rose only 6 per cent to $643m (£357m) in the first three months of the year, the slowest growth analysts at Collins Stewart could remember in the company. Pre-tax profits totalled $126m compared with $124m a year ago. The company cut its 2006 forecast for underlying earnings growth to 4-6 per cent from 7-8 per cent previously. The first quarter was worse than expected and the second quarter is expected to show only a modest improvement. The company is confident trading will improve in the second half as it rolls out a number of new products such as a less invasive hip implant.

Zimmer, the US rival orthopaedics maker, also reported slower earnings growth in the first quarter on Wednesday but reiterated annual forecasts.

Despite ageing populations, the growth in the joints market has slowed from 12 per cent to an expected 10 per cent this year and S&N's shares have underperformed the FTSE 100 for some time. Mr O'Donnell said: "Investors are nervous about the future of growth for the orthopaedics joints market." But Mr O'Donnell dismissed the gloom, saying only one-third of S&N's business is dependent on that market.

Pricing pressures are another concern, along with an open-ended US inquiry into the relationship between surgeons and the orthopaedics industry.

One of the company's main hopes is the Birmingham hip, suitable for younger, active patients, which has already been approved in Britain and awaits imminent American approval.

There has been speculation that the company could bid for its US rival Biomet, worth about $10bn, after last month's departure of Dane Miller, the chief executive of Biomet who had been viewed as an obstacle to a deal.

While declining to comment on Biomet directly, Mr O'Donnell said: "It is unlikely that there is going to be any big to big orthopaedics consolidation." He argued that antitrust measures stood in the way of big mergers and that it was hard to achieve synergies, as sales forces in the sector act as specialist technical support people and there would be no overlap.