THE INVESTMENT COLUMN: Strong knee sales carry S&N higher

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The Independent Online
WITH OBESITY on the rise in the West, more and more people are requiring knee surgery to replace all or part of a joint that just can't stand the weight being put on it. And with gym-going on the rise among people trying to avoid obesity and get fit, more of us are requiring surgery to repair knees damaged in training. Sit on the couch eating chips, or get out the house and jog, either way Smith & Nephew wins.

The company makes artificial joints, and a stonking 23 per cent rise in knee sales in the US was the highlight of yesterday's full-year figures. S&N is winning market share in this highly competitive orthopaedics market, having invested in innovative new products and a bigger salesforce. And this in a market which is already growing at 13 per cent a year globally.

S&N shares were volatile last year because of investor scepticism that the orthopaedics market can keep up this cracking pace. S&N and its rivals are routinely pumped for clues that a deceleration might be under way. So far, there are none. Yesterday, the company was insistent that the current rate of growth can continue. An ageing population and the improvement of surgical techniques will stay very powerful long-term drivers of this market.

A couple of financial milestones were passed by S&N in 2004: the orthopaedics division had more than $1bn (pounds 500m) and operating margins across the group as a whole topped 20 per cent as the benefits of its increased scale fed through. Unfortunately, the results were marred by the decline in the dollar (in which most of S&N's earnings are made) and by an pounds 80m provision to cover the cost of replacing 1,200 faulty knees.

Prospects for the current year are strong, and S&N made some bullish forecasts for sales growth and further margin expansion. In orthopaedics, a new hip product is being launched. In keyhole surgery, sales of blades are back on the up. In wound management, a clever, silver ion-based dressing is being given a marketing push.

So, all is set fair still. A buy for the long term.

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