THE INVESTMENT COLUMN: US traumas for healthcare firms

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The Independent Online
Elastoplast to keyhole surgery group Smith & Nephew has worked hard to shift its unfocused conglomerate image and last year it completed its exit from pharmaceuticals and dumped surgeons' gloves, the last of its commodity-type businesses.

But despite all this effort, the City still pigeon-holes Smith in the "sound but dull" sector of the market. Yesterday's results only confirmed that view. The market clipped 0.5p from the share price to 188p after underlying pre-tax profits advanced an unexciting 5 per cent to pounds 180m in 1995, after stripping out restructuring costs and disposals from both the last two years. Integration costs of pounds 14.6m wiped out the pounds 8.7m contribution from acquisitions, mainly Acufex, the surgical instruments business, and Homecraft, a maker of aids for the old and disabled.

But these were respectable results for a year in which medical budgets continued to face downward pressure - selling prices slipped by 0.5 per cent last year - and with the main European and US markets growing at a rather anaemic 3 per cent. Overall volume growth of 8 per cent, the best for some time, was boosted by the UK, where the establishment of a unified sales-force 18 months ago helped the rate of sales growth more than double to 12 per cent.

Continental Europe, where the same "one company" strategy has been in place for some time, was up a handy 8 per cent. The problems lay in areas exposed to the US market, where healthcare is in the midst of a well- publicised upheaval. The impact of so-called healthcare management operations on big pharmaceutical groups is being paralleled in Smith's case by the concentration of hospital groups, notably the merger of Columbia and Hospital Corporation of America which created a buying group as big as the NHS.

The increased power of customers hit businesses skewed to the US market, namely trauma, endoscopy and orthopaedic implants. Sales growth in these operations failed to come anywhere near the double-digit increases notched up in wound management (Elastoplast and the like) and casting and support. The outlook is for another couple of years with growth held to around 5 per cent in the area.

But even if the US proves to be a relative drag in the short-term, Smith's artificial bone and cartilage products could provide plenty of excitement further out. If current development work is successful, and the chance is around 50 per cent, they could open up markets worth several billion dollars by the next century.

Profits of around pounds 190m this year would put the shares on a prospective multiple of 16. Acquisition prospects have been punctured since Johnson & Johnson found a target elsewhere, but backed by Smith's pounds 500m war chest for acquisitions, the shares should be held.

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