Smith & Nephew Cut Costs By $200 Million Due To Canceled Elective Procedures

05/08/2020

Medical device manufacturing company Smith & Nephew saw a 47% drop in revenue in April as the coronavirus pandemic caused the deferment of elective procedures. The British multinational supplier suffered from a drop in demand for its devices, especially from the United States. According to the company’s first-quarter results, United States sales, which usually make up half of global revenue, were down over 50% from the prior year since the coronavirus began in late March. Smith & Nephew plans to respond by cutting $200 million in costs this year. Their course of action includes putting a total freeze on hiring and reducing capital expenditure.

 Here are some highlights from the Smith & Nephew quarterly report:

 Hip and knee volumes impacted by the coronavirus prompt reductions in elective surgeries across all major markets.

  • Robotics was strong in the early quarter and declined in March.
  • Trauma was impacted due to lower levels of travel and activity.
  • There were restrictions on elective sports medicine procedures, except for soft tissue surgeries.
  • Wound management franchises were impacted by elective surgery exposure and reduced rep access in hospitals.
  • The largest impact on AWD due to COVID-19 was in Asia-Pacific.
  • There was scrutiny of respiratory tract ENT procedures with few exceptions.

Smith & Nephew warned their investors back in March that the coronavirus would have a severe impact on its sales. In late March, the company braced for an 8% drop in revenue within the first quarter alone and withdrew its 2020 guidance. The results were close with a 7.6% drop compared to the previous year. The decline resulted due to a sharp drop in sales within the United States and the United Kingdom. Additionally, the company lost revenue in China throughout most of the quarter. Weekly sales were down 80% in China within the first quarter.

The company's decline in sales stems from a lack of demand for elective surgeries around the world. The company specializes in producing orthopedics and sports medicine devices, which account for approximately three-quarters of sales. These devices are driven by a demand for elective procedures. However, most countries have banned elective procedures to make room for COVID-19 units in hospitals. Elective surgeries were also canceled to save on costs and supplies needed to meet the demand for COVID-19 treatment.

Trauma, which is a part of orthopedics that does not rely on elective procedures, was also down due to fewer road accidents in countries on stay-at-home orders. April’s results showed that sales were down in the United States throughout the first month of the second quarter. Approximately 7% of Smith & Nephew’s sales come from China, which rebounded in the beginning of April due to a surge in restocking. However, management thinks that elective surgeries may improve as much as 70% of normal levels by the end of the month.

Report Summary

The report broke down data into the following categories: advanced wound management, orthopedics, and sports medicine and ENT. First-quarter revenue was listed as $1,134 million with -7.6% underlying and -5.6% reported. Franchise split and growth were as follows:

  • Advanced wound management: $309 million with -4% growth
  • Orthopedics: $497 million with -8.3% growth
  • Sports medicine and ENT: $328 million with -9.5% growth

The report further detailed the decline among various locations:

  • Emerging markets: $174 million with -17.9% growth
  • US market: $581 million with -4.7% growth
  • Other established markets: $379 million with -6.3% growth

Orthopedics numbers declined during the company’s first-quarter as many elective procedures were canceled due to COVID-19. Knee and hip procedures were down 10.6% and 8.6%, respectively. Trauma was down 7.1% while other reconstruction procedures were up 19.4%. The report indicated that trauma procedures were down due to the decrease in travel from lockdown orders throughout the globe. While robotics was strong in the beginning of March, it declined near the end of the quarter.

Sports medicine procedures were also impacted by the pandemic as the need for COVID-19 treatments remained a priority among health responders. Sports medicine joint repair and ENT were down 7.1% and 15.2%, respectively. Arthroscopic enabling technologies was down 11.2%. The report noted that there were restrictions on elective sports medicine treatments, except for some that involved soft tissue injuries. However, REGENETEN, NOVOSTITCH, FLOW wands remained strong throughout the quarter.

 Wound management was the least affected, but the numbers were still down. Advanced wound care and advanced wound devices were down 6.7% and 13%, respectively. Advanced wound bioactives were down 8.6%. The report indicated that the region of Asia-Pacific was affected the most and that PICO and RENASYS grew double-digit again. The report then broke down the losses by country. In China, sales were on the decline in February and March and then spiked in April, likely due to restocking of supplies.

Here is a breakdown of each of the major sales countries:

 China: 2019 sales were $336 million or $6 million per week

  • United States: 2019 sales were $2,551 million or $50 million per week
  • United Kingdom: 2019 sales were $211 million or $4 million per week

In other countries, Smith & Nephews is anticipating the growth to continue as elective procedures become allowed again. For example, China is at approximately 50% to 70% of normal volumes while the United States is anticipating elective surgeries to be announced per hospital capacity. Australia’s National Cabinet agreed that certain procedures, including joint replacements, can begin again as of April 27. Germany is awaiting recommendations from the Federal Health Ministry for a date to start again. The United Kingdom expects to be performing elective surgeries later in 2020, but as soon as June, while Japan has no current start date.

 

The Company Remains Hopeful As Elective Surgeries Eventually Resume

The company also expects sales to be down substantially in the second quarter. But, since they pulled their guidance, Smith & Nephew is yet to make solid predictions for the rest of the year. Sales for the remaining year will depend on how quickly elective procedures resume across the globe. Smith & Nephew CEO Roland Diggelmann is optimistic. During a recent conference call, he stated that the company is starting to see encouraging first steps toward resuming elective procedures. He continued by saying that the need for patients to undergo elective surgeries will return at some point.

However, Diggelmann also predicts that the COVID-19 pandemic will drive longer-term changes that may also affect company sales. He stated that because the pandemic is controlling government finances and private healthcare providers are dealing with steep volume declines, Smith & Nephew’s customers may come out of the pandemic with less spending power.

Diggelmann stated that he expects price pressure to increase and many healthcare companies will emerge from the pandemic with new challenges. Some hospitals may put capital expenditures on the backburner temporarily. They will also want to drive efficiency, he stated.

To deal with these challenges, Smith & Nephew plans to reduce their spending by $200 million this year. They plan to reduce activities that are affected by the pandemic to save money, such as events and travels. They also plan to put a hold on all new hires, except those that are deemed crucial. At this time, the company is not reducing headcount, but plans to further cut costs if they need to in the future.