Supply constraints stymie Smith & Nephew's ortho recovery

Dive Brief:

U.K.-based Smith & Nephew reported 40% underlying growth in the second quarter but saw its stock slide amid ongoing challenges at its orthopaedic unit.
Orthopaedic sales were up compared to the pandemic-hit second quarter of 2020 but down 6% on the comparable period of 2019. Smith & Nephew attributed the orthopaedic results to headwinds including supply constraints.
Smith & Nephew retained its full-year guidance but, with other orthopaedic players bouncing back strongly, the results fell short of investor expectations. Shares in Smith & Nephew fell 7% in trading in London.

Dive Insight:

In recent days, first Johnson & Johnson and later Stryker have shown that orthopaedic surgeries have recovered from the pandemic pressures hospitals faced over the winter.

Smith & Nephew's second quarter results provide further evidence that demand has bounced back, although the recovery was marred by some ongoing difficulties. Jefferies analysts noted knees significantly underperformed Stryker and J&J.

Orthopaedic sales were up 43% year-on-year. With the sports medicine and ENT unit growing 51% and advanced wound management up 27%, Smith & Nephew grew 40% overall. Yet, the growth says more about how bad the second quarter of 2020 was than the health of Smith & Nephew today.

Compared to the second quarter of 2019, Smith & Nephew's sales were down 1%. The decline was driven by a 6% drop in orthopaedic sales, which more than offset growth of 1% in sports medicine and ENT and 5% in advanced wound management. On a geographic basis, Smith & Nephew grew versus 2019 in the U.S. but contracted in other established markets and emerging markets.

Talking to investors on a second quarter results conference call, Smith & Nephew CEO Roland Diggelmann attributed the decline in orthopaedic sales compared to 2019 to three factors: the lack of a cementless knee in the portfolio, a change in ordering patterns in China and supply constraints on certain product lines.

The impact of the lack of a cementless knee on sales, notably in the U.S., is a recurring topic on recent earnings calls. Smith & Nephew is working to fill the gap in its portfolio. Other headwinds are new and potentially short lived. In China, Diggelmann said distributors have withheld orders in anticipation of the introduction of volume-based purchasing but volumes in market are at pre-pandemic levels.

Smith & Nephew's supply issues are more complicated. Diggelmann said the company has been affected by challenges in global freight logistics. Those cross-industry challenges are somewhat out of the control of any one company.

At Smith & Nephew, the impact of the global challenges has been compounded by local problems specific to its business, including a labor shortage in Memphis, Tenn. Work is underway to address the problems.

"The surgeries that haven't taken place now, they will not come back. But overall, we believe that this will come back. We have had a huge effort in certainly hiring in Memphis and ensuring that we have the capacity from a systems perspective, from a labor and resource perspective," Diggelmann said.

Diggelmann declined to commit to a timeline for the full recovery, saying only that he expected the situation to improve gradually over the second half of the year. That headwind could be offset by the completion of surgeries delayed by the pandemic but the inability of public healthcare systems in Europe to absorb the pent-up demand means the recovery may be gradual.