Underlying sales at Smith & Nephew fell 47% in April amid the coronavirus pandemic as the deferral of elective procedures in the U.S. and other key markets torpedoed demand for its devices.
In first-quarter results posted on Wednesday, Smith & Nephew said U.S. sales, which typically account for half of global revenues, have been down more than 50% on the prior year since late March.
Smith & Nephew has responded by planning to cut costs by $200 million this year through actions including an almost total freeze on hiring and reduced capital expenditure.
Smith & Nephew warned investors in late March about the impact the coronavirus crisis is having on its business. At that time, the company withdrew its 2020 guidance and braced investors for an 8% drop in first quarter revenue. The final first quarter results came close to the prediction, with sales falling 7.6% compared to the prior year.
That decline reflects a sharp drop in sales in the U.S. and U.K. in the second half of March, and low revenue in China throughout most of the quarter. Weekly sales in China were down 80% at points in the first quarter.
The magnitude of the downturn in demand for Smith & Nephew devices is a consequence of its level of exposure to elective surgeries. Orthopaedics and sports medicine, which account for around three quarters of Smith & Nephew's sales, are driven by elective procedures. To compound matters, trauma, a part of the orthopaedics unit that is not reliant on elective procedures, was down due to fewer road traffic accidents in countries under lockdown.
Results for April show sales remained suppressed in the U.S. throughout the first month of the second quarter. Demand in China, which accounts for 7% of Smith & Nephew's sales, rebounded strongly at the start of April, in large part due to a surge in restocking, but management at the company thinks elective surgeries in the country improved to 50% to 70% of normal levels at the end of the month.
Smith & Nephew expects sales to be “substantially down” in the second quarter, but, having pulled its guidance, is yet to make concrete predictions for the period or the rest of the year. With the outlook for the rest of the year contingent on how quickly elective procedures resume, Smith & Nephew CEO Roland Diggelmann sees reason for optimism.
“We’re now seeing encouraging early steps toward resuming elective procedures,” Diggelmann told investors on Wednesday's first quarter results conference call.
The need for patients to eventually undergo procedures deferred in response to COVID-19 means Smith & Nephew, like its peers, expects demand to return at some stage. However, Diggelmann also sees scope for the pandemic to drive longer-term changes.
With the finances of governments roiled by the crisis and private healthcare providers contending with steep declines in volumes, it is possible that Smith & Nephew customers will emerge from the pandemic with diminished spending power, Diggelmann acknowledged.
“We do expect [price pressure] to increase. There’s no doubt. A lot of these [healthcare] systems will come out of this with challenges. It is clear some hospitals have put capital expenditures on the backburner. I think this is temporary. The hospitals will continue to want to drive efficiency,” Diggelmann said.
Faced with a drop in demand, Smith & Nephew plans to reduce spending by up to $200 million this year. The savings will come from reductions in activities that are affected by the pandemic, such as travel and events, and a freeze on all new hires except those deemed to be crucial. Interim CFO Ian Melling said the company is “not reducing headcount at this stage,” but has made plans to further cut costs in the event of a prolonged slowdown in demand.