Smith & Nephew has raised its revenue outlook for the year after rising demand in China and other emerging markets drove sales up 4.4% on an underlying basis.
Unfavorable foreign currency exchange wiped out most of the growth but Smith & Nephew nonetheless exited the quarter with evidence that demand is stabilizing in established markets and rising in new territories.
The performance made Smith & Nephew "increasingly confident" that it can hit the upper end of its 2019 sales guidance, prompting it to raise its outlook for the year.
Smith & Nephew came into 2019 on the back of a tough year that saw it miss its growth target by a wide margin, but the first quarter results hint the areas that held it back last year are stabilizing and growth in the better performing parts of the business is accelerating.
Sales of wound care bioactives, which dragged on performance last year, came in flat in the first quarter. Talking to investors on a first quarter results conference call, Smith & Nephew CEO Namal Nawana CEO warned problematic parts of the business have "not fully stabilized" but the situation is better than it was in previous quarters.
Smith & Nephew reported an uptick in performance in multiple geographies, too. Sales in the U.S. grew 4% as a result for rising demand at units including hips and knees, continuing the improvement seen in the second half of last year. Europe returned to growth after falling away in the back half of 2018.
Revenue growth remains low in emerging markets, though, with the 2.2% seen in the first quarter coming in slightly above the 1% achieved last year. Things are moving faster in emerging markets. Nawana said China achieved "well over 20% growth," powering emerging markets to a 15.3% rise in the first quarter. The CEO expects China and India to drive growth in Asia Pacific across 2019 and beyond.
The turnaround is yet to extend to arthroscopic enabling technologies. Sales at the unit fell 2% on an underlying basis last year and the difficulties continued into the first quarter, when revenue fell 1.1%. Nawana expects the franchise to return to growth later in the year.
Despite the lingering problems at the arthroscopic franchise, Nawana thinks Smith & Nephew can beat the aggregate market growth rate of 4%, in part because of the impact of acquisitions. In recent months, Smith & Nephew has struck deals to buy Brainlab, Ceterix Orthopaedics, Leaf Healthcare and Osiris Therapeutics, and been linked to a $3 billion takeover of NuVasive.
Analysts probed Smith & Nephew’s appetite for larger deals on the quarterly results call. But, while Nawana said he isn’t focused solely on small deals, they largely struggled to get Smith & Nephew to open up about whether a takeover such as the mooted NuVasive acquisition is on the cards.
"M&A is a very important part of what Smith & Nephew does," Nawana said. "People see what we buy. People don’t see all the things we didn’t buy. I don’t think there’s one single lens that we look through [when assessing opportunities]. We look through multiple financial lenses."
NuVasive reported results the day before Smith & Nephew, beating analyst earnings and revenue expectations on the back of double-digit growth outside the U.S. and the solid performance of its spinal hardware unit in its home territory. The reported talks with Smith & Nephew were not discussed on NuVasive’s first quarter conference call with investors.