Smith & Nephew Earnings: Cori Robot and Trauma and Extremities Fuel Solid Quarterly Growth

Smith & Nephew’s SN abbreviated third-quarter results displayed solid improvement that leaves the firm on track to meet our full-year revenue expectations. We’re holding steady on our fair value estimate and consider shares of this narrow-moat company undervalued. Quarterly revenue rose 8% in constant currency, driven by strength in trauma and extremities, as well as sports medicine. As seen with other orthopedic devicemakers, Smith & Nephew’s shares came under significant pressure since late summer as investors became preoccupied by knock-on effects of the GLP-1 therapies for weight loss. Considering osteoarthritis is driven by a mix of genetic predisposition, joint trauma, and lifestyle factors influencing wear and tear in addition to weight, we think it’s unlikely that GLP-1 use will substantially reduce the demand for joint replacement. Because arthritis is a progressive disease, we think it’s more likely that GLP-1s could cause some patients to delay the need for joint replacement, but that many of them will eventually undergo procedures.

Interestingly, some orthopedic devicemakers have indicated that the GLP-1s could actually help in the near term. Obese patients seeking large joint replacement translate into higher-risk surgery, and they are often required to lose some weight to reduce risk before they can undergo the procedure. The use of GLP-1s could shorten the pre-op time frame.

Smith & Nephew made considerable progress with its robot placements in the quarter, and the expanding installed base has shown up in knee replacements—more than 25% of third-quarter knee procedures used the Cori robot. Nonetheless, availability of instrumentation sets for knee replacements remains below demand, and we expect it could take a couple of quarters to significantly improve the situation. In contrast, trauma and extremity, or T&E, sets are close to meeting demand, and not coincidentally, quarterly T&E sales were up 10% (versus 6% for knees).