Smith & Nephew PLC (SNN) 2004 Q2 法說會逐字稿

Well, good afternoon, ladies and gentlemen, and good morning to everybody who is on the conference call from the U.S. We're doing a simultaneous presentation here of the Smith & Nephew second quarter results to a live audience in the City Presentation Center in London and on a conference call and webcast mainly to U.S. analysts and investors.

I'm joined here today by Peter Hooley and by Jim Taylor, our president of endoscopy, to update you specifically on what's happening to our endoscopy business. What I am obliged to do to start the call here today is to draw your attention to the forward-looking statement, which I will show you briefly and please read very carefully while it's up there. I know our U.S. colleagues have had the opportunity of listening to this.

What I would like to do today is to really make an introduction. We'll ask Peter Hooley to go through the results. I'd like Jim to talk about our progress and prospects at endoscopy, and then we'll have a Q&A session, which we will split between the audience here and the audience on the Web call.

The highlights of where we sit today is that in the second quarter and the first half, we believe we have made good progress in developing momentum and sales in our business. The first half sales were 10%, the quarter one sales were stronger than the quarter two. In our view, the quarter one was probably a little bit above the trend, and quarter two is a little bit below the trend, and we'll talk to that as we go through.

Our EPS growth was 14% for the first half, which is online for the mid-teens earnings growth numbers that we're looking for for the full year. Orthopedics continued to outperform the market. It continued particularly strongly in the U.S., and we'll talk about that as we go through. Endoscopy, I'm really pleased to say, has recovered from the difficult time we had in the U.S. last year, and its sales are now growing well and improving in the U.S.

Wound management did have an issue to deal with. It was slower, in question two particularly, against a very strong comparative 2003 quarter for the enzyme debriders in the U.S. That roughly had a 5% negative effect on first-half sales to reduce the underlying sales growth to 5% for the half.

I'll talk more about this, but it's very clear to us the market fundamentals remain strong, particularly for orthopedics, and we have made substantial further investments in orthopedic sales, new products, and in our MMT acquisition. The continued investment that we made in this means that we are confident that we will generate a stronger second half from particularly our new-product pipeline and ramp-up and the benefits of the sales force expansion.

So those are the highlights as we see them, and I'd now like to ask Peter Hooley to come to the podium here and talk you through the first-half results. We have split these between first half and quarter two. There are an awful lot of numbers there, and I've asked Peter to go through these fairly slowly and carefully to try and make sure everybody can get the chance to understand them. Peter.

Thank you, Chris, I'm going to take the [inaudible] on slowly, so I'll do my best. As Chris says, I'll first talk in conventional half-year terms, and then I'll go on to the detail of Q2. As usual, I will talk in terms of underlying sales growth, which is sales growth exclusive of the effects of the MMT acquisition, the three extra sales days, which you know we experienced at the beginning of Q1, and the adverse effects of currency translation, then I'll go back and talk about sales in the quarter terms. I'll make this absolutely clear to you -- so everything is in long terms.

Underlying sales growth was 10% in the first half comprising 8% in quarter two and a stronger 12% in quarter one. Growth in the U.S. is 11% and outside the U.S. it was 9% all in the first half. Margin expansion was 1% in the first half of a year ago, then we had certain plants had staff inefficiencies, which you may recall, and this takes the half-year margins to 19%. EPSA growth was 14% from the half-year and $100 U.S. consolidation, and that would have been actually 30%. We are expecting a stronger second half, and I shall be reconfirming our full-year targets as I go along.

As I said, I'll start with the conventional half-year trading statement and here we reported sales growth of 6%. This comprises 10% on the loan growth, just 1% from the MMT acquisition, 3% for the extra sales days right at the start of the year, and is less 8% for adverse currency translation, the dollar averaging 1.83 in this half compared to 1.61 in the first half last year, and pricing overall is running at about 1/2 to 1% as it always has done and positive in the first half.

EBITDA grew 13%, 7% faster than sales, reflecting a margin expansion I referred to. We continue to aim for at least 1% of margin expansion for the full year. A joint venture profit of 11m compares with 10m for BSM last year. The 3m difference in last year's number was in respect to AbilityOne which, you'll recall, we sold last September.

This is essentially margin expansion and up BSM, and we're looking for 25m out of BSM for the full year. And just to remind you, the real benefits of BSM's acquisition of J&J's casting business did not come through until 2005.

Interest is positive due to cash flow and lower rates. We are now looking to a figure of 2m positive for the full year. The tax rate was 29% based on an estimate for the full year, making EPSA in mid-teens, 14% growth. Shares and issue averaged 934m, and will average 937m for the full year.

If there hadn't been a debt up on consolidation, our EPSA growth would actually have been 16% stronger, about 30%, and, of course, you'll see these numbers when you look at our U.S. peers. And I refer to sales growth in better terms in the range of about 20%. You actually get some sort of comparator would be in the peers.

I'll deal now with cash flow, and then we can move on to Q2. On cash flow conversion, the half-year was 30% compared to 56 a year ago. This reflects a pull forward of a pension contribution, which we will make in the second half, and to aid us in the regulatory position over there because we have a pension deficit. Investments and inventory and instrumentation head off second half product launches at orthopedics and insurance recoveries. We continue to target 70% cash conversion for the full year -- that's operating profit into operating cash flow.

Interest tax and dividends are lower than last year because of interest going positive, and the tax timings and the acquisitions announced relates to the MMT acquisition.

Looking now at term Q2, reported sales grew 2%, which is after 8% of adverse translation currency, averaging in this quarter 1.82 versus 1.63, and this after the benefit of 2% from the sales of MMT. It was also in sales growth and underlying terms of 8%. Profit from EPSA growth was 7%.

I'll now go on to sales growth -- our business and our products. You recognize this slide. This slide deals with geographic sales growth and then your tax on your next page, I'll draw to your attention that we have listed the product growths, and I'll be giving -- so you don't have to jump in between the slides -- between both in Q2 and H1 terms. Again, all underlying terms, and I'll principally talk about Q2.

Starting at the column on the left. Orthopedic sales grew 14% in Q2 making 15% for the half. Within the year, growth continued strongly in Q2 at 18%, this is despite some maturing of the rapid penetration of Oxinium implants and the delay in the launch of our ceramic-on-ceramic hip, which we expect in Q4. Outside the U.S., growth remains in high single digits. Pricing on implants and trauma in Q2 in the U.S. was 2% positive and remain flat outside. I'm going to go slowly because I'm sure you want to take these down -- knee sales grew 16%; 21% was in the U.S. and 11% outside the U.S.; hip sales grew 14%, 11% within the U.S., 20% outside, driven by particularly strong sales growth in Australia and the UK; trauma sales were 9%, 13% were in the U.S. and 6% outside; and clinical therapies -- this is essentially U.S. business -- grew at 33%.

In the second half we had a number of product initiatives to increase sales growth, which Chris will talk about in more detail. We've accelerated investment the in sales force, particularly in the U.S. and in capacity to keep growth going above that of the market in the U.S. Thus, we continue to target high teens underlying sales growth for orthopedics for the full year, well recognizing this requires a step-up in growth in the second half.

Endoscopy showed further recovery in the U.S. with 8% growth in Q2 after 6% in Q1. U.S. growth was driven by strong visualization and repair, and blades in the U.S. maintained their growth rate. Outside the U.S., sales growth was unusually quiet at 4% for endo, with Japan and the UK being unexpectedly flat markets. But we do see these markets recovering in the second half. Overall, Q2 growth was 6% for endo, making 7% for the half.

Visualization sales grew 15% globally; in fact, they grew 24% in the U.S., reflecting a recapture of market share by the progressive scan camera. Repair products grew 10% globally and blades grew at 3% globally. IF, frankly, continues to disappoint, and we have a 13% decline in spine in the quarter. We've beefed up the management of this division and have a number of new products and marketing initiatives to benefit the second half. We continue to target high single digits underlying sales growth for endoscopy for the full year. This is notwithstanding the mess of the bipolar business following the ArthroCare injunction and though having brought out an alternative monopolar system for ablation in the back of the quarter.

Turning now to wound management, wound management sales were a disappointing 3% in the quarter, and that's after 7% in Q1. Outside the U.S. sales growth is 9% in Q2. This is actually despite with it being slightly off pace particularly in Germany. As you know, there have been changes in the investment arrangements. Within the U.S. sales were down by a very challenging 15%, where we still have to get meaningful sales traction with the replacement enzyme debrider product for Santyl. Excluding the effect of this, U.S. business actually grew a respectable 10% in Q2 and even grew 15% globally, Acticoat 49%, and Dermagraft 26% in Q2.

This slide sets out basically the credit growth which, really, I've just sort of given you but, in particular, [inaudible] I'd set out here on the first half absolute sales numbers to help you sort of basically build your models.

This slide provides the usual reconciliation of underlying sales growth to reported sales growth. It sits in the 2% reported numbers tie back to the P&L accounts we talked about earlier, and, as you can see, MMT adds 4% to Ortho sales in Q2 and about 5% in the second half. You can also see how currency reduced sales by 8% in both quarters.

Looking to the second half, and assuming the dollar holds at 1.83, we see adverse translation currency at 8% again in Q3 and 5% in Q4. The dollar, if you remember, shifted rapidly back end of the year -- last year, that is.

Turning to profitability, this slide gives the usual profitability by business both for Q2 and the first half. It shows how the first-half margin progression came largely from new management, relative to their production and efficiencies in the startups last year, which you may recall. Quarter two's relatively static margin, relative to last year, reflects investments in orthopedic sales force to accelerate second-half growth, legal costs and inventory write-off and endoscopy as a consequence of the ArthroCare injunction, and the impact of the Santyl product line to management in the U.S. However, as I said earlier, we are expecting to expand EBITDA margin at least 1% overall for the full year.

Our final slide -- this summarizes Q2 trading in the context of last year's quarterly comparators. It is worth pointing out that last year was a weak comparator, whereas Q2 last year was a strong one. Both, in fact, average out in growth terms the same as this year, particularly orthopedics. We expect a stronger second half, and our best holding to our previous underlying sales growth targets for the year of high teens growth in orthopedics, and high single-digit sales growth for endoscopy and wound management. Frankly, wound sales growth now is 1% below that of endo's. And to remind you, EPS growth in the first half is 14% so, again, this actually was off at 8% adverse currency at the sales line. And so with that, I'll pass it back to Chris. Thank you very much.

Thanks, Peter. I think that gives you a good flavor of the split between the quarter and the half. What I'd like to do now is talk about the positioning of the business in two respects -- one is how do we feel about the markets? We do feel positive about them, but why? And, secondly, to share with you what we believe are the important business drivers for Smith & Nephew for quarters three and quarter four, which give us confidence in achieving our forward targets, as Peter just outlined.

Clearly, the basic fundamentals remain in place. Baby-boomer demographics are driving, particularly, reconstructive implants and the majority of our wound management products. We actually believe that now the second most important factor is increasing consumer awareness and demand. It really started, perhaps, in the orthopedic business, but we're seeing more and more impact in wound management and endoscopy in a variety of ways, and similarly, it is very simple -- it's people who have a successful MIS knee surgery saying, "Well, actually, that wasn't so bad and, look, I'm back on the golf course in six weeks," and convincing their friends to take the risk. People are, quite rightly, it's quite serious surgery, nervous about doing these things, and we see actually part of the drivers in the slight pickup in the U.S. knee market arising from MIS knees, in particular, because there's no doubt that the techniques have improved considerably, and the patient results are better. It's helping people get their lives back more quickly.

We do have a very strong technology platform. It's converting into product launches. This is a major priority for us now and going forward. This year we've got 23% of our sales in the first half of products launched within this year and the previous two. That's a record performance and every business has stepped up to the plate and improved their performance in the first half. We expect to continue to improve this, going forward.

Each of our products has to have positive health care economic benefits. We look for clinical benefits, we have to have positive health care economic benefits, and that's part of our story and our offering to the marketplace. We have significant margin enhancement opportunities, and we'll take these, and we expect to create value in this company by both organic growth and our augmenting acquisitions.

So I'd like now to turn to this on a business-by-business basis. In orthopedics, we are delivering growth ahead of the market. All first-half growth was 15%, all estimate -- and we refined this considerably and checked it basically as a result of some of the doubts that have crept into market commentators following the results of some of our competitors. We believe that for reconstructive and trauma products, which are our marketplace, excluding spine and at constant currency, the market growth in the first half was 13%. It was probably a bit more than that in quarter one, but our belief is that the market grew at 13% for 2003. So we actually see, if you will, a pickup, to some extent, in quarter one but a slight drop below the trend line, maybe to a 12% number in quarter two. We haven't seen all the competitive results, so we can't sort of take off that matrix.

We are sufficiently confident in this marketplace and our position within it, that we've made a major further investment in our sales force in orthopedics. We've increased the sales force by 14%, principally in trauma and clinical therapies, but remember when we're doing this, in the U.S., which is where the majority of the investment has gone in, we are essentially splitting off our trauma salespeople to be separate from a combined trauma and reconstructive sales rep. So, roughly, for every trauma rep we add, we get two-thirds of a trauma rep and a third to a half of a recon rep, if you see what I mean, because we're freeing up somebody else's time that was previously looking after trauma for part of his time.

MMT is very positive for us. We've integrated it very successfully, and it's grown to 22% in its first quarter during our management. And that adds 4% to the quarter two growth of orthopedics. That's over and above our underlying numbers. We are continuing to manage the macrotexture revision effectively. It's now around the year since their withdrawal, and the reported revisions are broadly in line with the patented implants. The majority of macrotextured implants, the vast majority, were done in the last six months of sales, i.e., the six months backwards from August to February of 2003, and therefore, roughly, the median of the revisions is around a year later. So we expected to see and have seen a higher number in this recent quarter.

So orthopedics, in our view, there has been no fundamental change in the marketplace. We see the dynamics remaining very positive, and we've got some strong product drivers coming through into the business. I mentioned earlier, MIS knees. We've released very large numbers of MIS knee sets and MIS hip sets -- over 200 of each. The MIS knee sets didn't go out until June and July, and we're rolling more sets out to roughly double those totals in both categories by the end of the year.

I'm going to move to endoscopy now, and I'm going to deal with this very briefly because Jim will talk about this later, but just to say I'm very pleased to see that, under Jim's direction, we have recovered the sales growth in the U.S. First-half growth was 7%, just very slightly below what we believe the market growth rate to be in arthroscopy only of 8% if we project forward from last year. But the key thing was to rebuild our U.S. sales, and that's going very well. New products in this business are 24% of sales, the same as orthopedics. Blade use has restabilized -- blade reuse has stabilized, and the new camera, which Jim will talk about, we think is really going to be increasingly important in driving sales growth in endoscopy.

Wound management -- its sales were robust but impacted by U.S. debriders, and so our first-half growth was only 5%, and the maximum impact of this debrider product switch was in quarter two, where you can see the global growth was only 3%. The issue is confined to the U.S., and you can see that broadly in the half-year, the impact was 5% on our wound management sales. It's quite a serious impact, and the impact in the second half is approximately 2% in each of quarter three and four.

For people who perhaps aren't familiar with this particular issue, put simply, it's as follows -- the previous supplier of our main enzyme debrider product in the U.S. failed FDA factory inspection requirements. They did not achieve the deadlines of the compliance program, and the product became unavailable. We have switched to a different product from a new and secure supplier, but it is a slightly different product and essentially it's a new product launch. Now, the good news about wound management products is they have very long lifecycles. The bad news, in this context, is it's a slow burn to get them to take off, by comparison with ortho or endo products. So we're in that phase at the moment, and so we'll see an improving picture in the second half, and this effect will disappear in 2005.

Actives are continuing to replace traditional wound care products across the world. The interest level in this is picking up. The recent wound management -- Worldwide Wound Healing Congress held in Paris is the second such congress -- there were 6,000 delegates. At the first and previous one, which was four years previously, there were 1,200. And that's an indication of the step-up in technology and presence of wound management as an active therapy area. New products in wound management, I am pleased to say, have stepped up to 19% of sales, which, for a long product lifecycle is very good, indeed, and it's contributed to the overall position.

So the second-half growth drivers are broadly as follows -- market growth remains strong. The markets in which we operate range in growth between 8% and 13%. We have an innovation-driven product ramp-up and I'd like to single three things out here -- the minimally invasive knee program, which I talked about earlier; the progressive scan camera for endoscopy; and the three wound superbrands that we're putting the majority of our sales force time behind -- Allevyn, Acticoat, and Dermagraft. The sales force investment in orthopedics, the 14% additional U.S. salespeople, is starting to deliver. It will deliver more strongly in the second half, and our new product rollout will continue to add momentum for 2004 and 2005.

So looking forward, we do expect to see improved momentum in the second half. The orthopedic market, in our view, remains fundamentally strong. It's a market we like to be in. Smith & Nephew expects to lead the growth in this market forward by a combination of new products and technology and sales force investment, and we see also good prospects for growth in endoscopy and wound. We expect to continue to improve our margins, as Peter indicated, for price, mix, and volume leverage, and in this way to achieve the underlying mid-teens and per-share target that we aim for.

So, in conclusion of this section, we do expect a stronger second half and achievement of our full-year targets, and I hope that I've pointed out to you those key areas where we expect to make this happen.

So with that I'd like to ask Jim Taylor to come to the platform. I know some of you know Jim, but others haven't met him before. Jim has been promoted from running Smith & Nephew's international business to be president of endoscopy, taking that post at the back end of last year, and who has done a really solid and strong job in getting this business focused on growth in the U.S. market. I'd like him to talk to you about the position of the business and the drivers, going forward. Jim.

Thank you, Chris. Good afternoon and for those in the U.S., good morning. As Chris said, I took over as president of endoscopy at the end of last year, and it's my pleasure to be talking to you today as the head of what I see as a very strong business, which has regained its momentum in the last two quarters. Today I'll be explaining to you the growth opportunities that we have within the business and a startup by talking about our first-half performance highlights.

I'm pleased to note that we've seen a recovery in our U.S. business with 7% growth in the first half. This has helped us achieve an underlying sales growth of 7% for our global business. This can largely be attributed to the launch of the new camera system, as Chris mentioned; the launch of Powermax, our new lightweight shaver handpiece, and 19 other new product launches in the first half of the year.

I can tell you that after a relatively short period of time in the position, I am happy with these results, and I am excited about how far we can take this business. To understand the opportunities, you need to understand the market landscape. By a significant margin, we are undoubtedly the market leader within arthroscopy with a 29% market share. As many of you know, in many markets arthroscopy is a core element of sports medicine. From a core business standpoint, our arthroscopy business represents approximately 75% of our overall business, and as the market leader, with the continued introduction of new products and technologies, we can continue to [shed] and grow the markets. We have a substantial market position, which we capitalize on by the breadth of our product range. Future opportunities and growth will come from the introduction of new products and procedures.

Let's take a few moments to discuss our products by technology grouping and our market position within each area. I'd like to stress that we are the only full-line arthroscopy company, and it's worth remembering that in addition to being the market leader in refraction by a considerable margin, we have significant market positions in every technology segment needing to perform arthroscopic surgery. For instance, the surgeon needs to access the injury, for example, a torn meniscus. He needs to be able to visualize the site of the injury, and he needs to resect or remove damaged soft tissue, and he then needs to repair the injury. So the surgeon requires access, visualization, resection, and repair products. We you have solutions in every one of those areas. The breadth of product offering offers a great platform for future growth, and the increasing focus on segmentation of the sales force will enable us to further leverage this business.

The key to a successful future for this organization is, as I've already said, I think, on a number of occasions already, the introduction of new products. For me, it's been a focus since day one, and I'm pleased to say that we launched 21 new products in the first half of the year, including our new camera system; Powermax, our lightweight shaver handpiece; Ultrabraid, our new high-strength surgical suture; our new Trivex system for varicose veins; and Sculptor, our new RF monopolar ablation probe line, and that is amongst many others. In the first half, as Chris mentioned, 24% of our sales came from new products, and as was said, we define new product sales as those products launched in the past three years.

Digital OR is a key initiative that will promote procedure volume and drive disposable growth in repair products, and the acquisition of Reed Medical has enhanced our ability in this area. I also know that you must be interested in the ArthroCare case. Whilst I can't provide specific details regarding this case, I can tell you that we strongly disagree with the Delaware court's decision, and the company is vigorously pursuing an appeal.

That said, we are gaining traction as we push to convert our former bipolar users to monopolar by both previously existing products and the new scope to probe, which we launched in May.

There are a number of key drivers that will help us build our business, moving forward. People get injured, and patient demand for minimally invasive procedures continues to gain momentum as patients want a more active life. In the U.S. we are also seeing a significant number of procedures moving to surgical centers or AFCs. For example, today there are close to 4,000 surgery centers in the USA, of which 2,700 are independents. The significant majority of these will need some form of digital OR. You may ask why. First, because it allows them to perform more procedures in a given day. Secondly, it actually attracts surgeons to the surgery center working with the latest technology, which, in turn, attracts patients. And you all know what that means -- basically, procedure volume will increase, and our ability to drive disposable and repair products will grow.

Market drivers won't make a difference if you don't have the core business drivers in place. So what are the key building blocks of the endoscopy business? For me, it's simple. We have the market position. We have the largest global arthroscopic sales force, and we've an unparalleled commitment to surgeon partnerships and education. The future will depend upon our ability to bring new products and technology to the market to further segment and educate our sales force and to educate the surgeon community in new techniques and procedures. I am confident that we can deliver. These key building blocks also serve as the strength behind our near-term business drivers.

Five key high-technology areas of focus will drive our business in the near term and drive growth in the near term. I'll cover each of them over the next few minutes. Digital OR -- I've already mentioned a short time that digital OR is a key driver of our business, particularly in ASCs. It increases efficiency in the OR, and it allows more procedures to take place, which, in turn, as I've already said, drives that disposable revenue. It also supports our efforts to drive capital sales. The digital OR also provides wider benefits to surgeons, patients, and administrators, and the first-half acquisition of Reed Medical further increases our capabilities and capacity in this area.

Earlier this year we launched the industry's first progressive scan camera system, which provides surgeons with superior image. For anyone that's ever had a chance to sit in on surgery, you know that the number-one requirement for a surgeon is a quality image. And, as you can see, perhaps a little bit of a dramatic license, this system delivers an excellent image. There are clear advantages to progressive scan.

Within resection, which is obviously a key area for us which I say, again, we lead by a long way, our surgeons wanted a lighter handpiece with greater power, and we delivered one that weighs 50% less whilst delivering 25% more power, and power acts as one of the drivers behind our growth in resection in the first half.

Sculptor, as I've already mentioned, is a brand-new addition to our monopolar RF product line. And what's most important about Sculptor is that, as a monopolar probe, it is as effective as bipolar RF.

As a result of our education and outreach campaigns, reprocessing does not seem to be increasing in the U.S. We are also seeing other organizations step up and take a proactive position on this issue. For example, I don't normally mention other organizations, but Ethicon Endo-Surgery has initiated a smarter patient campaign, regarding what patients should know prior to surgery. One of the tenets of the campaign is for a patient to know whether a reprocessed, single-use device will be used in their surgery and, more importantly, to know that they have the right to refuse the use of these reprocessed devices. I am also pleased to note that the state legislation in Utah is pending regarding informed patient consent on reprocessed single-use devices. We hope this will lead to similar legislation in other states and across the globe.

Minimally invasive spine is another core focus for this business. We have the clinical evidence that, for the properly selected patient, IDET relieves pain. What we failed to do in the past was to convince the medical community of that. We've plans in place to work closer with payors and the physician community to help them better understand the benefits of this procedure. I am pleased to note that we've expanded our spine portfolio with a new electrothermal generator and RF probes. We've still some way to go to develop this business and to see the fruits of our labor, but we've put the foundation in place as we have for the rest of the endoscopy business.

In addition to being pleased with overall endoscopy results, I continue to be pleased with our repair numbers, which was indicated earlier with 13% growth for the first half. This group of products that you see on the slide continues to provide us with the growth momentum that we're seeking in knee repair and allows us to further penetrate the shoulder repair market. What you may not know is that these are premium technology products. For example, one bioresorbable screw-in shoulder will sell for around $250 in the USA.

Within repair, we focus on two things -- maintaining a robust product pipeline that continues to deliver new products and procedures to our surgeon partners and education -- education of our sales force and education of our surgeon partners.

So, in summary, there are several keys to success. As the leader, we will drive and gain share, continuing our sales growth momentum. We will innovate and introduce new products and procedures to further build this business, and we'll introduce and educate the surgeon community in new techniques and procedures, and we will continue to invest in our selling organization with more feet on the street, segmentation, and education. As I mentioned earlier, this is a fantastic business, one in which we are positioned to drive the markets to grow faster than both it and we are today. Thank you.

Thank you very much, Jim. That concludes the formal half of the presentations, and we're pleased to be able to take this opportunity to actually share with you the knowledge of the endoscopy business.

For question procedure, we are going to take three questions from the presentation here and three from the U.S. in rotation. There are microphones available, please use them, and what I would like to do is please don't ask more than two questions per person.

[offmike] and remembering correctly the three days you gained extra in the first quarter, at least two of those you would be losing in the second half of this year and which quarter will that be? Given that, isn't it then fair to assume that the earnings will be equally impacted on the negative side, as earnings were positively impacted in the first quarter because of that reason? If you could just talk us through that, it would be helpful. Secondly, the new enzymatic debrider in the U.S. -- in terms of the ramp-up, which possibly has been slightly slower than you had envisaged, I get the sense would this be because of the acceptance of the product in the market or are there any restrictions as to the supply of this product from the company you're working with in this case?

Okay, Peter, do you want to do this one?

There are two sales days in the quarter -- so you need to factor that in when you're doing underlying growth, which is effectively 3%, you know, on -- so if you call it adverse to quarter four sales.

In the earnings?

Well, it's all in the times, which we've given you.

So you've taken account of all of it in the guidance. In terms of the enzyme -- sorry?

[offmike]

Take the microphone, please.

I have some difficulty in actually making these assumptions match in terms of the second half, because based on the slightly weaker-than-expected second quarter, you will have to have a pretty remarkable second half of this year, even before taking into account the two extra sales days. So I just want to get a sense for where I might be missing some kind of strength in the business. Is it really the margin will be actually quite significantly better than 1 percentage point after last year or any other tax effect possibly?

I'll talk from the bottom -- our tax would be 29 for the full year, so there's no tax effect on it. The margin was sort of at least 1% improvement, and we can take that to 20%. That includes the 20% margin. We've made it quite clear, and obviously, especially you're going to have there is going to be substantial pickup in orthopedics' growth. There has been a massive investment in sales force in orthopedics in the U.S. with 17% in this first half, and this process has been going on. I know we've been shipping out instrument sets, and we are shipping out instrument sets at the rate of 20 per month, or something like that -- a very, very significant amount. And Chris was going through -- we've had product launches coming full in the second half. You've seen the momentum in endoscopy. We do expect endoscopy to pick up this momentum slightly. We've got the camera coming through on the other side of the business. We've had a quiet start in the UK and in Japan. Internationally, what is most unusual, and we do expect that to right itself in endoscopy. In wound management, the underlying sales growth in wound management, frankly, will be roughly what you see today -- normally, the 10% or 11%. So all you've got to do is factor into that that you've 2% less because of Gladase in Q3 and Q4, and we've got 3% more sales days in Q4. Now, I know that's one hell of a pace, but I read that off a piece of paper and not discussed it.

That's very helpful.

So I think the point to just stress on this is we have made a big investment in orthopedics. The rate our knee business is growing, the business is doubling every two-and-a-half years. We've actually made some sales force investment, and we've made some infrastructure investments to actually make sure we can deliver on that, going forward. The bulk of that has been committed in the first half, and if you look at the quarterly margin, you haven't seen as much quarter improvement in quarter two. However, as we get the sales leverage going forward in the third and fourth quarters, we will see the margin improvements.

In terms of the enzyme debrider, we are very satisfied with the supplier. There isn't an issue about security of supply. People are saying that they want to try and test the product. There are other products in the marketplace and naturally they've tried to occupy some of the Santyl space. It is one of our portfolio products in wound management, and our priority products to drive are Allevyn, Acticoat, and Dermagraft, particularly in the U.S. So they're not giving us a disproportionate amount of sales force focus, because the long-term benefits of driving those products home are very substantial. So it's part to do with sales force focus, it's absolutely not to do with supply, I'm very pleased to say. Okay? Can we take another question there, please?

The first question, Peter, just, in general, is there anything that's change in terms of the predictability of the business and [inaudible] into the finance and in terms of market, particularly in orthopedics? Secondly, on the theme of that, and as we look at -- if you have to sort of react to increased competition or trying to meet this guidance that you've got -- have you got more flexibility -- have you got any flexibility in terms of beefing up your marketing, particularly in orthopedics in terms of sales force or in terms of how many sets you've put out for the knees and reaction to competition. Have you got more flexibility in terms of cut and call sales for that?

Chris will answer the latter; I'll talk about the unpredictability. You are used to seeing Smith & Nephew on a half-and-half basis. Whereas, if you actually look at this is one reason why we've gone to the trouble of putting out the time series off, you know, all the quarters have been backwards. If you look at those, there is a -- that's going to effect the volatility, which perhaps you and we have not been used to handling in a public arena. But in terms of, let's call it, the long-run beat rate on the business, we are absolutely convinced that the long-run beat rate, which we are articulating, is pretty steady. The markets are pretty steady. We're going to a lot of trouble to, let's call it, validate the opinions, which we are saying today about the long strength of the market. And, you know that Smith & Nephew has, by and large, outperformed the new market, because it's been prepared to invest very heavily in the sales line in the market, and we haven't changed any of that. In fact, you could have said that we could have poured more margin out in Q2 if we'd been absolutely preoccupied with Q2 margins. We haven't been. We have decided to build the orthopedics, let's call it, loft in power prowess in the U.S., whilst the market is such a strong market in the U.S., and we see such opportunity there.

Well, it's absolutely fair, and the big slug of manufacturing during quarter two was devoted to producing these very substantial numbers of hip and knee instruments, minimally invasive instruments. A big bolus of that has gone out to the market in June and July, and there is going to be monthly deliveries thereafter, because we have now scaled up our manufacturing. Just to indicate the scale of this -- manufacturing in orthopedics is up 42% first half of this year over last year. And we've made a big investment -- 14% addition to the sales force in the first half is a big investment, and we have taken the margin penalty, because we believe the growth is there to be taken in the second half and in 2005.

We'll take on more question over here, please, Peter.

Thanks very much. Yes, investors seem to have a confidence crisis on the sector, which you clearly don't share. And one of the factors seems to have been a perceived deterioration in the pricing environment in the U.S. So could you give us your thoughts on that?

Peter, will have a go?

Thanks. I think taking a macro first, and then you've seen DRG. It's been customer confirmed now -- DRG is coming in at 2.7% which, actually, I think is slightly stronger than the indications. So you've had DRG-positive buyback at 3% for two years and then after that it was 7%. So in terms of, let's call it, what is there in the driver into the hospitals? Quite frankly, that is strong and historically that was our strong rate, and our analysis is the U.S. used the price method to make sure the hospitals have got the capacity for the baby boomers. It's coming through.

We see price on recon and trauma increasing on a yearly gain by 2%, and that's our internal price on recon and trauma -- in the U.S., that is. That's on that sort of book price.

I think, Peter, and obviously you'd have to talk to other players in the market to see exactly what their experience is, but I think our -- what we've always tried to do is separate out like-for-like price from mix. It's our opinion that if there is a shaving in market growth between quarter two and quarter one, that relates to the fact it's the fifth quarter of things like ceramic-on-ceramic hips. Now, that's actually a mix effect not a price effect, in our language. Because like-for-like when you introduce it but, obviously, in the fifth quarter you've got a direct comparable. To be fair, and Peter mentioned it, it's also the fifth quarter of our Zirconium hip head, so we have something of that in there, but we don't count [money] in price, we count that in mix. And therefore on a like-for-like price basis, we've seen 2% -- well, maybe, we might have seen 3% last year on the implants and trauma products.

Okay, I'm going to allow some calls from the conference, please. Can I take the first caller, please, Marie?

Right, okay, sir, we have three from the U.S. and our first question comes from the line of Mr. Milton Hsu from Bear Stearns. Please go ahead.

Thank you, good afternoon. Chris, overall, it looks like, from the numbers reported in the second quarter that hip sales have decelerated somewhat, and knees have gone up. With respect to Smith & Nephew specifically, what caused the -- it looks like the U.S. sales dropped about 11% growth. It was a bit slower than your 16%, 17% growth in the past. Was that price concessions? Was it surgeons holding off in anticipation of ceramic-on-ceramic? Any thoughts on that?

You're talking U.S. hips, Milton?

Yes.

U.S. hips are -- in quarter one were 19%, in quarter two were 11%. Part of that was the fifth quarter effect of the Oxinium hip heads. That's probably the most significant effect. It wasn't particularly a price effect. We, however, did not hit our timing for production targets of MIS instrumentation. We're shipping these out at about 25 a month, 30 a month at the present time. And I think that that's possibly also slightly responsible for the slowdown. In our hip sales, quarter-on-quarter. There's also the very strong first quarter was tough on our inventories. So we didn't have as much inventory to go with to go out and attack new accounts. But I don't see that as being a long-term trend shift, with the exception of the fact we've now got Oxinium hip heads into the comparison.

Okay, thanks. And then the second question is on Gladase. Can you just give a little more detail on the difference between that product and Santyl? In addition to that, it looks like -- well -- from a clinical perspective, maybe the negative pressure devices address the same exact type of wounds. Are you seeing any competition from companies like KCI? Thank you.

Broadly, the difference between Santyl is a collagenase enzyme, and Gladase is papain urea-based. They do the same job. The papain urea actually achieves the consumption of the dead or decaying tissue faster, but it differentiates less well between live and dead tissue. So it works faster, so some people like it a lot more, but on some patients you can get a stinging effect that the patients don't like. Now, since collagenase is off the market, it's not a choice that anybody's got anymore. So that's the difference between the two. They do the same job, the timing is different, and on some patients the Gladase -- and any papain urea, actually, gives a slight tingle, I think, is the right way of describing it.

Sorry, that was the first part -- the second part was --

KCI and --

Oh, KCI, right. Quite frankly, KCI's business development is very rapid. It is a high-ticket procedure. It's between $2,500 and $3,000 a treatment. That's good, because it's expanding the doctor interest in the prescription market for higher-ticket products. It's not -- it's principally in the hospital environment, and it's dealing with post-surgical wounds. We're not seeing it take a significant number of wounds away from our target population, which is chronic wounds and burns, where it's less suitable. Okay?

Okay, thank you.

Take another question?

Our next question comes from the line of Mr. Mark Landy from SIG. Please go ahead.

Good morning, folks.

Good afternoon.

As it is, sorry about that. There has been a mad rush to add salespeople on a worldwide basis. Could you maybe give us an overview of what is going on in the hiring markets? Specifically where are these new reps coming from? What is their industry knowledge and the depth of their physician relationships? And I think these are new folks to the industry, you know, what is your timing to maximum profitability from each of these sales reps?

Okay, what we are doing in the U.S. is we're focusing our hiring efforts on bringing on trauma and clinical therapies reps, releasing the current combined recon and trauma reps to focus on recon broadly -- it's always worked that way. In terms of the people we're bringing on, typically they'll have some relationship with wider health care, although not always, and so they'll have some background there, or they'll be professional salespeople -- salesperson. Either way, we provide very substantial training over a significant period of time, such that for a trauma rep, and we're focusing our trauma reps on the level-one trauma centers in the U.S. We expect to have all of those covered by the end of the year. It will take us, depending on the background, because we are getting some competitive reps, but they're in the minority -- I mean from other directly involved companies -- it can take us anywhere between six and 12 months to get that rep trained, able to deal as an expert with difficult procedures with the surgeons, and well positioned and establish the relationships with the surgeons on the territory. So this is a long-term build program.

In clinical therapies, it's much shorter. It's three to six months for the rep to get up to pretty close to full speed. So there's a mix of benefits, and we roughly split the additions half and half between those two forces.

So then the observation would be that the second half should be good from reps coming up to speed, but we could see even a bigger benefit in the first half of next year?

Yes, and one of the other things that goes on in these circumstances is some territory reallocation goes on, which always needs a bit of bedding in with the sales forces. But we have a very talented group of sales management who are handling that. We've recently strengthened that by the addition of another senior sales guy who joined us from Johnson & Johnson, and we're well set to organize that. And we believe we will start to deliver in the second half, but the bigger benefits will be beyond that in 2005.

Just one final question -- could you comment on the business at HealthSouth? Are you seeing a rebound in business there or are we just going to enter a period where we're going to anniversary the loss of business, and at least we're going to start seeing growth in our flat basis there?

Which business -- sorry?

HealthSouth.

Oh, HealthSouth, I think HealthSouth is in the past. Jim, would you like to comment on that?

Yes, I mean, effectively, HealthSouth has affected our numbers in 2003 but in 2004 we're seeing growth in the HealthSouth [inaudible].

That's my question -- what is the growth like within HealthSouth, or is the HealthSouth business now just flat, and then that's not kind of hurting your new growth business outside of HealthSouth?

I'm not sure we're going to identify growth by customer, but we are seeing growth in the HealthSouth account by itself. It's not -- the comparator has just disappeared. Okay?

Thank you.

Yes, one more from the U.S.?

Our next question comes from the line of Mr. Jason Wittes from Leerink Swann. Please go ahead.

Hi, thank you. First question, on Oxinium, it sounds like it's pushed from the third quarter to the fourth quarter -- the approval time? Could you just tell us -- give us an update on what's going on with your discussion with the FDA?

Do you mean ceramic-on-ceramic?

Sorry, yes, I do -- ceramic-on-ceramic.

Okay. Well, yes, we're having discussions with the FDA. I think we are reasonably confident -- this is the FDA -- we are reasonably confident we will definitely get approval. It's our opinion that approval will not come in time for us to launch the product in quarter three. We would, subject to the FDA, believe we'd be able to launch the product in quarter four.

And also, given your guidance with an uptick in orthopedics, does part of that hinge upon this approval, particularly in the fourth quarter?

A small part of it does, but really the big drivers in ortho are the additional salespeople and the release of the MIS instruments together with substantial inventory backing them up. So we do expect the after new accounts rather than necessarily get a big kicker from upgrading existing accounts. We'd like to do that, but, remember, a lot of our accounts already are users of the Oxinium hip head, and we believe that to be a better product, anyway, than the ceramic-on-ceramic. We think it's unlikely those users will switch. It may well be the switch -- for us -- will be those patients who are actually the consumer-driven patients we talked about earlier, who come in saying, "Doctor, I want a hip like Jack's." And presently, we are sitting to that. So it's very interesting -- the dynamics may revolve around the consumer awareness factor. Okay?

Thank you.

Good, we'll take some questions here. I think you had your hand up earlier -- then we'll go to this side.

Two questions -- Jim, could you give us a little bit more additional information on the international growth in the endoscopy business and also why the growth in your repair products has declined sharply versus that in Q1? I think in Q1 the repair products grew by 19%, where in Q2, it was 10%. It seems that it's been a very good growing product for you. And the second question relates to the new business in the U.S. According to the data reported by your competitors, it seems that everybody else has done substantially better than they had been doing over the last few quarters. So would you be able to give us some more information about how the competitive landscape has actually changed?

Okay, so you answer the ortho one, and I'll answer the endo on.

I thought there were two, actually, for endo.

Anyway, go on.

In terms of the international growth, as many of you may remember, last year in the UK the decontamination spend [audio break] this time in 2003 midyear and is more normalized growth this year. So basically it peaked at midyear, and the comparators against that peak, midyear. So basically we see a return to normalized growth in the second half of this year from a UK point of view.

In Japan, effectively Japan introduced a new residency program in quarter two, which disrupted their healthcare system completely, and effectively had a negative effect on the overall number of procedures in quarter two. Again, we expect a return to more normalized numbers in the second half of the year, once that residency program is vetted in.

In terms of the current growth, I'll say rather than look at quarter-to-quarter, I'll say we're very happy with our growth at 13% in the first half of the year, and we're continuing to introduce new products in the second half of the year. As I said, we introduced 21 in the first half, we're going to introduce a similar number in the second half of the year, and that will help drive our growth.

Okay?

[offmike] What is the market growth rate for [audio fade]?

I would say in mid-teens.

[offmike]

I think we're growing inline with the market?

At 13% is below 15.

Okay, well, it depends how you describe mid-teens then.

Right.

With a word to knees -- if the observation is right, the U.S. market, we think driven by the interest in MIS procedures, actually we think the U.S. market growth has stepped up slightly, although the market outside the U.S. has fallen away. Our growth in the U.S. was slow in quarter two principally because we needed to get the manufacturing of these MIS instrument sets through the factory. Quite frankly, it took us longer than we thought, and we didn't open as many new accounts as we had expected to, or that we would have liked to. I think "expected to" is the wrong word. We have now done that, and that's one of the reasons why manufacturing is up by 42% in our facilities, and I think that bodes well for quarter three and quarter four, since we've now got those instruments out there, and we're seeing a very, very good reception to Smith & Nephew's minimally invasive knee instruments. I, personally, think they're absolutely super, simple, clear, and they enable the surgeon to train on them very fast. Okay? Can we take a question here, please?

Thank you. Peter, given that you've got 290m of net debt and, obviously, 173m if you take off the interest rate swaps, can you just talk us through the net interest line? How did you end up with an interest positive?

Because, as you know, that we have a hedge balance sheet. We have more volumes in the U.S. than we actually have volumes on the rest of it basically and in swaps in the UK. So there's always run a positive arbitrage between the U.S. and the UK.

So what was the contribution of that in the first half of the year?

I would have to look that up for you.

Because, I mean, if you apply it to 2003 numbers, it's contributing -- it's got to be contributing getting on to 5% of your pretax profit.

It obviously contributes a sizable amount to the interest line. That's money we're using and why I always guide it explicitly on interest, because it's virtually impossible to risk calling it -- giving you a formula to do that.

Okay, just --

-- and I will guide you, and when we come to the end of this year, I will guide the interest. I mean, it's just the way -- because we are a sterling-denominated company, and a lot of our business is overseas. That's a relatively slow balance sheet total, but one thing we have to do is we have to make sure that our balance sheet is protected. The benefits, as it so happens at the moment, is going, through time, is an interest benefit, which comes from that.

Okay, and if we could just take that forward a little bit -- what is the risk of that part of the line turns negative at some point in the future? Is it sensitive -- currency is more sensitive or is it what's happening to interest rates? Where's the risk?

The risk is basically monetary policy -- if you call it the difference between -- on the fed and the UK, which actually is not a -- our interest rates are different today, long-term, there is not going to be an arbitrage between the UK and U.S.

And just finally, just wondering if your definition of mid-teens is the same as your colleagues?

You were listening carefully to what I was saying earlier -- I actually gave you a definition in my words -- I was very careful about that.

The official definition of mid-teens is 14% to 16%, so we are clear on that. We'll take one more question.

The first question is you've invested quite heavily in trauma, yet the sales growth has slowed down from Q1 to Q2 sequentially. So what is going wrong for your trauma business here? Is the investment in the sales force not working as effectively as you thought it would? And then, secondly, on the revisions -- the numbers have been tracking around 70 per month versus the previous quarter of around 50 per month. What is the rate of change from here on? Is it going to decelerate, given that you've had a peak in terms of the number of placements for the same period last year? And, just quickly, you settled half of your patients -- what's happening with the other half that haven't been settled yet?

Okay, trauma -- broadly, we've taken sales reps on, and, as I said, the training period is very, very intensive. We are not getting any productive contribution or very little from the trauma reps we've set on in the first half of this year. We are getting, and you can see we are getting, a contribution from the clinical therapies reps. So that's really a straight investment, and that will probably carry through the third quarter and, realistically, we expect to start to see some reasonable level of contribution from those trauma reps in period -- in the fourth quarter. So it really is the issue of sales training and the effort going into that, because those 60-something trauma reps -- that's a massive training load to get them through this. And getting to accounts where traditionally we haven't had a level one trauma account manager. So there's position among the therapy as well. So there's a significant lag. It's bigger than we've been accustomed to, which is why we haven't seen that particular effect.

With regard to macrotextured -- the high level of actual implants was seen over the last six months of implants, really. We do see the majority of revisions within a broadish frame of six to possibly 14, 15 months. So it will carry on for some period of time, we would expect after the anniversary period, probably through the end of the year. We don't have perfect information on this. It's not -- we have good information, but it's not real-time information. If a hospital revises a patient, the first thing they do to call us with a lecture and give us the entire data. So one of the things we have done is establish very direct doctor-and-patient contact now, and we've got it much more real time. So actually we've done some reporting catch-up during the last quarter as well as the actual numbers of revisions as far as that went.

Settlements -- we have a substantial group working on settlements. We've got a good deal more than half of the cases settled, but since the majority of them have been relatively recently done, we're actually working with a relatively short-range term. It doesn't -- number of unsettled cases -- it doesn't indicate they're any more difficult or there are any problems in so doing. It's purely there are more of them, by definition. So that's how it works.

Just very quickly -- in terms of the settlement, why are these patients settling early? If you look at some of the CenterPulse settlements, these patients were getting -- meaning there was [inaudible] in the first instance, are you settling quite generously with those patients or why would they settle early if they could get more?

We have adopted something that's absolutely novel in the industry. By establishing, with appropriate consents related to privacy, direct contracts with the patients. We will talk with the patients, we will help them -- because our business is about making people better; helping them to get their lives back. With this particular instance, if the implant doesn't take, we have not achieved that mission. We are setting out to rectify that as quickly as we can. We work with the patients to get them properly into surgery; to get it revised. Clearly, the doctor and the patient manages that. And then we seek to settle with them for the -- if it's appropriate -- for the pain and injury they have settled. We can't discuss settlement sums and wouldn't do so. All I would say is that we are -- this is very manageable in terms of the coverage that we have and it is being paid for by our insurors, as you'd expect. We carry substantial insurance. But it is a very proactive and novel program, and we believe it's the right thing for the patients and it's proving very, very effective. Can we move now to some more questions from the U.S., please?

We have one question from the U.S., and it comes from the line of Mr. Mark Mullikin from Piper Jaffray. Please go ahead.

Good afternoon.

Good afternoon.

First a question for Jim. You mentioned in the presentation that you expect the impact from the ArthroCare injunction to be fairly minimal -- only a $5m impact to sales. What gives you confidence in that? Are you seeing a very positive reception for the Sculptor product? Maybe if you can provide sort of just rough estimates around what percentage of customers you might retain, et cetera?

Obviously, again, our guidance is up to $5m a set. I think our guidance was that in 2003 sales of these products for the year were around $10m. In terms of uptick of Sculptor, it's very interesting. Obviously, relatively new launch -- a launch they may have this year. I can give you an example that we have one territory in New York whereby our sales rep has converted every single surgeon in his territory from bipolar to monopolar to the new Sculptor. So, early days -- we believe it's a great product, as I said in the presentation. For the first time ever, there is a monopolar probe in the marketplace which, from an ablation point of view, is as powerful as bipolar. So we have great hopes for the product.

Okay, thank you, and, Christopher, could you comment about the impact of the new German DRG system on your various businesses -- orthopedics, endoscopy, and AWM? Just -- is there a tangible impact that you're seeing?

The DRG system adversely impacted the orthopedic and endoscopy businesses in Germany last year, and we put a pretty substantial program into looking at how we should deal with these. Generally, Smith & Nephew does very well in markets with DRGs because our products are designed to enable surgery to be done with less intervention and faster than competitive products, but there is a transition issue. Last year was, quite frankly, a tough year. The sales growth in Germany, Peter, for the different product lines -- do you have those?

I've only got for our side, which was 15 plus 7, which is 22, half of that, say, is 11.

So we've grown 11% this year in Germany in orthopedics, and do you have a German number off the top of your head?

High single digits.

So it's just 10. Wound is about the same as that. So, now, the impact on wound is different. It's not a DRG impact. There's a co-payment for GP treatment coming this year. It actually came in with five days' notice. So everybody has to go through the GP for the second or more times in the quarter has to pay 10 euros per visit. It has just been pretty dramatic in Germany. Because wound management products are spread between hospital and GP prescription, we've seen a lower growth rate, like high single digits in Germany as this system gets underway. There's been huge protests in Germany about it at the public level. I mean, the minister of health daren't go out in public, virtually. But we are coping with that. So our sales in Germany are decent. Germany is a major market for us for the long term. We're not making major investments in German sales force 'til the dust settles. We reckon that's probably 2006, but we believe that because the two DRG markets are Australia and the U.S., which are two of our three fastest-growing markets. This change in Germany will be good for us. Okay?

Thank you.

Another question?

Yes, sir, we have a question from the line of Mr. [Alex Evans] from Deutsche Bank, and he's in the UK. Please go ahead.

Thanks for taking the call -- just a quick question on the implant revisions. Are you confident that the insurance will cover all of the future potential revisions and, secondly, depending on how much you're prepared to talk about quarterly phasing of sales and earnings growth, but it looks like Q3 last year is going to be a slightly easier comparison than the fourth quarter of last year. So are we likely to see sort of better growth rates, as a consequence, in the third quarter of this year as compared to the fourth quarter?

Right, we really don't want to get into discussing amount paid per person and insurance cover limits, but I think we are making the statement, which should give you sufficient comfort, that we have obviously reviewed this and, in our view, we're managing this effectively -- the implant revision issue -- and it will remain manageable.

Now, with regard to the quarterly phrasing, you can see that quarterly phrasing is actually fairly variable in 2003. What we're doing is giving values through the end of the year. There will be some variation, quarter-by-quarter, but I would say that quarter four, the lower rate was a slightly lower quarter than we would normally expect to see in a quarter four historically. Particularly, we normally see a higher growth than 4% in endoscopy in a final quarter. So, broadly, we're looking for good growth out of both quarters in all businesses. I think we're prepared to do that. Okay?

Thank you.

Can I take another question?

Yes, and our next question comes from the line of Mr. Bill Plavonic from First Albany. Please go ahead.

Good afternoon.

Hello?

Yes, can you hear me?

Yes, we can, Bill.

Fantastic -- my question is in regards to clinical therapies. The growth was actually impressive. We did see the re-acceleration in the rate there. I was wondering if you could share with us what the U.S. growth rate was and some differentiation between the stimulation growth and the SUPARTZ.

Peter, do you have those numbers?

I have the U.S. growth, which was 39%. I'll have to dig into my printouts to find the other ones for you.

For this [inaudible] SUPARTZ?

Yes.

Okay. We can try and do that for you, Bill. We don't have the information directly here.

Okay, and then just one other question, if I may. On the ceramic-on-ceramic -- was that your own product that you put through clinical trials? Was it a modular PMA? And if it was sub-licensed from [Ceramtech], what type of clinical data did you combine with that package?

We did the clinicals to support this in the U.S. There are clinicals.

Was it a modular or was it a straight PMA?

I believe it was a straight PMA but, to be honest, I wouldn't be 100% sure on that. Okay?

And would you be willing to share with us the questions that the FDA is asking? It seems that pushing out approval past the 12-month timeframe, considering we already have two others on the market, you know, I'm just kind of curious to why that would be.

I'm equally curious. I have seen the questions. I can't remember what they actually were in detail, but they were extremely detailed questions, which the FDA wanted assurance on. It did seem to me that they didn't go to the heart of anything. They were things that required to be ticked up rather than anything from the [mental] at all. There weren't questions about the substantive nature of the trial.

It's a question of process, and it wasn't the timing of our getting our application in and getting it processed. The FDA, within their timeframes, they have asked some questions. There weren't a lot of them, but we have dealt with them, and we feel fairly confident, except we don't have a sign-off, as we said here today, that we will get the approval.

Great, thanks a lot, Chris.

Another question?

There are no questions from the lines.

Okay, we'll open the floor to two more questions here in the [inaudible]. The gentleman over there, please?

Hi, lads, it's Max Herrmann from ING. Just a quick couple of questions, firstly, on the Japanese pricing reform and what were the implications in the second quarter from that and going forward? Secondly, just a bit more detail on Dermagraft and exactly your expectations for the product -- perhaps a little bit more in terms of your peak sales expectations, maybe. And, finally, just -- I know Stryker mentioned on the camera doing extremely well in the second quarter, and they'd seen a pickup. I wonder whether -- how your product actually compares and the profile there?

Well, let's start with the last one. Jim, would you like to talk about comparators with Stryker -- how we leave them in the dust?

Effectively, [inaudible], and we believe we've got the camera in the marketplace, which gives the surgeon the best image. From a visualization point of view, as Peter already already mentioned, basically we've got visualization growth of 24% in quarter two in the USA. So our visualizations are strong -- visualization sales are strong, and we believe that's a reflection of our product.

Okay, the issue in Japan, Max, is that we have built into our forecast a progressive fall in Japanese pricing in orthopedics, in particular and, progressively, it's trauma and recon alternate years, and it's just a challenge to deal with. We are a leading part of the industry body that pushes back on MHW because, for various reasons, the price gap between the U.S. and Japan, in particular, is actually closing down over a period of time, because U.S. prices have risen, and Japanese prices have fallen.

So the prognosis is Japanese prices will continue to fall at a -- probably, overall, business low single-digit rate, while that's comprised of 5% to 6% alternate years on trauma and recon. So it's not a positive pricing climate. We do work hard to try and persuade the Japanese Health Ministry they should pay a reasonable price. I think that's about as much as I can say. There's then the pharmaceutical law, which is coming in April of next year, which leads specifically organized to deal with, and we will be organized to deal with that -- we pretty much are already.

With regard to Dermagraft -- Dermagraft continues to provide excellent clinical treatment in the U.S. It's approved for diabetic foot ulcers. We are increasingly seeing a concentration of treatment in higher volume of wound clinics, which works well for us and works well for the clinics, and we're focusing our sales force programs behind building that up just from a service point of view. This product, remember, is delivered at minus 70 degrees. It's cryo-preserved effectively. We are able to serve those customers with high reliability and lower cost, and we continue to expect Dermagraft to progress at a strong rate the balance of this year and into next year and achieve successful profitability out of the total program, but it's still a couple of years away. Okay? We'll take one more question. Has anybody not asked a question -- that gentleman there -- the last question.

Hi, Martin Wales, UBS. Coming back to wound management and your comments on slow growth, particularly in the UK and Japan -- [inaudible] are you going to see a pickup in those markets in that business area, particularly in the UK? I think we got the impression from the Paris conference there were some concerns that, if anything, products were being overused in the UK -- or at least these kinds of products were being overused in the UK? Could you comment on that also?

I think the slow growth in the UK and Japan is endoscopy. The UK and Japan are going like trains for us in wound management.

I obviously misunderstood.

Our Japanese wound management and growth is spectacular and our UK growth with new products on the so-called "drug turf" have been very good as well. And the department of health is trying to reduce the cost of purchased products. There's a sizable initiative in the UK, which might be what you're referring to -- I am the industry spokesman for all products, as it happens, around the co-chair of the government industry working party. So I am discussing this with the UK government. I can't say I've ignored that for the moment. We are seeking, the government and the industry, to actually develop the medical technology industry in the UK as a really valuable, high-value-added contributor to the UK economy. And the government is looking to do this. We can't do that at the same time as we're cutting the heck out of prices. That's the point I'm making very politely to the government.

One of my questions, obviously, was erroneous. In terms of what's going on with IDET, which some things were quite disappointing -- can you make some comments for that and why you haven't really seen more pickup, particularly in terms of what's going on in spine?

Jim?

As I said in my presentation, effectively, in terms of IDET, we've got some building blocks in place. We failed to communicate the benefits of the products to the surgeon and -- well -- to a number of surgeons and to the payor community. Effectively, what we're doing is we're putting a great deal of effort behind reimbursement and the payor community. Obviously, reinvestment is decided buy the payor organizations, and we're working -- we've got direct efforts with the payors with the Blues in the USA. We're approaching large, self-insured employers, and we're working far more closely with the payors, convincing them of the benefits of the IDET procedure. And I'll say slightly disappointing results. We believe that the efforts -- what we're doing will lead to a good, long-term business from a spinal point of view.

What more can you do clinically? Obviously, you had a publication -- spine was helpful -- but there seems to be more skepticism, particularly in the spine area.

Yes, I'll say again, I mean, from a spinal point of view, we've got peer review clinical evidence that shows for the correctness in selected patients, which is the case in any medical procedure. IDET works, it relieves pain. You know, I read something the other day, low back pain costs the U.S. economy $50b a year, and IDET works in that particular area. We've got to convince the payors, the surgeon community, and convince 100% that we can convince the end consumer. But we need to be paid for our products, and that's what we've got to work on, and that's what we are working on.

Jim, would you like to make any comment on the international side of this business?

The pickup internationally is -- have you got the exact numbers there, please -- the pickup internationally is greater than in the U.S., largely because the sell to the non-U.S. surgeons is easier in all of the states.

There's not a very small base, remember. So, I mean, in Q2, this is spine and arthro, grew 60%. In Q1 it grew 130,but that's a small basis, but its acceptability, it seems, is easier and quicker.

What Jim was somewhat shy about saying is U.S. spinal surgeons receive very large reimbursement for their fusion surgery, and they receive relatively small reimbursement for doing IDET. That barrier doesn't exist internationally, and we are seeing very good traction with international surgeons who see a real place for IDET in between aspirin or paracetamol and physiotherapy on spinal fusion. All those patients found it suitable.

What we're trying to do is convince the U.S. spinal community that IDET is part of the continuum of treatment, but it's not necessarily a replacement for fusion. That was not the case, say, 12 months ago. We are trying to convince them that it was a replacement for fusion, and it isn't. It's part of the continuum of treatment.

So we feel we've found a good prospect.

Thank you.

Okay? Well, thank you all very much. We're going to break it off here. We'll be around here for a short while. Peter will be here, certainly. I have to go and do some other things, and happy to do some individual discussions. Thanks, everybody, on the conference call.