Smith & Nephew PLC (SNN) 2004 Q3 法說會逐字稿

Good morning. This conference call contains certain forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995. In particular, statements regarding planned growth in our business and in our operating margins discussed under outlook are forward-looking statements.

These statements, as well as the phrases "anticipate," "well-placed," "believe," "estimate," "expect," "target," "consider" and other similar expressions, are generally intended to identify forward-looking statements.

Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of Smith & Nephew or industry results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

Please refer to the documents that Smith & Nephew has filed with the US Securities and Exchange Commission under the US Securities Exchange Act of 1934, as amended, including Smith & Nephew's most recent annual report on Form 20F for a discussion of certain of these factors.

All forward-looking statements in this conference call are based on information available to Smith & Nephew as of the date hereof. All written or oral forward-looking statements attributable to Smith & Nephew or any person acting on behalf of Smith & Nephew are expressly qualified in their entirety by the foregoing.

Smith & Nephew does not undertake any obligation to update or revise any forward-looking statement contained herein to reflect any change in Smith & Nephew's expectation with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

I will now hand over to Sir Christopher O'Donnell.

Good afternoon, ladies and gentlemen. My name is Marie, and welcome to the Smith & Nephew Quarter Three Results hosted by Sir Christopher O'Donnell, Chief Executive and Peter Hooley, Finance Director.

[OPERATOR INSTRUCTIONS].

Over to you now sir.

Thank you very much. Good afternoon to everybody in the UK and good morning to everybody in the US and Canada. Welcome to the Smith & Nephew third quarter results conference call. And I hope that before we start the listeners, at least, in the US have already heard the Safe Harbor statement.

You all have seen the numbers for the third quarter, and we're all very pleased here at how sales growth has stepped up in our third quarter. Particularly in orthopedics, which has grown strongly and gained share in the US and globally.

Endoscopy has continued its growth momentums and advanced wound management is working its way through the enzyme debrider product switch. Increased margin has come through as expected. As a result, I believe we remain in good shape to meet our mid-teens earnings per share growth target this year.

We've continued to invest in sales force expansion, new products and instrument sets for orthopedics. We are very pleased particularly with our MMT acquisition, which is already enhancing our marketing outside the US, and we've now filed our US PMA for the MMT resurfacing hip, based on its substantial clinical data.

Our quarter four and full year results announcement will be on the 3rd of February next year. In the meantime, on the 17th of November, Peter Hooley will be giving a web cast presentation on International Accounting Standards as it relates to our figures. We will sell tickets for this event.

I will now turn the call over to Peter, who will run through the results in his usual detail, and I'll then summarize and take questions at the end. Over to you, Peter.

Thank you, Chris. Hello, everyone. Good morning, here in the US, and good afternoon in London. Underlying sales growth for quarter three was 12%. After 8% of adverse currency translation, principally the US dollar falling from an average rate of 1.62 in Q3 a year ago, to 1.81 in Q3 this year. And the 2% benefit from the first time inclusion of sales from the acquisition of MMT, reported sales growth was in fact 6% at 307 million Sterling.

As previously, all references hereafter as to sales growth are after adjusting for translation currency and MMT sales in this year. A reconciliation of reported to underlying sales growth is set out at the foot of note one in the quarterly accounts.

As I said, group underlying sales growth was 12%, and this compares with 12% in the first quarter, and 8% in Q2, making year-to-date growth of 11%. Orthopedic sales grew 19%, a strong performance, again, demonstrating share gains in a market, which we believe is growing at 13%.

Sales growth inside the US is 23% from Q3 and outside the US 10%. Sales pricing contributed approximately 3% to US recon and trauma growth, and was basically flat outside the US. Knee sales grew 22%, that is 25% within the US and 16 outside the US. Hip sales grew 15%, that's 14% within the US and 17% outside the US.

Trauma sales grew 13%, 18 within the US and 5 outside the US. Clinical therapies grew 49%, largely within the US. And these are all Q3 growth percentages in underlying terms and before the MMT. MMT added 5% to orthopedic sales overall, and adds about 22% on the global hip number.

Turning for a moment to the macrotextured femoral knee component, withdrawn from the market in August 2003. Revisions of this product stood at 640, as of the 29th of October. We continue to reach mutually satisfactory settlements with patients on more than half of these cases, and believe the product withdrawal remains manageable in business terms.

Turning to endoscopy. Sales are up 8% compared to Q3 a year ago. US sales grew 6% and sales outside the US grew 10%. Visualization grew 23%, driven by the new progressive scan camera system. Repair products continued to grow strongly at 13%, led by shoulder fixators. Blades grew 1%, with re-use in the US not seeming to be increasing. Radio frequency products declined 6%, reflecting the impact of the recent injunction on bipolar products in the US.

Turning to advanced wound management. Sales grew 6% in Q3. Inside the US growth recovered to 6%, as the effects of the enforced switchover of enzyme debrider products in the US started to reduce. In fact excluding enzyme debriders, growth in US sales continued strongly, and was 15% in the quarter.

Outside the US sales growth was also 6%, reflecting healthcare reforms in Europe, particularly Germany. ALLEVYN grew 10%, ACTICOAT 40%, and DERMAGRAFT grew 19% in the quarter. EBITDA grew 17% in the quarter, significantly ahead of reported sales growth from a near 2-percentage point increase in the margin to 19.5%.

The BSN joint venture continues to improve its margin, and we're looking to profits at 24 million for this year. The benefits of their acquisition earlier this year of J&J's fracture casting business will start to come through next year, enabling double-digit profits growth in 2005. Interest was just positive for a favorable US rates, and should be around 2 million positive for the full year.

The tax charge is based on our estimate for the full year over 29% rate on profit before goodwill amortization, and I suggest you use 30% for 2005. The average number of shares was 935 million, and use that figure as the average number for the full year, and use 940 million for next year.

Just looking briefly at the marked nine months to date. Underlying sales growth is 11%. The reconciliation of that to the reported number of 6% is, again, given in note one. EBITDA growth is 14%, reflecting over 1% of margin improvement. And earnings per share before amortization growth is 14%.

Anticipating the question of what reported sales in EPSA growths would have been had we done a US dollar consolidation? The answer is, that would have been 19% for sales growth, and 29% for EPSA growth, both for the quarter and for the nine months.

Net debt closed at 162 million-sterling, after spending 69 million on MMT earlier in the year. The conversion of EBITDA into trading cash flow is 46%, and for the full year, we're expecting this to be around 60%.

This reflects the buildup of inventory and instruments at Ortho to fuel its increased growth, and insurance receivables on settled macrotextured claims. Net of tax dividends and acquisition costs, we're now looking at net debt of around 120 million at the yearend, assuming the dollar at 1.80, being the dollar rate at the end of the quarter.

This has been a strong quarter, and we continue to guide to high-teens sales growth for orthopedics, high-single digit sales growth for endoscopy, and now mid-single digit for wound management for the full year, and at least a 1% increase in operating margin overall. This requires underlying sales to pickup a couple of points more in Q4, given there are two less sales days in Q4, compared to last year, and we're looking to an EBITDA margin of 21.5% in the last quarter.

I'll give you some help on translation currency in Q4. If the dollar remains at 1.80 and the Euro 1.45, the effect would be to reduce sales growth by 3% in Q4, but against that don't forget the benefit of the MMT acquisition to the topline.

And with that, I'll hand it back to Chris, but before doing that, I'll just remind you that I will be giving a web cast presentation and teleconference on our adoption of International Accounting Standards. This will be held at 2:00 p.m. GMT and 9:00 a.m. Eastern on the 17th of November. I'll let you have further details near the date. And with that, I'll pass it over to Chris.

Thanks very much, Peter. Well, we indicated at our Q2 results that we expected to accelerate sales growth across the business in the second half of the year. We're delivering against this plan following the sales force and marketing initiatives of the last 12 months. Orthopedics continues to take share, particularly in reconstructed joints. Oxinium continues to drive sales in the US, and is used in some 40% of knees and hips, and we're looking to introduce a revision knee component made of Oxinium next year.

We're also making a substantial investment in education and instrumentation to drive future MIS knee and hip growth. We're confident that we're going to gain approval for our ceramic-on-ceramic hip from the FDA, but we've yet to receive the formal paperwork. Our substantial investment in a dedicated trauma sales force in the US is as predicted, starting to gain traction. Our US trauma growth stepped up in the quarter, and we gained market share.

Our sales force recruitment and training continues with the aim of covering all US level-I trauma centers by yearend, with dedicated sales people. We are surgeon trialing a new compression locking plate and screw system, which we expect to launch in the first half of next year. Clinical therapies, which markets our unique Exogen Ultrasound Bone Healing System, and our joint fluid therapy injection SUPARTZ increased its dedicated sales team again, and generated an outstanding 49% growth in the quarter.

Endoscopy continues to see strong repair and visualization sales, with growth to date in the US of 7%. Outside the US, as predicted, we saw the UK and Japan pickup on their Q2 performance. Our new progressive scan camera system is now fully available in the US and being rolled out internationally. This is growing our business both in visualization, and in the digital operating room program, coupled with our audio-visual systems generated from the Reed Medical acquisition earlier this year.

ACTICOAT and DERMAGRAFT continue to grow extremely well for wound management. In the US, ALLEVYN is growing strongly, but it did have a quieter quarter in Europe. While US sales in Q3 were, again, impacted by last year's loss of the Santyl enzyme debrider product, the effect of this is reducing. Excluding this, the growth of the business in the US is excellent at 15%.

Going forward, orthopedics is investing in inventory and instruments to drive future growth. Combined with the usual seasonal factors in quarter four, this puts us on track to meet our mid team earnings per share growth for the full year.

We have a strong momentum going into 2005, which with a number of significant new initiatives sees us looking for high teen sales growth again at ortho, and high single digits at endo and at wound. We're also planning further margin improvements in 2005, which all gives sustainability to our mid teens EPSA growth target going forward.

So with that I'd now like to ask our operator to set us up to take questions.

OK. Thank you, sir. Ladies and gentlemen, your question-and-answer session will now begin. if you wish to ask a question, please key "star" "one" now.

Hello, operator?

We have our first question and it comes from.

Mark Landy.

Hello there.

Hi there. Wow, that's a new system you have there. Good morning, guys.

Good morning.

Good morning.

Just on the PMA for the resurfacing products, could you maybe detail what your expectation are in terms of timing for a panel?

It's really too early to say that. We have submitted the documentation to the FDA. They have accepted it, and they're taking it into their system. As you know, the December panel was canceled. There is no current date set for a panel on this at this point in time. Obviously, if this becomes available, then we'll update people as more information comes through.

So when you say accepted, you've gone through your initial round of questions, or have they just accepted the filing and you're yet to get your questions?

They have technically accepted the PMA. We have not gone through our first round of questions. The PMA was submitted during the quarter, and we would expect to go through that round of questions sometime this quarter. And then probably we'll have some better feel for where we are going forward. That is encouraging, they have accepted this PMA based on the data we've submitted. Which we believe to be very, very strong.

So, then, it would be fair to assume that the 100-day meeting would probably be kind of in the very beginning of next year?

It was submitted during the quarter, so that's a reasonable assumption.

OK. Thank you very much, guys.

Thank you.

OK. Thank you. And our next question comes from, I believe, its Mr. Hans Bostrom from Smith and Messy (ph). Please go ahead. Your line is live.

I thought you were from UBS actually Hans, but anyway nice to talk to you.

It's actually Goldman Sachs.

Goldman.

Yes. Well, I'll start off with congratulations to these very good results.

Thank you.

And I had a couple of questions, if I may. Firstly, on the IDET product, could you discuss with us what the actual status is of the efforts you have to gain a more -- somewhat better and more rigid reimbursement for this product and what the time lines are for this, and how you've seen this changed over the course of 2004 and also expectations for 2005?

And secondly, if you could give us a sense for -- so I know this is a very difficult question for you to answer, but we've seen a slight reduction in the run rate of revision cases as far as we can calculate on the macrotexture Oxinium knee, but it's ever so slight from 72 to 66 a month, how should we really forecast this going forward? Is there any reason to believe that this will dramatically drop off in the fourth quarter, or we should only see a slight reduction in this revision rate?

OK. Can I just confirm that the first product you are talking about was IDET because the line went a bit funny.

Yes, that's correct.

OK. The reimbursement position for IDET hasn't changed in the quarter. We are looking to pull together the strong body of clinical evidence that does exist for IDET, and the increasing sales that we are getting internationally, but sales in the US have not been increasing, in fact they have registered a slight fall in the quarter. And getting good coverage of reimbursement is a significant challenge for our business in this area.

In the US, we currently have 19 million lives covered. And what we're seeking to do is to develop this on a -- by talking to individual payers related to the clinical information that we have going forward. We also do have a tracking code with the AMA, and we'd like to see if we can get that stepped up. But that's a longer-term objective.

Our view is that this is going to take us some time, and therefore we're not looking to see significant growth inside the US in our IDET product per se, but our facet denervation product line, and our new generator which services IDET T-compression catheters, and facet denervation is giving us some positive vibrations in this area. And the facet denervation is, while not a huge product line, is satisfactorily reimbursed.

So we're moving forward with this, realistically, I think it's going to be 2006 before we see a step-up in reimbursement in material terms in the US in terms of IDET. Now moving on to macrotextured, you're absolutely right to observe that the rate of revisions in the last three months is lower than the rate in the previous three months, and I don't think we're in a position where we can call that a trend, we're being cautious about that. Because all sorts of factors play a part in when revisions get done, medical, social and all the rest of it.

So it's really too early to call it a trend, but the observation we have made to you and other people is that obviously the peak sales of the macrotextured product were in the second and early third quarters of 2003, and broadly the apparent peak of revisions looks as though it's around a 12-month delay from implant with a spread of four or five months on either side.

So as we've said to you, we think we'll see revisions running on through the end of the year. We are encouraged, modestly, that the rate has decreased, but we're very hesitant to indicate to anybody that that is a peak trend at this time. I hope that's helpful. But that's how we view it.

Yes, I just want to try and get some further clarity on this because you do mention 12 months as the average lead-time between implantation and revision. You should start to see a decline in the revision rate clearly in the fourth quarter, but you are not really confident that that will be the case, then?

Well, there's a spread of, let's say, five, maybe six months either side of that, so if you take the six months from August, you're into early next year. So I think it will be early next year before we can actually say this is definitely the pattern, because we are still seeing some revisions, as you observed.

They're not increasing, they are decreasing over that period of time, but we're just being cautious that there may be factors, which we don't understand related to that. But we did say we thought that we'd see revision through the end of the year, and that encompasses broadly the 18-month period, into very early next year.

I would presume that is underlying your assumption that this is a business-wise manageable issue, then, that you will see a reasonable continued rate of revisions until early next year, is that how I should interpret you?

What we've said, we see this as manageable from a business point of view in that we have -- I believe we've handled this very positively with surgeons and with patients. We've seen no adverse reaction from surgeons related to our business with them. and as you do know, we do have -- we do carry substantial insurance coverage, as you'd expect, and in terms of all of those things, we'd continue to believe that this is very manageable.

OK. Thank you very much.

Thank you.

OK. Thank you, sir. And our next question comes from -- I believe its Michael Jungling from Merrill Lynch. Please go ahead. Your line is live.

Yes. Good morning, and good afternoon, gentlemen. Just three quick questions, perhaps. Just on the first one, looking at your outlook for 2005 in orthopedics, I mean, it looks fantastic, high teens growth. And I'm just wondering, what sort of visibility do you have to achieve growth that is so much higher than the current growth rate of the market?

And perhaps you can also give me an indication as to what assumptions you're making for growth in recon well as in trauma to get that high teens growth in orthopedics? And secondly, the margin in wound management recovered very well in the third quarter from Q2, despite seasonally being a weaker quarter. I would just like to know what has sort of driven that margin improvement.

And then thirdly, you mentioned before that the IDET technology continued to show decline moving into the third quarter. I'm just wondering whether this will require perhaps -- do you think the orders will require you to perhaps do an impairment charge on the acquisition that you've made, given than 2006 is perhaps the earliest time you will see an increase in reimbursement?

Right. Let's try and deal with those. We do believe we've got very good growth prospects in orthopedics. Based on our product line-up, which is extremely strong in recon led by Oxinium, led by excellent programs in MIS knees and in hips. We've got a strong lineup of new products including Oxinium revision coming through next year. And the effect of the trauma sales force investment has also freed up full-time recon reps in equivalent cities.

So, we believe that we'll continue to see strong recon growth, we're not giving a precise forecast, but the indicators are we'll be in somewhere north of 20%. What we do expect to see is a step-up in trauma growth beyond this year, because the investment we've made there in sales people, particularly in the US, but also in other countries, too, and from the very strong product lineup we're bringing to the market, including locking plates next year.

We're getting very good surgeon response to our trials, and that would clearly be our lead trauma launch for next year. We can't neglect clinical therapies, which although it's our smallest sales segment, is just performing outstandingly and we've continued to invest in the last quarter in adding to their sales force, because Exogen is gaining share dramatically in the bone stem market, and SUPARTZ is gaining share in the joint fluid therapy market. So all the signs are very, very good there.

So the combination of those makes us very confident. We'll have a high teens growth prospect for ortho next year. Peter, do you want to deal with the margin question?

Yes. On wound margins -- I think basically you can see there's been a very strong growth in the US, which is obviously a profitable market for us, and if you recall a year ago, or just over a year ago, I mean, wound was commissioning -- had plant commissioning delays, and basically let's call it -- that is behind us and say -- the plants are sort of running without inefficiencies. I mean, that's basically it.

IDET, you want to cover that?

Yes you talked about impairments and the like, I mean, I think we're satisfied today that the ORATEC acquisition taken as a whole supports it's carrying value -- IDET is only one of one of a number of products within the ORATEC radio frequency line, in fact it only counts at 20%. And so, you know, we have looked at this, I don't think we have a carrying value problem.

OK.

And you see the point is -- it is only a part of the value we acquired with ORATEC. OK?

OK. Thank you.

OK. Thank you, sir. And our next question comes from Milton Hsu from Bear Stearns. Please go ahead, sir. Your line is live.

Hi good afternoon. I have three questions. Peter. Sometime in the middle of '03, you gave some financial guidance, I think it was 19% EBITDA growth and 20% for the full year. And this quarter looks like it came in better than your comments may have indicated, at least that's the way I took it. Did this supporter come in as a surprise to the upside to you?

Well, in terms of guidance, I mean we obviously -- I mean, 19, 19.5, honestly -- I don't honestly think that we can sort of guide and forecast that accurately - let's say it's a 0.5% of margin. You might think we can, but the real world is we can't. I only intend to talk in rounded terms anyway Milton, otherwise you are just chasing decimal points up and down the page.

Certainly we've had a very positive performance here, we've seen ortho a little bit stronger perhaps and wound perhaps a shade weaker. Ortho has a better margin than wound. It swings the margin - at the margin, as they say, so broadly within -- we feel we're just at the top end of the ballpark guidance.

That's a good point Chris, there is a mix benefit because the orthopedic is a higher margin business and is a high gross business, but it has a higher SG&A, and you can see that being reflected in the mix of the cost structure of the group.

OK. And then Chris, you mentioned some share gains in the US with respect to your ortho business, can you just give us a sense of what accounts this is coming from, basically is it smaller players or your larger competitors? And it just seems like Oxinium is still doing well, but you're gaining share not -- maybe not because of new products, because of the fact that you've freed up some of your recon sales people. Is that sort of accurate?

In the third quarter, the biggest driver was the release of MIS knee sets. As we told you during the second quarter, we had a huge bolus of these going through the factory, and we released a very large quantum of them during the third quarter. We've started to see a pickup of these, as surgeons schedule treatment. And encouragingly, around a quarter of the surgeons who've signed up for MIS education are from competitive accounts. And that's probably the best way of giving you a feel for what's currently going on there.

We have launched our tandem bipolar, really that's probably giving us gain more in existing accounts, where we're pushing out competitive alternatives because it's a long time since we upgraded that product. And what we really have done is solidify a lot of the area around our accounts, and then lead with Oxinium and MIS, which you need together to penetrate new accounts.

So, a lot of the share gain we've seen in this quarter, in recon, has come from, if you will, solidifying existing accounts while pioneering what goes on in new accounts. In trauma, it is new accounts, where we have established a greater degree of strength where we're doing trials of our locking plate, and we're getting very good traction from our new Jet-X, External Fixator, which was a big gap in our trauma product line.

And obviously, we believe we have a sales force balance and structure right with a dedicated trauma team, in metro centers that gives us dedicated recon team, and with the clinical therapies sales force, which is able to handle these two products very effectively for almost 50% sales growth.

So, a lot of it has been about sales force dynamics, working with the accounts that we have to strengthen and solidify those, and build the architecture to really go after competitive accounts in 2005.

OK, and just the last question on one of your comments. 25% from the competing surgeons with MIS, can I assume that these are surgeons who are loyal to companies without MIS, so something outside of Zimmer and Stryker?

No, I don't think you can assume that. I think particularly, our MIS knees, we believe to be the best MIS knee technique. We could argue about whether our MIS hip is absolutely the best or not. And our marketing guys would certainly argue that it is. It's very good.

So, what we are doing, though, is it's the combined benefit of Oxinium and MIS that's really helping us. We have the best, advanced there in technology, but the leading surgeons don't want to put that in without the MIS technique. So, we needed those two together. So, it's the combination that's really driving our business forward, and we're attracting surgeons who are using all competitive products across the whole spectrum.

Great, thank you.

And in the course, that doesn't mean they'll necessarily convert, but that's the best feeler we can give you.

OK, thanks a lot.

Thanks Milt.

OK. Thank you, sir. And our next question comes from Mr. Lachlan Towart from UBS. Please go ahead.

Hello.

Hello, it's actually Martin Wales from UBS.

Hi Martin.

Afternoon. Couple of quick questions. Just as one further clarification on the action macrotexture knee revisions. I think, Peter that you made some comment to the effect that it was settlement, which I believe are now greater than 50% of cases manageable within normal business.

Should we read from that it's all covered by insurance or you're anticipating some costs out (ph) with insurance at this point? My second is unrelated to that, just for you to remind me what the product launches for the rest of this year, and the extent to which you've already launched those products versus what still has to go out if this varies.

I mean, I think we've indicated that the macrotextured is -- we carry substantial product insurance, and that's how we expect it to be covered. We can't really say much more than that. The products that are being launched in this quarter include, really the real rollout of the tandem bipolar and the Accord cable system for particularly revision hip surgery in orthopedics.

We do expect to get the ceramic-on-ceramic approval. That will probably have a minor effect in the quarter, but it will get rolled out, at some point, we would expect. We have launched some new shoulder products for Endoscopy, Bioraptor is one of our new fixation systems, and the full rollout of our CLEAR-TRAC shoulder cannula is really occurring in this quarter.

So, those are the big releases that we've got going on in this quarter. Now, additionally we do have computer-aided surgery systems going out in orthopedics. They -- so then per se that they drive implant sales, but quite frankly they will have a marginal impact in this quarter. We do expect them to start getting some traction next year. OK?

OK, thank you very much.

OK. Thank you, sir. And our next question comes from...

Roger Tanually (ph). Good morning, thanks for taking the question.

Hi.

Question on the guidance for next year, the high teens ortho growth. I'm curious, you didn't mention either ceramic-on-ceramic or MMT as necessary to reach that. Is that true? Is that true -- are you is that sort of potential sources for upside in next year?

Well, broadly, MMT is going very well. We would expect MMT to play its part in our hip programs. And MMT is, if you look at our hip growth, very strong outside the US. MMT is pulling through other hips alongside it, as part of a total program, which is a very exciting development for us.

So yes, I should have mentioned it. It is a very important development opportunity for us in 2005, and beyond. And obviously, when we get approval in the US, which we can't really call the shots on timing-wise, but is probably going to be 2006 or thereabouts. Then we'll also see, we think, a very strong effect in the US.

Right, but ceramic was -- I was just going to say but those, sort of those numbers, they don't really assume any approval in '05 for that product?

No, they don't. No, they do not. So, if we got MMT approval in the US in '05, it might have an impact. It would be very much in the backend, but in our thinking it's probably somewhere in '06.

Ceramic-on-ceramic will be a useful product for us, but remember we already have a 40% penetration of hips and knees with Oxinium, so it will be an adjunct to that very strong program, because other players have only achieved a 30% penetration, approximately, of ceramic-on-ceramic in the US. We were already 10 points higher than that.

But there are some surgeons who like ceramic-on-ceramic, and we believe in pulling together a product line that offers the surgeon the choices that he wants to give to the patients. And if we add ceramic-on-ceramic and then subsequently hip resurfacing, we will have the strongest advanced bearing lineup in the marketplace. We have it outside the US. We'll get it inside the US when we get the MMT approval, and obviously the ceramic-on-ceramic, too.

Right. On the MMT front, is it exclusively European data you submitted for your PMA?

Yes, it is.

OK.

Well, OUS data because it also includes some Australian data.

So none of it is...

None is US, and the encouraging thing is the FDA has accepted the PMA, and is now going through the data.

Right, so there was no -- they didn't have any sort of, push back from the fact it was outside the US? They haven't as yet?

No, but we have not had their questions yet, so as we talked about earlier, but it's very encouraging, they have accepted the PMA submission we gave them, which we believe to be an outstanding PMA, the clinical data is very good.

And then just one last question on that. Can you give us a sense of where hip resurfacing stands in the UK, for instance, as a percentage of hip replacements that are done, what percentage are done resurfacing versus sort of total hip?

We believe it's somewhere around, between 12 and 15% of the UK hip market, which clearly indicates why we're so excited about the potential of MMT.

OK, thank you very much.

Thank you.

OK. Thank you, sir. And our next question comes from.

Edan Wi (ph).

Go ahead.

Hello. Good afternoon, everyone. I have several questions. First of all, in terms of the locking plates you plan to launch next year, would you be able to talk about comment on how it differs from products already on the market, and also your pricing strategy for that product?

I can talk about the products. In terms of pricing strategy, I think we'll talk about that nearer the time, Edan. It will be a premium priced product. We're very excited about the potential. We believe the way we've developed the contours in the product, and the unique locking features of the screws makes it easier and faster to use than competitive products for the surgeons.

That's certainly the feedback that we've had from the trial centers that we've used. And this is consistent with our approach to surgery of making surgery easier and faster for the surgeon, which benefits him, and it benefits obviously the patient, and obviously benefits the hospital system. So, we've taken that design approach from our other products through into the locking plate system, and the feedback is very good.

And in terms of the different variations of the plates, you intend to launch, how much -- of the ones that you're going to launch next year, what sort of -- what percentage of the potential market do you think they would represent?

The main program next year will relate to the lower limb, which is more than 50% of the market.

OK. And then next question is, would you be able to talk about the differences between the data you have submitted, with the bone in hip and the ones that your obviously, the other companies have tried to submit, or have failed in and therefore they had to go through an IDE. I mean what makes your data different?

Well, it's very good data with very good outcomes, very, very low revision rates, or any kind of technical problem. The combination of the metallurgy, the design, and the instrumentation for building the product then makes it a very, very successful procedure. I can't comment on the others, because I don't know the details of them.

OK. I mean, in terms of the regulatory side of things for this product, now that the FDA has accepted the PMA application, does that mean that you no longer have to do an IDE study for this, or is that yet to be determined?

Well, it would be extraordinary if they asked us to do an IDE study, having accepted the PMA. Because essentially by accepting the PMA, they're saying there's adequate data on the face of it for them to review it as a PMA, and therefore we do not expect to have to do an IDE trial in the US.

OK, great. And then, a question regarding the Oxinium revisions. When you talk -- the 640 figure that you've given, is that -- does that represent the number of revisions that have been done or the number of cases that have occurred versus reported?

Number of implants that have been revised.

Right. And do you know how many more implants are waiting to be revised?

No. No, we don't. We don't have visibility until the surgeon or the patient or some combination of them actually contacts us and gives us a date for which surgery is scheduled. Typically, we actually find out after the event.

Right. And I think I have two more questions. Would you be able to give us an update on the market acceptance of GLADASE, is that speeded up a little bit, or still the same?

It's speeded up a bit. But basically we have our wound management team in the US focused very strongly behind ALLEVYN and ACTICOAT and DERMAGRAFT. And we have not redirected their priorities towards GLADASE per se.

Clearly that's driving the 15% growth we're seeing absent the Debrider product lines in the US. It's being very successful. The second GLADASE product is in evaluation trial in various centers. It's closer to Collagenase, it's not Collagenase. And I expect we'll see a useful pickup in sales, but we're not focusing sales force time on it.

OK. A follow-up to that is, I mean, you've historically said that you provide a full platform for treating of products for treating every stage of the wound heating process. I mean, by not having an enzyme debrider, one would expect the sales of your other products would be compromised, but you're not seeing that happen. Would you be able to comment on that?

But we do have an enzyme debrider. We have -- obviously, we do have Collagenase outside the US, we have GLADASE inside the US, it's certainly not detracting in anyway from the sales of our other products, as you can see from the numbers.

OK. And then last question. Would you be able to talk about the sort of -- number of surgeons that have been trained with your MIS products, and how the instrument releases have progressed in their outlook for the rest of the quarter?

If I can actually -- find the answers -- OK. The number of surgeons we trained in the quarter were 113 in hips, and 220 in knees, and we have the number of sets that have gone out. Can anybody point me to that?

Yes. We've got 463 sets, between hips and knees that went out in the quarter, a huge number.

And the cumulative number since the launch?

We've got 1,400 hip and knee sets out in the market in total.

Yes. 700 each.

Yes, roughly 700 each.

700 each.

Knees will eventually be higher than hips, but they're caught up, now virtually.

And surgeons? Trained -- surgeons trained, since you've started this initiative?

About 700 surgeons trained in each.

All right. And your plans for Q4 and going into 2005 is there much still to come?

That we continue rolling training programs at about the same sort of rate.

OK. Great. Thank you.

OK. Good. Thank you.

OK. Thank you. And our next question comes from -- I believe, its Mr. Steven Lichtman. Please go ahead. Sir, your line is live.

Great. Thank you. Most of my questions have been answered. Just a couple, Chris, I was wondering on minimally invasive, if you could give us a sense of the feedback that your reps are getting from surgeons on both the hip and knee MIS? And what they're saying -- the surgeons are saying regarding the benefits and perhaps the differentiation of your platforms versus what's out in the field?

I think, the thing that we have, Steven, is with our MIS design, the instrumentation design, we are combining the minimal incision with the ease and speed of use of surgery. Now, our Smith & Nephew surgeons are used to that. What the -- what we -- and we saw this with Oxinium, when we introduced this into competitive accounts.

We're seeing now Oxinium and the minimally invasive surgery. Surgeons are saying "Gosh, we really like your instruments." So it's a combination of the very good minimal incision capability, plus the ease and speed of surgery, and consistently where we've got Oxinium into competitive account surgeons will say, "Oh, we really like this, we'll do some of your cobalt chrome, as well."

So it really enables us to penetrate the account. So that's why we're so strong about knees. In hips, we have seen very positive feedback, and we have introduced what may sound like a little feature, which is a light system, which works with the instrument to look inside the wound.

And actually, obviously, the smaller the incision, the less the visibility, and we're getting very good feedback from this (inaudible) light system. Which is really part of the instrumentation rather than product sale, but is really helping to get surgeons to do very good quality minimally invasive hip surgery. Some of our competitors have struggled on the quality end, we understand. So people are very receptive to our product line.

OK. Thank you. And just lastly, for Peter, you spoke about margin improvement into 2005. Could you give us broadly some scale, should we look for it about inline in terms of the improvement we're seeing in 2004, and will it come pretty evenly between gross margin and SG&A?

Well, I think at this stage of the year, the margin expansion will be just under 1%. It will be over 0.5%, but it will be just under 1%. So if you want to use a 0.75% margin expansion, I think that would be a good starter. And it'll be becoming really from a -- you'll see the mix shift that you've seen, you can see this year with the numbers, you'll see that repeat itself next year, because obviously orthopedics is growing faster than the other two and orthopedics is a higher margin business, but a high SG&A business. And so you'll see that come through. But I mean, I don't frankly have the -- at this stage the detail of the cost structure to give you this morning.

OK. Thank you, gentlemen.

Not helpful for an opening guidance. Obviously, we'll talk more about this, when we get to the year-end result

As we get into year as well.

Perfect. Thanks.

OK. Thank you. And our next question comes from...

Charles Weston.

Go ahead, sir.

Hello. I have just three questions. Firstly, a numbers question for Peter. And I'm wondering, if you can give us some of the information, you've given us on previous conference calls in terms of the penetration of Oxinium in hips and knees at the end of third quarter and separately? And also the growth rates of SUPARTZ and Exogen separately in the US and ex-US.

Yes, I can. Basically, Oxinium in US knees is at 40%, and Oxinium in US hips, and it's only -- I mean, it's only those hips that take it, is at 45%. Growth of SUPARTZ and Exogen, I gave that growth number to somebody last night. Have you got it?

We may have to come back to you.

It's on a piece of paper and I can't remember, which piece of paper it's (inaudible).

Shall I move on?

No. 60% on SUPARTZ, and 36% on Exogen.

And then, do you have that US mix here? I guess that's primarily US, is it?

True. It is primarily US.

OK. So two other questions. First of all, could you give us indication of when we might see data from the DERMAGRAFT trial in venous leg ulcers, and when you might expect approval from that?

We expect to submit the supplementary PMA during this quarter, and we would expect therefore the FDA to look at it. And with luck we'll get an approval late 2005, but we've taken no account of that in 2005 numbers, recorded as 2006 benefit.

OK. So on that DERMAGRAFT, could you reminds us as of your guidance, I think, you have some long-term sales guidance for DERMAGRAFT?

This year, we expect to be in high teens of dollars in DERMAGRAFT.

It's 15.

It's 15?

Yes.

16, something like that?

15, $16.

Yes.

And I mean, taking the tissue engineering in total, which is -- what drives the profitability or sort of guidance...

Trends...

Yes, trends out in there and you're talking about the guidance, which we're aiming at is in 2006, 2007 is where the $50 million target lies.

Yes.

And does that include the venous leg ulcer being approved?

The assumption there is that venous leg also would get approved in 2005.

Yes.

OK. Thank you. One last...

But not for sale, sales in 2006.

Yes. I mean, that's basically on DERMAGRAFT foot, DERMAGRAFT leg and (inaudible).

OK. Thank you. And lastly, just going back to the IDET Procedure. Could you tell us what the age distribution is of the patients, who actually receive this therapy?

Well, it's a very simple answer that which is no. Typically, if your question is, are they Medicare patients?

That's the question.

No. They're broadly, most of them are below 65. So, it's not a Medicare pay issue. It's a private pay issue.

Private pay workers' comp.

Yes.

Private pay workers' comp type market. So I mean, you're bracketing people in the 40s and 50s, really.

OK?

OK. Thank you.

Well, we can probably take two more questions.

That's fine. Sir, we have two more questions in the queue. And our next question comes from Hans Bostrom. Please go ahead.

Hans Bostrom here again, from Goldman Sachs. Follow-up questions. And firstly, could you comment on what assumptions, you are making on pricing in orthopedics in 2005, in the US and the rest of the world, if you could split that out?

Well, basically the answer is really not much changed, frankly. The DRG, as you know, doesn't correlate directly. It obviously, it still gives the headway for the industry, and our pricing has been pretty stable, really, over the last couple of years plus three in the US and outside the US, in orthopedic by enlarge breaks even. And we see that continuing into next year.

You don't actually see negative pricing outside the US, which one could have thought given the Japanese price cuts and also pressures that you're likely to see in many continental European markets?

Yes, we do see those Hans. Broadly with our mix of business, though, what we see is price increases in some countries in such as the UK, Australia, some of the markets around the world. We do see this bi-annual push from the Japanese to bring the prices down.

And there is some price weakening in Germany and France. What is really helping us is our rate of new product introduction. Which is enabling us to re-enter products in those markets with a new price, if you were. If you will.

So in the round, the guidance we gave, and that actually has worked out to be remarkably consistent, is within those overseas markets. Our positioning is such that effectively pricing is flat in orthopedics, but it is up and down between different markets.

And lastly, on the topic of Germany, could you specifically refresh our memory, what is the change that it taking place in the German wound care market that is -- that straining your business there?

Really quite a substantial change in -- there are two main changes. Number one, the introduction to DRG system is continuing to gather pace. That doesn't significantly affect our wound market. The change that has made the biggest difference is the introduction of a fee per visit to the general practitioner.

And it's only 10 euros, but the German population are very resistant to this, and you're allowed, if I recollect, one free visit per quarter then every subsequent visit you have to pay 10 euros. But it has change the visit pattern and the prescribing pattern of community based advanced wound products.

And actually caused some fluctuations in the market, because obviously the distributors are trying to balance all the inventories and so on and so forth. So, it's been quite a change in the marketplace. It's working its way through, but overall it's down demand a bit.

Should I then infer that you would be seeing a pickup, of course, it sounds like this is just...

I'd like for you to infer that. We haven't actually seen any signs of that pickup, yet Hans. We're looking for it very hard. But typically what happens is it takes a little while for these systems to stabilize. They always create opportunities as well as problems.

And we are getting growth in Germany, but it's a slower rate of growth than we've been accustomed to seeing, in wound management. And we did have a slowish third quarter. I think, we'll get our growth in Germany, I do expect, but it's taking a while.

And one very last point. The DERMAGRAFT sales growth clearly was the lowest that you've recorded for some time now. What should we understand from that?

Well, that's a good observation. We do have a focus selling team on our DERMAGRAFT product line. Unfortunately, the two hurricanes that hit Florida, hit our customer service center on the day, when we get our biggest orders for DERMAGRAFT, so while we don't want to make a big fuss about it. There was some considerable disruption of the DERMAGRAFT supply to patients, unfortunately, as a result of the hurricane.

Initial supply across the US as a result of the hurricane impact, and safety precautions we have to take for our staff, in the third quarter. So, we do expect DERMAGRAFT sales to pick up in the fourth quarter from the level you've seen there.

Just as we're talking about hurricanes, also our endo sales suffered a little bit because a couple of quite substantial digital operating room orders in Florida got delayed, because people evacuated for their own personal safety rather than concentrate on ordering our excellent digital operating room. We can quite understand that, but hopefully we'll pick those up in the fourth quarter. So, there was a little impact of the sequence of hurricanes on our business, primarily in DERMAGRAFT and endoscopy.

Great. Thank you.

OK.

OK. Thank you, sir. And the last question comes from...

Bill Plavonic.

Please go ahead, sir.

Great. Thank you. Good evening.

Hi, Bill.

Hi. Actually all of my questions have been answered. Good quarter. Thanks a lot.

OK. What a great way to finish. I don't need to say anything now. We thoroughly enjoyed the quarter, we've enjoyed presenting the results, we do like to gain market share, and it's very evident we've done, so particularly in orthopedics. So, well done to all our teams around the world. We're looking forward to a very good strong fourth quarter. Thank you all for joining our call.

Thank you, ladies and gentlemen. That concludes your conference call for this afternoon. Thank you for joining us.