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Smith & Nephew PLC

Smith & Nephew PLC (SN) is a Watford, United Kingdom-headquartered diversified advanced medical technology company, which hold market leading positions in advanced wound management, trauma and extremities, sports medicine, and hip and knee implants. The group has operations in more than 100 countries worldwide, supporting healthcare professionals by developing, manufacturing, marketing and selling medical devices and services. The operations of the group are differentiated in three operating segments, namely Sports Medicine & ENT, Orthopaedics & Trauma and Advanced Wound Management, with the aim to simplify and improve the operating model.

Trading update
In the third quarter ended 28 September 2019, Advanced Wound Management revenue was up by 2.1% and Sports Medicine & ENT accelerated from the strong first half as it delivered revenue growth of 6.9%. Maintaining good momentum established in the first half, Orthopaedics delivered 3.4% revenue growth, while as 390bps benefit of acquisitions outweighed 140bps currency headwind, reported growth in total revenue was 6.5% and revenue was up 4.0% on an underlying basis. Trading profit margin was expected to be around 22.8% and underlying revenue growth was anticipated to be in the range 3.5% to 4.5%, as the full year guidance was updated, the results for which would be released on 20 February 2020.

Financial Highlights (H1 2019, in $m)
 
(Source: Company Filings)

On an underlying basis, revenue surged by 3.9%, while due to the growth in foreign exchange and benefit from the acquisition, the company’s reported revenue increased by 1.8% to $2,485 million as compared with the corresponding period of the last year. With incremental benefits as compared with the corresponding period of the last year, the ongoing APEX (Accelerating Performance and Execution) programme incurred restructuring costs of $48 million in the first half of 2019, while operating profit increased to $419 million against the $372 million in H1 2018. Basic earnings per share were reported at 35.3 cents, an increase from the previous year and adjusted earnings per share (‘EPSA’) rose by 5% to 45.8 cents against the 43.7 cents in H1 2018.

Share Price Commentary

Daily Chart as at 1^st November 2019, before the market closed (Source: Thomson Reuters)

On 1^st November 2019, at the time of writing (at 9:30 AM GMT, before the market closed), SN shares were trading at GBX 1,663.5, up by 0.696 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 1,998.40/GBX 1,336.50. The company's stock beta was 0.33,reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £14.41 billion, with a dividend yield of 1.71 per cent.

Conclusion
The group is exposed to the effects of political and economic risks, including the impact of Brexit, as the market expects macro-economic uncertainty or downturn in the UK economy as a result of Brexit. Global political uncertainty regarding trade policy also poses a risk for the group, including protectionist measures and regulation or legislation in local markets. Inability to keep pace with significant product innovation and technical advances to develop commercially viable products, and risk of adverse trading margins due to fluctuating foreign currency exchange rates across main manufacturing countries also poses a significant threat for the group.

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the current price of GBX 1,663.5 (as on 1^st November 2019), while we look for any upcoming catalysts in the near term.
 

Indivior PLC

Indivior PLC (INDV) is a North Chesterfield, USA-headquartered speciality pharmaceutical company which focuses on opioid addiction treatment drugs and has over 20 years of experience. The company was formed in 2014 after Reckitt Benckiser separated its speciality pharmaceuticals segment into an independent company, which focused on developing, manufacturing, and selling prescription drugs used for the treatment of opioid dependence. Primary products of the company are Subutex and its Naloxone-combined preparation Suboxone, and the core geographical segments are the United States and Rest of World.

Trading Update for Q3 and YTD 2019 ($ MN)
      
(Source: Company Filings)

In Q3 2019, total net revenue decreased by 19% at actual exchange rates (-18% at constant exchange rates) to $199 million (Q3 2018: $245 million) and total net revenue YTD 2019 decreased 15% to $652 million (YTD 2018: $768 million) at actual exchange rates (-14% at constant exchange rates). YTD 2019 gross margin was 85% (YTD 2018: 88%) and 83% in Q3 2019 (Q3 2018: 86%), while on an adjusted basis (ex.-exceptionals), YTD 2019 SG&A expenses declined by 27% to $271 million (Adj. YTD 2018: $371 million). Reflecting lower net revenue, Q3 2019 operating profit as reported and on an adjusted basis was $57 million, 20% lower compared to the prior year, while on an adjusted basis (ex.-exceptionals), YTD 2019 operating profit was $248 million versus $254 million (33% margin) YTD 2018, and YTD 2019 operating profit as reported was $220 million, 19% lower compared to the prior year. Q3 2019 net income stood at $48 million. YTD 2019 net income was $189 million (YTD 2018: $251 million).

Share Price Commentary

Daily Chart as at 1^st November 2019, before the market closed (Source: Thomson Reuters)

On 1^st November 2019, at the time of writing (at 9:30 AM GMT, before the market closed), INDV shares were trading at GBX 39.25, up by 0.38 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 223.50/GBX 20.98. The company's stock beta was 0.74,reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £284.86 million.

Conclusion
Due to the poor performance from Suboxone Film, as it lost market share to generic competitors, the company reported a sharp decline in revenue and profit on a reported basis in the latest quarter. In April, the US Department of Justice indicted the company on a range of charges for fraudulent marketing of its treatment for people addicted to opioids, and while the company contested the charges and hailed its strong defences, the company is expected to face downside pressure until updates are provided in the near future.

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the current price of GBX 39.25 (as on 1^st November 2019), while we look for any upcoming catalysts in the near term.

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