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Orthopedic major Smith & Nephew (SNN - Snapshot Report) recently extended its well-regarded Legion Total Knee System with Legion Narrow Femoral Components containing Oxinium Oxidized Zirconium. This new addition is the only narrow component that offers the company’s proprietary Verilast technology.

The latest component of the Legion Total Knee System is narrower in the medial/lateral dimension. It thus provides better fit and wear performance by enabling surgeons to closely fit the Legion Narrow Femoral Component to a patient's natural anatomy.

Clinical studies also support the construction of the Legion Narrow Femoral Component as the implant of a wide femoral component can result in overhang of the femoral component in patients with smaller femurs. Studies reveal that improving implant fit can reduce distress and increase satisfaction among total knee replacement patients.

Considering that wear performance and fit are the major concerns associated with any total knee replacement, Smith & Nephew should gain competitive edge on the back of its latest extension. The company is currently the third largest player in the $5 billion market for knee implants. Smith & Nephew’s focus on innovation should further improve its market position.

With challenging conditions in the company’s established markets - primarily Europe, underlying sales growth continue to clamber. Smith & Nephew reported revenue of $952 million, up 1% on an underlying basis, (after considering currency translation) in the third quarter.

Revenues from the knee implant franchise decreased 1% year over year compared with an estimated market growth of 2%. Ongoing softness in the European market, where the company’s revenue base is larger compared with the U.S. market and the position of the new product cycle led to decline in revenues.

Management is banking on new products such as the Legion Hinge Knee System (European launch expected in 2013) and the Journey II System (under clinical evaluation) to revive growth in the knee implant franchise. The extension of the Legion Total Knee System also reflects strategic measures to overcome macro level concerns.

We also note Smith & Nephew’s increasing focus on the Advanced Wound Management division, away from the clouded orthopedic space. Its recent acquisition of Healthpoint Biotherapeutics is a strategic fit and an important step toward creating a strong position in bioactives, the fastest growing area in advanced wound management.  

However, Smith & Nephew faces stiff competition from players like Stryker (SYK - Analyst Report), Zimmer (ZMH - Analyst Report) and Johnson & Johnson’s (JNJ - Analyst Report) DePuy. We currently have a long-term ‘Neutral’ recommendation on Smith & Nephew which carries a short-term Zacks #3 Rank (Hold). Medical devices stock carrying a Zacks #1 Rank (Strong Buy) are Omnicell (OMCL - Analyst Report) and Thoratec (THOR - Analyst Report).
 

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