Second half sales set to slide at Corin

After a good run recently hip and knee replacement specialist Corin saw a bout of profit-taking after a set of interim results which struck a note of caution about the rest of the year.

First half operating profit was £1.0m, up from £0.9m (excluding exceptional items and discontinued operations) the year before, while reported profit before tax jumped to £0.9m from £0.2m, excluding discontinued items, in the corresponding period of 2011.

Group sales in the first six months of 2012 were up 15% to £25.0m from £21.8m (restated) in the first half of last year, and were 13% higher year-on-year on a constant currency basis.

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Excluding sales to US customer Mako Surgical, which has been going through a major restocking exercise, the top line grew 9% on a constant currency basis.

Hip product sales were the main driver of growth, up 38% to £15.9m from £11.5m last year, as the group's new cementless hip system gains traction in the market, but it is the company's new Unity total knee system which is set to carry the hopes of restoring some of the former glory of this company, which was once valued at more than ten times the price it is now.

"We are pleased with the progress on our hip portfolio," Corin's Chief Executive Peter Huntley told Sharecast.

"The next phase is to roll out our new Unity knee system. The knees market is growing faster than the hips market, and this presents a big opportunity for us," Huntley said, adding that "knees are really the story from 2013".

For the time being, however, sales of Knees products are in the shadow of Hips, with first half 2012 sales down 5% to £3.5m from £3.7m.

Geographically, the group saw the top line dip in its biggest market, Australia, but otherwise it saw sales growth in all of its regions, including the key US market.

The 10% decline in sales in Australia to £5.6m was not altogether a surprise, Huntley explained, as previously the company had enjoyed good sales of LARS ligament augmentation products down under, whereas sales have dropped off as Aussie health-care professionals debate the validity of the use of LARS in anterior cruciate ligament surgery.

That decline, along with the fact that Mako will not be placing any orders in the second half after completing its restocking initiative. has persuaded management to take a cautious view of the rest of the year, with sales likely to be down year-on-year.

Another factor that has caught the attention of the bears is the threat of litigation relating to Corin's legacy metal-on-metal (MoM) products.

The group saw a rise in the number of litigation claims and potential claims concerning its MoM products during the first half. In the majority of these claims, very little information has been provided so far by the claimants, making it very difficult at this early stage for Corin's management to judge just how large or small any liabilities are likely to be, Hunter told Sharecast.

In the US, the first MoM litigation case taken to court was successfully defended with a motion to dismiss the case, based on the Investigation Device Exemption study and Class III PMA approval of Corin's Cormet hip resurfacing system in that market. The legal expenses incurred in administering and defending MoM product liability claims, during the first half, were £0.1m. The group also has insurance on commercial terms in place against product liability claims.

No interim dividend has been declared, as flagged at the time of the company's full-year results.

Numis Securities said: "Overall, we are impressed that [2012] sales of new hips are likely to be over double where we expected them to be two years ago, although declining LARS sales have hurt group growth."

Although operating profit of £1.0m was £0.6m below Numis's forecast, the broker thinks there is room for significant upgrades in 2014 "if sales of the Unity knee can grow as well as the newer hip systems," although the broker acknowledges that the need to invest in sales infrastructure will hamper "the drop-through margin" for a while.

"We are lowering our assumed discount to Corin's small orthopaedic peers to 30%, from 40%, increasing our price target from 65p to 74p," Numis said, which rates the shares as a "buy".