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Smith & Nephew PLC
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[Call Starts Abruptly] certain statements in this presentation are forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from those included in these statements due to a variety of factors. More information about these factors is contained in the company's filings with the Securities and Exchange Commission.
I would like to hand the call now to our first speaker, Mr. Graham Baker, the CFO. Thank you. Please go ahead.
Thanks operator and good morning, everyone. Welcome to Smith & Nephew's Third Quarter 2019 Trading Update. I am here with Skip Kiil, President of our Global Orthopedics franchise; and Phil Cowdy, who you all know well. First, I'll take you through the detail of the third quarter, with 4% underlying sales growth and 3.9% year-to-date as well as our progress on integrating the recent acquisitions. Then Skip will update you on progress we already made and what lies ahead of us in the Orthopaedics franchise. And finally, I'll return to cover guidance for the full year.
Third quarter revenue was $1.25 billion, that's underlying revenue growth, that's a little above the first half and in line with our aggregate markets, even as we begin to lap a stronger comparable from the second half of 2018. Pleasingly, all franchises contributed to performance again, with Orthopaedics growing 3.4% and both Sports Medicine at 6.9% and Wound Management at 2.1%, stepping up sequentially. I'll drill down further into the franchises in a moment. I would also note, as a highlight, the first quarter of growth in AET in three years. Turning to the geographic split. The U.S. grew 2.7%, up from Q2; other Established Markets declined 0.3%. While this is still an overall decline, we've seen improvement in Europe. Emerging Markets were again a highlight of 16%, driven by China, which continued to grow at 30%.
Moving on to the detail of the franchises. As mentioned before, Orthopaedics grew 3.4%. Within that, knees and hips grew 4.6% and 2.6%, respectively, both maintaining a global growth from the first half and with the U.S. returning to growth after a soft second quarter. Skip will talk in a moment about some of the opportunities we have to further accelerate these businesses. Other Reconstruction grew 1.5%. Within that, we continue to see strong double-digit growth for our NAVIO robotics platform.
We now also include the joint replacement navigation business acquired from Brainlab in Other Reconstruction. And the lower overall growth reflects bulk purchases of Brainlab in Q3 2018. As you know, our underlying growth rate calculation for acquired assets reflects our booked sales in the current year against the pro forma baseline of the prior year. Trauma grew 2.2%. The ongoing global rollout of EVOS remains the key driver, and we expanded the platform further in Q3 with the launch of the EVOS wrist plates. INTERTAN also grew double-digit and continues to be a meaningful contributor.
Sports Medicine & ENT accelerated once again in Q3 growing at 6.9% overall. Sports Medicine Joint Repair grew 12.2%, which is the third consecutive quarter of double digit growth. REGENETEN and NovoStitch Pro continue to be important drivers in the U.S. and we saw strong growth broadly across our shoulder and knee portfolios and across all geographies. Arthroscopic Enabling Technologies grew 0.8%. I feel a little fanfare should be playing at that moment because this business has been under pressure since 2016.
So, it’s pleasing to see the results with much improved focus coming through. The mechanical resection and radiofrequency categories both returned to growth in the quarter as we increased the penetration of our PLATINUM blades and WEREWOLF COBLATION system. We also launched the LENS 4K Imaging System with good reception for the product in initial customer trials, so we continue to see progress ahead. ENT grew 5.3%. We are continuing to convert hospitals to our COBLATION technology for tonsil and adenoid procedures. Advanced Wound Management as a whole grew 2.1% in the quarter, up from 1.2% in Q2.
Within that, Advanced Wound Care remained challenging with growth at minus 1.8% largely unchanged. Performance in Europe improved as an early consequence of recent contract and tender wins, but that was offset by pop up on our chargeback revisions in the U.S. reflecting higher price pressure this year as we renewed a number of important contracts. Advanced Wound Bioactives grew 2.1% another pleasing result in a segment that has had prolonged challenges but is now returning to growth. SANTYL end-user demand stabilized this quarter and the acquired Osiris product maintained double-digit growth.
Although looking ahead, I'd note Q4 2018 saw a very large quarter for Osiris as they launched the room temperature stabilized GrafixPL Prime. Advanced Wound Devices grew 15.4% as well as continued strong progress with global PICO globally, including the launch of PICO 7Y in the U.S. during the quarter. RENASYS is now also contributing strongly to growth, following recent contract wins in the U.S. Moving on to our recent acquisitions. I'd like to go into some detail on the integration of our largest recent deal, Osiris, which is both delivering our expected revenue growth targets and tracking above the deal model on trading profit.
There's a dedicated integration team leading the process and we've been making good early progress in a number of areas. Firstly, we've been working on aligning the culture of our acquired business with Smith& Nephew's. From the very beginning at Osiris, we've led with our Life Unlimited brand purpose, our culture pillars and the winning behaviors that go with them. We're now working through a formal process to embed them just as in the whole company.
The second key area is sales effectiveness. We're rolling Osiris' sales training and professional education groups into the Smith & Nephew organization and we're looking at how we can leverage Osiris' already well developed medical liaison function. We're also working on operating efficiency. We started rolling out Lean Six Sigma into Osiris manufacturing to build supply capacity and we're getting G&A leverage by integrating HR, finance and IT teams.
We've made similar progress with all of the acquisitions. With Leaf, we've now completed training the Smith & Nephew wound care reps to sell the system as part of our pressure injury solution. The same process is underway with Ceterix with reps from most U.S. territories now trained on NovoStitch Pro. With Brainlab, we're at a slightly earlier stage but have made the first sales of kick system under Smith & Nephew and we're also expecting to reach the first development milestone with Atracsys by the end of 2019. We're really pleased with the progress this year on our M&A strategy and the team's continuing to actively seek and assess further opportunities.
And with that, I'll hand over to Skip.
Very good. Thank you, Graham. I'm delighted to speak with you about our global Orthopaedics business. I joined Smith & Nephew just short of a year ago having spent all of my professional career working in leading medical device businesses at Stryker, Alcon and NuVasive. I joined because I saw the great opportunity Smith & Nephew's product and technology portfolio and because I felt that my previous experiences would contribute to unlocking that potential. Since joining, I've been very busy building my team and making a series of structural enhancements to the organization while formulating and implementing a commercial and portfolio strategy to accelerate global growth. I'll start by covering the details of what we've done before moving on to some of the specific key new product launches, the longer term business development opportunities that will further drive market share gains across the business.
Before focusing on the changes in the organization and strategy, I wanted to provide a backdrop of what our global growth profile looks like for year-to-date 2019. I'm pleased that we're seeing results across all areas of the business. We're building on top of that of what is already a good position in knees and hips. Smith & Nephew has been outperforming the global knee market for the last several years and now we have shown reasonable acceleration in our hip business throughout the back half of 2018 and through the first three quarters of 2019.
I am also happy to report that our Trauma business has returned to growth for the second half of 2018 through the ongoing commercialization of our EVOS plating system and after making some leadership changes and aligning our commercial structure. I'll come on to that in more detail in the next few slides. My goal is to continue to improve the growth of the franchise as for the whole of Smith & Nephew. To do that, we are delivering against three key priorities. Firstly, to evolve our focus on better commercial execution and enhance our go-to-market model. Secondly, to transform the competitiveness of our business through enabling technologies, moving well beyond our established NAVIO handheld robotic system. And third, to accelerate market share gains with key new product launches where we see near and midterm growth opportunities across all segments in the franchise.
So first, let me expand on the changes that we've made to drive better commercial execution. With the move to a franchise structure, I wanted to bring significant focus on execution by setting up integrated business teams with general managers for recon, Trauma businesses in the U.S. These general managers now have oversight and cross functional responsibility for the necessary teams involved in delivering the business results, including sales, commercial marketing and new product commercialization.
Moreover, the people we've appointed in these roles are seasoned leaders with strong understanding of the customer and a great track record of high performance in the businesses concerned. We reorganized our global marketing function to focus on the pipeline innovation, global portfolio strategy and in-market commercial execution. Again, working through leaders whose expertise have been built across the industry. We are also in the process of aligning our commercial approach in the AET setting. We're hiring a new leader and building a dedicated team focused on the key area of growth, which we've identified as a critical market opportunity for all of Smith & Nephew.
We've also enhanced the effectiveness of our sales organization. We've expanded our global commercial training and education function and we're reviewing our U.S. distribution model in Trauma. Our experience suggests that greater specialization and focus will drive better business performance. And we've made these changes through allocation process that make better use of our assets by aligning inventory and instrument sets to territories and countries with the greatest market potential around the world.
Moving on to enabling technologies, which is increasingly important in today's environment as the world moves towards greater procedure automation, driven by integrated planning, execution and implant systems. We've enhanced our offering earlier this year with the acquisition of Brainlab's orthopedic joint reconstruction business. The transaction included Brainlab's hip software that we are integrating into our robotics platform and we expect to introduce a new hip application in 2020. Smith & Nephew also now has access to the global installed base of more than 500 surgical navigation account and, as Graham mentioned, we've already made our first few sales of the hip platform.
We first showed our next generation robotic platform at AAOS in March of this last year. It dramatically reduces the physical footprint compared to NAVIO and other competitive systems, as you see in the image on the right-hand side of the page. Together with the CT-free technology we believe it's an ideal solution for all surgical care settings, including ambulatory surgical centers. It brings advances in surgical workloads and data acquisition and unlike the field – the fixed configuration of our systems are currently available, it will be at the center of the ecosystem of multiple assets that can be used for different surgical applications that will be added to the platform over time.
Here are just a few key recent and forthcoming product launches. The EVOS plating system has been an important launch and we expect it to continue to drive growth in our Trauma business. Having multiple fixation options in a single plating system is being very well-received by our customers and we're continuing to add further elements over time. Most recently, we added the wrist plates. And large fracture plates will be added – will be the next addition to EVOS. OR 3.0 is our new advanced dual mobility hip system, incorporating our proprietary OXINIUM technology, we submitted the 510(k) to the FDA in May this year and is under review. The first market introduction is planned for the U.S. with a comprehensive global launch to follow. From an instrument and implant deployment standpoint, this will be one of the Smith & Nephew's largest project launches ever.
Finally, we see a long-term opportunity for the great use of technology and big data in conjunction with our next generation robotics platform applied through the orthopaedics care cycle. Mobile apps can educate patients, surgeons and measure satisfaction scores. Wearable devices can access patients and help guide rehab. And artificial intelligence can be used to help optimize surgical strategies in the future.
In summary, I'm very excited about what's going on in the Orthopaedics franchise. The results are moving in the correct direction, we have an experienced team in place and we're continuing to invest in meaningful technology. So I'm very pleased with our progress to date, and I'm looking forward to that progress continuing. And my ambition is for Smith & Nephew to become the fastest-growing, most innovative company in orthopaedics.
And with that, I'll hand it back to Graham.
Thanks Skip. Now on to guidance. After another quarter of 4% underlying growth, and improving growth in areas such as Arthroscopic Enabling Technology and Advanced Wound Bioactives, we're confident to increase our 2019 revenue guidance a second time this year to 3.5% to 4.5% underlying growth. Based on rates prevailing at the 25th of October, foreign exchange will reduce our reported growth rate by around 230 basis points for the full year, while acquisitions will add 270 basis points. So we, therefore, expect reported sales growth to be between 3.9% and 4.9%.
As flagged at the half year, we continue to make investments in medium-term growth opportunities in commercial, for example, in training, professional education and locally in markets such as China and in R&D. Initial margin dilution from M&A activity and a small foreign exchange effect are also second half headwinds. The effect is that we now expect our full year trading margin to be around 22.8%, which is at the lower end of our previous guidance range and around 40 basis points of underlying expansion above the prior year. And as you'll quickly work out when you combine that with our revenue guidance, the implied trading profit at the midpoint is largely unchanged by the updates. Our medium-term expectation to deliver meaningful margin expansion at the same time as accelerated growth also remains unchanged.
Finally, before closing for questions, let me say a couple of personal things. Firstly, we're really delighted to welcome Roland Diggelmann as our new CEO of Smith & Nephew from tomorrow. Roland has spent his entire career in medical technology, most recently as CEO of Roche Diagnostics. At the time of his departure from Roche in 2018, Diagnostics was a global business with turnover at CHF 11.5 billion and have delivered above-market growth under his leadership. He's been a non-Executive Director of Smith & Nephew since March 2018 and will bring vital continuity, great experience and proven leadership.
Secondly, I'd also like to say that we're all grateful for Namal's leadership in his time at Smith & Nephew and for the important changes he made at the company over the last 18 months. We wish him very well for the future.
And with that, we can move to your questions. Thanks, operator.
Thank you. [Operator Instructions] Our first question comes from the line of Patrick Wood from Bank of America. Your line is open. You can now ask your question.
Thank you very much. I have two, please, if I may. The first, Skip, it would be great to hear a little bit more about the dual mobility hip. It sounds like a reasonably exciting product and quite a big focus for you guys. I'd love to get a little bit of details on that?
Then the second one would be, similarly, for Brainlab, there was obviously a large number of implants associated with that that were going away to a competitor. And I'm wondering how should we be thinking about the conversion of those next year, and therefore, the impact on growth for you guys. That would be great. Thanks guys.
Patrick thanks for the question. I'll start with dual mobility. We're really excited about the opportunity to compete in this marketplace. We see it as a key opportunity from a strategic perspective. We haven't participated in this in quite some time and we see as some of the other competitors have reported that, that's a key driver for their growth. And obviously with our hip number growing at 2.7%, we see this as a key strategically for us on a go-forward basis. And as I previously mentioned, this is going to be a really big launch for Smith & Nephew and a strategic one and we're very focused on making sure we deliver a world-class experience to our customers.
Secondly, as you talked to kind of the Brainlab acquisitions and the greater share of implants, again, it's early days with the Brainlab partnership. And I think we're still working through kind of those transactions and what that looks like and feels like. But ultimately, as you think about all kind of navigation and robotic solutions, the ultimate goal is to pull through implants. And I will contend that we have that same strategy and we're very focused on that on a go-forward basis. So I wouldn't necessarily figure out how to model that I would just think that in general terms as you think about kind of the advanced technology solutions, we're seeing focus on that as a key strategic driver and we'll see that pull through on the longer term. Thank you.
See you, Patrick.
Thank you.
Bye, Patrick.
Thank you.
Operator, do we have someone else on the line?
Yes, sir. Our next question comes from the line of Kyle Rose [Canaccord Genuity]. Your line is open. You can now ask your question.
Hi, Kyle.
Hi, good morning gentlemen. So Skip, I wanted to touch on ortho in two ways, one on the knee side in the U.S. and then also I have some follow-ups on NAVIO and the enabling technology. So first on the knee side, I appreciate the commentary about the global share gains. I mean, I think that's clear, particularly OUS. But when you look at the U.S. market dynamics, you have one of your major competitors kind of on the ropes for the last several years and they seem to be getting increasingly competitive. I guess help us understand the U.S. setup and how you view, I guess, the stability of your share gains in that momentum on a go-forward basis? And I've got one follow-up on NAVIO.
Great. Kyle thanks for the question. As you think about the U.S. knee business, I think there's a clear competitive field out there. And to be very frank, Smith & Nephew has grown at or above the U.S. market rate for eight out of the last nine quarters and we're projecting our sales to continue to accelerate. I feel great about our ability to compete in that space. Obviously, as you think through the kind of key advantages, some of our competitors have cementless knee and the reality is we're working through those changes with the opportunity to compete there and we will do so at a certain time.
But with that said, we're still picking up market share in the U.S. and I would say that I feel very good about the prospects in the U.S. related to our knee platform and particularly tied to our robotics source of the business. As you start placing more robotics units again that will overall lead the – overall accelerate your knee penetration in certain accounts. And we're not just going to friends of the family, so to speak, as we look at robotics placement, we will be going after competitive conversions. And again so I'm very excited about the opportunity to compete in that market and feel very good about the procedural volumes in the United States on a go-forward basis.
Great. And then when you think about NAVIO, in particular the NexGen launch is that something that you believe is capable of driving top line revenues as a standalone product basis? Or is that something that you think about different commercial models as far as placements to secure share? I guess I'm just trying to understand how we should think about that revenue contribution from a high-level perspective, given the contribution we've seen historically from some of the competitors?
Yes, Kyle, I think that's an insightful question. The reality is if you think about the capital base business, and that's how I look at this, it is a capital business. But it's also there to pull-through your base profile. And again going back to my commentary about knees, I would say, it's not going to have a meaningful contribution at the top line over a period of years as that business grows. Again, if you look at kind of where our competitors are, their big push is really pulling through the implant side of the business and it will always provide revenue, but that's not the way I would be modeling it. I think as we think through critical financing options, the cost of capital these days in health care institutions, particularly in the United States, they don't want to outlay millions of dollars for robots, and I would tell you that's one of our key competitive advantages. We have a different financing profile than our competition, which makes me feel very, very good about our ability to compete in that space.
Great. Thank you for taking the question.
Welcome.
Thank you. Our next question comes from the line of Veronika Dubajova [Goldman Sachs]. Sorry if I mispronounce your name ma’am. But your line is open. You can now ask your question.
Hi, Veronika.
Hi. Gram. Hi, Skip. Good morning and thanks for taking my questions. I’ll also keep it to two. My first one is actually on Advanced Wound Care. And Graham, I was hoping you could give us a bit of a sense for what the growth rate was if you strip out the rebate provisions that you had to take? Just it would be helpful for us to understand exactly where that momentum is tracking and I guess how long will these headwinds continue? Is that something you anticipate to last through Q4 and then into next year?
And then my second question is also a financial one. Just thinking about some of the headwinds, or I don't want to call them headwinds, but some of the reasons why the margin is going to come down – come in at the lower end of the guidance this year. Just curious how many of those persist into next year. What should we be bearing in mind either in terms of the investments annualizing or the FX headwinds that you mentioned as something that may be persistent to first half of 2020?
Okay. Thanks, Veronika. On AWC, I mean I think you rightly picked out one of the key changes that we've seen in the quarter and the top ups around the chargeback provisions. That did catch us up a little bit on that. Essentially, what's driving those is some contract renewals with some important customers that came through in the back half of 2018 and through the first half of 2019. And so I expect those sorts of effects to continue. Those contracts typically get signed for sort of THREE-year period. And so once you've been through them and you've lapped the effects of them, it kind of works through back down to a more normal kind of pattern.
In terms of the precise quantification of it, Veronika, we don't do that at sort of individual franchise level. But it was meaningful enough to mention it. Clearly, it's masking the improved performance that we've seen in Germany and the U.K. and one or two places that we have talked about a few times on AWC and where we are seeing a couple of brighter spots. In terms of the choices that we've made around margins and a little bit of headwind that we've seen on FX, you rightly captured the M&A choices that we've made that drive the top line growth, have seen us absorbing some dilution this year, and we're working through that at a faster rate in the second half than we did in the first half, because a lot of those deals completed either the back end of the first half of the year or early in the second half.
And so those will continue to flow through a little bit into next year. The decisions that we've made around investments in China, in professional education, in training, again, those are all with a view to driving top line growth. And of course, when you look to the midterm, obviously the best lever that we have for driving bottom line progression is also seeing a stronger top line growth. So as I highlighted, we're staying true to our midterm guidance, but we see sales growth at or above our markets and continued margin progress.
Now I've mentioned at the half-year the transactional FX headwind that I think at the half year I said will be around 40 basis points to 50 basis points. We've now seen sort of three more months, 3.5, nearly four months further FX hedging that we've put in place. So we're largely hedged on transactional now. And it's about 50 basis points of headwind next year on transactional side. So that's about it. I'm not going to say anything more about next year other than; obviously, we continue to be positive and optimistic about the forward trajectory of the business. We'll give you more of an update on next year with the full year results.
That’s great. And Graham, can I just follow up on the wound care question, I guess. Would it be fair to say if you had not had the rebate provisions that the growth in the business would be at least consistent with what we saw in the first half?
That’s probably not a million miles off, Veronika.
Fab. Thank you very much.
Thank you. Our next question comes from the line of Sebastian Walker [UBS].
Hi, Sebastian.
Hi there. Thanks for taking my question. I’ve actually got three if I could. So just on wound, what is driving that pricing pressure? Is that a structural trend that you're seeing because it's more competitiveness? And then opposing that in Europe, what is driving the improvements in that business?
The second question is on growth. Skip, I was wondering if you could, in the ASC setting, what kind of orthopedic growth are you seeing there?
And then finally, following the announcement of Namal's departure, I'm just wondering whether you've seen any other resignations or changes in divisional or regional heads? Thank you.
Okay. Well I’ll ask Skip to cover ASC first and then I'll cover the other questions.
Sure. Thanks, Seb. The reality is we see the ambulatory care setting as a great strategic opportunity for Smith & Nephew. If you look at kind of the physical footprint of our robotics platform and where we're going with that, we obviously are performing very well in the ASC to date. And hence, the idea around strategy. I wouldn't want to get into specifics around our growth profile there, but it is well north of kind of industry average in what we're seeing organically across the business in the other health care setting. So we're very excited about what that growth profile looks like. If you look at it in total, in total joint reconstructive in the ASC setting really only makes up between 4% and 6% of the total procedural volumes today. We see that expanding pretty substantially over the coming months and years for sure. And we'll participate willingly in that category.
Cool. And so on wound in the U.S. now I don't see this as a structural thing, Sebastian. It's linked to our contract refresh cycle which, as I mentioned, is sort of, in many cases, with the large contracts around a three-year cycle. So we've worked through that and then those contracts lock us in for a three-year period. I'm clearly not saying that I expect any of our markets to become easier. We're competitive and we are focused on making sure that we provide good value to our customers and our customers continue to demand sensible prices. But I think what we're working through right now is not a strong guide to where we will be sort of permanently in the future.
In terms of Europe, the improvements, as I mentioned, we've seen some progress, still not all the way there yet, but some progress in Germany and the UK and that's based around teams who are focused at the franchise level that we've built into our cluster, that same global franchise focus, bringing customer intimacy and customer understanding that we've talked about at global level playing out through each of our geographic clusters. And it's also built around the tendering approach that we've taken and the contracting approach and some – those tenders and contracts don't all get placed at one-time, they work through it over time, but we've seen some consistently good results from getting back into those tenders, focusing on leveraging our overall portfolio rather than a specific product focus. So pleasing and gratifying to see some sort of early shoots of encouragement there to that strategy.
Turning to the executive team following Namal's departure, no, we've had no resignation since Namal departed. And indeed, I think the whole leadership team is absolutely focused on driving the opportunity that we have in Smith & Nephew, working with the teams that they built to make sure that we fulfill our promise to patients, which is helping them live lives unlimited. So focus around the culture, the purpose and the business opportunity and teams that we have is very strong. And of course, everybody on the executive team knows Roland well. They know his credentials, they know his background, they know the support that he has shown for the strategy and the continuity that, that engenders, to say that we're going to carry on doing what we've done, which is driving success and strengthening the company. So I think everybody is in a good place. We wish Namal very well for the future, all of us, but we're totally focused on our responsibility at Smith & Nephew.
Great. Thanks very much.
Thanks, Sebastian. I think we've got Tom coming on the line?
Yes, sir. Mr. Tom Jones [Berenberg]. Your line is open. You can now ask a question.
Good lovely. Thanks for taking my questions. I had one for Skip and one for you Graham. Skip, I wanted to come back to the dual mobility hip issue, or question, really. I mean I'm somewhat surprised that this has become such an important product for orthopedic companies in recent years. It's not as if it's a new concept. I think the first dual mobility hips were introduced some 40-odd years ago. And there does still seem to be some significant clinical debate about the utility of dual mobility. I guess that they are primarily aimed at those patients that are at risk of instability but then you carry the risk of having two bearing surfaces rather than one, so potentially two – two or twice as much risk of wear debris. So I guess my questions are why do you think it's gaining so much attention now? From your perspective, what part of the overall – what percentage of overall hip procedures do you think are genuinely amenable to dual mobility hip?
And then the sort of follow-on question is one of the purported risk mitigation strategies for dual mobility hips is to use a ceramic or a ceramicized head. How do you feel your OXINIUM head positions you relative to the competition in that context?
I'm sorry if it's a bit of long winded one, but it's quite a technical area. And then question for Graham. I noticed your interest expense guidance has ticked down just a notch between Q3 and Q2. Is this just lower debt balances? Or are you seeing some improvement in your cost of debt?
And I guess the question really that follows on from that is how should we be thinking about the cost of debt, not so much interest expense, that's clearly dependent on what you spend, but the cost of your debt 2020 versus 2019 as you sit today?
Awesome. Thanks, Tom. Well, I'll take the simpler one first and then I'll give Skip a go. Actually, during the middle of the year, we took – we did a little bit of refinancing and we took some euro-denominated debt to match our business profile, and that comes with a very competitive coupon. So sort of kudos to our treasury team for working through that, and thanks to our lenders, we're in good shape there. In terms of working forwards, obviously again, Tom, I'll give some thoughts on that when we start the New Year.
Okay, Skip [indiscernible].
Thanks, Tom.
Yes. Tom thanks for the question. In general terms if you think about dual mobility and I'm going to speak specifically to the focus that we have, and it's really around dislocations and instability. I think you categorized that correctly. And I think that, from our perspective, our clinical evidence would contend that it actually reduces that risk substantially. And then when you start thinking about the dual mobility platform and you start thinking about bearing surfaces, our proprietary OXINIUM technology is only in [indiscernible]. This is zirconium that we turn into a ceramic coating and we feel really good about the wear profile of that.
And obviously, we also bring the nickel sensitivity component into this, and so there are some components that are pretty substantially weighted in our favor here. And we really look forward to kind of competing in that particular category. And again, that's a system of products, so if you think about the POLAR3 total hip solution, some of the non-modular systems with the hip and the cup and the bearing surface, that's very much where the market is trending.
Again, that first pass at dual mobility, which was a couple of decades ago, I think it really lends itself to some good credibility in evidence. But now, as bearing surfaces have evolved tremendously, I think the survivorship there is substantially at the high end of the range and we feel very confident in our position. And hence, some of the competition have stated that one-third of their overall hip growth in revenue is in the dual mobility solution. So we're excited to compete in the space and look forward to the opportunity too.
Do you think that surgeons – we've seen a couple of instances in the last 10, 15 years where orthopedic companies and surgeons together have gotten quite excited about new technologies thinking metal-on-metal, modular systems and they've got their fingers burnt. We had the [indiscernible] issue with metal-on-metal and then we had the taper corrosion issues with the modular systems. Do you think that the experience of those kind of exciting new products, for want of a better way of putting it, that subsequently turned out to be less exciting than originally thought are going to make it a little more difficult for you to convince surgeons to switch over to the latest new technology?
Well, Tom, I would say that we have surgeons proactively creating inbound requests from Smith & Nephew. And obviously, as we work through our design development principles on the OR 3.0 dual mobility solution, we feel like we are going to drive mix and win back some of those cases in surgeons that we lost over the last number of years. And this really, from my perspective, enables us to go after competitive conversion and ultimately expand the marketplace, which we see as a key strategic advantage. It's really a – we're going to go big in this launch and so I think it will play out over the next few quarters and into 2020.
Perfect. That’s super helpful. I’ll jump back in the queue.
Okay. Thanks Tom.
Our next question comes from the line of Kit Lee from Jefferies. Your line is open. You can now ask your question.
Hi.
Hi. Thanks for taking my questions. I’ve two please. I guess, firstly, just on NAVIO system sales, I think it's pretty masked by this consolidation of Brainlab's, but can you just help us out on the run rate there? What sort of growth rate have you done on NAVIO placement during 3Q?
And then second question is on your APEX program. Appreciate that you are probably looking to invest more now, but just thinking in terms of the funding, have you see more opportunities on the cost efficiency side as well which could potentially fund the increase investments that you are looking for? Thank you.
I’ll ask Skip to talk about NAVIO.
Sure. Sure. Kit, I think from our perspective, NAVIO sales are going very well. We have a great product and we've actually been converting quite a few accounts over the last few quarters and feel very strongly about kind of the performance. What you're seeing in the numbers play through is really as we acquired Brainlab, there was a very large comparable in the year-over-year results that are muting the overall performance of the NAVIO business. But there's been no change in the NAVIO product portfolio. And in fact, we're still seeing strong double-digit growth in that category for us.
Thanks Skip. On an APEX. Yes. No, APEX is continuing to progress well. We do see opportunities ahead. We have been thinking that we will give an update at call, but clearly I think everybody will understand it's important to get Roland really close to the detail as he comes into the company in terms of laying out future thoughts. So we will return to that again in the New Year. But yes, we're pleased that APEX is providing us with the headroom to both make the investments that we need in sustainable growth of the company and, indeed, in pushing up the revenue growth in the company whilst at the same time also allowing us to see margins to progress. So we're pleased with that.
Okay, that’s great. Thank you.
Thanks.
Thank you. Our next question comes from the line of David Adlington from JPMorgan. Your line is open. You may now ask your question.
Hi, David.
Hey, good morning guys. Just a – most of my questions have been asked, but maybe just a bigger picture question with respect to strategy and the change in leadership. I just wondered if that change, would that delay any decisions made around strategy or, in particular, potential acquisitions. Thanks.
Thanks, David. Well, good question, but again, I'll sort of refer to Roland's work with the company as an NED for the last 18 months. I can tell you personally that every time we've got to any sort of crunchy question or a difficult question, Roland has been the person who, based on his background and knowledge of the industry, and also his enthusiasm for the strategy, has been the strongest supporter of where we've been going. So I don't see any hiatus. Obviously, it's important for him to spend time over the next two to three months taking his knowledge to a more detailed level and to meeting the teams and working with those teams and getting to know them on a personal level. So he's going to be pretty occupied on airplanes and at meetings over the next two to three months, but I don’t see that holding is up. We’ve got Phil sat here on my right, he's a busy guy, he's got lot of things for us to continue to look at and we're going to continue moving forward with the business well. So no let up in progress, just more of the same.
Got it. Thanks guys.
Thanks, David.
Thank you. Our next question comes from the line of Michael Jungling [Morgan Stanley]. Sorry if I mispronounced your name, but your line is open. You now ask your question.
Good morning, Michael.
Good morning everyone. Thank you for allowing me to ask questions. And I have two questions primarily. Firstly, when it comes to organic sales growth, what is the growth rate adjusted for acquisitions that you've made that are less than 12 months old, like Osiris? How much did that contribute to organic growth in the third quarter, please? Question number two is on emerging markets growth. What exactly is happening in your product portfolio that is allowing you to grow so strongly, especially in China? And then I have – hopefully, if I have time, a follow-up question. Thank you.
Hi. Thanks Mike. Forgive me, on the organic growth, minus the ones that we bought more than…
Correct.
I am going to have…
Because way of calculating organic growth.
I am going to have to phone a friend on that and ask you to follow up with Andrew after the call to get the technical details there. I'm sorry, that's not a calculation that I've got to hand, fundamentally.
Graham, it’s fair enough. Your organic growth in the third quarter benefited from acquisitions that you've made less than twelve months old.
Actually, from the yin and the yang of it, when I think about the Brainlab strong prior year comparable, which will be in the underlying number, and the plus that we're getting around Osiris double-digit growth and the other things, it's probably not very large, Mike. I'm going to give a punt on that, but I am going to defer giving you a definitive answer because I want to make sure that Andrew has a chance to check the sums there carefully. But I actually suspect it's pretty small on an underlying basis. Clearly, you've seen the split out on the reported basis, and clearly, that is obviously helping us.
In terms of Emerging Markets growth, I think the underlying dynamics are that there is a strong volume opportunity. We have our second biggest market in the world in China, so we are sort of geared to one of the fastest growing markets in Emerging Markets. But there are opportunities in growth all around our portfolio. But there is a mix effect there from being well-established, having good relationships and having invested in China for a long time that certainly helps us. In terms of broader drivers that are within our portfolio, of course we are bringing our wider portfolio into Emerging Markets.
And over time, that doesn't mean that necessarily where we are today, we are launching all of our products at the same time all around the world. But as we bring some of those products that have been driving growth in the U.S. and Europe into Emerging Markets that also helps to accelerate our growth. So fundamentally, our growth is being driven by strong underlying demand and an improving quality and breadth of portfolio, together with long-established investments and relationships there that allow us to bring those messages and products to a wide customer group.
And then the final question is on strategy. And I recall when Namal started; the focus was very much in trying to focus on the underperformance in the developed markets. And while I recognize that certain components have worked, if you look at the overall category of Established Markets, we really haven't seen much of an improvement in the past four quarters. And really, the improvement and the contribution to growth really has been the Emerging Markets, probably China. I'm just curious why you think the strategy is working. Because in essence, what we've got here is the Emerging Markets really being very kind to you in helping to accelerate organic sales growth. Some say therefore…
Yes. You'll have to forgive me for not quite accepting all the premises in that question, Michael. So let me wind back a little bit. When Namal started, we made it clear that we were going to take a more forensic approach to looking at our segments and sub-segments across the business and where, on a global basis, we see the strongest performance in our sector from competitive companies. It is difficult to see that they're outgrowing the market in around 90% of the segments and settings that they play in. We have been not at that level and with some of the other players in this sector more at the level where we're outgrowing the market in around about 50% of our sectors.
Now clearly, seeing AET, where the growth is being helped by our performance in China but is improving all around the world, including in the United States, where we are both getting more sharply focused on strategy and introducing new products into the portfolio, seeing that click from red to a better green, or at least move into amber, is probably where it is at the moment, is an encouraging sign of our progress in moving from that 50% up towards our aspiration of outgrowing the markets in 90% of the world. Clearly, the Emerging Markets is helping us and is strong but our performance improvement is not confined just in the Emerging Markets.
Okay, thank you.
All right, thanks Michael.
Thank you. Our next question comes from the line of Chris Gretler from Credit Suisse. Your line is open. You can now ask your questions.
Good morning, Chris. How are you?
Thank you. Good morning, Graham. Hi, Skip. I have a few questions, actually, maybe starting off under financials. Graham, would you be able to quantify the M&A dilution of all these now acquired assets on a – kind of on an ongoing basis, so that we also might get a sense about the effect into 2020?
I will repeat what I said at the half year, Chris, which is its a few tens of basis points of dilution.
So it hasn’t really changed. So, okay…
[Indiscernible]
Okay. And then on the investments, you're flagging, as you basically bring down your trading margin guidance, are those actually no new investments? And again, what level of kind of an ongoing kind of impact now should we expect from these apparently new investments, I guess?
So I'll confine the sort of the forward view to what we expect for the full year, which is we are investing in professional education, we are investing in our sales training, we are continuing to invest in R&D, and those are consistent with our margin guidance, which is to be around 40 basis points of progress, 22.8% for the full year. I'm not going to venture into next year, Chris, because that's something – so when get to next year's.
Okay, okay. I appreciate it. It’s already almost November, anyway. And maybe two questions for Skip. I mean the first kind of on the hip offering, it looks like some market participants are growing very strongly with this anterior approach, incision approach in hips. Could you outline your offering and your stance with respect to that specific market segment, maybe?
Sure, Chris. I would contend that the anterior approach has been growing consistently for a number of years. This isn't anything new. We participate in this space and we'll continue to do so on a go-forward basis. So there's no big departure or change in our strategy relative to that approach. I think if you look at our POLAR3 category, I would contend that all the data on the clinical side is extremely strong. And again, as we think about that dual mobility solution, we're really looking forward to competing in that space regardless of procedural technique or approach.
Okay. And then maybe the last one. If I look at your U.S. knee performance over the last couple of months or years basically, and given all these substantial investments, and you're highlighting this strong double-digit growth of NAVIO placements, I still don't really get why this U.S. knees should not grow much faster as you pull through sales. Could you maybe elaborate a bit on that?
Yes, Chris, I would contend, we actually are seeing a stronger pull through on the unit basis and we are seeing a stronger growth in our J II categories via the JOURNEY II knee. We have actually seen substantial pull through as we placed NAVIO units. And again, its early days in that adoption curve in that cycle. But the reality is the market is strong. Procedural volume is moving in the right direction.
The other piece of this is there's a tremendous amount of focus on medical training and education in regards to the HCPs that we participate with and with our sellers in this space. And there are some advancements in the training and education and we're actually placing technology specialists. One of the organizational design principle that I brought to the company is having subject matter experts coming in and helping us bring competitive conversions in and we'll see this play out over a number of quarters in the next few years here. So I feel very good about our approach and we'll continue to see this moving in the right direction.
I mean just to add a couple of points. If you look backwards, then our U.S. performance has been to some extent, dampened by the wind down of the ZUK uni-knee as we've introduced the ZUK – JOURNEY uni-knee we see stronger prospects moving forward and also that sort of drag unwinding, as ZUK has now become a relatively small part of our portfolio, just a couple of technical things there in relation to the U.S. Of course, as Skip also highlighted, if we look out further into the midterm, having a more comprehensive cementless portfolio will, I think, also make it easier for us to bring the already strong growth that we're seeing on the JOURNEY portfolio in the U.S. through to the overall number on U.S. knee growth.
Okay, I appreciate your comments. Thank you.
Thanks.
Thank you. Our next question comes from the line of Ed Ridley-Day [Redburn]. I am sorry if I mispronounced your name. Ed, your line is open. You can now ask your questions.
Good morning, Ed.
Good morning. Welcome.
Welcome. I think just to put a sort of warning out, we'll probably take one more question after yours. So over to you, Ed.
I’ll keep it brief, but I have a follow-up on robotics. First, just Skip, if you could give us any more exact time frame on when you expect the commercial availability of the NexGen system particularly in the U.S. market. And secondly, just a bit more clarification around NAVIO. In this other recon business, I know you have cement, which is declining. But as per other comment, I really can't see the signs of strong growth. So Skip, is that because effectively you're moving more to an operating lease model whereas you've intimated regarding the knee system you are effectively using it as a leader for your implant, is that why we can't see stronger revenue growth in other recon?
Thanks for the question. When you talk about commercial availability on the next-generation product, I'm not going to get into specifics around the actual date and time associated with it. It's going to be kind of mid-to-early 2020. We're in premarket trials currently, and there's some ongoing discussions and feedback about the product and so we're doing some verification validation testing in that process. So that's part of the overall commercialization process that we've outlined to the company direction and we feel very good about the ability to compete in that next generation category in 2020. Graham, I will layoff on the question.
Yes, I'll pick up on the question around other recon. You're right, Ed, cement is a dampener to growth in that sector. But as I mentioned in the script, there's also a sort of one-off in the third quarter that we now also report our Brainlab navigation sales in that line, and there was a particularly strong third quarter with bulk sales in 2018. So we are seeing double-digit growth within that total within NAVIO. It's just being dampened by not one, which was the cement and the historic effect, but two effects in Q3 this year. I think the last thing to say is just to repeat what Skip has been saying, which is, we have always assumed that whilst there's good value from a capital sales and the placement of robots, ultimately the – as you built into your question, the real promise and the real value there is around the pull through around implants.
Well, thank you.
Thank you.
Thanks.
Thank you.
The final question, please operator.
Yes, sir. Our last question comes from the line of Julien Dormois [Exane BNP Paribas]. I am sorry if I mispronounced your name. Your line is open. You can now ask your question.
Hi, Julien.
Hi, good morning guys. Thanks for squeezing me in. I will keep my questions brief. The first one relates to Trauma, it's not for the sake of being provocative, but you will probably end up 2019 with the same level of sales in absolute terms that you had back in 2012, so in a market that's been growing 3% to 5% over the years. Do you believe that the changes that have been made to commercial execution and the launch of EVOS and a couple of other new products, do you believe you have found the magic recipe in that the improvement that we have seen so far this year is sustainable? And the second one is very brief it’s a follow-up to Michael's question about Emerging Markets. Just wondering whether there's any particular tender offer in those regions that we should be aware of that took place in 2019 that could create a tough comp for next year.
Yes, Julien. Thanks for the question on Trauma. I come into this organization extremely excited about the Trauma & Extremities franchise here at Smith & Nephew. I will contend that it hasn't been a focal point, and it is one that is a focus for me in this organization, hence the reason that we put a General Manager over it and restructured the marketing department, again focused on new product development, commercialization. This is an area where we will absolutely continue to invest in. And the exciting proposition is we have some very good product portfolio, as you think about the EVOS platform.
I mean boy this is just a game changer for us from a clinical perspective, from ease of use, just about every surgeon we show it to is excited about it. And we're continuing to ramp-up our capacity from a manufacturing standpoint and we continue to look forward to taking and competing in that marketplace very substantially. So we see this as a key opportunity for our growth profile moving forward.
And then turning to China. There are a couple of things that you need to understand about the tender system in China. Firstly, it's not a winner-takes-all system, when you win a tender, you basically then have a right to sell within that region, but you still have to interact with customers, you still have to interact with local and regional payers to ensure that you're making a competitive offering. And so it doesn't tend to create discontinuities in the way that's implied in the question. But it does, of course, create opportunities to build demand.
So we did win an important tender in the Hebei region in the north of China, around Beijing and surrounding regions, which is a significant part of business, and that is part of our growth this year. But I don't see it as something that's sort of a one-time unsustainable thing, you basically, having won the tender, you then have to build the demand over a period of time. So we remain very optimistic and positive about the potential to build our business and to serve patients more broadly in China.
Okay, that’s very helpful. Thank you.
I think with that, we will call the call to a close. Thanks for all the questions, and we look forward to speaking to you again with Roland with the full year results.
Very good. Thank you.