Medical technology minnow Surgical Innovations (SUN:AIM) warns delays in the supply of products for its Elemental Healthcare arm will swipe £1.25m from the top line this year. This means profit before tax growth will merely be ‘modest’ this year, disappointing news that sends shares in the Leeds-based business 13.7% lower to 3.15p.
Surgical Innovations designs and makes innovative medical technology for minimally invasive surgery. Last August, it acquired medical products distributor Elemental Healthcare for £9.3m in a ‘transformational’ deal – a word seasoned investors have learned to dread – designed to enhance earnings and provide a direct route to the UK market.
Elemental co-founder David Marsh and managing director Adam Power became significant shareholders following completion of a deal which is now causing Surgical some grief.
Since 2015, Elemental has been the exclusive UK distributor of a range of biological matrices under the Cellis brand, sourced from Meccellis Biotech and used in abdominal wall and breast reconstruction procedures.
Last year, Meccellis began to undertake a transition to a new notified body for European regulatory approval, including the recertification of its existing products, and the certification of new products. Unfortunately for Surgical Innovations, this transition has encountered delays.
Today, Surgical warns delays in sourcing products for Elemental from Meccellis will ‘have a continuing impact on revenues of Surgical Innovations in the current financial year’ ending 31 December 2018.
Erring on the side of caution, management has decided to strip out revenues from Cellis products from this year’s forecasts ‘until such time as there is certainty regarding the availability of current and new products in this range following regulatory approval. This has the effect of reducing revenue expectations for the current financial year by approximately 10%, or £1.25m, on the cautious assumption that sales do not resume in the current year.'
The revenue hit means profit before tax will show only ‘modest growth’ over the £1.1m generated in 2017 on turnover up 44% to £8.75m.
Investors nursing losses this morning can at least seek some succour in the fact sales from other parts of the group - Surgical Innovations branded products made in the UK and OEM product sales - are unaffected.