MEDICAL
SMITHS MEDICAL IS A LEADING SUPPLIER OF DEVICES USED DURING CRITICAL AND INTENSIVE CARE PROCEDURES AND FOR POST-OPERATIVE CARE DURING RECOVERY. WE FOCUS ON AREAS WHERE WE HAVE A COMPETITIVE EDGE AND WHERE THERE ARE EXCEPTIONAL OPPORTUNITIES.

The market for medical devices is expanding steadily as the ageing of the developed world's population creates continuously increasing demand for healthcare. We are developing strategic positions within this market, concentrating on the therapy areas where we excel and where there are the greatest opportunities for growth.

Medical delivered a 6% expansion in sales to £480m, and a 4% increase in operating profit to £97m. Margins remained high at 20%. Sales and profits would have been a little higher but for the decline of the Yen, which reduced the reported contribution from the important Japanese market.

Growth was achieved throughout Medical's nine global business units. One of the fastest growing was Needle Protection, which makes devices to protect clinicians and nurses from needle-stick injuries. Needle protection is compulsory across the US under the Needlestick Safety and Prevention Act, which became effective in April 2001.

Within the Ambulatory Infusion business unit, our market-leading Deltec infusion pumps enjoyed considerable success. Our new Cozmo diabetes pump, which obtained US Food & Drug Administration approval shortly after our financial year-end, has great potential. There are one million insulin-dependent diabetics in the US who would benefit from receiving insulin from an ambulatory pump rather than injecting themselves up to six times a day. Cozmo is the first insulin pump that individualises the dose. It is attracting considerable interest from diabetes sufferers across the US.

Restructuring
Medical was restructured into global business units in August 2001. The broad aim was to divide the business into therapy areas where we have competitive strength, to develop global scale and focus in these areas and to reduce manufacturing costs. Real benefits are already apparent and will be increasingly so over the next two to three years.

Most importantly, through concentrating on specific therapy areas we have naturally become far more focused on our customers' requirements. Being global, our business units are able to develop considerable synergies between geographical areas. Each business unit now has a dedicated specialist sales force. Sales should also be boosted by the establishment of a single organisation to manage third party distributors.

As part of the restructuring, some production lines have been transferred to our low-cost global assembly facility in Tijuana, Mexico. By the end of 2003, Tijuana will employ 1,000 people and will make one third of our devices for customers throughout the world.

Innovative products
Taking cost out of manufacturing is allowing us to increase our spending on product development. This should underpin our sales and margins because medical devices tend to sell best and to generate their highest margins when initially introduced. At present, we have a good new product pipeline – more than 20% of our product range has been introduced within the past three years.

We also pursue product development through acquisition. Abbott Laboratories' epidural kits and trays business was acquired in December to strengthen our market position in anaesthesia kits for pain management. We also acquired Bivona, Inc., a leading US supplier of silicone tubes used in anaesthesia and critical care, to extend our product range of airway management single-use devices.

We improved our range of needle protection devices through acquiring exclusive distribution rights to Medisys' Futura retractable safety syringe.

Two non-core businesses making urology and ostomy products were sold during the year.

Outlook – Medical
While the medical devices market continues to expand, we are concentrating product development on focused markets with exciting opportunities such as needle protection, diabetes pumps, airway management and medication delivery, especially in the oncology field. Savings from the concentration of assembly work in Mexico should improve profitability. Funds are also being released for investment in product development.