Manufacturing integration is in progress and is expected to deliver cost reductions from 2007. During the year, Smiths Medical announced the cessation of manufacturing at three facilities – Duluth, Georgia; Wampsville, New York; and Hythe, Kent – and the expansion of facilities in Mexico and Ohio. The cessation of manufacturing in Hythe is the largest of the closures and will take two years to complete. Costs of £19m (2005: £10m) have been charged in the year in respect of the integration of Medex.

Reorganisation of the division's global distribution system is under way. Working with logistics specialists, Smiths Medical has established a European centre in The Netherlands to serve all markets outside the US, replacing six national warehouses.

In September 2005 Smiths Medical disposed of its interests in pvb Critical Care GmbH for £6m.

Markets
Smiths Medical's product ranges serve three main markets – medication delivery, vital care and safety. The two main contributors to overall market growth are ageing populations and increasing spending on healthcare. The overall world market for devices and equipment of the type supplied by Smiths Medical amounts to some US$7bn and is growing consistently at 5-6% per annum.

Across the three Smiths Medical product groupings, markets are growing at varying rates. The global market for medication delivery products is growing at around 6%, while the market for vital care products is showing annual growth of around 4%. The global market for safety products is growing at around 8% with particularly strong growth in the US, reflecting the present 60% conversion of the market to safety needles and 95% conversion for peripheral intravenous (IV) catheters. In other geographic markets, conversion to safety products is in its infancy, with minimal sales but rapid growth. The Company has respected brands, competitive positions, considerable expertise in design and manufacture and a worldwide sales network.

Performance

During the year, sales of infusion pumps saw strong growth, especially the Medfusion™ 3500 Syringe Pump and the accompanying integrated software, PharmaGuard® Medication Safety Software.

Sales of single-use devices moved ahead of last year. In January, Smiths Medical signed a three year agreement with Novation, which offers contracting services to 2,500 hospitals throughout the US, under which the Company will be one of two suppliers of regional anaesthesia trays. These are standard or customised kits which provide all the necessary products for clinicians to perform regional anaesthesia.

In addition, Smiths Medical secured two major contracts with Premier Purchasing Partners group purchasing organisation for disposable anaesthesia and temperature management products. The temperature management product portfolio continued to increase its share of the market. During the year the temperature probe product range doubled in size and attained almost 50% market share in the US from 34% a year ago.

Safety devices continued to sell well in the US. Combining the Smiths Medical and Medex products has improved the range's competitive strength and is generating incremental sales.

Headline operating profit
Headline operating profit rose by 57% in the year. The translation of overseas earnings at stronger average exchange rates increased profit by 2%. On a statutory basis, operating profit was £109m (2005: £58m).

The increased headline operating profit is due to including a full year's activity from Medex plus an initial contribution from the synergies derived from the Medex integration and other restructuring savings, together with improvements in the product mix.

Research and development
Investment in R&D rose to £25m from £18m. Of this, £16m (2005: £14m) was charged against headline operating profit, with the balance being capitalised.

During the year there were a number of important new product launches. The ADVANTIV® safety IV catheter and the hypodermic needle/syringe Needle-Pro®EDGE™ were designed in response to continuing awareness of needle-stick injuries and consequent health risk. New respiratory products launched included the Portex® adjustable flange tracheostomy tube, the Portex®Thermovent® T2 heat and moisture exchange device, and the PressureEasy® cuff pressure controller. The line of anaesthesia offerings added a new carbon dioxide absorbent, SODASORB® LF, and a single-use bougie for difficult intubations. Smiths also launched a new range of advanced embryo replacement catheters, the Sure-Pro™ and Sure-Pro Ultra™ in response to the changing needs of fertility specialists.

Forward-looking issues
Smiths strategy is to continue to grow a global medical device business concentrating on improving medical outcomes by delivering medication, providing vital care and keeping medical practitioners safe.

Smiths Medical is well placed to make further progress in the coming year across all its business areas.