Operating Review

“We remain confident about the future growth prospects of the business, particularly from our SI branded products which offer an attractive value proposition to both clinicians and procurement managers in these times of austerity.”

 

Graham Bowland, Chief Executive Officer

 

 

Summary of Chairman’s statement

 

Strong demand for our Resposable® instruments has driven SI branded revenue up 12.9%.

 

Increased penetration of UK hospital market.

 

Drive further growth in the business and to capitalise in the US.

 

 

 

ceo

Operationally, we divide the Group into three segments:

 

SI Brand – our own branded laparoscopic
minimally invasive devices. These include
our port access systems: YelloPort® and
YelloPort+plus™; our instrument ranges:
Logi®Range, Logic®Reusable and Quick®Range;
as well as our retraction systems: FastClamp™
and PretzelFlex®. New products are under
development to move the business into other
areas of MIS beyond laparoscopy.

 

OEM – original equipment manufacturer
contracts with third party medical device
companies to supply minimally invasive
technology products through either own
label or co-branding.

 

Industrial – provides minimally invasive
technology for industrial applications. This
remains a non-core element of our business.

 

Results

Revenue for the period was £7.602 million (2010: £7.045 million) and profit before tax increased by 10% to £1.705 million (2010: £1.579 million).

 

SI Brand

Revenues from SI branded products increased
over the period by 12.9% to £5.33 million
(2011: £4.73 million). This growth was driven
by SI’s flagship Resposable® products
YelloPort+plus™ and Logi®Range.

 

We continue to see strong demand for our
Resposable® instruments, where some elements
are disposable and others reusable. The success
of this approach reflects a culture change
within the medical device industry and provides
cost-saving solutions within an increasingly
cost-conscious environment. We believe that,
whilst the laparoscopic market remains highly
competitive, demand for our cost-effective
SI Branded products is being driven by the
widespread austerity measures now experienced
within the general surgery environment.

 

Our “razor/razor blade” model continues to
provide us with growing recurring revenues from
the on-going sales of consumables. In 2012 we
saw unit sales of our YelloPort+plus™ valves and
SwingTop®s (the higher margin disposable elements)
increase by 33%, in direct relation to the increased
placing of the cannula units (the reusable element)
sold in the previous year. In 2012 we sold a total
of 10,124 YelloPort+plus™ cannula units, up 92%
on the previous year (2011: 5,272 units). As a
result, we expect to see a consistent pattern of
rising consumable revenues in 2013 and beyond.

 

The SI branded products are now sold through
a network of specialist laparoscopic distributors
across 31 countries. As part of our sales strategy
we have established strategic alliances with ten
key distributors. As a consequence we have seen
revenues from these particular distributors
increase by 51%. These alliances will provide
improved clinical feedback with links to the
International Clinical Advisory Board, greater
focus on device solutions for the “clinical need”
in each specific market together with enhanced
sales and marketing support and attendance
at local clinical meetings.

 

In February we received approval from the US
Food and Drug Administration (FDA) for our
Logic® range of reusable instruments and our
US master dealer, SI USA Inc., was awarded a
three year contract by the Premier Healthcare
Alliance (Premier) for the sale of our Resposable®
Logi®Range, and Logic®Reusable range
of instruments. Importantly this provides
SI USA Inc. with the opportunity to present our
technologies to the 2,800 plus hospitals and 90,000 other sites within the Premier Alliance and
is a significant benefit to any perspective sub
distributor of SI USA Inc. We remain committed
to driving our US business and with cost saving
at the very heart of US procurement thinking,
we believe the US will remain our key market
in the foreseeable future.

 

Our advanced laparoscopic retractor, PretzelFlex®,
was launched in Europe at the end of 2011.
We have received positive clinical feedback from
surgeons and distributors on the product and
it has sold well. As a reusable device we will
experience revenue growth from new markets,
both geographical and clinical, supplemented by
new PretzelFlex® line extensions. It was pleasing
to announce the launch of the new 3mm
PretzelFlex® at the end of 2012, this adds value
to the range and enhances our move into
3mm surgery.

 

Following the recent five year extension to our
distribution agreement with our UK distributor,
Elemental Healthcare, we have seen extremely
strong growth in UK sales of SI branded products,
up 34.3% on the previous year. This increase in
sales has been driven by a greater penetration
of the UK hospital market with a number of
hospitals converting to SI branded products.
In the last year seven UK hospitals converted
to using YelloPort+plus™ and eight hospitals
converted to using Logi®Cut scissors.

 

With the NHS having to report future
annual savings in the region of £20 billion,
our cost-effective devices are beginning to make
a positive impression with both procurement
management and clinicians prepared to support
the UK healthcare industry. One NHS hospital
in West London changed to SI’s Resposable®
instrumentation and this has brought savings
of £250,000 in the first year alone, compared
with the previous year’s cost of using fully
disposable instruments.

Our 3mm instrument range has been developed
in response to the continuing trend to less invasive
surgery within the MIS space. The benefits of 3mm
surgery are identified through smaller incisions,
thus reducing collateral damage to the abdominal
wall, negating the need for port site closure with
sutures and ultimately providing near “scarless”
surgery. SI’s objective is to become a leader in
3mm surgery; we are well positioned to do so
with our unique offering of 3mm ports,
instruments and PretzelFlex®.

 

Our UK Clinical Advisory Board is a key element
within our growth strategy. By addressing the
“clinical need” within each area of laparoscopic
surgery through our clinical relationships we
are able to develop devices that will be widely
accepted within the surgical community, both
national and international. We are proud of our
close links with UK clinicians and highly value
their feedback and input which has enabled us
to launch several new product line extensions
over the final quarter of 2012.

 

OEM

Revenues from OEM decreased 21.5% to
£2.20 million (2011: £2.81 million), reflecting
our focus on strategic OEM partners whilst
focussing resources on the promotion of
SI branded products.

 

Our OEM contracts business, whereby we
license our intellectual property over fixed
periods and manufacture the products on our
customer’s behalf, is very much reliant on our
partners driving business on our behalf and it
can, on occasion, be unpredictable in terms of
initial product launches, supply chain inventory
requirements and clinical adoption of new
device technology.

 

In the US we sell the PretzelFlex® laparoscopic
retractor through an OEM partnership with
CareFusion. Following FDA 510(k) clearance
in March 2012 the first batch of PretzelFlex®
devices were shipped under this agreement
with a second batch shipped in December.
In addition we received FDA 510(k) clearance
for our reusable 3mm PretzelFlex™ device in
January 2013, which will enable CareFusion
to address the growing 3mm general surgery
market as well as paediatric surgery. We have
shipped a number of these instruments to
CareFusion for evaluation purposes with their
key opinion leaders. Following the successful
conclusion of these evaluations sales to the
US have now commenced.

 

2012 also saw the launch of the Vikon branded
laparoscopic instrument range for Integrated
Medical Systems Inc. (IMS) and we expect to see
stronger sales of this product line with a full
contribution in 2013, with the opportunity to
develop further line extensions thus enhancing
the overall Vikon product portfolio.

 

In September 2011 we signed a development
agreement with Advanced Medical Solutions
Group plc (‘AMS’) to develop a novel device for
internal deployment of their branded adhesive,
LiquiBand®. This product, described by AMS as
their “Hernia Mesh Fixation device”, is still on
track for a late 2013 launch initially focusing
on key European laparoscopic hernia markets.

 

Industrial

Revenues for our non-core Industrial business
remain at historic levels at £101,000 (2011:
£70,000). These revenues relate to the use of
technology in on-wing inspection of jet engines,
as well as a feasibility project for a possible
bespoke solution for a device delivery system.

 

Product development and new product pipeline

New product development and product
enhancement for the SI Brand continues apace
and is driven by the R&D team’s close working
relationship with our Clinical Advisory Boards.

 

We have continued to invest significantly in new
products with a total investment of £2.23 million
relating to product development (2011: £2.90
million) to generate a regular flow of innovative
products to bring to market.

 

The Concept and Development teams have been
working on a number of new products which
will launch under the SI brand during 2013.
Our main focus has been on the development
of our 3mm ultra-MIS range, delivery systems
– the AMS device being the first for glue
deployment, as well as our efforts to diversify
our product portfolio from laparoscopy into
new clinical areas and in the first instance the
hip arthroscopy market. We are already working
with our Clinical Advisory Board (CAB) members
to create a gold standard in 3mm surgery
by developing best practices in laparoscopic
cholecystectomy (gallbladder removal) and
hernia surgery.

 

A dedicated team within our R&D department
continues to work with our CAB arthroscopy
specialists and having launched pre-production
devices for evaluation at the end of 2012 we
are confident that will be in a position to have
ports and instruments available for clinical use
in 2013. It is believed that hip arthroscopy is the
fastest growing area within orthopaedic surgery
and as surgeon proficiency and patient outcomes
improve we look forward to being able to service
the increasing demand for the required high
quality, cost-effective instrumentation.

 

Our product development roadmap has
been well documented and we continue to
explore possibilities of technology transfer
from laparoscopic to other areas of MIS.
We commenced with hip arthroscopy and this
will be followed with moves into thoracic, cardiac
and spinal surgery. Thoracic MIS techniques
centre around video assisted thoracic surgery
(VATS) and we have commenced discussions with
key opinion leaders on how we can utilise our
technologies in this innovative area of surgery.

 

Clinical Advisory Boards

The UK CAB now consists of eight
highly-experienced laparoscopic surgeons
covering a wide range of specialisms within
laparoscopy together with three key opinion
leaders in hip arthroscopy and spinal surgery.
This structure ensures that SI is able to both
address the clinical need in all areas of laparoscopy
and implement the strategy to transfer our core
MIS technology into new areas of the body
across a broad range of clinical disciplines.

 

We have also started to develop the
International Clinical Advisory Board, (ICAB), a
group of key opinion leaders around the world
who can offer advice about their local markets
and feedback on our products. In March this year
we announced the appointment to the ICAB
of Sean Barnett, a US paediatric and thoracic
surgeon specialising in core trauma and bariatric
surgery. This appointment is significant given the
launch of our new 3mm laparoscopic devices
which are aimed at all areas of general surgery,
but which could be particularly advantageous
for minimal invasive surgery in children.

 

Manufacturing

We continue to implement our programme
of gross margin improvements throughout
the manufacturing process. As part of this
process we have commenced working with
the Manufacturing Advisory Service (MAS) on
a long-term lean manufacturing programme.

 

This has already provided tangible benefits in
2013 and will be a key driver in our manufacturing
objectives for further in-house manufacture of
critical, yet currently outsourced components.
Following substantial investment in 2011 to
ensure the continued growth and optimisation
of our manufacturing arm, 2012 saw a planned
reduction in this investment to £117,000
(2011: £1.24 million).

 

Post period end events

In January 2013 we formally signed the Regional
Growth Fund (RGF) Final Grant Offer Letter.
This provides us with up to £5.05 million in
Government funding and will be used to develop
a state-of-the-art research and development
facility and clinical training centre.

 

We expect that the RGF grant will provide
infrastructure funding to implement our long term
strategy for growth through enhanced product
development in new clinical areas of MIS. It will
also enable the creation of a clinical training
centre which we believe will act as a magnet for
pioneering surgeons looking to develop new skills
and instrumentation in minimal invasive surgery

 

Outlook

Our strategy remains firmly in place to become
a leading innovator within the laparoscopic
surgery field and to continue to focus on product
development for our existing markets as well
as new therapeutic markets within MIS.

 

We continue to work with our partners to
bring our technology to market, be it through
OEM agreements with major medical devices
companies or through our extensive international
distribution network that promotes our own
SI branded products.

 

The R&D team continues to work on generating
both a wider range of new products and
enhancements to existing product lines. We expect
to see a regular flow of these in 2013 particularly
within the 3mm ultra-MIS range, as well as the
launch of our new hip arthroscopy products.

 

We continue to receive interest from global
medical device companies to develop innovative
laparoscopic products on an exclusive OEM basis.
Such enquiries are testament to the high regard
in which our design team is held, we assess each
enquiry on its merits, taking into consideration
the impact on our own SI branded products
against the strategic positioning of SI with
the potential partner.

 

We expect to see further sales in the US of our
PretzelFlex® through our exclusive arrangement
with CareFusion, and with the planned 2013
launch of the laparoscopic “Hernia Mesh Fixation”
device for Advanced Medical Solutions we should
see the commencement of a revenue stream
in the final quarter of 2013 and the full benefit
in 2014 as the clinical benefits of glue fixation
become accepted across the MIS space.

 

We continue to be well placed to drive
further growth in the business and to capitalise
particularly on the opportunities that are
presented to us in the US, which is our largest
target market. We will continue to promote
SI branded products through our master dealer
for instruments and through specialist tray
companies for our ports. It is our intention to
allocate resources to support the promotion
of our US business, thereby ensuring we fully
capitalise on the current opportunities opening
up to SI as a result of the economic pressures
being applied to the US healthcare system.

 

We remain confident about the future growth
prospects of the business, particularly from our
SI branded products which offer an attractive
value proposition to both clinicians and
procurement managers in these times of
austerity. With the increased placement of
cannula units in 2012 we anticipate the benefit
of pull through of higher margin consumable
sales in 2013. UK sales for SI branded products
have started well in 2013 and already in the
first quarter nine UK hospitals have converted
to using YelloPort+plus™ and a further three
hospitals have started using Logi®Cut scissors.

 

The strong performance in the final quarter of
the year was a great achievement by the team
and I would like to thank my colleagues for their
hard work and support in all areas of the business.

 

We remain confident in both our sales and
product development strategies. There needs
to be a fine balance between developing routes
to market and the development of new products
that ultimately feed into these routes. It takes
many years to create a robust international sales
network capable of promoting our specifically
positioned medical devices. We believe this
balance will be achieved in 2013 as we invest
within the US market and I look forward to
providing further updates during 2013 as we
focus on US revenue generation in the current
financial year.

 

Graham Bowland
Chief Executive Officer
8 April 2013