Executive Summary / Key Takeaways

• Smith & Nephew is undergoing a significant transformation under its "12-Point Plan," moving from historical sub-market growth to a consistently higher growth profile, underpinned by operational improvements and a robust innovation pipeline.
• The company is demonstrating a clear inflection in financial performance, with 2024 delivering 5.3% underlying revenue growth and 60 basis points of trading margin expansion, accelerating into 2025 with guidance for approximately 5% revenue growth and a trading margin of 19% to 20%.
• Technological differentiation, particularly in surgical robotics (CORI), regenerative medicine (REGENETEN), and advanced materials (OXINIUM), is a core competitive advantage, driving market share gains and enabling participation in high-growth segments like direct anterior hip replacement and Ambulatory Surgery Centers (ASCs).
• Despite external headwinds, notably Volume-Based Procurement (VBP) in China and anticipated tariffs, the company's strong free cash flow generation, projected to exceed $600 million in 2025, supports a $500 million share buyback and continued investment in organic growth and strategic acquisitions.
• The strategic relocation of the CFO to the U.S. underscores the critical importance of the U.S. market, where the Orthopaedics business is showing sequential improvement and is on track to achieve market-level growth by the end of 2025.

A Medical Technology Powerhouse Reinvents Itself

Smith & Nephew plc, a global medical technology company founded in the UK in 1856, has historically been a steady, albeit somewhat underperforming, presence in the industry. Prior to 2019, the company averaged approximately 3% underlying revenue growth, a rate that management recognized as below its market potential. This backdrop set the stage for a comprehensive strategic overhaul, the "12-Point Plan," initiated around 2022, aimed at repositioning Smith & Nephew as a consistently higher-growth and more profitable enterprise.

The medical devices industry is characterized by intense competition, rapid technological advancements, and stringent regulatory environments. Key players like Stryker Corporation , Zimmer Biomet Holdings , Medtronic plc , and Johnson & Johnson vie for market share across various segments. Smith & Nephew holds a prominent position in orthopaedics, sports medicine, and advanced wound management, segments where its specialized offerings and innovation are crucial differentiators. While larger, more diversified competitors may possess broader technological integration and greater scale, Smith & Nephew's focused strategy, particularly in regenerative medicine and advanced wound care, provides a distinct competitive edge.

Technological Differentiation and Innovation: The Core of SNN's Strategy

Smith & Nephew's transformation is deeply rooted in its commitment to technological differentiation and a high cadence of innovation. This is evident across its portfolio, from surgical robotics to regenerative implants and advanced materials.

The CORI Surgical System stands out as a core differentiated technology. This handheld robotics-assisted surgical platform has seen its global installed base exceed 1,000 units, with 10 new features added since 2022. CORI offers unique capabilities, including the ability to perform revisions using both image and image-free solutions, and to assess soft tissue balance before the surgeon makes any cuts. These features provide tangible benefits in terms of precision, procedural efficiency, and reproducibility. The system's compact form factor and lower capital cost position it strongly, particularly in the high-growth Ambulatory Surgery Center (ASC) channel, where it is seeing strong adoption. The company is actively expanding CORI's applicability, building towards a fully enabled hip platform with 3D navigation and introducing CORIOGRAPH pre-operative planning for shoulder replacements in 2025. For investors, CORI's unique functionality and strategic placement in ASCs contribute to a robust competitive moat, driving market share gains in a critical growth area.

Another significant technological differentiator is the REGENETEN Bioinductive Implant. This platform technology, initially successful in rotator cuff repair, is expanding its indications. New evidence highlights its clinical performance, demonstrating a 65% lower relative risk of re-tear rate compared to repair alone in rotator cuff repair. REGENETEN is now seeing increasing adoption in Achilles and Hip extra-articular ligament injuries, with 510(k) clearance for the latter. This expansion into new applications, such as foot and ankle procedures (which now account for approximately 10% of REGENETEN's utilization), positions it as a long-term growth driver, addressing unmet clinical needs and enhancing patient outcomes.

In hip reconstruction, the CATALYSTEM Hip System, launched in Q3 2024, is a new shorter stem hip system optimized for the direct anterior approach. This approach represents approximately 50% of the U.S. market and is growing at a double-digit rate. Early utilization of CATALYSTEM has been ahead of plans, with positive customer feedback on its precision and efficiency. This innovation makes Smith & Nephew more competitive in a crucial, high-growth segment, directly challenging rivals by offering a compelling solution for a rapidly evolving surgical technique.

The company's commitment to advanced materials is exemplified by OXINIUM, a proprietary material used in hip arthroplasty. Clinical evidence reveals an exceptional 20-year survival rate of 94.1% in total hip arthroplasty, the highest among all bearing combinations. This long-term performance provides a strong clinical advantage, reinforcing the company's reputation for durability and patient satisfaction.

Further innovations include the TRIGEN MAX Tibia Nailing System, launched in June 2025, which offers side-specific nails with variable angle locking technology for stable and unstable tibia fractures, aiming to optimize fixation and streamline procedures. The CARTIHEAL AGILI-C Cartilage Repair Implant, an FDA-approved product with breakthrough designation, has shown an 87% lower relative risk of Total Knee Arthroplasty or Osteotomy at 4 years compared to the surgical standard of care. Additionally, the LEGION Medial Stabilized Inserts for cementless knees and the ALLEVYN Ag+ SURGICAL antimicrobial dressing are expanding the company's offerings in key growth areas.

Smith & Nephew's R&D investment strategy is clearly yielding results, with 75% of H1 2025 underlying revenue growth attributed to products launched in the past five years. This consistent pipeline of innovation is foundational to the company's competitive moat, enabling it to command higher average selling prices, reduce manufacturing costs through optimized designs, and solidify its market positioning against formidable rivals.

Operational Excellence Driving Financial Resurgence

The 12-Point Plan has systematically addressed operational inefficiencies and enhanced commercial execution. Product availability, a historical challenge, has significantly improved, with overdue orders for U.S. knees falling by 85% in 2023 and an additional 30% in 2024. Implant availability for key products reached target levels by the end of 2023 and has since improved further. This operational discipline is translating into commercial gains, particularly in the crucial U.S. Recon business, which has shown four consecutive quarters of sequential improvement, with customer churn becoming net favorable since Q4 2024.

Strategic initiatives in manufacturing network optimization are also contributing to profitability. The closure of four Orthopaedics facilities (three in Europe, one in China) in 2023 and early 2024 is expected to yield significant benefits to the P&L in the second half of 2025, driven by lower production costs in remaining facilities (Memphis and Malaysia) and reduced fixed costs. Complementing this, a company-wide headcount reduction of approximately 9% since the end of 2022, with a significant portion in late 2024, is further contributing to cost savings that will flow through the P&L in Q2 and H2 2025. The implementation of a Zero-Based Budgeting (ZBB) approach across all business units and central functions, with 51 initiatives mobilized (over half complete), is targeting $120 million to $130 million in savings in 2025.

A notable strategic move reinforcing the importance of the U.S. market is the relocation of Chief Financial Officer John Rogers to the United States, effective September 29, 2025. With over half of the Group's revenue derived from the U.S., this relocation is designed to enhance executive leadership and oversight of U.S. operations and foster closer collaboration with U.S.-based senior leaders, reinforcing the company's commitment to financial performance and operational excellence in its largest market.

Financial Performance: A Clear Inflection Point

Smith & Nephew's operational and strategic shifts are visibly translating into improved financial performance. In 2024, the company reported total annual sales of $5.81 billion, reflecting 5.3% underlying revenue growth. This momentum continued into the first half of 2025, with underlying revenue growth of 5.0% and total sales of $3.0 billion. The second quarter of 2025 was particularly strong, with 6.7% underlying growth and $1.6 billion in revenue.

Profitability is also showing a clear upward trajectory. The company achieved 60 basis points of trading margin expansion in 2024, reaching 18.1%. This expansion accelerated in the first half of 2025, with a 100 basis point increase in trading margin to 17.7%, slightly ahead of expectations due to accelerated efficiency savings. The Orthopaedics segment, a key focus of the 12-Point Plan, demonstrated significant progress, achieving 230 basis points of margin expansion in H1 2025, reaching 12.7%. This was driven by initiatives to reduce inventory, streamline instrument set allocation, simplify the portfolio, and focus on higher-volume accounts. While the Sports Medicine & ENT segment saw a 130 basis point margin decline to 23.1% in H1 2025 due to the VBP impact in China, margin accretion is anticipated in the second half as the VBP impact annualizes. Advanced Wound Management also contributed positively, with a 160 basis point margin increase to 22.1% in H1 2025, driven by mix and efficiency gains. Overall, since the start of 2023, Smith & Nephew has successfully offset over 700 basis points of headwinds from inflation, foreign exchange, and VBP, while delivering 240 basis points of group margin expansion from H1 2023 to H1 2025.

Cash flow generation has significantly strengthened. In 2024, free cash flow improved to $551 million, with a robust 95% cash conversion. This positive trend continued in H1 2025, with trading cash flow increasing by 70% and free cash flow reaching almost $250 million. The company's net debt at June 28, 2025, was $38 million higher than at year-end 2024, with the leverage ratio decreasing slightly to 1.8x, well within its target. This strong cash position has enabled the announcement of a $500 million share buyback in the second half of 2025, fully funded by 2025 cash flow and existing balances, without compromising growth plans or leverage. Inventory management has been a key priority, resulting in a 46-day reduction in Days Sales Inventory (DSI) to 506 days in H1 2025, a $69 million reduction in inventory value at constant currency. The quality of inventory has also improved, with units of the slowest turning quartile of SKUs down by 14% in H1 2025 compared to H1 2024, and down 22% since the start of 2023.

Outlook and Strategic Trajectory

Smith & Nephew's outlook for 2025 remains consistent, with expectations for approximately 5% underlying revenue growth and a trading margin between 19% and 20%. The company anticipates delivering well over $600 million in free cash flow for the full year, with the strong start to the year enabling the announced share buyback. Management expects a significant step-up in margin in the second half of 2025, driven by cost savings increasingly flowing through the P&L and reduced year-on-year headwinds from VBP in China. The Orthopaedics segment is projected to lead margin expansion, with over 200 basis points of accretion.

The company's capital allocation framework prioritizes investing for organic growth, followed by strategic acquisitions, paying a dividend, and then returning any excess capital to shareholders. This disciplined approach, combined with robust cash generation, positions Smith & Nephew for sustained value creation. Looking beyond 2025, the company expects continued margin accretion in 2026 and 2027, with many of the components for delivery already in place. A Capital Markets Day in early December will outline the next stage of its strategy, signaling a continued focus on long-term growth and profitability.

Risks and Competitive Headwinds

Despite the positive trajectory, Smith & Nephew faces several pertinent risks and competitive headwinds. The situation in China remains dynamic, with slower-than-expected volume benefits from VBP in Sports Medicine and continued channel adjustments in Orthopaedics. China Orthopaedics, at current VBP price levels, is not a profitable business for the company, and there is evidence of market share loss to local manufacturers. The company expects these China headwinds to persist into 2025.

Tariffs also present a challenge, with an anticipated net headwind of $15 million to $20 million in 2025, primarily impacting the second half of the year. This impact is expected to be more pronounced in the Wound and Sports segments, as most Orthopaedics manufacturing is U.S.-based. Furthermore, proposed updates to Medicare reimbursement for skin substitutes in outpatient and physician office settings are expected to be a headwind to Advanced Wound Management sales and profitability in 2026.

In the competitive landscape, while Smith & Nephew's CORI system offers advantages in ASCs and unique functionalities, rivals like Stryker (SYK) and Medtronic (MDT) maintain strong positions in broader surgical robotics and integrated digital health solutions. Zimmer Biomet (ZBH) remains a formidable competitor in traditional orthopaedics, and Johnson & Johnson's (JNJ) diversified portfolio provides significant scale. Smith & Nephew's ability to continue differentiating through specialized technologies and operational efficiency will be crucial to counter these competitive pressures.

Conclusion

Smith & Nephew is in the midst of a compelling transformation, successfully pivoting from a period of modest growth to a trajectory of higher revenue expansion and significant profitability improvement. The "12-Point Plan" has been instrumental in rewiring its operations, enhancing commercial execution, and fostering a culture of accountability. This operational discipline, combined with a robust pipeline of technologically differentiated products like the CORI Surgical System, REGENETEN Bioinductive Implant, and CATALYSTEM Hip System, forms the bedrock of its competitive advantage.

The company's financial performance reflects this strategic shift, with strong underlying growth, expanding margins, and impressive cash flow generation supporting shareholder returns and future investments. While external headwinds, particularly from China and tariffs, present ongoing challenges, Smith & Nephew's management has demonstrated a prudent and adaptable approach, integrating these factors into its guidance. The continued focus on innovation, operational excellence, and strategic market positioning, particularly in the critical U.S. market, suggests that Smith & Nephew is well-positioned to sustain its resurgent growth and profitability, making it a compelling consideration for discerning investment audiences.