Executive Summary / Key Takeaways

• Smith & Nephew is undergoing a significant transformation under its 12-Point Plan, successfully pivoting towards higher growth, enhanced profitability, and robust cash generation, with 2025 poised as a pivotal year for financial delivery.
• The company's strategic focus on innovation, particularly with its CORI robotics platform, CATALYSTEM hip system, and REGENETEN regenerative technology, is a primary driver of growth, contributing 75% to underlying revenue growth in the first half of 2025.
• Operational efficiencies, including manufacturing network optimization, headcount reductions, and zero-based budgeting, are translating into substantial margin expansion, with Orthopaedics margins expected to increase by over 200 basis points in 2025.
• Despite persistent headwinds from Volume-Based Procurement (VBP) and destocking in China, and potential future impacts from U.S. tariffs and Medicare reimbursement changes, Smith & Nephew's established markets are demonstrating strong performance and a favorable competitive balance.
• Strong cash flow generation, with free cash flow projected to exceed $600 million in 2025, is enabling a $500 million share buyback in the second half of 2025, underscoring management's commitment to shareholder value creation.

A Legacy Reimagined: Smith & Nephew's Strategic Pivot

Smith & Nephew plc (SNNUF), founded in 1856 and headquartered in Watford, UK, has long been a fixture in the medical devices industry. For years, prior to 2019, the company maintained an average underlying revenue growth of approximately 3%. Recognizing the need for accelerated performance in a dynamic healthcare landscape, the company embarked on a comprehensive transformation in July 2022 with the launch of its "12-Point Plan" under CEO Deepak Nath. This ambitious strategy aims to reposition Smith & Nephew as a consistently higher-growth business, driving enhanced profitability and cash generation through operational excellence and innovation.

The medical device industry is characterized by intense competition, continuous innovation, and evolving market dynamics, including a growing shift towards Ambulatory Surgical Centers (ASCs) and increasing pressure from value-based procurement (VBP) in key emerging markets like China. Smith & Nephew operates across three core segments: Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management, each facing unique competitive pressures and opportunities. The company's strategic response has been to leverage its foundational strengths, particularly its differentiated technology, to carve out a competitive edge.

Technological Edge and Innovation Driving Growth

At the heart of Smith & Nephew's resurgence is its commitment to technological differentiation and a robust innovation pipeline. The company's core technologies are designed to offer tangible benefits to both surgeons and patients, translating directly into competitive advantages and improved financial performance.

The CORI robotics platform stands out as a significant technological differentiator. Unlike some larger, less flexible systems, CORI is a handheld robotic system known for its unique functionality and adaptability to various surgeon preferences. It is the only platform capable of performing revisions and offers image-free solutions, providing surgeons with unparalleled flexibility. Furthermore, CORI is unique in its ability to facilitate soft tissue balance before any cuts are made during surgery, a critical feature for optimal patient outcomes. Its compact form factor and lower capital cost make it particularly well-suited for high-growth channels like Ambulatory Surgical Centers (ASCs), where it is seeing strong placement growth. This strategic advantage positions Smith & Nephew to capture future leading surgeons as the market pivots away from inpatient procedures. The company has continuously enhanced CORI, adding 10 new features between 2022 and 2024, and is expanding its application to cover all joint replacement procedures, including a June 2025 launch of CORIOGRAPH preoperative planning and modeling for shoulder replacements.

In hip reconstruction, the CATALYSTEM Hip System, launched in Q3 2024, is a new shorter stem hip system optimized for the high-growth direct anterior approach, which now accounts for approximately half of the U.S. market. Surgeon feedback on CATALYSTEM has been very positive, highlighting its precision, procedural efficiency, and reproducibility. This system makes Smith & Nephew more competitive in a rapidly expanding segment, with accelerated set deployment planned for Q3 2025 and expansion into markets like Japan.

The REGENETEN regenerative technology is another key growth platform. Initially focused on rotator cuff repair, REGENETEN has demonstrated significant clinical benefits, with a randomized controlled trial showing a 65% lower relative risk of re-tear rates compared to repair alone at the 2-year mark. The company is strategically expanding REGENETEN's indications, with over 10% of its use now outside rotator cuff, including applications in foot and ankle. In Q2 2025, REGENETEN received FDA clearance for extra-articular ligament injuries in the U.S., with an initial focus on hip capsule repair and future expansion into other extra-articular ligament repairs. This broadens the technology's market reach and reinforces its position as a long-term growth driver.

Smith & Nephew's commitment to innovation extends across its portfolio. The OXINIUM bearing technology, used in total hip arthroplasty, boasts a 20-year survival rate of 94.1%, the highest among all bearing combinations, as reported by the Australian National Registry. This exceptional long-term performance provides a strong clinical advantage. Recent product launches include the TRIGEN MAX Tibia Nailing System in Q2 2025, expanding the company's nailing range, and the LEGION Medial Stabilized Inserts for cementless knees, aligning with market trends towards medial stabilized inserts, robotics, and cementless fixation. In Advanced Wound Management, the early 2025 U.S. launch of ALLEVYN Ag+ SURGICAL, an antimicrobial dressing with new silicone technology, further strengthens its foam dressings portfolio. These innovations collectively contribute to Smith & Nephew's competitive moat, driving higher average selling prices, improving margins, and solidifying its market positioning.

Operational Transformation and Financial Momentum

The 12-Point Plan has systematically addressed operational and commercial inefficiencies, leading to tangible financial improvements. Product availability, a historical challenge, has significantly improved, with overdue orders falling by approximately 90% since 2022. U.S. non-set product line item fill rates for key products now exceed target levels, and knee capital availability reached its target in Q2 2024. These foundational improvements have enabled better commercial execution.

Smith & Nephew's U.S. Recon business, which was slower to recover, has shown progressive sequential improvement, with customer churn becoming net favorable by Q4 2024 and continuing into Q2 2025. This indicates a more stable and growing customer base. The company's focus on cost optimization through a zero-based budgeting (ZBB) approach has been instrumental, targeting gross cost savings of $325 million to $375 million by 2027. Headcount has been reduced by approximately 9% since the end of 2022, with a significant portion occurring in late 2024, contributing to cost savings flowing into 2025. Furthermore, the closure of four Orthopaedics manufacturing facilities (three in Europe and one in China) and the transfer of production to Memphis and Malaysia are expected to yield P&L benefits in 2025 due to a more favorable cost position.

The financial results for the first half of 2025 underscore the success of these initiatives. The company reported 6.7% underlying revenue growth in Q2 2025, reflecting sequential acceleration across all regions and business units. For the first half of 2025, underlying revenue growth stood at 5%. This higher growth profile is directly supported by innovation, with 75% of H1 2025 underlying revenue growth attributed to products launched in the past five years.

Profitability has also seen a significant uplift. First-half trading margin expanded by 100 basis points, slightly ahead of expectations due to accelerated efficiency savings. The Orthopaedics segment, a key focus of the transformation, achieved a remarkable 230 basis points of margin expansion in H1 2025, driven by initiatives such as inventory reduction, instrument set allocation streamlining, portfolio simplification, and a focus on higher-volume accounts. Management anticipates Orthopaedics margins to reach north of 14% for the full year 2025, a substantial increase from just below 12% in 2024. Advanced Wound Management also saw a 160 basis point margin increase in H1 2025, while Sports Medicine and ENT experienced a 130 basis point decline due to the VBP impact in China. Overall, Smith & Nephew has delivered 240 basis points of group margin expansion from H1 2023 to H1 2025, successfully offsetting over 700 basis points of headwinds from inflation, foreign exchange, and VBP since early 2023.

Cash flow generation has dramatically improved, with trading cash flow increasing by 70% and free cash flow reaching almost $250 million in the first half of 2025. This was largely driven by lower working capital outflows and a 46-day reduction in days of inventory (DSI) across the group to 506 days. 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.

Competitive Landscape and Strategic Positioning

Smith & Nephew operates in a highly competitive environment, facing off against diversified healthcare giants like Johnson & Johnson (JNJ), specialized orthopedic leaders such as Stryker Corporation (SYK) and Zimmer Biomet (ZBH), and broad medical technology innovators like Medtronic (MDT).

Compared to Johnson & Johnson, Smith & Nephew's more specialized focus in orthopedics and wound care allows for deeper expertise and targeted innovation. While JNJ's scale provides broader market reach and financial flexibility, Smith & Nephew's unique value proposition in wound management, particularly with advanced biomaterials and regenerative medicine, offers a qualitative edge through potentially superior clinical outcomes.

Against Stryker, a leader in minimally invasive procedures and robotic-assisted surgery, Smith & Nephew's CORI platform provides a strong counter. CORI's unique features, such as its handheld design, lower capital cost, and ability to perform revisions and soft tissue balancing, position it favorably, especially in the growing ASC channel. While Stryker emphasizes advanced technological integrations, Smith & Nephew's EVOS plating system continues to be a key growth driver in Trauma and Extremities, demonstrating resilience against competitor launches.

In comparison to Zimmer Biomet, which specializes in musculoskeletal healthcare and digital health integration, Smith & Nephew's hip and knee implants, particularly with the CATALYSTEM system, offer differentiation through designs optimized for specific surgical approaches and advanced biomaterials. While ZBH focuses on digital tools for surgery planning, Smith & Nephew's strengths in sports medicine and wound care provide a broader value proposition for integrated care solutions.

Medtronic, a global leader in medical technology with a presence in orthopedics, emphasizes connected health solutions. Smith & Nephew's specialized focus in advanced wound bioactives and extremity trauma devices offers distinct performance aspects. While Medtronic's scale and technological connectivity are formidable, Smith & Nephew's focused innovation in product performance for wound applications and surgical tools allows it to maintain a competitive stance.

A key challenge for Smith & Nephew, particularly in China, has been the impact of Volume-Based Procurement (VBP) and a push to support local manufacturers. This has led to market share loss in the Recon business, which is currently not profitable at VBP price levels. However, the company is adapting its go-to-market model and leveraging its global manufacturing network to mitigate these impacts. The Sports Medicine business in China, while affected by VBP, is in a better profitability position than Orthopaedics.

Outlook and Shareholder Value Creation

Smith & Nephew's outlook for 2025 remains consistent, with management reaffirming guidance for approximately 5% underlying revenue growth and a trading margin between 19% and 20%. This includes an anticipated net tariff headwind of $15 million to $20 million, primarily impacting the second half of the year. The company expects margin expansion to accelerate in the second half of 2025, driven by cost savings from manufacturing network optimization and reduced China VBP headwinds.

Free cash flow is projected to exceed $600 million for the full year 2025, a significant increase from $551 million in 2024. This robust cash generation has enabled the company to announce a $500 million share buyback in the second half of 2025, which will be fully funded by 2025 cash flow and existing balances. This strategic move demonstrates management's commitment to returning excess capital to shareholders while maintaining a healthy leverage ratio, expected to decrease to 1.8x by year-end 2025 from 1.9x in 2024.

Looking beyond 2025, management anticipates continued margin accretion in 2026 and 2027, driven by the annualization of cost savings and ongoing efficiency initiatives. Orthopaedics margins are expected to continue expanding, with the goal of doubling ROIC in 2025 and exceeding the cost of capital by 2026-2027, primarily driven by continued improvement in U.S. Recon performance. The company will outline the next stage of its strategy at a Capital Markets Day in early December.

Despite the positive momentum, certain risks warrant attention. The uncertainty surrounding tariffs and their final impact, as well as proposed Medicare reimbursement changes for skin substitutes in 2026, could pose headwinds to Advanced Wound Management sales and profitability. Additionally, a slowdown in U.S. knee procedures, attributed to factors like vacation schedules and surgeon transitions, highlights the dynamic nature of market demand. However, the company's favorable balance of competitive wins versus losses in U.S. Recon, a trend continuing into Q2 2025, provides reassurance.

Conclusion

Smith & Nephew is in the midst of a profound transformation, with its 12-Point Plan delivering tangible results across growth, profitability, and cash flow. The company's strategic emphasis on innovation, particularly through its CORI robotics, CATALYSTEM hip system, and REGENETEN regenerative technology, is strengthening its competitive position and driving market share gains in key segments. Operational efficiencies, including manufacturing network optimization and disciplined cost management, are translating into significant margin expansion, setting the stage for sustained profitability.

While external headwinds, notably from China's VBP policies and potential U.S. tariffs, present ongoing challenges, the company's strong performance in established markets and its proactive mitigation strategies demonstrate resilience. The robust free cash flow generation and the announced share buyback signal a clear commitment to shareholder value. As the 12-Point Plan nears its completion, Smith & Nephew is poised to build upon its improved foundation, with a clear technological roadmap and operational discipline driving its trajectory towards becoming a consistently higher-growth and more profitable leader in the medical device industry.