Smith & Nephew cuts outlook on China weakness

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Smith & Nephew cut its annual forecast on Thursday as it warned of unexpectedly weak demand for medical equipment in China, sending shares down 12 per cent.

The FTSE 100 group, which makes a range of medical supplies including hip and knee replacements, said it was hit by “worse than expected headwinds” in China in the third quarter, which it expected to continue into 2025.

Sales in China were impacted by the country’s push to create more competitive tenders for medical devices and pharmaceuticals through its so-called volume-based procurement programme, which awards large contracts to companies that submit low-cost bids. 

The impact of that programme “masked sports medicine’s strong performance across the rest of the world”, said Deepak Nath, chief executive, and weighed on prices. The company said it also experienced a slowdown in demand in China for orthopaedics products such as implants and devices used in reconstruction.

The company now expects to deliver underlying revenue growth of around 4.5 per cent this year, down from a previous forecast of between 5 and 6 per cent.

The company also trimmed its trading profit margin forecast to between 17.5 and 18 per cent, compared with previous guidance of “at least” 18 per cent, though it said that would improve in 2025.

Smith & Nephew reported a 4 per cent jump in revenue for its third quarter, to $1.4bn, adding that its business excluding China grew by 5.9 per cent. Sales across emerging markets fell by 1.2 per cent over the period.

Nath said that the company remained “convinced that our transformation to a higher growth company, with the ability to drive operating leverage through to the bottom line, is on the right course”,

He added the company had “more to do” to improve hip and knee implant sales in the US, its largest market, but advanced wound management products had the best quarter this year, with sales up 6.5 per cent.

Smith & Nephew shares have fallen by over 40 per cent in the past five years, underperforming other medical equipment makers such as Stryker, and taking its market capitalisation to £8.5bn. Activist investor Cevian Capital took a 5 per cent stake in the group in July but has not made a public move to intervene in the company’s management or strategy.

The company has had high turnover in senior management as well as supply chain problems. Nath took over in 2022 and formulated the company’s current 12-point plan for improved productivity and growth.