S&N has strong arms but still weak knees

MedTechs remain a disaster story – held back by a series of never-ending headwinds, like supply chain, interest rates, slowing China, tariffs etc., ever since the COVID-19 music stopped a few years ago. However, Smith & Nephew (REDUCE; UK), the smallest of the four major global orthopaedic implants players (others being Stryker, J&J and Zimmer Biomet), had a much better run. In fact, since our last investment case push “ELUSIVE S&N IS STILL PROMISING” in mid-2024, the firm’s shares are up c.19% vs. c.20% correction for AV MedTech sector.

Rare winner in a losers market 

Execution has clearly improved 

S&N's turnaround under CEO Deepak Nath has gathered real momentum, with various positives/beats across the last six-to-eight quarters – a clear evolution from a largely in-line delivery in 2023, and several misses in 2022.

Execution has been solid on the 12-Point Plan, launched in 2022 with targets for 2025, focused on fixing Orthopaedics’ (40% of sales) supply issues, simplifying the portfolio, improving productivity and working capital discipline, and accelerating innovation-led growth in Sports Medicine & ENT (31% of sales) and Advanced Wound Management (AWM, 29% of sales) segments. Supply chain metrics, like implant availability and overdue orders, have normalised with Orthopaedics returning to mid-single-digit growth. Sports Medicine and AWM continued to deliver mid-single-digit growth amid continued benefits from ageing demographics, rising procedure volumes and the shift toward outpatient care settings. Hence, what was once a cyclical rebound story has transitioned into a mid-single-digit structural growth narrative.

 Source: Company filings

As a result, the group operating margin improved from 14.6% in 2022 to 16.3% in 2025, which was further supported by cost savings across manufacturing and procurement – annual targets for which have also been upgraded, from $200m by 2025 to $325–375m by 2027. Cashflow recovery was most notable, with ‘reported’ FCF recovering to $840m in 2025 vs. $129m in 2023 – also enabling the group’s first share buyback ($500m) in over a decade. 

US knees – a gap that refuses to close

Within Orthopaedics, the US Knee Implants business remains the most stubborn blemish on S&N’s turnaround story. Despite returning to growth (+3.6%) in Q4 2025, after a decline in the two prior consecutive  quarters, the gap vs. peers remains wide and structurally uncomfortable: Stryker (+7.6%), Zimmer (+6%), and J&J (+5.1%) posted better Q4 growth in US knees. This has now been a persistent underperformance across multiple quarters.

Outperformance of Stryker and Zimmer likely reflects their larger robotics installed base driving implant pull-through, alongside stronger positioning in the fast-growing ambulatory surgical centres (ASC) channel, where S&N has historically under-indexed. S&N is addressing both: CORI (robotic surgical platform) now exceeds 1,100 global installations, with 36% of US knee procedures being performed on the platform and 45% of 2025 placements being in ASCs. CORI has also expanded beyond knees to cover major joint procedures, including hip and shoulder. Upcoming launch of the new LANDMARK Knee System is a credible further response.

However, rivals are not standing still, and the risk of market share loss in this high-volume and high-visibility segment is a material overhang on the earnings trajectory. No wonder, J&J—despite being a healthcare behemoth—is eyeing an exit from its low-growth implants business.   

Stronger balance sheet, but M&A track record is mixed

S&N’s balance sheet has strengthened (reported net debt/EBITDA 1.7x at FY25-end vs. 2.1x at FY23-end), supporting an ‘A’ AV credit rating (vs. ‘BBB’ sector). Despite the recent share buyback, covenant headroom remains significant (1.7x vs. <3.5x covenant), leaving genuine firepower for further deals. The question is how this capacity is deployed. Remember, S&N's M&A strategy has largely focused on technology bolt-ons rather than scale acquisitions, with the most successful deals in Sports Medicine and AWM rather than Orthopaedics. The track record is mixed: deals such as Rotation Medical (REGENETEN) and Osiris have created durable growth platforms – the former establishing S&N in shoulder biologics, and the latter adding a meaningful Advanced Wound Bioactives sales stream. Others, including Engage Surgical, have delivered weaker returns after failing to gain commercial traction. 

The most recent deal, Integrity Orthopaedics ($225m upfront plus up to $225m in milestones), fortunately fits the better end of this playbook: the Tendon Seam rotator cuff repair system targets the $875m US market, offers differentiated clinical credentials, and completes S&N's shoulder portfolio alongside REGENETEN (biological repair patch for tendons) and AETOS (shoulder replacement). While the deal is targeted to be margin accretive by 2028, it aligns well with the company’s new RISE strategy, which prioritises investment in higher-growth segments. Strategic rationale is credible, but near-term (margin) drag is also real. 

Activist angle renders hope but little clarity

Cevian Capital (an activist investor), which disclosed a 5% stake in S&N in July 2024, has since increased it to c.9%, making it one of the largest shareholders. While Cevian has engaged with the board, it has – unlike activists – not publicly outlined specific strategic demands. Some investors have nevertheless floated structural options, including potential separation of Orthopaedics (like J&J) — the largest but lower margin and historically slower-growing business. Management continues to defend the integrated portfolio, pointing to Orthopaedics as a growing contributor to improvements in margins, FCFs and ROIC. A separation would be complex, distracting and financially uncertain, arriving precisely when the core turnaround requires sustained execution. So, while the activist angle is supportive in theory, it’s unlikely to act as a foreseeable near-term catalyst, particularly after the stock’s rerating in recent years.

2026 guidance comes with headwinds

Management outlined a three-year strategic framework at its December 2025 CMD, targeting accelerated growth in Sports Medicine, Advanced Wound and ENT, while returning Orthopaedics to market growth. The c.6% organic sales growth outlook for 2026 appears broadly in line with market growth, which is a notable constraint for a company holding a #2 position in two of its three segments. It is also subject to headwinds such as: (1) inventory revaluation from ongoing portfolio rationalisation; (2) tariff-related cost pressures ($60m vs. $17m in 2025); (3) skin substitute reimbursement changes ($20–40m incremental impact); and (4) AET and ENT’s volume-based procurement roll-out in China. Skin substitute risk deserves particular attention as it is among the highest-margin lines in the portfolio, and guided headwinds could prove conservative, if the US reimbursement dynamics shift more structurally. Any slippage here would weigh disproportionately on profit and returns. Adding on top a dilutive Integrity Orthopaedics bet, operating disappointments could (re-)emerge.

Valuation premium is hard to justify

At current levels, S&N trades at P/E and EV/EBITDA of 16.8x and 9.6x, respectively – broadly in-line with MedTech peers, and after a material re-rating from discounted multiples in mid-2024. That convergence to sector fair value is itself the problem. Remember, S&N is a business guided to clock 6% organic growth (broadly in-line with market), but this ignores the looming risks. While the fundamental valuation metrics still rightly bank on management’s unrelenting execution, the near-term peer metrics weigh on the overall upside (c.10%). Hence, caution is warranted as S&N’s seemingly strong legs still depend a lot on its fragile knees.