Smith & Nephew Cuts Outlook as US Knees and Hips Stay Weak

Smith & Nephew (NYSE:SNN) reported third-quarter revenue of $1.55 billion, up 3.4% on both an underlying and reported basis, and at the same time lowered its full-year revenue and trading profit outlook. The cut follows continued weakness in the U.S. knee and hip businesses, which tempered otherwise stronger quarterly growth. Management now expects approximately 3% underlying revenue growth for 2026 and around $1.25 billion in trading profit.

The numbers improved on the second quarter, helped by sports medicine and a return to growth in orthopedics, while advanced wound management was nearly flat. By geography, third-quarter revenue grew 3% in the U.S., 3.2% in other established markets and 4.8% in emerging markets. Excluding China, underlying group growth was 4%.

Chief Executive Officer Deepak Nath said the quarter was broadly in line with expectations, but management no longer expects a material improvement in U.S. knees and hips in the fourth quarter. Every quarter of group growth, in short, still rests on segments management does not fully control.

What changed in the guidance?

The company now guides to:

• Approximately 3% underlying revenue growth for 2026
• Around $1.25 billion in trading profit
• Free cash flow of around $750 million
• Return on invested capital of approximately 9%

Interim Chief Financial Officer Pierre Palassian said the trading profit outlook includes marginal dilution from the Integrity Orthopaedics acquisition. He identified potential tariff costs and above-average inflation as margin headwinds next year, while a normalization in skin substitutes could provide a tailwind. Management declined to give a 2027 growth or margin forecast, saying it would issue guidance and update its medium-term outlook alongside fourth-quarter results. Nath said the growth drivers behind the previously discussed 6% to 7% medium-term growth ambition remain intact — although the business will start from a lower revenue base.

Why did the J&J talks end?

Nath confirmed that discussions with Johnson & Johnson about a potential combination involving its DePuy Synthes business have ended. Smith & Nephew approached J&J earlier in the year as part of work to consider strategic options for orthopedics. He described the talks as intensive and said the company is actively exploring a full range of alternatives for the business, but declined to identify a likely outcome or give a timetable.

"It wouldn't be helpful for me to speculate on what the likely outcome for that would be," Nath said, adding that considerations would include stranded costs and the expense of establishing a separate business if a spin-off were pursued. While the board considers portfolio strategy across the group, Nath said the active evaluation is focused on orthopedics. In the meantime, the company plans to keep investing in its higher-growth, higher-margin sports and wound businesses while executing upcoming orthopedics product launches.

How weak are U.S. knees and hips?

Orthopedics revenue grew 2.5% on an underlying basis in the quarter, with strong hip and knee performance outside the U.S. and double-digit growth in both categories in emerging markets. In the U.S., knees and hips remained weak.

Palassian said the U.S. knee decline primarily reflected business lost in previous periods rather than significant new losses during the quarter. Nath also cited the retirement or exit of several high-volume surgeons earlier in the year; most of those losses occurred in the first quarter, with some in the second.

The shift toward cementless knees compounds the problem. Cementless products now account for nearly 40% of the U.S. knee market, against about 10% of Smith & Nephew's knee portfolio, according to Palassian. The gap is wide, and closing it will take time.

The company received U.S. Food and Drug Administration approval for the cementless version of its LANDMARK knee during the quarter and has completed more than 100 cases. Nath said early surgeon feedback has been positive, but the launch will take time to build; the cemented version is expected in the second quarter of 2027, and he called the second half of that year the more relevant period for LANDMARK to gain commercial traction.

In hips, demand for CATALYSTEM has been encouraging, but the pace of instrument-set deployment limited the company's ability to convert and retain some legacy customers, Palassian said. Nath said a more disciplined approach to deploying capital contributed to the constraint. Management expects additional sets and planned CORI hip robotics launches in 2027 to support performance.

Can sports medicine carry the load?

Sports Medicine and ENT grew 7.9% on an underlying basis, including double-digit U.S. growth across all three segments. Joint repair revenue rose 11.2%, marking its fourth consecutive quarter of double-digit growth. Palassian cited broad strength across shoulder, hip and small-joint repair, including continued growth for REGENETEN.

Advanced Wound Management revenue declined 0.2%. Within the division, advanced wound care grew 1.2%, and advanced wound devices rose 10.7%, helped by PICO and LEAF. Bioactives revenue fell 8.8%, as U.S. skin substitute sales continued to face pressure following reimbursement changes introduced at the start of the year.

Management expects the full-year trading profit headwind from skin substitutes to sit toward the upper end of its previously stated $20 million to $40 million range. Nath said the market's adjustment to the reimbursement changes has taken longer than expected and could remain slower into 2027.

What about shareholder returns?

The $500 million share buyback remains on track, with $250 million completed by the end of the third quarter, Palassian said. Smith & Nephew, founded in 1856 in Hull, England as a pharmacy business, now develops and sells products used in surgery, orthopaedics and wound care across global markets, spanning orthopaedics, sports medicine and ENT care, and advanced wound management.

The buyback is intact; the revenue base beneath it is not what it was.