Challenging Times for Smith & Nephew: China Causes Disappointing Forecast Adjustment

Smith & Nephew, the renowned company from the FTSE 100 index, has revised its annual forecast downward due to unexpectedly weak demand for medical technology in China. This announcement prompted a 12 percent drop in the stock price. In the third quarter, the medical products manufacturer, known for items like hip and knee replacements, faced stronger-than-expected challenges in China, anticipated to persist until 2025. The decline in sales in China is attributed to the government's volume-based procurement program, which aims to increase competition by awarding large contracts to suppliers with the lowest bids. This program has overshadowed the impressive performance of sports medicine in other regions, emphasized CEO Deepak Nath, while simultaneously increasing price pressure. Additionally, the company recorded a decline in demand for orthopedic products, such as implants and reconstruction devices, in China. Smith & Nephew revised the forecast for underlying revenue growth to about 4.5 percent this year, compared to the previous estimate of 5 to 6 percent. At the same time, the company lowered the forecast for the operating profit margin to 17.5 to 18 percent, from the previous target of "at least" 18 percent. However, an upward trend is expected for the year 2025. In the third quarter, Smith & Nephew reported a revenue increase of 4 percent to $1.4 billion. Excluding China, revenue rose by 5.9 percent, while sales in emerging markets declined by 1.2 percent. Nath emphasized that the company is on the right track to become a higher-growth business capable of effectively leveraging operational efficiencies. In the U.S., the company’s largest market, there is still potential for optimization in hip and knee implant sales. Conversely, products in the advanced wound management segment experienced the best quarter of the year with revenue growth of 6.5 percent. Despite the challenges over the past five years, during which the stock has fallen by more than 40 percent, the company sees a promising future ahead, also fueled by the activism of Cevian Capital, which recently took a 5 percent stake but has remained reserved so far. The company’s leadership under CEO Nath, who has been at the helm since 2022, has already embarked on a 12-point plan to enhance productivity and growth, which is now set to be pursued consistently.