Smith+Nephew Cuts Revenue Growth Forecast to 3%, Ends Merger Talks With Johnson & Johnson
Key Facts
On November 4, Smith+Nephew cut its forecast for underlying revenue growth in 2026 to about 3% from about 4%, and lowered its estimate for operating profit growth to about 4% from about 8%. In its third-quarter trading update, the company said talks with Johnson & Johnson about a possible combination of their businesses had ended. It said it had approached Johnson & Johnson earlier in the year, and discussions followed but then stopped. The company statement did not give a reason for the talks ending. The announcement combines lower annual performance targets with the closure of a potential merger path, while the company said slowing U.S. orthopaedics growth would continue in the fourth quarter.
The company reported revenue of $1.551 billion in the quarter ended September 26, compared with $1.501 billion in the third quarter of 2025, an increase of 3.4% on both a reported and underlying basis. But revenue growth did not translate to the same extent into the annual outlook, as the company also lowered its operating profit estimate to about $1.25 billion from about $1.3 billion previously. On a reported basis, the new revenue growth estimate equates to about 4% at exchange rates prevailing on October 30. These figures reflect a revision to the full-year outlook, not a decline in reported quarterly revenue. The company did not provide a reduced forecast for its annual profit margin.
The revision also extended to free cash flow, which the company expects to be about $750 million in 2026 instead of about $800 million. It also lowered its estimate for adjusted return on invested capital to about 9% from more than 10% previously, excluding the impact of its acquisition of Integrity Orthopaedics from this measure. In contrast, the company kept its operating cash conversion forecast at about 95%, in line with its original guidance. These indicators distinguish the cuts to free cash flow and return on capital forecasts from operating cash conversion remaining at the previously stated level. The company said its $500 million share buyback program was on track, having completed $250 million by the end of the third quarter.
The company attributed the forecast cut to slowing growth in U.S. orthopaedics, and said the weakness was likely to continue in the fourth quarter. In the third quarter, the orthopaedics unit returned to growth, with revenue of $590 million, up 2.5% on an underlying basis, but knee implant revenue fell 2.0%. In the United States, knee implant revenue fell 7.3% and hip implant revenue declined 1.0%, on both reported and underlying bases. The company cited market weakness and the impact of prior business losses on U.S. knee and hip implant results. The gap between overall unit growth and weakness in key U.S. categories explains why the guidance revision focused on the outlook for orthopaedics.
Elsewhere, sports medicine and ear, nose and throat revenue rose 7.9% on an underlying basis to $507 million, while advanced wound management revenue increased 4.7% to $454 million. The company said joint repair growth in sports medicine was double-digit, supported by broad performance across regions and the portfolio, including shoulder, hip and small-joint repair. These businesses supported quarterly revenue growth, while U.S. orthopaedics remained the weakest point in the outlook. Results in other segments do not change the company's estimate that slowing U.S. orthopaedics growth will continue in the fourth quarter. The revenue breakdown shows varying performance across the company's units during the quarter.
On its next steps, the company said its board had been reviewing strategic options for the orthopaedics unit for several months and would continue to consider options available to it after the talks with Johnson & Johnson ended. The company did not identify a specific option or timetable for a decision on the unit in its statement. This process remains separate from the buyback program, which the company said was continuing as planned. Smith+Nephew is scheduled to report fourth-quarter and full-year 2026 results on March 1, 2027. The annual results will provide a set date for updating investors on performance and options for the orthopaedics unit.