$4.4bn

$987m

$810m

76.9¢

61.7¢

27.4¢

TRADING PROFIT²

MARGIN

TRADING PROFIT

TO CASH CONVERSION²

OPERATING PROFIT

MARGIN

OPERATING PROFIT

AS A PERCENTAGE OF

CASH GENERATED

FROM OPERATIONS

With a business model

that creates value

OUR MISSION STATEMENT

Delivering advanced medical technologies that help healthcare

professionals, our customers, improve the quality of life for their patients

OUR VALUES

  Advanced Surgical Devices

ORTHOPAEDIC RECONSTRUCTION

REVENUE¹

2012  $1,540m

TRAUMA & EXTREMITIES

REVENUE^1,2

2012  $474m

SPORTS MEDICINE JOINT REPAIR

REVENUE^1,2

2012  $474m

ARTHROSCOPIC ENABLING TECHNOLOGIES

REVENUE^1,2

2012  $458m

OTHER ASD

REVENUE^1,2

2012  $162m

Advanced Wound Management

ADVANCED WOUND CARE

REVENUE¹

2012  $849m

ADVANCED WOUND DEVICES

REVENUE¹

2012  $180m

ADVANCED WOUND BIOACTIVES

REVENUE¹

2012  N/A

With over 11,000 employees

supporting healthcare

professionals globally

so that ever more of

our business comes from

areas of higher growth

Healthpoint acquisition delivers

Our major acquisition at the end of 2012, Healthpoint Biotherapeutics, has given us a leading position in bioactives, the fastest growing segment of Advanced Wound Management. This business has out-performed our expectations, increasing its revenue by 47% in 2013. With its unique portfolio, excellent sales execution and expertise in product research and development, it is an outstanding addition to Smith & Nephew.

Leaders in emerging markets

Throughout 2013, we have built upon our leading position in the emerging markets, generating strong revenue growth. We enhanced our platform, investing in the sales force and infrastructure in markets such as Mexico and the Middle East, as well as acquiring distributors in Turkey and Brazil. By having a direct relationship with our customers we are able to offer them a fuller range of products and services.

We see a major opportunity to create portfolios for patients in the economic mid-tier across the emerging markets, and launched our first products and acquired the Sushrut-Adler Indian trauma business in 2013.

Perpetual efficiency

These strategic investments and many other initiatives have been made possible through our continued drive to be more efficient, to reduce cost, and to simplify and improve our operating model. In 2011, we announced an initial programme to generate annual savings of $150 million and this will be largely complete by the end of 2014. We are now a leaner business, and, as importantly, we are embedding a culture of perpetual efficiency into our processes and future thinking.

Sustainability

Our mission at Smith & Nephew is to help our customers improve people’s lives. I can think of nothing more intrinsic to this mission than operating sustainably and responsibly to

deliver long-term benefits. In 2013, we maintained our commitment to our customers, patients, employees, communities and Shareholders. This was again recognised in our inclusion in the FTSE4Good and Dow Jones Sustainability indices.

Sir John Buchanan

Sir John Buchanan will step down as Chairman of the Board in April 2014. I wish to thank Sir John for his leadership, counsel and dedication over the past nine years. As Chairman he has overseen a number of significant changes and has given me tremendous support in my role as Chief Executive Officer. We are confident that in Roberto Quarta we have found another excellent Chairman.

Acquisition of ArthroCare Corp

In February 2014, we announced our intention to acquire ArthroCare, an innovative medical devices company with a highly complementary sports medicine franchise. Based in Austin, Texas, ArthroCare’s technology and products will significantly strengthen our portfolio – and we will use our global footprint to drive substantial new revenue growth. We expect to complete this acquisition in the middle of 2014 for a net cost of approximately $1.5 billion.

Rebalancing Smith & Nephew

Smith & Nephew made excellent progress in 2013, delivering both revenue and earnings growth and generating strong cash flow. I would like to thank our employees for their contribution during the year. It was their dedication and focus that achieved these results, and importantly, are enabling us to accomplish our programmes to make the Group fit and effective for the future.

We are successfully reshaping and rebalancing Smith & Nephew so that even more of our business comes from areas of higher growth. In this way we will continue to deliver the best support for our customers and the greatest value for our Shareholders.

Yours sincerely,

Olivier Bohuon

Chief Executive Officer

PERFORMANCE

R&D investment now represents 5.3% of revenue, an increase in spending of 35% in reported terms. We have maintained our strong momentum of introducing new products:

–  In ASD, we successfully launched the JOURNEY II BCS Knee System and our Sports Medicine franchise expanded through a next generation HEALICOIL suture anchor range and we also expanded our Extremities offering

–  Over 20 new AWM products launched

–  In our Emerging & International Markets we launched a low-cost camera to drive market expansion and access to minimally invasive joint repair

–  Launched new medical education websites to support healthcare professionals.

GLOBAL OUTLOOK

Innovation offers the key to meeting the realities of healthcare and economic paradigm in both Established and Emerging & International Markets. New products, technologies and surgical techniques hold the potential of reducing the overall cost of healthcare.

PERFORMANCE

Trading profit grew by 5% and trading profit margin decreased slightly to 22.7% as expected. Targeted investments, increased R&D and the new US Medical Device tax were partially off-set by efficiency and cost initiatives

Key initiatives included:

–  Continuing to deliver our $150 million per annum efficiency savings programme

–  Expansion of the Suzhou facility continues on track

–  Started roll-out of major Europe- wide single IT and business intelligence platform.

GLOBAL OUTLOOK

By simplifying and improving our operating model we can liberate resources to invest in growth opportunities and meet the persistent price pressure. A simpler and more efficient organisation allows us to make faster and better decisions.

PERFORMANCE

2013 has been another active year from a business development perspective, mainly focused on supporting our Emerging & International Markets strategy:

–  Acquisition of distributors in Brazil and Turkey

–  Acquisition of a mid-tier trauma business in India

–  Successful integration of Healthpoint Biotherapeutics which we acquired in 2012.

GLOBAL OUTLOOK

Acquisitions and partnerships are important elements which supplement organic investment and provide increased opportunity for high growth and value creation.

Capital Allocation Framework

We consider that the efficient use of capital on behalf of Shareholders is an important objective. We have delivered good revenue and earnings growth and strong cash generation in the challenging markets of the last few years.

During 2011, we announced our Strategic Priorities, focusing our business on liberating resources to invest in driving greater growth. In order to support this strategy, the Board believes in maintaining an efficient, but prudent, capital structure, while retaining the flexibility to make value enhancing acquisitions. This approach was set out in the new Capital Allocation Framework announced in May 2013.

The Capital Allocation Framework will be used to prioritise the use of cash and ensure an appropriate capital structure. Our commitment, in order of priority, is to:

1.

continue to invest in the business to drive organic growth;

2.

maintain our progressive dividend policy;

3.

realise acquisitions in-line with strategy; and

4.

return any excess capital to Shareholders.

and strong

cash generation

In-line with the above framework, and reflecting our confidence in the successful execution of our Strategic Priorities, we commenced a $300 million share buy-back programme in May 2013. As of 31 December 2013 we had spent $226 million. This programme was suspended following our agreement to acquire ArthroCare, announced on 3 February 2014.

Liberating resources

In August 2011, Smith & Nephew announced a programme to drive structural efficiencies in order to liberate the resources needed to fund investment in the emerging markets and R&D, targeting savings of at least $150 million per annum. The cost of the currently identified programmes is expected to be $160 million in cash and $40 million in non-cash costs.

To date the Group has realised annualised benefits of $131 million and we expect to complete the programme in early 2015 and realise slightly more than the anticipated benefits. The costs are on track. As a result of this programme and other actions, a culture of continuously looking to be more efficient is being embedded across the Group.

Acquisitions

During the year the Group has completed acquisitions of manufacturing and distribution businesses in Turkey, Brazil and India. The aggregate cost was $126 million. Through these acquisitions, we are implementing a number of our Strategic Priorities: to build leadership positions in the Emerging & International Markets; to supplement our organic growth through acquisitions; and to bring forward mid-tier portfolios to these countries.

Outlook

We anticipate the market conditions seen in the second half of 2013 to continue in 2014. We expect the US to be stable with some signs of improvement, Europe to remain challenging and the emerging markets to continue to offer opportunities for higher growth.

In terms of revenue growth by franchise, we expect:

–  Orthopaedic Reconstruction, continuing its recent improved performance, to grow at approaching the market rate;

–  Trauma & Extremities, building upon our recent investments, to grow overall at the market rate, but with a stronger second half to the year;

–  Sports Medicine, with its strong product pipeline, to deliver growth above the market rate; and

–  Advanced Wound Management, with its unique mix of leading products, to deliver another year of growth above the market. Within this, we expect Advanced Wound Bioactives to grow at a rate in the mid-teens.

In terms of trading profit margin, we expect to exceed our 2013 performance.

I am confident that our continuing focus on efficiency, coupled with further investments to drive growth and the disciplined use of our strong cash flow will generate greater value for our Shareholders.

Yours sincerely,

Julie Brown

Chief Financial Officer

Market trends

Demand for healthcare continues to increase worldwide influenced by the following trends:

Increased longevity and average age

As a result of improvements in healthcare and living conditions, life expectancy across the world has increased in modern times and this increase is expected to continue.

The Organisation for Economic Co-operation and Development (‘OECD’) calculates the average life expectancy at birth in 2010 as 79.7, a significant rise from the 70.3 calculated in 1970.

As a consequence of longer life expectancy and the falling birth rates in many developed countries, there is an expanding gap between the demand for healthcare and the ability of governments to supply healthcare. Demand for healthcare will increase because of the ageing world population but at the same time the changing balance of age in the population means that, relatively speaking, there is potentially an accompanying decrease in funds available for healthcare raised through taxation of the working population.

More active lifestyles

Demand for healthcare is also increasing because people now expect to maintain active lifestyles longer into retirement and to return to activity sooner after treatment. This has resulted in a desire for less invasive surgery and quicker recovery times. Patients also desire products with a better replication of natural movement and an ability to cope with more rigorous activity over a longer period.

Obesity and associated chronic diseases

Obesity is an increasing global problem which causes more wear on the joints of the human body and increases demand for orthopaedic reconstruction.

Across the OECD countries, an average of 18% of the population is obese; this has increased from 13% in 2000.

Obesity also increases the risk of diabetes which can lead to other medical conditions and complications. In 2012, the International Diabetes Federation estimated that 8.3% of the world’s population (371 million people] suffer from diabetes and this is projected to rise to 9.9% (552 million people] by 2030.

There is a proven link between diabetes and a higher risk of surgical site infections which increases the risk of surgical procedures on diabetic patients. This risk can be minimised with the use of specialist wound care products designed to lower the risk of infection.

It is estimated that up to 10% of people with diabetes also suffer from diabetic foot ulcers. These ulcers are prone to infection, causing an increased risk of amputation, increased morbidity and are a significant burden on the health system.

Increased affluence in emerging markets

The emerging markets are becoming more affluent and therefore more able to afford medical treatments. However, the cost of many medical devices restricts access by the wider population.

Patient awareness

In certain countries, patients are becoming increasingly aware, from the internet and direct-to-customer advertising, of the various healthcare options and treatments available. This has led to some increased patient influence over the product purchasing decisions of medical service providers.

Global economic crisis

The supply of healthcare in many of our markets is funded by governments. The global economic crisis in recent years has placed increased pressure on governments around the world to reduce or constrain healthcare expenditure.

In summary

The increased demand for healthcare products and the limitation of available resources is widening the funding gap. Providing technologies that deliver value by improving clinical outcomes while reducing the consumption of overall healthcare resources is vital for the success and sustainability of medical device businesses.

Regulatory standards and compliance in the healthcare industry

The international medical device industry is highly regulated. Regulatory requirements are important in determining whether substances and materials can be developed into marketable products and the amount of time and expense that should be allotted to such development.

National regulatory authorities administer and enforce a complex series of laws and regulations that govern the design, development, approval, manufacture, labelling, marketing and sale of healthcare products. They also review data supporting the safety and efficacy of such products. Of particular importance is the requirement in many countries that products be authorised or registered prior to manufacture, marketing or sale and that such authorisation or registration be subsequently maintained. The major regulatory agencies for Smith & Nephew’s products include the Food and Drug Administration (‘FDA’) in the US, the Medicines and Healthcare products Regulatory Agency in the UK, the Ministry of Health, Labour and Welfare in Japan and the China Food and Drug Administration.

In general, the trend in many countries in which we do business is towards higher expectations and increased enforcement activity by governmental authorities.

We are committed to doing business with integrity and welcome the trend to higher standards in the healthcare industry. We and other companies in the industry have been subject to investigations and other enforcement activity that have incurred and may continue to incur significant expense. See ‘Legal proceedings’ on page 130.

RESPONDING TO THE MARKET

Smith & Nephew is committed to developing products that respond to the demand and supply pressures faced by the healthcare industry. Some examples are set out below.

Our VERILAST^à Technology has been laboratory tested to demonstrate wear performance sufficient for 30 years of use enabling a total replacement option for younger, more active patients.

PICO^à is our single use NPWT product which brings the wound healing benefits of NPWT to a wider audience due to its discrete size and portability. Research is also proving the benefits of NPWT products to reduce recovery times after major surgery, such as caesarean sections.

VISIONAIRE^à, our patient matched instrumentation, uses the patient’s MRI and X-rays to design cutting blocks specific to each patient. This may reduce surgery time by eliminating several sizing and alignment steps and improves precision in fitting the implant.

We are developing products targeting the middle economic tier of the emerging markets to capitalise on their forecast growth. This will enable doctors and nurses to deliver quality products to new patient communities around the world.

Improving quality of life

Smith & Nephew’s business model, set out on page 7, supports our mission to deliver advanced medical technologies to help healthcare professionals, our customers, improve the quality of life for their patients.

Through it we:

–  invest in research & development to create innovative new solutions that improve clinical outcomes and reduce the economic burden on healthcare systems;

–  rigorously enforce regulatory and compliance standards, conducting business ethically everywhere we operate;

–  ensure our manufacturing, supply and distribution footprint is lean and efficient;

–  provide medical education and product training to healthcare professionals to help ensure safe and effective treatment for patients; and

–  support our sales and marketing teams to guarantee our customers have the advanced technologies and supporting services they need to treat their patients.

Our business model is underpinned by our values and Capital Allocation Framework:

–  our values of Innovation, Trust and Performance focus our people on being responsive to the needs of our customers; energetic, creative and passionate in our work; and building lasting and close relationships with our stakeholders; and

–  Our Capital Allocation Framework enables us to invest for the future, both in organic growth and through acquisitions, whilst also generating value for Shareholders today through a progressive dividend policy and commitment to return any excess capital.

By implementing our Strategic Priorities we increase momentum throughout the business model to:

–  build on our strong position in the Established Markets;

–  realise the significant opportunities in the Emerging & International Markets;

–  maintain an unremitting focus to innovate for value;

–  simplify and improve our operating model to maximise efficiency; and

–  supplement our organic growth through acquisitions.

Research and development

We have a deep knowledge of the needs of surgeons and nurses, we understand the economic pressures healthcare payers work under, and we recognise that patients are demanding better treatment options to restore quality of life. These factors inform our research and development (‘R&D’) strategy, which is at the heart of our business model.

In 2013, we again delivered many new and innovative products. These included a major new knee platform, the JOURNEY II BCS; the first sports medicine product to use Smith & Nephew’s proprietary advanced biocomposite material in the HEALICOIL REGENESORB Suture Anchor; and DURAFIBER Ag, combining a highly absorbent, gelling fibre dressing with the antimicrobial benefits of silver.

We have a strong new product pipeline for 2014, with many innovations scheduled, in particular in Sports Medicine Joint Repair, Trauma and Advanced Wound Management.

These new products, and many more currently in development, are a result of our focus on R&D. We invested $231 million in this area in 2013. At 5.3% of revenue this is an increase from the 4.1% spent in the previous year. We expect to maintain our investment level at around 5% of revenue going forward.

We are highly disciplined in project selection. Our R&D experts in the UK, US, Europe, China and India have extensive customer and sector knowledge, which is augmented by ongoing interaction with our marketing teams. Strict criteria are applied to ensure new products fulfil an unmet clinical need, have a strong commercial case, and are technologically feasible. Our R&D teams also work closely with manufacturing and supply chain management to ensure we can produce new products to clinical, cost and time specification.

Open Innovation

As part of our R&D strategy, Smith & Nephew supports and works with numerous small companies looking for help with developing and commercialising new technologies.

As supporters of NASA’s TecFusion Open Innovation programme we access and support companies developing highly creative, often disruptive, technologies that are funded by the US federal government.

We are a primary sponsor of the Massachusetts Medical Device Development Center (‘M2D2’) New Venture Competition, supporting entrepreneurial product development by early-stage medical device companies.

3 INNOVATE FOR VALUE

New treatment for venous leg ulcers

HP802-247 is an investigational human cell therapy for the treatment of venous leg ulcers currently in Phase III trials. Results from Phase llb trials investigating the efficacy of HP802-247 were previously published in The Lancet.

Based on in vitro studies, HP802-247 is believed to release various growth factors and cytokines into the micro-environment of the wound. These living cells are anticipated to interact with the patient’s own cells to stimulate wound healing. HP802-247 has been designed to deliver a defined cell ratio (keratinocyte:fibroblasts) to support optimal tissue regeneration.

Venous leg ulcers are increasingly common and costly to healthcare systems and a cause of prolonged suffering for patients. These wounds are caused by swelling and inflammation secondary to blockage or backflow in the veins of the legs. many venous ulcers fail to heal even after three months of standard treatment and develop into chronic, non-healing wounds.

Based on an estimated figure of 2.5 million venous leg ulcers in the United States alone and a study of actual direct treatment costs of $9,685 per person, the annual cost of treating these wounds is likely to be in the many billions of dollars. Accordingly, the availability of innovative and more effective treatment strategies for such high-risk wounds could provide tremendous benefits to both patients and society.

4 SIMPLIFY AND IMPROVE OUR OPERATING MODEL

Perpetual efficiency

The significant investments undertaken in 2013 have been possible through our successful drive to be more efficient, reduce cost, and simplify and improve our operating model.

In 2011, we announced a programme to generate annual savings of $150 million. As a result of our work to date, we have annualised benefits of $131 million. The programme will be largely complete by the end of 2014.

Significant actions included a major reorganisation when we created the Advanced Surgical Devices division, the opening of an extension to our Advanced Wound Management factory in Suzhou, China, and the introduction of a major new IT platform.

We are now a leaner business, and, as importantly, we are embedding a culture of perpetual efficiency into our processes and future thinking.

1 ESTABLISHED MARKETS

Pioneering e-learning

We have extended our commitment to medical education in 2013 with the launch of Education and Evidence, a new e-learning platform for surgeons to access and share peer-to-peer educational resources. It follows the success of our Global Wound Academy (www.globalwoundacademy.com) which has more than 46,000 registered users.

Education and Evidence supports joint repair and replacement, extremities and trauma specialties. The member-based service at www.smith-nephew.com/education/ hosts more than 1,000 videos, articles, surgical techniques, podcasts, training courses, tablet PC apps and iBooks^TM. It uses an innovative search engine and self-profiling to tailor content to users, while also enabling the sharing of resources with colleagues.

Through these powerful e-learning tools we are delivering on our Strategic Priorities, reinforcing our position in the Established Markets and extending our reach in the Emerging & International Markets.

Directors

Male

Female

Total

Senior Managers and above ²

Male

Female

Total

Total employees

Male

Female

Total

1     Number of employees as at 31 December 2013 including part time employees and employees on leave of absence.

2     Senior managers and above includes all employees classed as Directors, Senior Directors, Vice Presidents and Executive Officers and includes all statutory Directors of our subsidiary companies.

The Emerging &

International Markets have

become an increasingly

important opportunity

for our products

Overview

In Advanced Surgical Devices (‘ASD’) we develop, manufacture and sell products in the following franchise areas:

Orthopaedic Reconstruction

Smith & Nephew offers a range of specialist products for orthopaedic reconstruction in its Knee Implants and Hip Implants franchises.

Implant bearing surfaces such as the proprietary OXINIUM^à Oxidized Zirconium continue to be a point of differentiation for Smith & Nephew. OXINIUM Technology combines the enhanced wear resistance of a ceramic bearing with the superior toughness of a metallic bearing. When combined with highly cross-linked polyethylene (‘XLPE’) it results in our proprietary VERILAST Technology. In Hip Implants, the combination of a ceramicised metal head and a polyethylene lined cup have been shown in joint registry data to have superior five-year survivorship (97.9%) compared to implants made from any other material. In Knee Implants, the LEGION Primary Knee with VERILAST Technology is the only knee implant with a 30-year wear performance claim – more than double the length of wear performance testing of conventional technologies.

Knee Implants

Smith & Nephew offers a range of products for specialised knee procedures. The JOURNEY II BCS Total Knee System was launched in the US in 2013. It is designed to restore the normal kinematic motion by replicating the anatomic shapes of a normal, healthy knee.

The LEGION/GENESIS^à II Total Knee System is a comprehensive system designed to allow surgeons to address a wide range of knee procedures from primary to revision.

These systems also feature VERILAST Technology, our advanced bearing surface and also utilised VISIONAIRE Patient-Matched Instrumentation.

With VISIONAIRE Instrumentation, a patient’s MRI and X-rays are used to create customised cutting blocks that allow the surgeon to achieve optimal mechanical axis alignment of the new implant. In addition, VISIONAIRE also helps save time by reducing the number of steps and instruments needed in the operating room.

5 SUPPLEMENT GROWTH WITH ACQUSITIONS

Leadership in India

The Emerging & International Markets have become an increasingly important opportunity for our products. The acquisition of India’s Sushrut-Adler, a leader in trauma products, greatly enhanced our portfolio for this fast growing segment.

Sushrut-Adler has a long and distinguished history, a reputation for quality products and a loyal customer base. Its trauma portfolio strongly complements our established positions in orthopaedic reconstruction and sports medicine in India. From our enhanced platform we can develop further products for the mid-tier in India and for export. We are delivering on our Strategic Priorities to build leadership positions in the Emerging & International Markets and to bring forward products for these countries.

3 INNOVATE FOR VALUE

Natural-motion Journey II

BCS Total Knee System

JOURNEY II BCS sets a new standard in knee implant performance by restoring more normal motion. This is achieved through the reproduction of both the shapes of the joint’s hard surfaces and the normal force behaviour of the soft tissues, such as ligament and muscle firing patterns. As a result, the soft tissue’s re-adjustment to new shapes and forces after surgery is minimised, helping to return the patient’s stride to its natural rhythm.

This latest innovation is the result of intense research and design, and the development of new PHYSIOLOGICAL MATCHING^à Technology. Using our LifeMOD^à human simulation software, Smith & Nephew

engineers were able to conduct proprietary analysis of the bone, ligament and muscle forces that impact the knee, and then account for those forces within the design of an implant that restores anatomic shapes and normal motion.

JOURNEY II BCS is made from Smith & Nephew’s VERILAST Technology. The combination of two wear reducing materials – proprietary OXINIUM alloy and a highly cross-linked plastic liner, VERILAST Technology generates a significant reduction in implant wear compared to traditional bearing couples on the market.

4 SIMPLIFY & IMPROVE OUR OPERATING MODEL

In Advanced Wound Management (‘AWM’) we offer products from initial wound bed preparation through to full wound closure. These products are targeted at chronic wounds associated with the older population, such as pressure sores and venous leg ulcers. There are also products for the treatment of acute wounds such as burns and invasive surgery that impact the wider population.

The main products within the AWM business are for Exudate management, Infection management, NPWT and Bioactives.

AWM has its global headquarters in Hull, UK and its North American headquarters in St Petersburg, Florida.

Advanced Wound Care

Exudate management

Exudate management products focus on effectively and efficiently locking away wound fluid and creating an optimal healing environment to ensure better healing outcomes. Our key brands in this space are ALLEVYN foam dressings and DURAFIBER gelling fibre dressings.

During 2013, we continued to invest in the commercialisation of ALLEVYN Life, our latest innovation in foam dressings, designed to provide a better quality of life to the patient during the healing process. In several studies this has resulted in better patient satisfaction, longer wear times and overall reduced healthcare management costs. One recent article published in the Journal of Community Nursing stated “In employing a design intended to combat the common problems of living with a wound, such as exudate leakage and conformability, the dressing has the potential to improve wound management practice and reduce the use of associated resources, such as nursing time”. The article concluded that around 2,500 working days could be saved annually as a result of using ALLEVYN Life.

DURAFIBER has continued to grow over the course of 2013, with customers switching from other products within the gelling fibre segment.

Infection management

AWM has two significant technologies in its infection management portfolio, silver (ACTICOAT, DURAFIBER Ag and ALLEVYN Ag) and iodine (IODOSORB^à). The iodine-based IODOSORB product has continued to gain interest as biofilms become a more important topic in wound care.

We launched DURAFIBER Ag in 2013 and with it entered the silver gelling fibre market, one of the largest segments of the infection management market.

Expanding Suzhou

In April distinguished guests from Suzhou Industrial Park and Jiangsu Province attended the official opening of the major extension to Smith & Nephew’s Advanced Wound Management manufacturing facility in Suzhou, China.

The expansion more than doubled the size of the Suzhou facility, and is enabling Smith & Nephew to continue to develop its product portfolio both for the Chinese market and for export. Those manufactured at Suzhou include ALLEVYN, Smith & Nephew’s leading foam dressing brand, which is used in the treatment of hard to heal wounds such as leg ulcers, as well as new portfolios for the mid-tier across the Emerging & International Markets.

Completed on time, to budget, and without a lost-time incident, the extension takes the total floor area to 27,000 square meters and doubles the production capacity to over 100 million wound dressings a year. We are delivering on our Strategic Priority to Simplify and Improve our Operating Model by optimising our global manufacturing footprint.

China is of great strategic importance to Smith & Nephew. We are proud of what we have achieved here and are investing for the long term. We now have more than 900 people in China, working across manufacturing and commercial operations. We have built our success upon a sustainable and ethical approach to business, and are bringing this long-term commitment to our work, our employees and our communities.

Reduce non-renewable energy use by 15%

-0.6%

Energy consumption is decreasing but not in line with expectations. This is largely influenced by higher energy use in China as we scale up for expansion. The increased production levels at our Suzhou, China plant have given rise to an underlying increase in Group energy usage of 2.6%.

Reduce CO₂ emissions by 15%

CO₂ emissions reflect different carbon footprints of energy production in different geographic locations. Increasing production capacity at the Suzhou plant has contributed to an underlying increase in the carbon emissions of 3.6%. The carbon footprint in China is roughly twice that of the UK.

Reduce water use by 15%

Water usage continues to rise as new facilities are commissioned and we make operational choices based on best environmental options. For example, as we have expanded at Suzhou we have chosen to use a cooling system based on evaporation to reduce energy consumption.

Water consumption at Memphis and Suzhou account for 84% of our total water usage and when excluded the increase was 7.6%.

Reduce packaging materials by 15%

We are evaluating all the options for reducing packaging whilst maintaining product safety and protection. This is a challenging area and details and examples of projects will be available in our Sustainability Report.

Reduce total waste by 15%

In 2013, there were two exceptional waste sources that contributed to the increase in total waste generated by the business. Specifically these were from the validation of manufacturing start-up in China and the disposal of obsolete stock in the US. We continue to focus on waste reduction at source and recycling opportunities.

Increase % of total waste recycled by 15%

+21.2%

(Excludes waste

to energy)

Recycling of wastes continues to rise as more opportunities are exploited. We are now reporting separately the waste that is diverted for energy recovery.

2013

$m

2012

$m

Reported
growth in
revenue

%

Constant
currency
exchange

effect

%

Acquisition

/Disposal

effect

%

Underlying
growth in
revenue

%

Advanced Surgical Devices

US

Other Established Markets

Established Markets

Emerging & International Markets

Advanced Surgical Devices

Advanced Wound Management

US

Other Established Markets

Established Markets

Emerging & International Markets

Advanced Wound Management

2013

$m

2012

$m

Operating profit

Acquisition related costs

Restructuring and rationalisation costs

Trading profit

2013

$m

2012

$m

Operating profit

Acquisition related costs

Restructuring and rationalisation costs

Trading profit

Specific risks we face

Risk management actions

Possible impacts

–  Competitors may introduce a disruptive technology, or obtain patents or other intellectual property rights, that affect the Group’s competitive position

–  Claims by third parties regarding infringement of their intellectual property rights

–  Lack of innovation due to low R&D investment, R&D skills gap or poor product development execution for Established and Emerging & International Markets

–  Failure to successfully commercialise a pipeline product, or failure to receive regulatory approval

–  Ineffective acquisition due diligence, valuation, purchase terms or integration.

–  Processes focused on identifying new products and potential disruptive technologies (internal and external)

–  Increasing productivity, prioritisation and allocation of R&D funds

–  Increasing R&D investment in order to enhance clinical capability, invest in biomaterials

–  Strengthen intellectual property rights

–  Support an emerging market portfolio

–  Business development resources and processes and investments to augment the internal product development

–  Increasing speed to market of new products.

Link to Strategic Priority

3  INNOVATE FOR VALUE

4  SIMPLIFY AND IMPROVE OUR OPERATING MODEL

5  SUPPLEMENT THE ORGANIC GROWTH THROUGH ACQUISITIONS

In most markets throughout the world, expenditure on medical devices is controlled to a large extent by governments, many of which are facing increasingly intense budgetary constraints. The Group is therefore largely dependent on governments providing increased funds commensurate with the increased demand arising from demographic trends. Reimbursement rates may be set in response to perceived economic value of the devices, based on clinical and other data relating to cost, patient outcomes and comparative effectiveness. Political upheaval in the countries where the Group operates or surrounding regions could adversely affect Group operations or turnover.

Group operations are affected by transactional exchange rate movements. The Group’s manufacturing cost base is situated in the US, UK, China and Switzerland and finished products are exported worldwide.

Specific risks we face

Risk management actions

Possible impacts

–  Reduced reimbursement levels and increasing pricing pressures

–  Reduced demand for elective surgery

–  Increased focus on health economics

–  Government policies favouring lower priced and locally sourced products

–  Political upheavals prevent selling of products, receiving remittances of profit from a member of the Group or future investments in that country

–  The Group is exposed to fluctuations in exchange rates. If the manufacturing country currencies strengthen against the selling currencies, the trading margin may be affected

–  Economic downturn impacts demand and collections

–  Increased generic and low cost products could impact revenue and profits.

–  Develop innovative economic product and service solutions for both Established and Emerging & International Markets

–  Incorporate health economic component into design and development of new products

–  Enhanced expertise supporting reimbursement strategy and guidance

–  Optimise cost to serve to protect margins and liberate funds for investment

–  Streamline COGS, SKUs, and inventory management

–  The Group may transact forward foreign currency commitments when firm purchase orders are placed to reduce exposure to currency fluctuations.

Link to Strategic Priority

1  ESTABLISHED MARKETS

2  EMERGING & INTERNATIONAL MARKETS

3  INNOVATE FOR VALUE

4  SIMPLIFY AND IMPROVE OUR OPERATING MODEL

Supply, system and site disruption

Unexpected events could disrupt the business by affecting either a key facility or system or a large number of employees.

The business is also reliant on certain key suppliers of raw materials, components, finished products and packaging materials.

Specific risks we face

Risk management actions

Possible impacts

–  Catastrophe could render one of the Group’s production facilities out of action

–  A significant event could impact key leadership or a large number of employees

–  Issues with a single source supplier of a key component and failure to secure critical supply

–  A severe IT fault or cyber crime could disable critical systems and cause loss of sensitive data.

–  Ensure crisis response/business continuity plans at major facilities and for key products and key suppliers

–  Audit programme for critical suppliers and second sources or increased inventories for critical components

–  Implement enhanced travel security and protection programme

–  IT disaster and data recovery plans are in place and support overall business continuity plans

–  Mobile device and cyber security protection plan implementation.

Link to Strategic Priority

1  ESTABLISHED MARKETS

4  SIMPLIFY AND IMPROVE OUR OPERATING MODEL

The Rt. Hon Baroness Virginia Bottomley (65)

Independent Non-executive Director

Baroness Virginia Bottomley was appointed Non-executive Director in April 2012. She is a member of the Remuneration Committee.

Baroness Virginia Bottomley has extensive experience and understanding of healthcare. She was appointed a Life Peer in 2005 following her career as a Member of Parliament between 1984 and 2005. She served successively as Secretary of State for Health and then National Heritage. She holds a number of positions within the public and private healthcare sector.

Other Directorships

–  Director of International Resources Group Limited

–  Member of the International Advisory Board of Chugai Pharmaceutical Co.,

–  Chancellor of University of Hull and Sheriff of Hull

–  Pro Chancellor of the University of Surrey

–  Governor of the London School of Economics

–  Trustee of The Economist Newspaper

Nationality

British

Michael Friedman (70)

Independent Non-executive Director

Michael was appointed Non-executive Director and elected by Shareholders at the Annual General Meeting on 11 April 2013. He is a member of the Ethics & Compliance Committee.

Michael was formerly Chief Executive Officer of City of Hope, the prestigious cancer research and treatment institution in California and is now Executive for Special Projects and Emeritus Cancer Center Director. He has also served as director of the institution’s comprehensive cancer centre and held the Irell & Manella Cancer Center Director’s Distinguished Chair. He was formerly senior vice president of research, medical and public policy for Pharmacia Corporation and has served as Deputy Commissioner and Acting Commissioner at the US Food and Drug Administration. He has also served on a number of Boards in a Non-executive capacity, including RiteAid Corporation.

Other Directorships

–  Non-executive Director of Celgene Corporation

–  Non-executive Director of MannKind Corporation

Nationality

American

Pamela Kirby (60)

Independent Non-executive Director

Chairman of the Ethics & Compliance Committee

Pamela was appointed Non-executive Director in March 2002 and Chairman of the Ethics & Compliance Committee in April 2011. She is a member of the Remuneration Committee

Pamela has extensive commercial and product development experience within the international pharmaceutical and healthcare industry. Her last executive position was Chief Executive of Quintiles Transnational Corporation in the US, having previously held senior positions in various pharmaceutical companies including AstraZeneca PLC and F. Hoffmann-La Roche. She is now a Non-executive Director of a number of international companies.

Other Directorships

–  Non-executive Chairman of Scynexis, Inc.

–  Senior Independent Non-executive Director of Informa plc

–  Non-executive Director of DCC plc

–  Non-executive Director of Victrex plc

Nationality

British

Brian Larcombe (60)

Independent Non-executive Director

Brian was appointed Non-executive Director in March 2002. He is a member of the Nomination & Governance, Audit and Remuneration Committees. He will become Senior Independent Director following the Annual General Meeting on 10 April 2014.

Brian spent his career in private equity with 3i Group. After leading the UK investment business for a number of years, he became Finance Director and then Chief Executive of the Group following its flotation. He is well known in the City and has held a number of Non-executive Directorships.

Other Directorships

–  Non-executive Director of gategroup Holding AG

–  Non-executive Director of Incisive Media Holdings Limited

Nationality

British

Joseph Papa (58)

Independent Non-executive Director

Chairman of the Remuneration Committee

Joseph was appointed Non-executive Director in August 2008 and Chairman of the Remuneration Committee in April 2011. He is a member of the Ethics & Compliance and Audit Committees.

Joseph has had over 30 years’ experience in the pharmaceutical industry working for a number of companies both in the US and Switzerland. He is now Chairman and Chief Executive of Perrigo Company plc, one of the largest over the counter pharmaceutical companies in the US, having previously held senior positions at Novartis International AG, Cardinal Health, Inc. and Pharmacia Corporation.

Other Directorships

–  Chairman and Chief Executive of Perrigo Company plc

Nationality

American

Ajay Piramal (58)

Independent Non-executive Director

Ajay was appointed Non-executive Director in January 2012. He will retire from the Board following the Annual General Meeting on 10 April 2014.

Ajay is one of India’s most respected businessmen. He enabled the Piramal Group to transform from a textile-centric group to a conglomerate in diversified areas. He has extensive industry and market knowledge and international experience. He has held a number of global healthcare leadership positions in both India and internationally.

Other Directorships

–  Chairman of Piramal Enterprises Limited, Piramal Glass Limited, Allergan India Pvt. Limited, and IndiaREIT Fund Advisers Pvt. Ltd.

–  Chairman of the Board of Governors of the Indian Institute of Technology, Indore

–  Member of the Board of Dean’s Advisors at Harvard Business School

–  Chairman of Pratham India

Nationality

Indian