Title of each class

Name on each exchange on which registered

American Depositary Shares

Ordinary Shares of 20¢ each

New York Stock Exchange

New York Stock Exchange*

¨  U.S. GAAP

What’s in this report

Strategic Report

4

Financial highlights

Chairman’s statement

Chief Executive Officer’s review

Smith & Nephew today

Strategic performance

Chief Financial Officer’s overview

Our marketplace

Our business

Advanced Surgical Devices

Advanced Wound Management

Financial review and principal risks

Sustainability

Supporting Healthcare professionals

42

Case studies

Corporate Governance

54

Our Board of Directors*

Our Executive Officers*

Corporate Governance Statement*

Audit Committee Report*

81

Directors’ Remuneration report

Financial statements
and other information

103

Directors’ responsibilities for the accounts*

Independent auditor’s US reports

Independent auditor’s UK report

Group accounts

Notes to the Group accounts

Company accounts

Notes to the Company accounts

Group information*

Other financial information*

Information for shareholders*

Smith & Nephew heritage

*   These sections and pages 111, 113 and 115 form the Directors’ Report.

“The journey to reshape

 Smith & Nephew continues

 and I am excited by our

 prospects for accelerating

 growth in 2015 and beyond.”

Dear Shareholder

Smith & Nephew proudly supports healthcare professionals in their daily efforts to improve the lives of their patients. We do this by taking a pioneering approach to the design of our products and services, by striving to ensure wider access to our advanced technologies, and by enabling better outcomes for patients and healthcare systems. In doing so, we drive growth and create value for our stakeholders.

In 2014, we made great progress. We drove a much improved performance in US Hip and Knee Implants and maintained our momentum in Sports Medicine Joint Repair and Trauma & Extremities. Advanced Wound Bioactives, acquired at the end of 2012, again produced double-digit growth. Our continued investment in Emerging & International Markets drove revenues up 17%.

Performance in Europe was weaker and Advanced Wound Management was held back by a distribution hold on RENASYS^à in the US, and I am confident that we have taken actions that will deliver a better 2015 across these areas. Additionally, the Phase 3 trial results for HP802 were a disappointment, but we remain committed to developing pioneering Advanced Wound Bioactives treatments.

The Group generated a good increase in revenues and trading profit, and an 8% uplift in EPSA. I am pleased by the changing mix of the business, as we successfully rebalance by strengthening our higher growth platforms. These now represent more than half of our revenue, up from just 35% three years ago.

Pioneering design

Smith & Nephew has a long history of pioneering design, dating back to our foundations in the 19th century. In 2014, we launched many exciting products, including a cruciate retaining version of our JOURNEY^àII natural-motion knee, a first-of-its-kind DYONICS^à PLAN surgical planning tool for hip arthroscopy, and the HAT-TRICK Lesser Toe Repair System. We continued to invest more in R&D, over 5% of revenue, and have a strong pipeline for 2015 and beyond.

Advanced Surgical Devices

Our Capital Allocation Framework

Maintain a strong balance sheet to ensure solid investment grade credit metrics

Resource utilised

Manufacturing

plants worldwide

Established Markets

Performance

Established Markets for Smith & Nephew are Australia, Canada, Europe, Japan, New Zealand and the US.

Our combined businesses in the Established Markets delivered flat growth for the year. Headwinds in Europe impacted our performance and offset the positive growth we achieved across the US, Japan, Australia & New Zealand.

In Advanced Wound Management, our performance was slightly below estimated global segment growth, despite a 15% growth in Advanced Wound Bioactives. While Trauma & Extremities, Hip Implants and Knee Implants growth were also slightly below the market, these franchises performed better than last year and demonstrated an improving trend in the second half of the year as a result of our investments in marketing, medical education and new products. In the higher growth Sports Medicine Joint Repair segment we delivered growth at around market rate and saw the first benefits of the ArthroCare acquisition.

Global Outlook

While there are some signs of improvement in economic conditions, overall the Established Markets continue to experience a challenging environment. We have responded by realigning our business models and made focused investments to enhance our performance and efficiency in these markets.

Emerging &

International Markets

Performance

Emerging & International Markets represent those outside of the Established Markets including the fast growing BRIC group of Brazil, China, India and Russia.

Our Emerging & International Markets grew at 17%, building further on the double-digit growth of 2013. These geographies now represent 15% of the Group’s overall revenue, up from 11% in 2011.

During 2014:

–   Our success in China continued with growth of over 30%, for a second year in a row, as our investment in training and infrastructure continue to show results.

–   Our Latin American markets, which include Brazil and Mexico, are set for improvement going forward as we spent the year integrating acquisitions and making organisational and strategic changes.

–   The execution of our mid-tier market strategy continues with the establishment of an independent commercial structure and increased investment in building a suitable product portfolio.

Global Outlook

The healthcare environment in our regions continues to rapidly expand and with the right investments combined with strategic execution will provide sustained growth opportunities for the Group.

Innovate for value

Performance

For Smith & Nephew ‘Innovate for value’ means having a pioneering approach to creating both products and new commercial models to bring products and services to our customers.

Consistent with 2013, R&D investment represented over 5% of revenue, bringing a wide range of products to market across all our franchises. More detail on individual products is set out on pages 21 to 22 and on pages 27 and 31.

In addition we have made investments in two venture funds as part of our search for future disruptive technologies.

We have also been investing in an innovative commercial solution for Orthopaedic Reconstruction that fulfils the unmet needs of customers searching for a different value proposition. Called Syncera, it offers customers clinically proven primary hip and knee implants combined with cutting-edge technology that streamlines the supply chain and logistics and enables technical support in the operating room. This new model has the potential to generate significant savings for the customer.

A pioneering approach to products and services provides competitive advantages. Smarter, easier to use, cost-efficient products and services can offset pricing pressures, disrupt markets and challenge the status quo, which will be required to meet the new and expanding demands for healthcare customers globally.

Our results

$4,617m

Revenue¹ up 2%

$1,055m

Trading profit^1,2 up 3%

1   The underlying percentage increases/decreases are after adjusting for the effect of currency translation and the inclusion of the comparative impact of acquisitions and exclusion of disposals.

2   Explanations of these non-GAAP financial measures are provided on pages 176 to 179.

Dear Shareholder,

Smith & Nephew made significant progress in 2014 and continued to deliver good revenue and earnings growth. Our growth trajectory is being enhanced by the integration of our acquisitions, greater Group efficiency, and tax improvement – combining with strong cash generation and disciplined capital allocation to accelerate value creation for shareholders.

Strong earnings growth

In the full year 2014, we generated revenue of $4,617 million (2013: $4,351 million), an increase of 2% on an underlying basis and 6% on a reported basis. Acquisitions added 5% to the reported growth rate, while currency was a -1% headwind.

Trading profit was $1,055 million (2013: $987 million), up 3% underlying and 7% on a reported basis. The trading profit margin was 22.9% (2013: 22.7%), a 20bps increase despite the headwind from the US RENASYS distribution hold announced in June.

Operating profit for 2014 was $749 million (2013: $810 million), reflecting acquisition costs largely relating to ArthroCare, as well as restructuring and rationalisation costs, amortisation of acquisition intangibles and legal and other items incurred. The net interest charge and other financing costs for 2014 were $33 million (2013: $7 million). Profit before tax was therefore $714 million (2013: $802 million).

The tax charge of $213 million reflects an effective tax rate of 27.7% for the full year (2013: 29.2%) on Trading results.

EPSA was 83.2¢ (166.4¢ per ADS) (2013: 76.9¢). Reported basic earnings per share was 56.1¢ (112.2¢ per ADS) (2013: 61.7¢).

Trading cash flow was $781 million (2013: $877 million), reflecting a trading profit to cash conversion ratio of 74% (2013: 89%).

Net debt at the year-end was $1,613 million reflecting our acquisitions of ArthroCare and in the emerging markets. This represents a reported net debt/EBITDA ratio of 1.2x.

Reinvestment & Group optimisation

During 2014, we launched a programme to target further efficiencies. We have identified four main areas of activity:

1  Globalising functions such as Finance, HR, IT and Legal to ensure that we are operating most effectively to support business growth.

2  Driving procurement savings to get the most value from the money we spend.

3  Rationalising our footprint to simplify the way we work.

4  Further simplifying our operating model, including establishing a single operating structure under a single managing director in all markets outside the US so that we can make decisions more quickly and effectively.

All areas of the programme are progressing well. Overall, we are on target to deliver benefits of over $120 million over a four-year period, with the majority of this expected to benefit margin over time.

Acquisitions

We acquired ArthroCare Corporation in 2014 for a net $1.5 billion. This has strengthened our Sports Medicine business. Its technology and products will significantly enhance our portfolio, and we will use our global presence to drive substantial new growth. The integration is progressing well.

The financial rationale for this transaction was strong, and we expect to realise cost and revenue synergies of around $85 million of additional annual trading profit in 2017.

Our other recent acquisitions continue to perform well. The Advanced Wound Bioactives business acquired at the end of 2012 delivered strong 15% growth in 2014. Our emerging markets acquisitions in Brazil, Turkey and India are now bedded in and delivering increasing benefits. And Bioventus, our orthobiologic therapies development vehicle, completed a successful external refinancing and repaid a $160 million loan-note, plus $28 million of accrued interest, to us in October.

Market trends

The combination of ageing populations and increasing prevalence of obesity and associated chronic illness is expanding the gap between the demand for healthcare and ability of governments to supply it. The changing balance in ageing populations also means that there is a potential decrease in funds available for healthcare raised through taxes on the working population. Consequentially, governments and healthcare providers are looking for various ways to constrain their healthcare expenditure.

Cost and Outcomes

Healthcare providers, in an effort to reduce spending, are increasingly focusing on the cost of the whole treatment, rather than the individual components. This is leading governments and hospitals to seek greater transparency of product pricing.

As a result, health economic data is being used to obtain reimbursement or justify product pricing. Health economic data currently forms an integral part in shaping the recommendations from the National Institute for Health and Care Excellence (NICE) in the UK and in the US, the Affordable Care Act has committed budget spend to carry out comparative effectiveness research on treatments.

As well as the focus on suppliers of healthcare products, some providers are also implementing incentives for better health outcomes to reduce the costs associated with repeated patient treatments or reduced hospital stay.

Governments are beginning to impose penalties on healthcare facilities for acute patient re-admissions or for infections acquired within the health system which present an additional economic burden on health care systems.

In the US, healthcare-acquired infections cost almost $10 billion annually, with surgical site infections being the largest contribution to overall cost.

Product innovation has been the primary response by some suppliers in meeting patient and healthcare provider demands to improve outcomes, simplify procedures and reduce cost.

New commercial models, together with product innovation, are being adopted by health systems as a solution to improving resource allocation. There is a recent trend by health systems to shift towards ‘payment for performance’ schemes in an effort to promote high quality care and increase the effectiveness of treatments. Additionally, suppliers of healthcare products and devices are providing lower cost or reduced service offerings to those segments of the market more sensitive to price.

The healthcare industry is also seeing protectionism/localisation playing a part in the product selection process as some jurisdictions are implementing laws to show bias towards locally manufactured products. This already exists in Brazil for major tender offers and China is considering incentives to encourage hospitals to use locally made medical devices.

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.

Self-Care and Prevention

Self-care and prevention is regarded as an important element of healthcare in that it will help protect society from potential health threats by minimising the risk factors that cause them. Governments have been investing in programmes and providing tools to encourage and support healthier behaviour to reduce the strain on healthcare systems from ‘lifestyle’ diseases. Additionally, pressure is gradually being applied on the food industry to reduce saturated fats, sugar and salt in products and increase nutritional labelling in an effort to tackle rising rates of obesity and diabetes.

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 safe and effective products and done so in an environmentally sustainable way.

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 the placement on market 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, the China Food and Drug Administration and the Australian Therapeutic Goods Administration.

Smith & Nephew estimates that the global orthopaedic reconstruction segment is worth approximately $14 billion and increased by approximately 3% in 2014. Competitors in the orthopaedic reconstruction segment include Biomet, DePuy Synthes (a division of Johnson & Johnson), Stryker and Zimmer.

Smith & Nephew estimates that the global orthopaedic trauma segment is worth approximately $5 billion and grew by approximately 6% in 2014. Competitors in the orthopaedic trauma segment include Biomet, DePuy Synthes, Stryker and Zimmer.

Smith & Nephew estimates that the global sports medicine segment (representing access, resection and repair products) is worth approximately $5 billion and grew by approximately 8% in 2014. Competitors in the

sports medicine segment include Arthrex, Conmed, DePuy Mitek (a division of Johnson & Johnson) and Stryker.

Smith & Nephew estimates that the global wound management segment is worth approximately $7 billion and grew by 4% in 2014. Global competitors vary across our product areas and geographies and include Acelity, Coloplast, ConvaTec, 3M and Molnlycke.

Customers

In certain parts of the world, including the UK, much of Continental Europe, Canada and Japan, the healthcare providers are largely government organisations funded by tax revenues. In the US, our major customers are public and private hospitals,

which receive revenue from private health insurance and government reimbursement programmes. Medicare is the major source of reimbursement in the US for knee and hip reconstruction procedures and for wound treatment regimes. In the emerging markets, demand is driven by self-pay patients.

Seasonality

Orthopaedic and sports medicine procedures tend to be higher in the winter months when accidents and sports related injuries are highest. Conversely, elective procedures tend to slow down in the summer months due to holidays.

Due to the nature of our product range, there is little seasonal impact on the Advanced Wound Management business.

We continued in 2014 as the commercial partner in SWAN-iCare, an EU-funded initiative to bring multidisciplinary European research teams together to deliver a next generation integrated autonomous solution for monitoring and adapting personalised therapy of foot and leg ulcers.

Smith & Nephew also welcomes new product concepts from surgeons. Through our InVentures programme we collaborate to bring ideas to reality. InVentures evaluates surgeon concepts for technical and market viability and our development team works hand-in-hand with surgeons to deliver new products that advance healing. Commercialised products benefit from the global selling power of Smith & Nephew.

In addition, Smith & Nephew invests in early stage technologies relevant to our business. Recent examples include UK-based Michelson Diagnostics that is developing a point-of-care tissue-imaging system that for the first time allows users to see below the surface of the skin; and an incubator fund investing in orthopaedic technologies close to commercial launch.

We continue to scout for further opportunities where we can access new disruptive technologies in our areas of specialism. These investments are typically in technologies that are not yet ready for acquisition but that we believe hold great promise. As well as funding, we may bring R&D, management and manufacturing expertise, and gain privileged access to or rights to the technology. We aim to accelerate the journey to market and may ultimately acquire the business.

Intellectual property

We protect the results of our research and development through patents and other forms of intellectual property. The Group’s patent portfolio currently includes in excess of 5,000 patents and patent applications. Patent protection for our products is sought routinely in our principal markets.

We also have a policy of protecting our products by registering trademarks under the local laws of markets in which such products are sold. We vigorously protect our trademarks against infringement.

In addition to protecting our market position by filing and enforcing patents and trademarks, we may oppose third party patents and trademark filings where appropriate in those areas that might conflict with our business interests.

In the ordinary course of business, we enter into a number of licensing arrangements with respect to our products. None of these arrangements individually is considered material to our current operations and financial results.

Ethics and compliance

Code of conduct and

business principles

Smith & Nephew earns trust with patients, customers, healthcare professionals, authorities and the public by acting in an honest and fair manner in all aspects of its operations.

We expect the same from those with whom we do business, including distributors and independent agents that sell our products. Our Code of Conduct and Business Principles (‘Code’) governs the way we operate to achieve these objectives.

Smith & Nephew takes into account ethical, social, environmental, legal and financial considerations as part of its operating methods. We have a robust whistle-blowing system in all jurisdictions in which Smith & Nephew operates. We are committed to upholding our promise in our Code that we will not retaliate against anyone who makes a report in good faith.

New employees receive training on our Code, and we assign annual compliance training to employees. In 2014, we updated our Code training. The new module is more interactive, role-based and allows individuals to apply the Code in different scenarios. Individuals can earn ‘trust points’ and ‘achievement badges’ if they make the right choices in the scenarios. Individuals who show an understanding of the Code by selecting the right behaviour in a scenario can move through the module more quickly than individuals who choose the incorrect behaviour and are then subject to remediation.

Global compliance programme

Smith & Nephew has implemented what we believe is a world-class Global Compliance Programme that helps our businesses comply with laws and regulations. Our comprehensive compliance programme includes global policies and procedures; on-boarding and annual training for employees and managers; monitoring and auditing processes; and reporting channels.

Through a global intranet website, we provide resources and tools to guide employees to make decisions that comply with the law and our Code and earn trust. We conduct advance review and approval for significant interactions with healthcare professionals or government officials. We regularly assess existing and emerging risks in the countries in which we operate.

Managing Directors complete an annual certification to the CEO to confirm implementation of required programmes. Managers and employees make an annual compliance certification, and executive management, managers and employees have a compliance performance objective customised to their level in the organisation.

In 2014, we developed and piloted a face-to-face course for new managers, which supplements the on-line manager certification training. In 2015, all new managers will be required to complete both the on-line and the face-to-face course.

New distributors and other higher risk third parties are subject to screening and are contractually obligated to comply with applicable laws and our Code. Their management is required to take compliance training and certify that they will ensure their employees and agents comply with the law and our Code. They also receive a CD-ROM with tools to assist them with their own compliance programmes. We have expanded our oversight of independent agents and distributors with on-site assessments to check compliance controls and monitoring visits to review a sample of transactions from their books and records.

In 2014, Smith & Nephew filed its first report in compliance with the US Physician Payments Sunshine Act, which comprised over 22,000 transactions with nearly $18 million in payments and expenses to reportable individuals and entities.

In early 2015, Smith & Nephew submitted the final report to the US Department of Justice (‘DoJ’) and the US Securities and Exchange Commission (‘SEC’) required under the Company’s Foreign Corrupt Practices Act settlement agreement. We also filed our first report under the deferred prosecution agreement we inherited with the ArthroCare acquisition (see Note 17.3 of the Notes to the Group accounts).

OPSITE Post-Op Visible

A waterproof, bacteria-proof dressing with

see-through absorbant pad. Unique design allows

continual monitoring of the incision site without the

need to disrupt the healing process.

A key base material used in the production of a large number of dressings is the intermediate bulk rolls of film which are manufactured in the Gilberdyke (UK) facility. The facility in Alberta (Canada) provides specific expertise in the addition of silver coatings onto the ACTICOAT burns range prior to shipping to Hull for the final conversion process into finished dressings. The facility in Gilberdyke (UK) was sold in 2014, and will continue to supply sub components to other facilities until 2016. The processes at the Alberta facility are being transferred to the Hull site during 2015.

The Suzhou facility opened in 2009 initially to manufacture some Foam products within Exudate management. It has since expanded to take on production of some Film Wound Closure products.

The majority of the NPWT components are bought in from third parties and assembled in the Advanced Surgical Devices Oklahoma City facility, with the exception of the dressings used for the PICO product which are manufactured in Hull.

Manufacturing for Advanced Wound Bioactives takes place in Curaçao, and at various third party facilities in the US. The products are distributed from a third party logistics facility in San Antonio (Texas, US). Advanced Wound Bioactives has facilities for the development and possible production of cell based therapies in Fort Worth (Texas, US).

Advanced Wound Management distribution hubs are located in Neunkirchen (Germany) and Derby (UK) for international distribution, Bedford (UK) for UK domestic distribution and Lawrenceville (Georgia, US) for US distribution.

Medical education

Smith & Nephew is dedicated to helping healthcare professionals improve the quality of care for patients. We are proud to support the professional development of surgeons and nurses by providing them with medical education and training on our Advanced Surgical Devices and Advanced Wound Management products.

Every year thousands of customers attend our state-of-the-art training centres in the US, UK and China and Smith & Nephew courses at multiple hospitals and facilities around the world.

In 2014, we provided training to more than 25,000 surgeons. Working under expert guidance, attendees refine techniques and learn new skills, whilst experiencing the safe and effective use of our products. We also support healthcare professionals through our on-line resources such as the Global Wound Academy, The Wound Institute and, for surgeons, our Education and Evidence website.

Sales and marketing

Our customers are the providers of medical and surgical treatments and services in over 100 countries worldwide.

The largest single customer worldwide is a purchasing group based in the UK that represented less than 5% of our worldwide revenue in 2014.

In our Established Markets, our Advanced Surgical Devices are principally shipped and invoiced directly to healthcare providers, hospitals and other healthcare facilities. Certain Advanced Wound Management products are shipped and invoiced to wholesale distributors and others are consigned to distributors that lease the devices to healthcare providers, hospitals and other healthcare facilities and end-users.

Our US sales forces consist of a mixture of independent contract workers and employees. Sales agents are contractually prohibited from selling products that compete with our products. In most other Established Markets country-specific commercial organisations manage employee sales forces directly.

In our Emerging & International Markets we operate through direct selling and marketing operations, and through distributors. In these markets, our Advanced Surgical Devices franchises frequently share sales resources. The Advanced Wound Management sales force may be separate where it calls on different customers.

For US patients, our successful VERILAST knee consumer campaign was expanded to include hips in 2014. Thanks to the combination of a well-established brand, a compelling call-to-action and our position as the first company to advertise differentiating technology to this audience, we were able to mirror the successes of our earlier knee campaigns by driving potential patients to our consumer-facing RediscoverYourGo website and its surgeon locator.

Trauma & Extremities

Our Trauma & Extremities franchises offer both internal and external fixation and tissue repair devices, as well as other products used in the stabilisation of severe fractures and deformity correction procedures.

For extremities and limb restoration, the franchise offers the TAYLOR SPATIAL FRAME^à Circular Fixation System as well as a range of plates, screws, arthroscopes, instrumentation, resection, and suture anchor products for orthopaedic surgeons including foot and ankle, hand and wrist, and trauma surgeons. For Trauma, the principal internal fixation products are the TRIGEN^à family of IM nails (TRIGEN META-NAIL System, TRIGEN Humeral Nail System, TRIGEN SURESHOT^à, and TRIGEN INTERTAN^à) and the PERI-LOC^à Plating System.

2014 saw the introduction of the D-RAD^à SMART PACK System for treating distal radius fractures. The new system – which includes complete, sterile, single-use instrument kits with implants, and a tray of sterile packaged fasteners and templates – allows hospital operating room staff to reduce the typical time and expense involved with reprocessing traditional plate and screw systems.

In wrist repair, we introduced a new solution for triangular fibrocartilage (‘TFCC’), a complex repair that leverages our FAST-FIX^à 360 technology and provides an all arthroscopic repair which eliminates knot stack.

Smith & Nephew also announced its entry into the forefoot market in 2014, with the launch of the HAT-TRICK Lesser Toe Repair System. Comprised of three separate repair options, the HAT-TRICK System includes products for metatarsophalangeal (‘MTP’) ligament repair and reconstruction, a metatarsal osteotomy guide, and a revisable, all-PEEK implant for Proximal Inter-Phalanges (‘PIP’) fusion, also known as hammer-toe correction.

In hip repair, we introduced INTERTAN^à Gold instrumentation that is designed to streamline the surgical steps and improve clinical outcomes by offering a more efficiently designed set. In addition, the INTERTAN 10S was launched to meet the unique needs of smaller-stature patients by offering a more appropriate size for this population.

We launched the EVOS^à MINI Plating System for use in complex fractures of the long bones of the arms and legs. Designed specifically for traumatologists, this long-bone-specific system includes the variety of mini, flat plates and screw sizes necessary to address both fracture reduction and short-term fixation while the final, load-bearing repair is being completed.

Sports Medicine Joint Repair

The Sports Medicine Joint Repair franchise offers surgeons a broad array of instruments, technologies and implants necessary to perform minimally invasive surgery of the joints, including knee, hip and shoulder repair.

Our global position within the Sports Medicine Joint Repair market was strengthened significantly in 2014, with the May acquisition of ArthroCare Corporation. The transaction adds technology and highly complementary products to our existing portfolio, including new shoulder anchor innovation.

In 2014, Smith & Nephew launched its SUTUREFIX^à Ultra soft suture anchor for hip and shoulder labral repair to surgeons in the US. The new anchor’s small, soft construct, and superior pull-out strength, allow surgeons to more precisely place fixation points around the joint to more accurately re-approximate the patient’s native anatomy.

2014 also saw the launch of the N8TIVE^à ACL (anterior cruciate ligament) System which helps surgeons create highly anatomic ACL Reconstructions. N8TIVE allows surgeons to restore the size, shape, and location of the native femoral and tibial ACL insertion points.

Arthroscopic Enabling

Technologies (‘AET’)

Our Arthroscopic Enabling technologies franchise now includes the latest generation COBLATION^à radio frequency (‘RF’) technology acquired from ArthroCare, as well as electromechanical and mechanical blades and hand instruments for the removal of damaged tissue. Additionally, the franchise offers fluid management equipment for surgical access and high definition cameras, digital image capture, scopes, light sources and monitors to assist with visualisation inside the joint.

Key AET products include DYONICS shaver blades, ACUFEX^à handheld instruments, and a wide range of RF probes. The ArthroCare acquisition brought us the latest generation of RF technology – the internationally patented COBLATION technology – which offers ablation, resection, and coagulation of soft tissue and hemostasis of blood vessels. The DYONICS Platinum Series Shaver Blades are single-use blades that provide superior resection due to their sharpness and virtually eliminate clogging through their improved debris evacuation capabilities. The DYONICS PLAN Hip Impingement Planning System was launched in 2014. This interactive, 3D software system uses data from low-dose¹ CT scans to help surgeons visualise, assess and plan each patient’s unique Femoroacetabular Impingement (‘FAI’) surgery before they enter the operating room.

Other ASD

The Other ASD franchise includes smaller businesses such as Gynaecology and our newly acquired Ear, Nose and Throat (‘ENT’) business.

The main Gynaecology product is the TRUCLEAR^à System, a first-of-its-kind hysteroscopic tissue removal system, providing safe and efficient removal of endometrial polyps and submucosal fibroids. The business also sells a hysteroscopic fluid management system, which provides uterine distension and clear visualisation during hysteroscopic procedures.

Our ENT business develops, manufactures, and markets products for the ENT market space. We offer a wide variety of products in this area including our COBLATION technology and our RAPIDRHINO^à carboxymethylcellulose (‘CMC’) technology which is featured in dissolvable nasal and sinus dressings, removable nasal and sinus dressings, and epistaxis treatment products.

OPSITE Post-Op Visible: This is our innovative dressing that combines the qualities of a premium dressing with the ability to see and monitor the incision. This unique product continues to deliver strong growth in both our Established Markets and Emerging & International Markets, supported by investment in clinical evidence.

Advanced Wound Devices

Advanced Wound Devices consists of two categories of products: NPWT and VERSAJET^à.

NPWT

Our NPWT solutions include traditional NPWT products (RENASYS products) and the single-use portfolio (PICO and KALYPTO^à products).

We are also progressing with launch plans for our next-generation traditional NPWT product.

During 2014, we were required to initiate a distribution hold in the US on RENASYS products as the FDA indicated new regulatory clearances were required in respect of certain design enhancements. We are working to obtain these and RENASYS remains available outside of the US.

The PICO system, our single-use, canister-free solution, is revolutionising NPWT. As familiar and easy to use as an advanced wound dressing, PICO provides an active intervention to help promote optimal healing for early discharge and enhanced outcomes in complex cases. PICO simplifies the delivery of negative pressure, which benefits patients and caregivers alike.

VERSAJET

The VERSAJET II Hydrosurgery system is a mechanical debridement device used by surgeons to excise and evacuate non-viable tissue, bacteria and contaminants from wounds, burns and soft tissue injuries.

Advanced Wound Bioactives

Smith & Nephew is the global market share leader in the bioactives segment, which is the fastest growing category of wound therapeutics. Our diversified biotherapeutic portfolio offers differentiated, cost-effective solutions for tissue repair and healing, addressing the full spectrum of hard-to-heal wounds.

Currently, our leading bioactive brand is Collagenase SANTYL^à Ointment, the only FDA-approved biologic enzymatic debriding agent for chronic dermal ulcers and severe burns. In 2014, Smith & Nephew launched a new 90g package size to bring convenience and economy to providers and patients treating large dermal ulcers and burns with SANTYL. In addition, consistent with Smith & Nephew’s scientific leadership strategy, new clinical data highlighting the benefits of using SANTYL adjunctively with sharp debridement was released early in the year and was closely followed by initiation of a larger, follow-on study of similar design to corroborate the initial findings.

REGRANEX^à Gel is the first and only FDA approved recombinant platelet-derived growth factor indicated for use as an adjunct to good ulcer care in the treatment of lower extremity diabetic neuropathic ulcers. Physicians increased their prescribing of REGRANEX throughout the year, in part due to REGRANEX 360, a novel programme launched by Smith & Nephew to help patients maximise the benefits of the brand by informing about insurance coverage, shipping the medication directly to the patient’s home or office and providing expert consultation on how to use the brand appropriately.

Collagenase SANTYL Ointment

The only enzymatic debrider approved by the FDA for use in the US. It selectively removes necrotic tissue without harming surrounding healthy tissue.

Trading and operating profit

Operating profit, the most directly comparable financial measure under IFRS, reconciles to trading profit as follows:

Trading and operating profit

Operating profit, the most directly comparable financial measure under IFRS, reconciles to trading profit as follows:

Operating profit

Acquisition-related costs

Restructuring and rationalisation costs

Amortisation of acquisition intangibles

and impairments

Legal and other

Trading profit margin increased from 23.6% to 24.6%. Trading profit increased by $98 million to $810 million from $712 million in 2013. This increase reflects the benefits from our structural efficiency programme.

Operating profit increased by $6 million from $620 million in 2013 to $626 million in 2014. This comprises the increase in trading profit of $98 million discussed above offset by increases in acquisition-related costs of $100 million and amortisation of acquisition intangibles of $37 million and partially offset by a decrease in restructuring and rationalisation costs of $11 million and credit relating to the US pension settlement and closure.

Advanced Wound Management

Revenue

AWM revenue decreased by $17 million (-1% on a reported basis), from $1,336 million in 2013 to $1,319 million in 2014. The underlying decrease of 1% is after adjusting for an increase of 1% for acquisitions completed in the year and a 1% unfavourable foreign currency translation.

In the US, revenue decreased by $17 million to $454 million in 2014 from $471 million in 2013 (-4% on a reported basis). The underlying decrease was also 4%. In Other Established Markets, revenue was $699 million in 2014, a decrease of $23 million from $722 million in 2013 (-3% on a reported basis). The underlying revenue decrease was 2% with 1% of unfavourable foreign currency translation. Our Emerging & International Markets revenue increased by $23 million in 2014 (16% on a reported basis). The underlying increase was 14% after adjusting 2% for unfavourable foreign currency translation.

Advanced Wound Care revenue decreased by $38 million (-5% on a reported basis) to $805 million in 2014 from $849 million in 2013. The underlying decline of 4% is after adjusting for foreign currency translation. Conditions across many European markets remain challenging but the introduction of the ALLEVYN Life range continues to make good progress across Europe following product introductions and investment in marketing.

Advance Wound Devices revenue decreased from $213 million in 2013 to $192 million in 2014, a reported decrease of $21 million and 10%. The underlying decrease of 9% is after adjusting for unfavourable foreign currency translations of 1%. This decline was due to the hold of RENASYS in the US due to regulatory issues and competitive pressures in traditional canister-based NPWT in Europe.

Advanced Wound Bioactives revenue increase to $322 million in 2014 from $280 million in 2013 (15% reported growth). The underlying increase was also 15%.

Trading profit margin decreased from 20.6% to 18.6%. Trading profit decreased by $30 million to $245 million from $275 million in 2013. The decrease in the year is primarily attributable to the RENASYS hold.

Operating profit decreased by $67 million from $190 million in 2013 to $123 million in 2014. This comprises of the decrease in trading profit of $30 million discussed above, costs relating to the hold on RENASYS and cessation of the HP802 trials amounting $52 million, offset by a decrease in acquisition-related costs of $13 million, due to the integration of the Healthpoint acquisition which completed in December 2012, an increase in restructuring and rationalisation costs of $14 million and an increase of $4 million in amortisation of acquisition intangibles.

Principal risks and risk management

As an integral part of planning and review Group, business area and functional management seek to identify the significant risks involved in the business, and to review the risk management action plans for those risks. The Group Risk Committee, which is comprised of the Chief Executive Officer and senior executives, meets twice a year to review the risks identified by the businesses and corporate functions and any risk management actions being taken. As appropriate, the Risk Committee may re-categorise risks or require further information on the risk management action plans. The Risk Committee reports to the Board on an annual basis detailing all principal risks. In addition, the Board considers risk as part of the development of strategy. Internal audit reviews and the Audit Committee reports on the effectiveness of the operation of the risk management process.

There are known and unknown risks and uncertainties relating to Smith & Nephew’s business. The following pages provide an overview of what the Board considers the most significant risks that could cause the Group’s business, financial position and results of operations to differ materially and adversely from expected and historical levels, and how these risks relate to the Group’s strategic priorities. Additional detail is set forth under Risk Factors in the Group information section of this report. In addition, other factors not listed here that Smith & Nephew cannot presently identify or does not believe to be equally significant, could also materially adversely affect Smith & Nephew’s business, financial position or results of operations.

Government Action, Pricing and Reimbursement Pressure

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, Costa Rica, 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

–  Lack of compelling health economics data to support reimbursement requests

–  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

–  Develop innovative economic product and service solutions for both Established and Emerging & International markets (‘Syncera’)

–  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 Cost of Goods Sold, Stock Keeping Units and inventory management

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

–  Loss of revenue, profit and cash flows

Link to Strategic Priority

Simplify and improve

our operating model

Established Markets

Emerging & International Markets

Business Operations and Business Continuity

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.

The Group manages a large product portfolio and a large product inventory. Sales and operation planning and supply chain management must ensure the products needed are available at the right place and time.

In a fast changing, complex, global business, high performing talent in key positions is a business critical requirement.

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

–  Over-production of product inventory and instrument sets may occur due to inadequate portfolio planning

–  Poor retention of high performing and high potential staff could jeopardise achieving objectives

–  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

–  Enhanced travel security and protection programme

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

–  Mobile device and cyber security protection plan

–  Improved sales and operations processes and inventory management with dedicated teams and key performance indicators

–  Robust talent systems and processes with focus on identifying key roles and successors

–  Loss of revenue, profit and cash flows

Link to Strategic Priority

Simplify and improve

our operating model

Established Markets

Emerging & International Markets

We care about our customers and helping improve people’s lives. We also care about the people who work for us, the environment in which we operate and the societies in which we do business. Addressing unmet social need with more affordable products gathered pace in 2014 with the introduction of our Syncera range and further growth and consolidation of our mid-tier products. As part of our commitment to build trust we increased our engagement with suppliers to increase assurance around compliance and ethics.

This is a summary of our sustainability activities and progress in 2014. Our Sustainability Report will be published in April 2015.

In 2014, there were no employee or contractor fatalities and our Lost Time Injury Frequency Rate (‘LTIFR’) fell again for the fourth successive year, this time by 20%. Compared to the previous year, total waste increased by 13%, however waste disposed to landfill fell by 19% as we found new ways to recycle.

Energy consumption has increased by 9% since 2011. However, after adjusting for the transient effect of transferring some production to China and the impact of newly acquired businesses, there was a net fall in energy consumption of 2%.

After three consecutive years of increases, water consumption reduced by 7% in 2014 compared to the previous year.

As part of the Great Place to Work strategy, substantially more of our employees enjoyed the benefits of wellness programmes.

We donated approximately $9 million in philanthropic activities, of which $2 million was in product donations and charitable gifts. Volunteering programmes were active in most of the territories where we work and the benefits to society and the level of employee involvement continued to increase.

Safety

The continuous improvement in safety performance is underpinned by committed leadership and a sharp focus on managing risks. Making health and safety a priority for all of our employees and contractors was an imperative in 2014. This was supported by the progressive rollout of our integrated management system and the wide introduction of behavioural based safety programmes.

Sports Medicine is the treatment of injuries to the soft tissues through keyhole surgery – typically ligaments, tendons and cartilage in the joints. These injuries can affect anyone, not just athletes. Sports Medicine helps patients recover function as well as minimise disability and recovery time.

Smith & Nephew is a global leader in Sports Medicine. In 2014, nearly a quarter of our revenue came from this area, and our Joint Repair business delivered revenue growth of 8%.

It is a $4.6 billion global market, and a strong area of focus and opportunity for Smith & Nephew.

We expect to see long-term global growth driven by delivering both clinical benefits and strong health economics. Repairing injuries today prevents them becoming more debilitating as patients get older, which reduces future demands on healthcare systems. In the emerging markets we are helping to widen access to these advanced treatments through delivering medical education.

Sports Medicine is a great place to innovate. We are investing more in R&D to improve existing treatments, and to develop new instrumentation to enable surgeons to better treat their patients.

24%

$5bn

came from Sports Medicine in 2014

having 24% market share in 2014 (see page 20)

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 drive our new product development programmes. In 2014, we launched a number of exciting new products, expanding our portfolios in our Established Markets and Emerging & International Markets.

We also invested $235 million in R&D in 2014, over 5% of revenue, and have a strong pipeline of innovation to come. Our experts in Europe, US, China and India keep us close to our customers and ensure our programmes target unmet clinical needs, have strong financials and are technologically feasible. They also work closely with manufacturing to ensure we can produce new products to clinical, cost and time specifications.

JOURNEY II

The JOURNEY II Cruciate Retaining (CR) knee replacement extends the JOURNEY II Total Knee System to procedures that preserve the posterior cruciate ligament (PCL), which accounts for approximately half of all knee replacement procedures. The JOURNEY II CR knee, like the JOURNEY II Bi-cruciate Stabilized (BCS) knee that was launched last year, sets a new standard in knee implant performance by restoring more normal motion for patients.

HAT-TRICK

The HAT-TRICK Lesser Toe Repair System is our entry into the high-growth forefoot market, where we believe there are significant opportunities for us to enhance the surgeon experience, simplify the procedures and, most importantly, improve patient outcomes.

EVOS

EVOS MINI Plating System for use in complex fractures of the long bones of the arms and legs. Designed specifically for traumatologists, this long-bone-specific system includes the variety of mini, flat plates and screw sizes necessary to address both fracture reduction and short-term fixation while the final, load-bearing repair is being completed.

PICO

PICO, Smith & Nephew’s disposable, canister-free Negative Pressure Wound Therapy system has been named Most Innovative Product 2014 at The Irish Medical and Surgical Trade Association Awards. The award was judged by a panel of top clinicians, health service executives and medical companies.

The ability to attract and retain talented employees is essential to achieving our business goals. This is why one of our strategic imperatives is to be recognised as, a great place to work.

For Smith & Nephew, being a great place to work means having a workplace where employees are proud and excited to come each day because they are doing work that makes a difference for customers and patients.

It is a place where employees are valued for their performance and achievements, and a place that values trust above all else.

To qualify as a Great Place to Work, a company must complete the Great Place to Work Trust Index survey and its management must participate in a Culture Audit. Both evaluate the company’s performance on key dimensions of engagement: Credibility, Respect, Fairness, Pride and Camaraderie.

We aim to provide an open, challenging, productive, diverse, healthy, safe and participative environment based on constructive relationships.

Diverse

Smith & Nephew believes that diversity fuels innovation. We are committed to employment practices based on equality of opportunity, regardless of colour, creed, race, national origin, sex, age, marital status, sexual orientation or mental or physical disability unrelated to the ability of the person to perform the essential functions of the job. Diversity & Inclusion continues to be a key focus for us and we have a Global Steering team sponsored by the CEO with local councils established across the business. 30% of our Board of Directors and 23% of senior managers are female.

Healthy

We strongly believe we perform better when our employees are healthy, motivated and focused. The support we provide our employees when they experience a health concern is a critical factor in how well and how quickly they are able to get back to peak. During 2014, Smith & Nephew signed up to the UK’s Time to Change programme, showing our employees being open about mental health concerns will lead to support, not discrimination, and embarked on a global wellness initiative to support all employees.

Safe

We are committed to providing healthy and safe working conditions for all employees. We achieve this by ensuring that health and safety and the working environment are managed as an integral part of the business, and we recognise employee involvement as a key part of that process. During 2014, we reduced the lost time injury frequency by 20%, reflecting a sharp focus of leadership on identifying and managing workplace risk.

Our employees support healthcare

professionals in more than 100 countries

of our senior managers are female