Emerging MarketsKelvin Johnson, President Emerging Markets19-20 November 2009

2

“Since the industrial revolution in the 19th Century, the rich countries of the ‘first world’ have dominated the global economy... That era may be over”

‘The Economist’, 21 January 2006

3

Market characteristics Developed markets Developed markets

• Established healthcare regulation

Educational marketing

Compliance

Products and pricing

• Evolving regulation and developing business practices creates operational risks

Strong sales and

distribution

• Consumers are generally aware of various options and products - standard marketing campaigns can be applied

• Surgeon training focused on converting existing surgeons

• Products developed for western customers - full product portfolio can be leveraged

• Overall affordability less of an issue, and innovation is key

• Direct sales possible • Well-established distributors with strong

long-term relationship network

• Specific campaigns for customer education essential to improve consumer awareness and unlock demand

• Surgeon training can focus on winning new surgeons and unlock demand

• Products must be customised to cater for different needs, hospital environments

• Products must be provided at appropriate price points

• Direct sales mostly not yet possible• Key decision makers are changing quickly,

relationships must be continuously re-established/expanded

Emerging marketsEmerging markets

4

Assessing the potential – our process

• Clear strategy on Emerging Market / Group fit

• Identify the markets

• Research the markets

• Execute

• Stick to the plan

5

Addressing the potential

Set clear objectives for each market

Build the right local teams Drive efficient operations

Right products and pricing Effective educational marketing Strong sales and distribution

6

Market size and competition

• Reconstruction– Major global companies have established

position– Much more ‘open’ than global market

positions

• Trauma– Significant local manufacturing competition

• Endoscopy– Relatively immature market

• AWM– ‘Traditional’ wound care remains ‘treatment

of choice’– Global companies established, but wide

variation on country specific basis

1.7

4.8

2008 2018F

Emer

ging

mar

ket r

even

ue ($

bn) CAGR

11%

2018F

Endoscopy

AWM

Trauma

Reconstruction42%

27%

12%

19%

1

2

3

4

5

0

Note: markets currently served by S&NSource: Smith & Nephew, BCG

General observationsGeneral observationsMarket sizeMarket size

7

Market prioritisation – the 3 step approach

Global pool of all developed and emerging

markets

50 largest markets

27 largest emerging markets

27 largest emerging markets

prioritised

15 emerging markets

categorisedinto 5 groups

1Initial screening Prioritising Grouping

2 3

15 high-priority emerging markets selected

8

Economic outlook and healthcare market opportunity used as key criteria for prioritisation

Key factorsKey factors

• Is the size of economy substantial?• How large is the population?• How many aged people in the market?• How many wealthy people who can afford

the premium products?• How large is the growth potential?• Any drivers to promote conversion /

trading up opportunities?

Data Data

• '12 real GDP• '12 total population• '12 population aged 60+• '12 household # with HH earning >

US$10k per year• '07-'12 real GDP CAGR• '12 real GDP/capita

WeightWeight

1111

12

Overall economic outlook

Current healthcare

market

Healthcare market

potential

• Is the healthcare market substantial?• Is healthcare expense affordable?• Are there enough healthcare

infrastructure / supply?• How large is the medical device market?

• '07 HC expenditure• '07 HC expenditure/capita• '07 doctors/1,000 pop• '07 hospital beds/1,000 pop• '06 medical device market

21112

• How large is the growth potential for healthcare market?

• Will the medical device market grow fast in the next few years?

• ‘07-’12 HC expenditure CAGR• ‘07-’12 HC expenditure/cap CAGR• '06-'11 medical device CAGR• '06-'11 medical device/bed CAGR

2121

20

7

7

6

Absolute-scale-related

13

Growth-rate-

related

7

Score of 1 (low) to 5 (high) to be assigned to each factor; weight of each factor then taken into account to arrive at the final score for each market

9

China

Russia

Poland

India

Brazil

South Korea

Turkey

Mexico

Taiwan

Singapore

Argentina

Hong KongSouth Africa

Israel

8580

66

65626257

55

55

55

53

52

51

51

Malaysia

Saudi Arabia

Iran

Thailand

Indonesia

Chile

Venezuela

Colombia

Nigeria

Kuwait

UAE

Pakistan

Algeria

47

46

44

43

41

40

39

35

34

34

34

31

30

Markets with relatively stable business operation environment

Favorable environment / low risks Tough environment / high risksNote: 1. Based on EIU overall operation business environment index (June 2008) 2. Based on EIU business operation risks index (June 2008)Source: EIU, BCG analysis

MarketMarket ScoreScoreMarketMarket ScoreScore

Operation environment1

Operation environment1

Operation risks2

Operation risks2

Operation environment1

Operation environment1

Operation risks2

Operation risks2

23 markets selected with relatively stable business operation environment

10

0

10

20

30

40

50

Focus in on 5 Groups with China the most attractive

Sizable medium-term potential• Steady economic and healthcare

market growth

0

5

10

15

0 1,000 2,000 3,000 4,000

China

India

Russia

Brazil

South Korea

Mexico

Turkey

Saudi Arabia

Poland

Indonesia

South Africa

Thailand

UAE

Malaysia

Argentina

Medical device market

2006 (US$ Mn)

Medical device market

2006-2011 CAGR (%)

5

Smaller markets with lower growth

A clear strategic priority• Large overall size and good

affordability

Medical device market 2011 (US$ 500 Mn)

India

RussiaBrazil

South

Korea

MexicoTurkey

Poland

South

Africa

0 100 1,1002002006 population (Mn)

Medical device market per capita 2006 (US$)

2

1

3

4

A fast-growing market but will remain small in the medium-term

Already more developed markets

Source: BCG analysis

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Smith & Nephew’s Emerging Markets

Countries with direct presence

Countries with established distributors

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Smith & Nephew – local teams run by local talent

Managed directly

AfricaMiddle East

South America

ASEAN China SouthKorea

PuertoRico

EasternEurope

India Mexico

Finance

Supply Chain

HR

Strategy and Direction

Compliance

President

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Revenue analysis

2008 Revenue by GBU2008 Revenue by GBU

Asia

Europe

Central & South

America

Africa/Middle East

2008 Revenue by Regions2008 Revenue by Regions

19%

35%

15%31%

AWM

Endo

Orthopaedics27%

30%

43%

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Performance milestones

• Pre-2005

– Opportunistic

• 2006: Formation of Emerging Markets Team

• 2006-07

– Clarity on strategic intent

– Quantification and Research

– Dedicated structures and teams

– Focused teams, but matrixed with GBU’s

• 2009

– Strategy refined

– Clear priorities

– Investment increased

– Expectations exceeded

Emerging market revenues and growthEmerging market revenues and growth

0

50

100

150

200

250

300

2006 2007 2008

Reve

nues

(US$

m)

0%

5%

10%

15%

20%

25%

30%

Und

erly

ing

grow

th ra

te (%

)

Revenue Underlying growth

China

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Growth fueled by favorable demographic, economic and HC environment

Growth fueled by favorable demographic, economic and HC environment

Chinese medical device market willcontinue to boom

HC spending / cap (US$) 83 116 197 317

Med dev/ cap (US$) 2.3 2.7 3.5 4.5

6,130

4,739

3,635

3,005

0

2,000

4,000

6,000

8,000

+9%

US$ M

2005 2007 2010 2013

Chinese medical device market will reach US$ 6.1Bn in 20132

Chinese medical device market will reach US$ 6.1Bn in 20132

+10%

1. at price of US$ 20052. Market size based on price to distributorSource: Espicom, EIU, BCG analysis

86

1.3

2005

15

85

1.3

2007

17

83

1.3

2010

19

81

1.4

2013

Aged 60+

Aged 0-59

0

100 14

50

% of population

Large and agingpopulation

Rapidly increasing

wealth

Total (Bn)

3.32.62.11.8

0

2

4

6

20102005 2013

Real personal disposable income1 (k US$)

2007

+8%

Increasinginsurancecoverage

• Urban resident basic medical insurance started pilot in 2007 to cover unemployed urban residents

• Public insurance schemes gradually introduced into rural areas

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Reimbursement

Regulatory

Pricing control

Healthcare provision

Healthcare operational environment• Clear evidence of commitment to improve quality and ensure customer

safety• New domestic, and imported lines, require mandatory clinical trials

• Current policy differs by city and favors local products in some areas• Most imported products are not included

• Tendering significant component of market• Bidding ‘entry prices’ often double digit reduction on existing average

prices• Ominous signs of NDRC price controls

• Healthcare provision is very uneven across the county, and favours urban population

• Private insurance remains very low

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• High-level and speciality medical service providerDefinition

Specialisation

No of Hospitals

Av. No of Beds/Hospital

Healthcare infrastructure - hospitals

Av. No of Joint Procedures /

Year

Class IIIClass III Class IIClass II Class IClass I

• Regional Hospital offers comprehensive medical services

• Grass roots medical institution offers basic healthcare services

1,182 6,608 4,687

~600 ~200 ~50

• Dedicated Recon/Trauma Team in Orthopaedics Department

• Specialised Orthopaedics Department

• No specialised Orthopaedic Department

• Coastal / big cities: ~50• Inland / small cities ~30

• Coastal / big cities: ~20• Inland / small cities: ~10

• Coastal / big cities: 0• Inland / small cities: 0

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Mid-market an important opportunity

High-end

Low-end

Premium with advanced technology and features

• MNC high-end imported

Target customersTarget customers

Top hospitals in big cities• Experienced doctors using

advanced products• Less price sensitive

PricePrice

High price• ~US$2.5k

Mid-market

ProductProduct GrowthGrowth

Medium to high growth

Less advanced features, with product specificationsmeeting local demand

• MNC low-end imported

• MNC locally produced• Quality local

Basic features, with medium to low quality

• Local low-end

Large hospitals in lower-tier cities, or lower-tier hospitals in big cities

• Need training in specialty operations

• More price sensitive due to patient' lower affordability

Other hospitals in lower-tier cities

• Not fully mastered basic surgical skills

• Very price sensitive due to patient' affordability and hospital budget limit

Medium price• ~US$1.5k

Low price• ~US$0.5k

High growth

Medium growth

Note: MNC = Multi-national corporation

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Chinese Government launched new healthcare reform in early 2009

Main Healthcare Reform PoliciesMain Healthcare Reform Policies

Expand basic medical insurance program• Enroll 90% rural and urban residents by 2011• Medical assistance covers all families in hardship• Raise basic medical insurance standard

Develop primary healthcare system• Build complete rural and urban communities

healthcare network and facilities in 3 years• Improve quality and standard level of primary hospitals,

especially through GP education• Establish dual-direction referral system between

community healthcare center and hospitals

Accelerate public hospital reform• Encourage private sector to open non-profit hospitals• Reduce hospital dependency on drug sales (with

increased public spending and refined compensation policy)

Implication to Medical Device businessImplication to Medical Device business

More potential patients accessible to diagnosis

Improved patient affordability, with medical insurance support

Patients are more likely to be treated in their own cities instead of coming to large cities (with improved local insurance coverage and improved local hospital quality)

Increasing importance of community and primary hospitals (patients to be referred from them)

Private hospitals are more likely to become more important (but overall percentage still very low)

Surgery and service is likely to become more important revenue source for hospitals

Backed by $125billion increased public healthcare spending in next 3 years

The reform is more focused on developing primary healthcare service, but will also benefit overall medical

device market in the end, by widening patient base

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Smith & Nephew in China 1994: Establish S&N Office in Shanghai

2004: Teams organised along GBU lines, but essentially approach still opportunistic

2007: Plus acquisition grants entre to Ortho Recon mid market – S&N switches to Strategic Mould, formalise thinking and commits resources

2008: China manufacturing plans formalised and approved

2009: Opening of second S&N Manufacturing Unit – AWC plant in Suzhou

Ground breaking on additional OrthopaedicManufacturing Site outside Beijing

New S&N China Head Office in Shanghai

Establishment of S&N China Board to guide strategy

Opening of first S&N Surgeon Education Centre in Shanghai

Beijing™ Orthopaedic plant™ Site of new

orthopaedic plant

Shanghai™ China head office™ Training facility

Suzhou™ AWM manufacturing

plant

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Success in China is a core Group imperative

• China market is significant but challenging– Medical device market forecast to be $6bn+ by 2013

– Complex market : uneven healthcare provision, evolving insurance, long registrations, daunting pricing controls, tiered markets, geography

• Smith & Nephew is making the required investment

• Opportunity exists for both– China growth from high-end and mid-market products

– “Reverse” innovation source back to Western markets

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Emerging Markets summary

• Emerging markets offer significant opportunities

– Double digit CAGR forecast to give circa US$5bn+ market by 2018

– China growing faster and potentially a circa US$1bn market in less than 10 years

• Smith & Nephew has a clear focus on key markets

– 15 high-priority emerging markets selected and categorised into five groups with different potential investment priorities

– China stands out as the most attractive market

• Our initial success suggests a current competitive advantage

– Delivering strong growth rates

– Co-ordinated investment by business unit and manufacturing

• Emerging markets will be beneficial to our ‘mature’ key markets

– Reverse innovation to be deployed to widen impact

• Our strategy, structure and resources are aligned for success

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Forward looking statements

This presentation contains certain "forward-looking statements" within the meaning of the US Private Securities Litigation Reform Act of 1995. In particular, statements regarding expected revenue growth and trading margins discussed under "Outlook" are forward-looking statements as are discussions of our product pipeline. These statements, as well as the phrases "aim", "plan", "intend", "anticipate", "well-placed”, "believe", "estimate", "expect", "target", "consider" and similar expressions, are generally intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors (including, but not limited to, the outcome of litigation, claims and regulatory approvals) that could cause the actual results, performance or achievements of Smith & Nephew, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Please refer to the documents that Smith & Nephew has filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended, including Smith & Nephew's most recent annual report on Form 20F, for a discussion of certain of these factors.

All forward-looking statements in this presentation are based on information available to Smith & Nephew as of the date hereof. All written or oral forward-looking statements attributable to Smith & Nephew or any person acting on behalf of Smith & Nephew are expressly qualified in their entirety by the foregoing. Smith & Nephew does not undertake any obligation to update or revise any forward-looking statement contained herein to reflect any change in Smith & Nephew's expectation with regard thereto or any change in events, conditions or circumstances on which any such statement is based.