2Smith & Nephew Annual report 2014

Our mission

Smith & Nephew is a global medical technology business that has been supporting healthcare professionals to improve patients’ lives since 1856.

DRIVING PERFORMANCE 

PIONEERING  INNOVATION 

 &  ENSURING  TRUST 

We do this by taking a pioneering approach to the design of our advanced medical products and services, by securing wider access to our diverse technologies for more customers globally, and by enabling better outcomes for patients and healthcare systems.

We have leadership positions in:

Orthopaedic Reconstruction and Trauma

Joint replacement systems for knees and hips and products to help repair broken bones

Advanced Wound Management

Treatment and prevention products for hard-to-heal wounds

Sports Medicine

Implants and enabling technologies for minimally invasive repair of the joint

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please visit www.smith-nephew.com

4Smith & Nephew Annual report 2014CHAIRMAN’S STATEMENT

Performance

–   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.

...and continued to deliver good

Based on the preliminary work undertaken when I took over as CFO, we undertook a thorough review of our business over the last few months. Our objective was to look afresh at opportunities to strengthen our competitive position and be more efficient. We have now substantially completed this analysis and begun executing our programmes…” revenue and earnings growth. Segment reporting As we simplify our operating model and move to one commercial organisation in all countries barring the US, we are updating our segmental reporting to reflect this, providing disclosure consistent with the financial information used by senior management to run the business. This means that from 1 January 2015 we will continue to disclose revenue performance by franchise, but other financial data, such as trading margin and assets, will no longer be split between two divisions – Advanced Surgical Devices (‘ASD’) and Advanced Wound Management (‘AWM’), since they are now part of one operating unit. Outlook We have made material progress in reshaping Smith & Nephew for higher growth since 2011. Whilst the journey to transform Smith & Nephew continues, increasingly we expect to benefit from the actions and investments we have made. We expect the Group to deliver higher underlying revenue growth in 2015 than in 2014. We also expect to deliver a further improvement in trading profit margin. Additionally, we expect the effective corporate tax rate on trading results to reduce to slightly above 27% in 2015, absent any changes to tax legislation. This is incremental to the 220bps reduction achieved in the last two years. We believe the Group is at the start of a new and exciting phase in its 158-year history. Sincerely, Julie Brown Chief Financial OfficerAdvanced Wound Management “We expectTreatment and prevention products for hard-to-heal wounds Sports Medicine Implants and enabling technologies for minimally invasive repair of the Group to   deliver higher underlying   revenue growth in 2015   than in 2014. We also   expect to deliver a further   improvement in trading   profit margin.” Smith & Nephew Annual report 2014            17 STRATEGIC REPORT Our marketplace Changing demandsjoint     Market trendsFIND MORE ONLINE   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 learn more about Smith & Nephew, 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 waysregister to constrain their healthcare expenditure.receive our news, or to explore opportunities to join us, please visit www.smith-nephew.com   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. 2      OVERVIEW SMITH & NEPHEW ANNUAL REPORT 2017   Product innovationCHAIRMAN’S STATEMENT  PROVIDING LEADERSHIP  The Board approaches 2018 with optimism. Olivier has built a strong foundation and we expect to attract someone of the highest calibre to accelerate business performance from this base. DEAR SHAREHOLDER One of the core duties of a Board is to ensure that companies evolve to meet the ever changing challenges and opportunities they face. A Board must set the pace in this, refreshing and strengthening its membership with deeper expertise, new perspectives and greater diversity. Since becoming Chairman in 2014 I am pleased with the evolutionary changes we have made at Smith & Nephew. I believe these build on the successes of the past and position the Company well for further progress. STRENGTHENING THE BOARD We have been able to attract new Non-Executive Directors of high calibre to replace Board members retiring after completing their service. Angie Risley, who joined in September 2017, is currently Group HR Director of J Sainsbury plc and was previously Non-Executive Director of Arriva plc, Biffa plc and Serco plc where she was also chairman of the Remuneration Committee. Marc Owen, recently retired from the Executive Committee of Fortune 500 healthcare business McKesson Corp, where he was Chairman of Celesio AG and President of McKesson Speciality Health, and previously a healthcare and technology specialist at McKinsey, joined in October 2017. Roland Diggelmann, Chief Executive Officer at Roche Diagnostics and a member of the Corporate Executive Committee of F. Hoffmann-La Roche Ltd, and previously a senior executive at Zimmer GmbH, will join on 1 March 2018. Marc and Roland strengthen the Board’s knowledge of commercial healthcare and the medical devices sector while Angie will provide effective leadership to our Remuneration Committee when Joe Papa steps down at the AGM in April. Joe has been a highly valued colleague and exemplary steward of Smith & Nephew. On behalf of the primary responsewhole Board, I thank him for his service. CHIEF EXECUTIVE OFFICER In October Olivier Bohuon notified the Board of his intention to retire by some suppliers in meeting patientthe end of 2018, after seven years as Chief Executive Officer. Under Olivier’s leadership Smith & Nephew has undergone important and healthcare provider demandsnecessary change and he has significantly strengthened the foundations of our Company. As Smith & Nephew enters its next chapter, the Board is determined to improve outcomes, simplify procedures and reduce cost.build on this.   SMITH & NEPHEW ANNUAL REPORT 2017 OVERVIEW      3 New Olivier continues to lead Smith & Nephew and drive the Company’s growth initiatives and operating plans. In this he is supported by our new Chief Financial Officer, Graham Baker, who joined in March 2017. The Board has been impressed with Graham’s strong start as he quickly developed his understanding of the business and we welcome his commercial models,acumen and attention to detail. Our views of Graham have been echoed by the positive shareholder feedback we have received. GOVERNANCE AND CULTURE In 2017 the Board invested significant time meeting local management and employees and understanding market dynamics. These  included visiting our offices in Dubai, Tokyo and Hull, as well as some Board members spending time with our salesforce to better appreciate their role and meeting customers. In addition to giving us commercial insight, such activities let us get anecdotal evidence of the culture at Smith & Nephew, something the Board puts great value on. We strive to set the tone from the top, and review data to demonstrate performance, but it is only by meeting employees from all levels of the Company that we can be certain that Smith & Nephew’s values of I perform, I innovate and I earn trust are being lived across the business. We conducted our regular review of strategy and Group structure at our annual strategy meeting in October, ensuring the continued close alignment of Board and management on our expectations and current direction. We upgraded our Risk Management process and strengthened our internal team in this area. Our Senior Independent Director, Ian Barlow, conducted a Board Effectiveness Review which identified some areas of further improvement which we are focusing on, such as deepening our knowledge of the competitive landscape to enable us to better support management develop and deploy resources to win in our chosen markets. I encourage you to read more about these and other matters in our Governance section starting on page 50. 2017 PERFORMANCE The Board receives regular updates on the performance of the business from the CEO and CFO, 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 segmentsmembers of the market more sensitivesenior management team attending Board meetings over the course of the year. We could clearly see areas of the business where the Company excelled in 2017, such as Global Operations where we have improved quality and supply, and R&D, where we have an exciting new product pipeline. It is no coincidence that both of these areas of the business have effective leaders who impressed the Board during 2017. Whilst the trading performance of the Group was better than in 2016, and we delivered within our guidance, we continue to price. endorse the Chief Executive’s view that this business can and should deliver better results and reinforce the need for continued focus on driving better execution. The healthcare industry is also seeing protectionism/localisation playing a part2017 full year dividend of 35.0¢ per share reflects the strong growth 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. adjusted earnings per share. The increased demandBoard approaches 2018 with optimism. Olivier has built a strong foundation and we expect to attract someone of the highest calibre to accelerate business performance from this base. Thank you for healthcare productsyour support and engagement in 2017 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 asBoard looks forward to serving you into 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 agenciesexciting next chapter 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.Nephew. 18Smith & Nephew Annual report 2014 Yours sincerely, Roberto Quarta Chairman                       FINANCIAL HIGHLIGHTS             $4,765m +2% +3%   35.0¢ +14%     Revenue Reported Underlying1   Dividend per share     Group revenue was up 2% on a reported basis (including -1% headwind from the 2016 Gynaecology business disposal) and 3% on an underlying basis, in line with guidance.   The 14% year-on-year increase reflects the strong growth in adjusted earnings per share.     $934m +17%    $1,048m +3%    87.8¢ 0%     Operating profit   Trading profit1   Earnings per share (EPS)     Operating profit margin of 19.6% is up 240bps year-on-year due to more favourable non-trading items.   Trading profit margin1 was 22.0%, up 20bps year on year, in line with guidance.   In 2016 EPS benefited from the gain on the disposal of the Gynaecology business.     94.5¢ +14%   14.3% +280bps   5%       Adjusted Earnings per share1 (EPSA)   Return on Invested Capital1 (ROIC)   R&D expenditure     Reflects one-off tax benefits, improvements in trading profit margin and the tax rate on trading1.   Reflects improvements in operating profit, the lower tax rate and a stable asset base.   To drive innovation, we maintain our investment in R&D at around 5% of Group revenue.                 1 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181.      FINANCIAL REVIEW PAGE 36 OUR BOARD OF DIRECTORS PAGE 50 GOVERNANCE PAGE  56       4      OVERVIEW SMITH & NEPHEW ANNUAL REPORT 2017 CHIEF EXECUTIVE OFFICER’S REVIEW STRONGER   SMITH & NEPHEW In 2018, I expect Smith & Nephew to build on 2017 by delivering another year of improved performance driven by our strong product portfolio and pipeline of innovative products. DEAR SHAREHOLDER We delivered on our promises to improve the top and bottom line in 2017. Our healthy balance sheet, good cash generation and increased dividend demonstrate the robust foundations underpinning our business. In 2018, I expect Smith & Nephew to build on 2017 by delivering another year of improved performance driven by our strong product portfolio and pipeline of innovative products. STRATEGIC PRIORITIES In my first year as Chief Executive, in 2011, we set five strategic priorities that have shaped a fundamental management and operational restructuring of the Group as a foundation to improving its growth and profit profile. Through these priorities we continue to drive our business forward. In 2017 I was pleased with the resultant commercial performance in many areas. In Knee Implants we had an outstanding year, Trauma and Extremities and Advanced Wound Devices also, and we returned the Emerging Markets to double-digit revenue growth. Of course, there are some areas that did not meet my expectations, such as in Arthroscopic Enabling Technologies and European Wound Care. These are not because of new issues, but they are taking longer to improve than expected. We are attacking the underlying issues with renewed vigour in 2018. You can read more about our performance against each of the strategic priorities in the next few pages (pages 10–15). I would like to draw your attention to how our strong new product portfolio reflects our decision of a few years ago to increase our investment in disruptive R&D and technology acquisitions. SMITH & NEPHEW ANNUAL REPORT 2017 OVERVIEW      5 One of our best recent achievements was to create a global R&D organisation that became fully operational in 2017 and is building on these successes. We now have greater visibility across our development portfolio to ensure we back the winners of the future in areas such as digital, robotics and biologics. We are making better decisions and hitting milestones consistently, and this will underpin our success for many years to come. ACCELERATING PERFORMANCE & INNOVATION As we have transformed Smith & Nephew, so our markets and industry have changed. We are seeing an increasingly competitive environment: new selling models, new entrants, pricing pressure and increasing costs – which in some markets are outpacing our growth. We also see great opportunity to invest behind pioneering technologies which take market share, offer a wider selection of commercial terms to suit more customers, expand our reach in the emerging markets and start to realise the benefits of the digital revolution for our industry. In late 2017 we undertook a review of our business to look for opportunities to achieve higher growth targets, strengthen our competitive position, and make us more agile to changes in the market. As a result, in early 2018 we introduced the APEX programme, which stands for ‘Accelerating Performance and Execution’. APEX will make key enhancements to our business and ways of working over the next five years. We expect this programme to deliver $160 million of annualised benefits by 2022. APEX is now possible because of the work put in to create our strong Group structure, and it will build on this robust base. More information on APEX can be found on page 14. BUILDING A WINNING CULTURE Our success as a Company is made possible by talented employees working together for our shared mission: to support healthcare professionals in their efforts to improve patients’ lives. This is why being a great place to work is important to us, and why every two years we measure our progress toward this goal with our Global Employee Survey. Our survey tool is the Great Place to Work Institute’s Trust Index, and in 2017 we performed strongly across the dimensions of vision, recognition, pride and equality. We now have nine countries accredited as a Great Place to Work. We put great store by our culture, and work to embrace diversity, encourage progression, and reward success. We also want our employees to put something back into their communities. Our People section on pages 25–28 describes our commitments and actions across all of these areas. LOOKING TO THE FUTURE In October 2017 I announced my decision to retire from Smith & Nephew by the end of 2018. As I looked ahead to the next long-term phase of growth, I decided that it was the right time to announce my retirement plans, providing ample time to identify a successor and ensure a smooth transition. In the meantime, I remain resolutely focused on delivering our commitments for 2018, while positioning the Company for further success. Looking further ahead, our greater focus on commercial execution gives us confidence we will outgrow our markets and the new APEX programme supports our expectation of improved trading profit margin. Yours sincerely, Olivier Bohuon Chief Executive Officer OUR STRATEGIC PRIORITIES Our strategic priorities guide our actions to support healthcare professionals and transform our growth profile. BUILD A STRONG POSITION IN ESTABLISHED MARKETS FOCUS ON EMERGING MARKETS INNOVATE FOR VALUE   SIMPLIFY AND IMPROVE OUR OPERATING MODEL   SUPPLEMENT ORGANIC GROWTH WITH ACQUISITIONS   STRATEGIC PRIORITIES UPDATE PAGE 10 OUR PEOPLE PAGE 25 6      OVERVIEW SMITH & NEPHEW ANNUAL REPORT 2017 WHO WE ARE ONE GLOBAL BUSINESS WITH MORE THAN 15,000 EMPLOYEES OUR VALUES AND HOW WE ACT Our values shape everything that we do as a business and form the basis of our relationships with all our stakeholders. Performance Innovation Trust Performance means being responsive to the needs of our customers and their patients, setting ourselves clear goals and standards and achieving them. Innovation means being energetic, creative and passionate about everything we do, anticipating customers’ needs and overcoming barriers and developing opportunities. Trust is something we understand that we have to earn and we strive to operate with integrity and take an ethical approach to business.                                 AN INTEGRATED BUSINESS                                  UNITED STATES (US)       OTHER ESTABLISHED MARKETS       EMERGING MARKETS                                    The United States is the Group’s largest market representing 48% of our global revenue. Due to its commercial importance to the Group, its revenue is reported separately. The United States is also home to a number of our manufacturing facilities.       Other Established Markets comprise commercial operations in Europe, Australia, Japan, Canada, and New Zealand, We have manufacturing facilities in the UK, Germany and Switzerland.       Emerging Markets include our commercial businesses in China, Asia, India, Russia, Middle East, Africa and Latin America. These generated 16% of Group revenue in 2017. We have manufacturing facilities in China, Costa Rica, India, Russia and Curacao.         2017 revenue       2017 revenue       2017 revenue         $2,306m       $1,678m       $781m         0% +2%       0% 0%       +13% +12%         Reported Underlaying1       Reported Underlaying1       Reported Underlaying1                                           ORTHOPAEDIC RECONSTRUCTION AND TRAUMA                                                   SPORTS MEDICINE                                                   ADVANCED WOUND MANAGEMENT                                                   GLOBAL FUNCTIONS2                                                                   1    These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181.       2    Commercial Excellence including Global Marketing, R&D, Manufacturing & Supply Chain, Central Support.   SMITH & NEPHEW ANNUAL REPORT 2017 OVERVIEW      7 SELLING NINE PRODUCT FRANCHISES KNEE IMPLANTS SPORTS MEDICINE JOINT REPAIR ADVANCED WOUND CARE HIP IMPLANTS ARTHROSCOPIC ENABLING TECHNOLOGIES ADVANCED WOUND BIOACTIVES TRAUMA & EXTREMITIES OTHER SURGICAL BUSINESSES ADVANCED WOUND DEVICES SUPPORTING HEALTHCARE PROFESSIONALS IN MORE THAN 100 COUNTRIES Revenue by products Revenue by geography A KNEE IMPLANTS $984m A UNITED STATES $2,306m B HIP IMPLANTS $599m B OTHER ESTABLISHED MARKETS $1,678m C TRAUMA & EXTREMITIES $495m C EMERGING MARKETS $781m D SPORTS MEDICINE JOINT REPAIR $627m E ARTHROSCOPIC ENABLING TECHNOLOGIES $615m F OTHER SURGICAL BUSINESSES $189m G ADVANCED WOUND CARE $720m H ADVANCED WOUND BIOACTIVES $342m I ADVANCED WOUND DEVICES $194m         In general, with the aforementioned industry trends, safety standards and regulations in the medical device industry are becoming more stringent. Regulatory agencies are intensifying audits of manufacturing facilities and the approval time for new products has lengthened. Legislation covering corruption and bribery such as the UK Bribery Act and the US Foreign Corrupt Practices Act business also apply to all our global operations.   We are committed to assuring a high level of regulatory compliance and to doing business with integrity and welcome the trend to higher standards in the healthcare industry. We and other companies in the industry are subject to regular inspections and audits by regulatory agencies and notified bodies, and in some cases, remediation activities have and will continue to require significant financial and resource investment. See ‘Legal proceedings’ on page 146.   Dependence on government and other funding In most markets throughout the world, expenditure on medical devices is ultimately controlled to a large extent by governments. Funds may be made available or withdrawn from healthcare budgets as a result of government policy. We are therefore largely dependent on future governments providing increased funds commensurate with the increased demand arising from demographic trends. Pricing of our products is largely influenced in most developed markets by governmental reimbursement authorities. Initiatives sponsored by government agencies, legislative bodies and the private sector to limit the growth of healthcare costs, including price regulation, excise taxes and competitive pricing, are ongoing in markets where we operate. This control may be exercised by determining prices for an individual product or for an entire procedure. We are exposed to changes in reimbursement policy, tax policy and pricing which may have an adverse impact on revenue and operating profit. There may be an increased risk of adverse changes to government funding policies arising from the deterioration in macro-economic conditions in some of our markets. Competitors Competition exists among healthcare providers to gain patients on the basis of quality, service and price. Providers are under pressure to reduce the total cost of healthcare delivery. In order to achieve this there has been some consolidation in our customer base, as well as amongst our competitors, and these trends are expected to continue in the long term. We compete against both local and multinational corporations, including some with greater financial, marketing and other resources. Manufacturing facility in Suzhou, China. Smith & Nephew Annual report 2014            19 STRATEGIC REPORT Our marketplacecontinued 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. 20Smith & Nephew Annual report 2014 STRATEGIC REPORT Our business       8      OUR BUSINESS & MARKETPLACE SMITH & NEPHEW ANNUAL REPORT 2017 Delivering advanced medical technologies   Smith & Nephew’s business model, set out on page 12, supports our mission to deliver advanced medical technologies to help healthcare professionals, our customers, improve the quality of life for their patients. OUR BUSINESS MODEL Through it we create value. This value creation process is actioned through five streams of activity.HOW WE CREATE VALUE –  Research & Development –  Ethics & Compliance –  Manufacturing –  Medical Education –  Sales & Marketing Our business model is underpinned by our Capital Allocation Framework. This 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. Research and Development We have a deep knowledge of the needs of surgeons, physicians 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 2014, we launched many exciting products, including a cruciate retaining version of our JOURNEY II natural-motion knee, a first-of-its-kind DYONICS PLAN surgical planning tool for hip arthroscopy, and the HAT-TRICK Lesser Toe Repair System. We have a strong new product pipeline for 2015, with many innovations scheduled. These new products, and many more currently in development, are a result of our focus on R&D. We invested $235 million in this area in 2014, in-line with our commitment, stated in 2011, to increase our investment level to around 5% of revenue. 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. Our products undergo clinical and health economic assessment both during their development and post launch. 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. We scout globally for new technologies and services to meet the needs of our customers. 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. We also work with MassChallenge, a global start-up competition and accelerator programme, to support emerging companies that fit with our strategic areas of interest. THE RESOURCES WE NEED Smith & Nephew Annual report 2014            21 STRATEGIC REPORT Our businesscontinued OUR PEOPLE Engaging, developing and retaining our more than 15,000 employees is important to us and we work hard to be a great place to work as well as a responsible corporate citizen. RESEARCH & DEVELOPMENT Innovation is part of our culture and we invest 5% of our revenue to develop new products that will help improve patients’ lives. MANUFACTURING & QUALITY We operate our global manufacturing efficiently, and at the highest possible standards, to ensure product quality at competitive pricing. SALES & MARKETING We support our customers in over 100 countries. Our commercial teams are highly specialised with an in-depth knowledge across the full range of product franchises. ETHICS & COMPLIANCE We are committed to doing business the right way and apply strict business principles to the way we deal with our customers and partners. TRAINING & EDUCATION Every year, thousands of healthcare professionals attend our training courses around the world. Education is fundamental to how we support our customers.     THE RESOURCES WE NEED PAGE 25   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). 22Smith & Nephew Annual report 2014           High quality manufacturing An employee at our manufacturing plant in Tuttlingen, Germany, working on a polished cementless hip stem. Manufacturing We operate manufacturing facilities in a number of countries across the globe, and a number of central distribution facilities in key geographical areas in which we operate. Products are shipped to individual country locations which hold small amounts of inventory locally for immediate supply to meet customer requirements. We have a defined manufacturing and facility footprint plan in-line with our commercial strategy which we review on a regular basis. We continue to implement improved processes such as ‘Lean Manufacturing’ throughout our factories, the global supply chain and the supporting operations to improve and sustain the levels of safety, quality, delivery, productivity and efficiency. We have numerous Core Competences including: materials technology; precision machining, high volume and automated manufacturing for both our Advanced Surgical Devices and Advanced Wound Management products. We procure raw materials, components, finished products and packaging materials from key suppliers. These purchases include metal forgings and stampings for orthopaedic products, optical and electronic subcomponents for sports medicine products, active ingredients and semi-finished goods for Advanced Wound Management as well as packaging materials across all product ranges. Suppliers are selected, and standardised contracts negotiated, by a centralised procurement team wherever possible, with a view to ensure value for money based on the total spend across the Group. We outsource certain parts of our manufacturing processes where necessary to obtain specialised expertise or gain lower cost without undue risk to our intellectual property. Suppliers of outsourced products and services are selected based on their ability to deliver products and services to our specification, and adhere to and maintain an appropriate quality system. Our specialist teams work with and monitor suppliers through on-site assessments and performance audits to ensure the required levels of quality, service and delivery. Our largest manufacturing operation for Advanced Surgical Devices is based in Memphis (Tennessee, US), with additional production and assembly plants based in Mansfield (Massachusetts, US), Oklahoma City (Oklahoma, US), Austin (Texas, US), Aarau (Switzerland), Tuttlingen (Germany), Beijing (China), Calgary (Canada), Warwick (UK), Heredia (Costa Rica) and Sangameshwar (India). The Memphis facilities produce key products and instrumentation in our Knee Implants, Hip Implant and Trauma franchises. These include the JOURNEY II and LEGIONà knees, the ANTHOLOGYà Primary Hip System and key Trauma products such as the PERI-LOCà Ankle Fusion Plating System and TRIGENà Intramedullary Nails. In addition to this, Memphis is the home to the design and manufacturing process of the VISIONAIRE patient matched instrumentation sets. The Mansfield facility focuses on sports medicine related products for minimally invasive surgery including the FAST FIXà 360 Meniscal Repair System, FOOTPRINTà PK Suture Anchor, DYONICS Platinum Shaver Blades, ENDOBUTTONà CL Ultra and the HEALICOILà PK suture anchor. The Aarau, Tuttlingen, Beijing and Warwick facilities produce a large number of products including key trauma products, the PLUSà knee and hip range and the BIRMINGHAMà Hip Resurfacing System. The facility in Oklahoma City deals mainly with the assembly of surgical digital equipment, such as HD560à Camera. We operate three main holding warehouses, one in each of Memphis (Tennessee, US), Baar (Switzerland) and Singapore. These facilities consolidate and ship to local country and distributor facilities. The Advanced Wound Management manufacturing is primarily managed from our factory and offices in Hull (UK). Wound Management products are also made at our facilities in Suzhou (China), Curaçao (Dutch Caribbean), Alberta (Canada) and Oklahoma City (Oklahoma, US). The products made at the Hull site cover the therapies of Exudate management (Foam products – principally ALLEVYNà), Burns treatment (ACTICOATà) and Wound Closure (OPSITEà film products). Several products produced in Hull, such as JELONETà and BACTIGRASà, transitioned to Suzhou in 2014, as part of our global footprint optimisation programme. Smith & Nephew Annual report 2014            23 STRATEGIC REPORT Our businesscontinued 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.FOCUS ON   PERFORMANCE    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.   24Smith & Nephew Annual report 2014 OUR VALUE PROPOSITION Our mission is to support healthcare professionals by providing advanced medical devices that they use in their daily efforts to improve the lives of their patients. PIONEERING APPROACH We take a pioneering approach to the design of our products and services. Smith & Nephew has a long history of innovation, dating back to our foundations in the 19th century, and today we support customers to manage and prevent disease states, and enable swifter recovery for their patients. ENSURING WIDER ACCESS We strive to secure wider access to our advanced technologies for more customers globally. In emerging markets we have built an entrepreneurial business resourced to reach and support an ever greater number of customers in delivering affordable healthcare. ENABLING BETTER OUTCOMES We seek to enable better outcomes for patients and healthcare systems, providing high quality products and appropriate training to improve clinical outcomes, enabling healthcare professionals to treat more patients and improving the economic outcome for payers.       SMITH & NEPHEW ANNUAL REPORT 2017 OUR BUSINESS & MARKETPLACE      9 Our people  CREATING   PRODUCTS   FOR OUR   CUSTOMERS   We have leadership positions in Orthopaedic Reconstruction and Trauma, Advanced Wound Management and Sports Medicine: We service our customers through our dedicated and highly trained global sales force and selected third party sellers: –  Knee Implants – Surgeons –  Hip Implants – Nurses – Trauma & Extremities – Nurse specialists – Sports Medicine Joint Repair – Physicians, GPs – Arthroscopic Enabling Technologies – Healthcare systems – Other Surgical Businesses – Procurement groups – Advanced Wound Care – Payers, administrators – Advanced Wound Bioactives – Retail, consumers, patients –  Advanced Wound Devices  OUR PRODUCTS PAGE 18 THE OUTPUT OF WHAT WE DO FINANCIAL PERFORMANCE Targeting higher revenue growth and a better trading profit margin. $4,765m Revenue $934m $1,048m Operating Profit Trading Profit1 CAPITAL ALLOCATION FRAMEWORK Prioritising the use of cash and ensuring an appropriate capital structure. $269m Dividend IMPROVED QUALITY OF PATIENTS’ LIVES Providing our advanced medical devices in more than 100 countries. 100+ countries TRAINING AND EDUCATION Supporting HCPs and ensuring the safe and effective use of our products. 45,000+ surgeon training instances GREAT PLACE TO WORK Supporting and encouraging employees to live our values. 15,000+ employees A SUSTAINABLE BUSINESS Working in a sustainable, ethical and responsible manner everywhere we operate. 160+ years of proud history 1   These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181.   Smith & Nephew is committed to attracting, engaging, developing and retaining employees. In 2014, we had more than 14,000 employees dedicated to our core values of Innovation, Trust and Performance. These values represent the foundation of our culture, and underpin our commitment to be an employer of choice as well as a responsible corporate citizen. 10      OUR BUSINESS & MARKETPLACE SMITH & NEPHEW ANNUAL REPORT 2017   Investing in our people and communities helps ensure the long-term sustainability of our business. Smith & Nephew strives to create a more engaged and productive workforce and focuses on measures to drive employee engagement. These include an understanding of the Group’s mission and direction, sense of employee involvement, focus and adaptability to customers and market place. We continue to listen to our employees, via regular surveys and focus groups, and we value their opinions. In 2014, we conducted a Global Employee survey to measure progress against our actions and were named Great Place to Work in Spain. STRATEGIC PRIORITIES Attracting the best talent and developing and engaging our employees are critical to achieving and sustaining our business objectives and overall performance. Employee advancement is merit-based, based on performance as well as demonstration of core competencies which include our core values with an emphasis on ethics and integrity. We prioritise the development and promotion of our existing employees whenever possible. Each year, Smith & Nephew conducts a comprehensive global development and capability review process to identify high-potential employees and ensure they have robust career development plans. Talented employees are provided with opportunities to develop their skills and career through new assignments and on the job experiences. Current programmes include our Chief Executive Officer (CEO) Forum – where small groups of high potential and emerging talent are given the opportunity to learn more about the business from the Company’s most senior leaders and to benefit from peer mentorship – and the annual Managing Director’s Meeting where country and regional commercial leaders begin the year in alignment with the Group’s strategy and goals. In addition, the Board reviews succession plans for key executive roles and succession plans are in place for critical positions across our business. Our performance management process ensures all employees set objectives which align to our overall business goals and have clear line-of-sight to how their individual contributions benefit the Company. Our performance management system assesses and rewards both performance and behaviour, in line with our Code of Conduct. All employees have a specific annual objective to adhere to the Code of Conduct and to complete training and certify their adherence to this Code. Smith & Nephew strives to create a highly engaged and productive workforce. We foster this goal with targeted initiatives to ensure understanding of the Company’s mission and direction, encourage employee involvement, and ensure focus and adaptability to our customers and market place. We seek employee feedback via regular surveys and focus groups, and we act on this feedback in the spirit of continuous improvement. Diversity at Smith & Nephew 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. MAXIMISING OUR PERFORMANCE Smith & Nephew has a Human Resource Global Standardclear vision to build a successful, sustainable business. This vision is encapsulated in our corporate value proposition – supporting healthcare professionals by taking a pioneering approach to the design of our advanced medical products and services, by securing wider access to our diverse technologies for diversitymore customers globally, and inclusionby enabling better outcomes for patients and healthcare systems. We are focused on transforming the growth profile of the business while delivering this proposition. We are working to rebalance the Group towards higher growth opportunities. Over the last five years, Smith & Nephew has materially improved the mix of higher growth potential to lower growth businesses, shifting from one-third higher growth to over 50% today. Our strategic priorities, introduced in 2011, guide our actions in delivering these twin aspirations of supporting healthcare professionals and transforming our growth profile. OUR STRATEGIC PRIORITIES     BUILD A STRONG POSITION IN ESTABLISHED MARKETS Build on existing strong positions, win market share through greater product and commercial innovation and drive efficiencies to liberate resources.  SEE OPPOSITE     FOCUS ON EMERGING MARKETS Deliver leadership in the workplaceEmerging Markets by building strong, direct customer relationships, widening access to our premium products and is committed to creating an inclusive environment that embraces and promotes diversity.developing portfolios designed for the economic mid-tier population.  PAGE 12       INNOVATE FOR VALUE Deliver pioneering products and business models that improve clinical and health economic outcomes and widen access across geographies and patient groups.  PAGE 13     SIMPLIFY AND IMPROVE OUR OPERATING MODEL Pursue maximum efficiency in everything we do, streamline our operations and manufacturing, remove duplication and build strong global functions to support our commercial teams.  PAGE 14     SUPPLEMENT ORGANIC GROWTH WITH ACQUISITIONS Build our platform by acquiring complementary products or businesses in our higher growth segments and manufacturing and distribution capabilities in the Emerging Markets.  PAGE 15 SMITH & NEPHEW ANNUAL REPORT 2017 OUR BUSINESS & MARKETPLACE      11 BUILD A STRONG POSITION IN ESTABLISHED MARKETS Established Markets for Smith & Nephew are the US, Europe, Australia, Japan, Canada and New Zealand. Smith & Nephew delivered 84% of its revenue from these countries in 2017. In the United States, our single largest country representing 48% of global revenue, reported revenue growth was flat and underlying growth was 2%. The BoardOther Established Markets growth rate was flat on both an underlying and Executive officersreported basis. In 2017 we focused on improving our commercial execution. With a simpler and more agile commercial structure in each country, supported by global functions, we sought to drive improved performance and greater efficiency. This was supported by sales force excellence initiatives including a sharper focus on both health economic and clinical evidence to support our products. In Reconstruction, the Knee Implants franchise performed well, with the JOURNEY™ II Total Knee System driving good growth, as did the LEGION™ Revision Knee System. In Hip Implants, the new REDAPT™ Revision and POLARSTEM™ Cementless Stem systems were well received. In Trauma & Extremities, new clinical evidence supported increased uptake of our TRIGEN™ INTERTAN™ hip fracture system. Sports Medicine Joint Repair performance was driven by good demand for our shoulder repair portfolio, and we added an exciting new technology when we acquired Rotation Medical (see page 15 for more). Arthroscopic Enabling Technologies was impacted by continued softness in mechanical resection. The roll-out of our LENS™ visualisation and WEREWOLF™ COBLATION™ systems are underway and we expect an increasing contribution from these in 2018. In the US, and other countries, we are seeing a shift towards day-case surgery for total joints starting to take place in Ambulatory Surgery Centre (ASCs), something Smith & Nephew is uniquely positioned to benefit from. Through Sports Medicine we are already a partner to many ASCs. We believe we can leverage this customer knowledge and relationships to improve the performance of our knee implants franchise. Our portfolio is well-suited for ASCs where early mobility and efficiency are key, as is our robotic NAVIOTM Surgical System due to its small footprint, portability and cost. The Advanced Wound Care franchise delivered strong growth in the US, but was held back by softer market conditions in Europe. In Advanced Wound Bioactives, SANTYL™ benefited from a new analysis demonstrating its effectiveness in advancing pressure ulcers through the healing process2, improving performance in the second half of the year. Advanced Wound Devices performed strongly across the year, led by the continued success of our single use negative pressure wound therapy (sNPWT) device PICO™. $3,984m Revenue from Established Markets 84% of Group revenue 0% +1% Reported Underlying1 WHY THIS KPI IS IMPORTANT We use this KPI to track the relative strength of our position in these markets. HOW WE PERFORMED Growth in the US, our largest market, was offset somewhat by softer conditions in some other markets. 1 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 38 and 178–181. 2 Advances in Wound Care. Gilligan, A.M., et al. Comparative effectiveness of Clostridial Collagenase Ointment to medicinal honey for treatment of pressure ulcers. Volume 6, Number 4 (April 2017). SUPPORTING CUSTOMERS AT THE ECC “It’s very humbling to know we are helping improve patients’ outcomes.” Natalia Zielinska Bioskills Laboratory Manager Smith & Nephew is proud to support surgeons and nurses by enabling them to learn from experts in their field of speciality. We do this at our state-of-the art training and innovation centres. In early 2017 we opened the Expert Connect Centre (‘ECC’) in Croxley Park, Watford, on the outskirts of London, UK. This is already establishing itself as a flagship destination for healthcare professionals from the UK, Europe and the Emerging Markets. 12      OUR BUSINESS & MARKETPLACE SMITH & NEPHEW ANNUAL REPORT 2017 FOCUS ON EMERGING MARKETS Our Emerging Markets represent those outside the Established Markets, including Brazil, Russia, India and China. The Emerging Markets accounted for 16% of Smith & Nephew’s revenue in 2017. In 2017 we returned our Emerging Markets business to sustainable double-digit revenue growth, up 13% on a reported basis and 12% on an underlying basis. This was a significant improvement over the flat underlying performance of 2016. In China, our largest Emerging Markets country, we delivered double-digit revenue growth as we improved our commercial execution. In the oil-dependent Gulf States we returned to growth by focusing on securing more private healthcare business to compensate for the reduction in government tenders. The majority of our other Emerging Markets continued to do well across 2017. We have been early investors in many of the Emerging Markets. There continue to recognisebe quarterly fluctuations in the importancegrowth rates, and differences in performance between countries, so we look at the longer term trends when making decisions, and those are very favourable. We also see the next wave of diversitysustained growth coming from the ‘mid-tier’, essentially growth from widening access to a greater proportion of the population in these countries. We are addressing this by steadily building a dedicated product portfolio and specific distribution model. We are well positioned to continue to drive strong growth from the Emerging Markets over the medium term. The much improved performance in 2017 is in line with where we see the medium term prospects for this increasingly important segment of Smith & Nephew’s business. $781m Revenue from Emerging Markets 16% of Group revenue +13% +12% Reported Underlying1 WHY THIS KPI IS IMPORTANT We use this KPI to track the growth of Emerging Markets relative to global growth. HOW WE PERFORMED Performance in the Emerging Markets improved strongly over the previous year. 1 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 38 and 178 – 181. RETURNING CHINA TO GROWTH “We have seen a return to double-digit growth in the attractive Chinese market.” Olivier Bohuon Chief Executive Officer China is our largest Emerging Market country. Here we faced challenges in 2016 as the market growth slowed down. In 2017 we improved our commercial execution and management of, and involvement in, the channel inventory. Looking to the medium term, we believe that our growth prospects in China remain very attractive. SMITH & NEPHEW ANNUAL REPORT 2017 OUR BUSINESS & MARKETPLACE      13 INNOVATE FOR VALUE In 2017 we began to benefit from a suite of exciting new products, solutions and business models as we deliver on our strategic priority to innovate for value. In robotics, NAVIO is a unique and compelling system. In 2017 we successfully extended its indications and introduced it to new countries such as India. We launched the total knee arthroplasty (TKA) application for our JOURNEY II, LEGION and GENESIS™ II Total Knee Systems. Surgeons completed the world’s first robotics-assisted bi-cruciate retaining total knee replacement procedures. This new approach used NAVIO to implant the new JOURNEY II XR (bi-cruciate retaining total knee system) currently in limited market release. This is the first and only bi-cruciate retaining robotics application commercially available. In the Emerging Markets we continue to build our mid-tier portfolio. Our ANTHEM™ Total Knee System, which, alongside the ORTHOMATCH™ Universal Instrumentation Platform, has been designed to provide wider market access to affordable knee treatments, performed well following its 2016 launch. During the year we launched into more markets, including Russia and Saudi Arabia, and introduced a new Cruciate Retaining (CR) variant, extending the options available to surgeons. In Sports Medicine our new LENS™ Surgical Imaging System and WEREWOLF™ COBLATION™ System for resecting soft tissue are being rolled out to customers. In Reconstruction we expanded our REDAPT™ Hip and LEGION™ Knee revision systems. In Advanced Wound Management our pioneering disposable single-use negative pressure wound therapy (sNPWT) device PICO™ continued to perform strongly and we extended our ALLEVYN LIFE foam dressing range with a new non-border version. We also focus on providing customers with the evidence that demonstrates the effectiveness of our innovative products. In 2017, PICO benefited from new clinical evidence showing its effectiveness at reducing surgical site infections1 and the TRIGEN™ INTERTAN™ hip fracture system also performed strongly supported by new clinical evidence2. We continue to develop new business models to address changing or unmet customer needs. During 2017 we ran the first study of our innovative Episode of Care Assurance Program (eCAP) that combines our hip and knee implants with PICO and ACTICOAT™ Flex 7 Antimicrobial Barrier Dressings. The first results showed eCAP delivering a 97% decrease in hospital readmission rates following total joint replacement surgery (based on 1,380 joint arthroplasties with only two readmissions, a readmission rate of only 0.145% as compared to published rates of 5.3% or more). $223m R&D expenditure 5% of Group revenue WHY THIS KPI IS IMPORTANT Through this KPI we monitor our investment in R&D. HOW WE PERFORMED The strong new product portfolio reflects increased investment in R&D and technology acquisitions. 1  O’Leary, D.P. et al, Prophylactic negative pressure dressing use in closed laparotomy wounds following abdominal operations. A randomised, controlled, open-label trial: The PICO Trial. Annals of Surgery, published online 06 December 2016. 2   Smith & Nephew INTERTAN claims brochure “The evidence is in ...” WORLD-CLASS R&D IN HULL “Britain is a global leader in medical technology innovation. Partnerships such as this between Smith & Nephew and University of Hull further strengthen our position at the forefront of global medical research and development.” Emma Hardy MP for Hull West & Hessle In 2017 we announced a long-term partnership with the University of Hull to create one of the world’s largest Wound Care Research Clusters with the aim of developing scientific insights and innovative treatments. This includes the creation of eight PhD studentships and a programme of collaboration between Smith & Nephew’s new Hull Research & Development centre and the University’s new Health Campus. 14      OUR BUSINESS & MARKETPLACE SMITH & NEPHEW ANNUAL REPORT 2017 SIMPLIFY AND IMPROVE OUR OPERATING MODEL Since 2011 Smith & Nephew has undertaken two successful efficiency programmes that have delivered significant savings and created an integrated Group structure. As announced with our Third Quarter 2017 Results, we believe that we now have the Group structure to allow us to strengthen our competitive position by driving further opportunities to accelerate performance through better execution, while at the same time realising savings through greater efficiency. In 2017 we completed our assessment of these opportunities and started to implement a programme called APEX – Accelerating Performance and Execution in early 2018. APEX is expected to deliver an annualised benefit of $160 million by 2022, with around three-quarters of this expected by 2020, for a cash cost of up to $240 million, of which a charge of around $100 million is expected in 2018. APEX has three workstreams: 1. MANUFACTURING, WAREHOUSING AND DISTRIBUTION We have already made significant improvements over the last two years, have expanded their own diversity profile: three of our ten Board members are female. On 31 December 2014, Smith & Nephew had the following breakdown of employees: We aimand see further opportunities to provide an open, challenging, productive and participative environment based on constructive relationships. We maintain open and transparent communication with employees through regular and timely information and consultation. We clearly communicate our business goals and performance standards, and provide the training, information and authority needed to achieve them. We provide fair recognition and reward based on performance. Our annual CEO Award, open to all employees worldwide, recognises employees who deliver exceptional resultssimplify in line with best practices to reduce overall cost, while improving quality and delivery through: –  A best practice facility footprint with larger manufacturing hubs supported by speciality facilities where appropriate. –  A product portfolio that meets the needs of our core values, encouraging innovationcustomers and a spiritcomplies with regulations, while minimising cost, complexity and inventory. –  A supply chain that is streamlined and efficient so that we are positioned to achieve the highest levels of continuous improvementdelivery at all levels. We are committed to working with employees to develop each individual’s talents, skills and abilities. We provide encouragement to learn and continuously improve. We recruit, employ and promote employees on the sole basis of the qualifications and abilities needed for the work to be performed. We do not tolerate discrimination on any grounds and provide equal opportunity based on merit.benchmark cost. 2. GENERAL AND ADMINISTRATIVE (G&A) EXPENSES We have improved our G&A expense ratio over the last five years, but with our global function structure we are committednow able to building diversityidentify additional areas of opportunity to reduce costs and improve service through: –  Best-in-class Global Business Services that includes a full-spectrum of support services delivered quickly and efficiently, enabling full focus on our customers and business objectives. –  Service hubs in locations that align to our regional needs and deliver the best value for money. –  System infrastructure that drives maximum efficiency, including rationalisation of legacy IT systems and adopting a working‘cloud-first’ strategy. 3. COMMERCIAL EFFECTIVENESS Whilst the commercial opportunities and competitive environment where there is mutual trustcontinue to evolve with changing customer expectations, new go-to-market approaches and respectprice pressure, we expect to improve overall productivity and where everyone feels responsible for the performanceaccelerate top line growth through: –  Increased sales and reputationmarketing effectiveness. –  Selective refinement of our Company. We are committedstructures and territories to providing healthymeet customer and safe working conditions for all employees. We achieve this by ensuring that healthmarket demands. –  Being more responsive to customers’ use of tenders 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.changing service level demands. We do not use any form of forced, compulsory or child labour. We support the Universal Declaration of Human Rights of the United Nations. This means we respect the human rights, dignity and privacy of the individual and the right of employees–  More accurate demand forecasting to freedom of association, freedom of expression and the right to be heard.    Number of Employees 1    Board of    Directors    Male 7      Female 3      Total 10    Senior Managers and above2    Male 562      Female 168      Total 730    Total employees    Male 8,485      Female 5,757      Total 14,242   1   Number of employees as at 31 December 2014 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. Smith & Nephew Annual report 2014            25 improve inventory management.   Overview In Advanced Surgical Devices (‘ASD’) we develop, manufacture and sell products in the areas of Orthopaedic Reconstruction, Trauma & Extremities, Sports Medicine Joint Repair, Arthroscopic Enabling Technologies, and others such as Gynaecology and Ear, Nose and Throat. 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 OXINIUMà 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 highly cross-linked polyethylene lined cup have been shown in various national joint replacement registries to have displayed best in class survivorship rates when compared to implants made from any other materials. In Knee Implants, the LEGION Primary Knee with VERILAST Technology is the only knee implant that has been laboratory-tested to 30-years of simulated wear. While lab testing is not the same as clinical performance, the tests showed significant reduction in wear compared to conventional technologies. Knee Implants Smith & Nephew offers a range of products for specialised knee procedures. In 2014, Smith & Nephew launched the JOURNEY II Cruciate Retaining (‘CR’) knee implant extending the JOURNEY II Active Knee System to procedures that preserve the posterior cruciate ligament (‘PCL’) which account for approximately half of all knee replacement procedures. The LEGION/GENESISà 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 utilise 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 procedural steps and instruments used in the operating room. In 2014, Smith & Nephew entered into a commercial agreement with Blue Belt Technologies (‘BBT’), makers of the Navio® Orthopaedic Surgical System, the next generation of orthopaedic robotic surgical navigation. Under this agreement, surgeons using the Navio system will be able to implant Smith & Nephew’s JOURNEY UNI partial knee. We also announced an agreement with OrthoSensor, the leader in intelligent orthopaedics, that will enable surgeons to benefit from OrthoSensor’s VERASENSETM Sensor Assisted Surgery Technology for soft tissue balancing when implanting our JOURNEY II and LEGION Total Knee Systems. VERASENSE utilises advanced sensor technologies to enable evidence-based surgical decisions regarding component position, limb alignment and soft tissue balance to optimise outcomes in total knee replacement. Hip Implants For Hip Implants, core systems include the ANTHOLOGY Hip System, SYNERGYà Hip System, the SMFà Short Modular Femoral Hip System, the R3à Acetabular System, the POLARCUPà Dual Mobility Hip System and the SL-PLUSà Hip Family System. In 2014, we introduced the POLARSTEMà HA Cementless Stem System in the US for state-of-the-art minimally invasive surgical techniques that preserve bone and soft tissue, with good functionality and reproducible results.                    Smith & Nephew Annual report 2014            27 STRATEGIC REPORT Segment performance:Advanced Surgical Devicescontinued     19.6% Operating Profit Margin 22.0% Trading Profit Margin1 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 FRAMEà 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 TRIGENà family of IM nails (TRIGEN META-NAIL System, TRIGEN Humeral Nail System, TRIGEN SURESHOTà, and TRIGEN INTERTANà) and the PERI-LOCà Plating System. 2014 saw the introduction of the D-RADà 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-FIXà 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 INTERTANà 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 EVOSà 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 SUTUREFIXà 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 N8TIVEà 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 COBLATIONà 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, ACUFEXà 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 TRUCLEARà 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 RAPIDRHINOà carboxymethylcellulose (‘CMC’) technology which is featured in dissolvable nasal and sinus dressings, removable nasal and sinus dressings, and epistaxis treatment products. 1 Low-dose scan protocol reduces radiation by approximately 50% compared to standard CT protocol. CT Protocol Report, HIPS. Document number 15001984, 2013. Data on file at Smith & Nephew. 28Smith & Nephew Annual report 2014   VERILAST Technology for Hip Replacement The proprietary technology combines innovation with long-term performance. Regulatory approvals   In 2014, regulatory clearances/approvals were obtained for several key products and instrumentations. In the US, 510(k) clearances were given to the D-RADà SMART PACK, VLPà MINI-MOD Plates and Screws, EVOS Mini-Fragment Plating System, JOURNEY II BCS Constrained Articular Inserts, BIOSURE HEALICOILà PK screw, Cannulated Captured Screw, N8TIVE ACL Anatomic Reconstruction System and NasaStentà CMC Nasal Dressing. Additional 510(k) clearances were also granted for our VISIONAIRE software revisions as well as the Q-Fixà Suture Anchor, the Multi-Fixà S Knotless Fixations System and the Topazà EZ Microdebrider COBLATION Wand. In Canada, approvals were granted for our LEGION Narrow OXINIUM and CoCr Femoral Components, HEALICOIL REGENESORBà Suture Anchor, the SUTUREFIXà ULTRA Suture Anchor, TFCC FAST-FIX Kit, TRUEPASSà Suture Passer, DYONICS PLAN, ULTRATAPEà, N8TIVE ACL Reconstruction System, BIOSURE HEALICOIL PK screw, KVacà and Ambient KVac COBLATION Wands, Q-Fix Suture Anchor System and MediENTà Turbinate Implant. In Australia, LEGION Narrow OXINIUM, HEALICOIL REGENESORB, LEGION Hinge Knee System, KVac COBLATION Wand, N8TIVE ACL Reconstruction System, SpeedLockà Hip Knotless Fixation System, Multi-Fix S Knotless Fixation Device, Q-Fix Suture Anchor System, Venteraà Sinus Dilation System and Serpentà Articulating ENT Instrument were approved. In Latin America, the Quantumà 2 COBLATION System and the Magnumà 2 Knotless Fixation Device were approved in Argentina; the Speedfixà Suture System and the Titanà Suture Anchor were approved in Brazil; and the RAPIDRHINO System was approved in Mexico. In Europe, the following products obtained regulatory clearance: HEALICOIL REGENSORB Suture Anchor, VLP MINI-MOD Plates and Screws, the EVOS Mini-Fragments Plates and Screws, the LEGION Hinge Knee System and the JOURNEY II CR Knee System. In Japan, the ANTHOLOGY HA Coated Hip stem, SMFà Hip Stem, Osteoraptorà OS Suture Anchor, HEALICOIL REGENESORB Suture Anchor, SUTUREFIX ULTRA Suture Anchor, TFCCà FAST-FIX Kit, OSTEORAPTORà HA curved, TRUEPASS Suture Passer, DYONICS PLAN, and ULTRATAPE were all approved. Other approvals include the Speedlock Hip Knotless Fixation System in Singapore and the ENT Irrigation Pumpà in Korea. Smith & Nephew Annual report 2014            29 Overview 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 elderly 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 management of wound exudate, treatment and prevention of wound infections, negative pressure wound therapy (‘NPWT’) and bioactive therapies. The portfolio is grouped into disposable wound care products (Advanced Wound Care), electrical equipment for wound therapy (Advanced Wound Devices) and bioactives (Advanced Wound Bioactives). Advanced Wound Care Exudate management Exudate management products focus on effectively and efficiently managing wound fluid and creating an optimal healing environment to promote improved healing outcomes. Our key brands in this space are ALLEVYN foam dressings and DURAFIBERà gelling fibre dressings. In 2014, we continued to invest in the development and commercialisation of our flagship ALLEVYN brand, with significant sales and marketing efforts in key countries. The ALLEVYN brand is evolving towards ALLEVYN Life, our latest innovation in foam dressings, which was designed to provide a better patient experience, and greater wear time. This leads to improved patient outcomes and economic savings for payers, which has now been demonstrated in several studies. We have also experienced a significant increase in the utilisation of ALLEVYN Life as a prophylactic measure to help prevent pressure ulcers, driven by the dressing’s unique multi-layer design which gives it superior pressure redistribution properties. Throughout 2014, we have continued to invest in customer insights and the generation of meaningful clinical and health economic evidence to ensure that our ALLEVYN portfolio is in a sustainable, category leading position and delivers to our customers’ expectations. Infection management AWM has two significant technologies in its infection management portfolio, silver (ACTICOAT, DURAFIBER Ag and ALLEVYN Ag) and iodine (IODOSORBà). The iodine-based IODOSORB product has continued to gain interest due to the unique properties of the cadexomer iodine molecule and their impact on biofilms, which have become a well-recognised barrier to healing in wound care. IODOSORB benefits from one of the most comprehensive evidence bases in wound care. WHY THIS KPI IS IMPORTANT We are also experiencing strong interestuse this KPI to track our underlying profit growth and trading profitability. HOW WE PERFORMED Trading profit margin was up 20bps, in ACTICOAT, particularly in post-surgical wounds to prevent the complications associatedline with surgical site infection and in delayed healing chronic wounds.guidance. Other AWM offers a wide range of other wound care products, resulting in Smith & Nephew having one of the most comprehensive ranges of wound care solutions in the industry.1 These products include our film and post-operative dressings, skincare products and gels. IV3000à: AWM’s specialist breathable premium IV dressing, utilising REALTICà film technology and unique patterned adhesive, continues to perform well, particularly driven by emerging markets. In 2014, the IV3000 range benefited from several product upgrades reinforcing its differentiation as a premium offering. Success in the emerging markets has created an opportunity for a mid-tier offering, which will be introduced in 2015. ALLEVYN Life An innovative multi-layered dressing designed for people living their everyday lives. Smith & Nephew Annual report 2014            31 STRATEGIC REPORT Segment performance:Advanced Wound Managementcontinued 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 VERSAJETà. NPWT Our NPWT solutions include traditional NPWT products (RENASYS products) and the single-use portfolio (PICO and KALYPTOà 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 SANTYLà 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. REGRANEXà 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. 32Smith & Nephew Annual report 2014 OASISà, a family of naturally-derived, extracellular matrix replacement products indicated for the management of both chronic and traumatic wounds completes Smith & Nephew’s bioactive portfolio. In October 2014, we announced the top-line results of the Phase 3 study of HP802-247, a living cell spray-on therapy designed to stimulate healing of venous leg ulcers. HP802-247 did not meet the primary endpoint in this trial and we have taken the decision to stop the Phase 3 programme. We remain committed to investing in developing pioneering Advanced Wound Bioactive treatments. Regulatory approvals In 2014, regulatory clearance was obtained for both ALLEVYN Life and DURAFIBER in Japan making the latest absorbent dressing technologies available to this important market. PICO, our single use NPWT system was approved for the first time in Japan. In addition, a significant enhancement to the PICO product, in the form of the new Soft Port dressing and tubing set, was approved in the EU and Australia. Other registration activities during the year include expanding the geographic footprint of established products within the emerging markets and the ongoing expansion of Smith & Nephew Medical (Suzhou) as a new supply site for multiple wound care products. Smith & Nephew Annual report 2014            33 STRATEGIC REPORT Financial review and principal risks The Group finished 2014 set to benefit from the actions and investments we have made 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 execution of disposals. 2 Explanation of these non-GAAPnon-IFRS financial measures are providedexplained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 176 to 179. 34Smith & Nephew Annual report 2014 178–181.   Revenue by market Based on the preliminary work undertaken when I took over as CFO, we undertook a thorough review of our business over the last few months. Our objective was to look afresh at opportunities to strengthen our competitive position and be more efficient. We have now substantially completed this analysis and begun executing our programmes…” The underlying increase in each division’s revenues, by market, reconciles to reported growth, the most directly comparable financial measure calculated in accordance with IFRS, as follows:       2014       $ million           2013 $ million                 Reported growth in revenue %                       Constant currency exchange effect %                        Acquisition/ Disposal effect %                     Underlying growth in revenue %             Advanced Surgical Devices US   1,558      1,391      12      –      (10 )    2    Other Established Markets   1,229      1,204        2      2      (4 )    –    Established Markets   2,787      2,595      7      1      (7 )    1    Emerging & International Markets   511      420        22      3      (8 )    17    Advanced Surgical Devices   3,298      3,015        9      1      (7 )    3                                                                 Advanced Wound Management US   454      471      (4 )    –      –      (4 )  Other Established Markets   699      722        (3 )    (1 )    –      (2 )  Established Markets   1,153      1,193      (3 )    –      –      (3 )  Emerging & International Markets   166      143        16      3      (5 )    14    Advanced Wound Management   1,319      1,336        (1 )    1      (1 )    (1 )  Advanced Surgical Devices Revenue ASD revenue increased by $283 million (9% on a reported basis) from $3,015 million in 2013 to $3,298 million in 2014. The underlying increase of 3% is after adjusting for a 7% impact from the acquisition of ArthroCare Corp in May 2014 and a 1% unfavourable foreign currency translation. In the US, revenue increased by $167 million to $1,558 million in 2014 from $1,391 million in 2013 (12% on a reported basis). The underlying increase of 2% is after adjusting 10% for the impact of the ArthroCare Corp acquisition in May 2014. In Other Established Markets, revenue was $1,229 million in 2014, an increase of $25 million from $1,204 million in 2013 (2% on a reported basis). The underlying increase was flat after adjusting for 2% from favourable foreign currency translation and the impact of 4% from acquisitions. Our Emerging & International Markets revenue increased by $91 million to $511 million in 2014 from $420 million in 2013 (22% increase on a reported basis). The underlying increase was 17% after adjusting for 3% for unfavourable foreign currency translation and the impact of 8% from acquisitions. In the global Knee Implant franchise, revenue increased by $8 million from $865 million in 2013 to $873 million in 2014 (1% on a reported basis), representing a 2% underlying revenue increase after 1% of unfavourable currency translation. Growth has been impacted by exposure to a weakening European market with conditions continuing to deteriorate in Germany, our largest European market, and our position in the product life cycle versus our peers. Growth improved driven by sales of the JOURNEY II BCS Knee System. Global revenue from the Hip Implant franchise increased by $1 million from $653 million in 2013 to $654 million in 2014 (flat on a reported basis), which represented an underlying revenue increase of 1% after 1% unfavourable foreign currency translation. Sales in our VERILAST Hip and direct anterior approach portfolio contributed to the increase. Trauma & Extremities revenue increased by $20 million from $486 million in 2013 to $506 million in 2014 (4% on a reported basis), representing underlying revenue growth of 4% after adjusting for a 1% impact from the acquisition of a Brazilian distributor and 1% of unfavourable foreign currency translation. Sports Medicine Joint Repair revenue increased by $80 million from $496 million in 2013 to $576 million in 2014 (16% on reported basis), representing underlying revenue growth of 8% after adjusting for a 8% impact from the acquisition of ArthroCare Corp, 1% from the acquisition of a Brazilian distributor and 1% of unfavourable foreign currency translation. Global revenue from Arthroscopic Enabling technologies increased by $101 million from $441 million in 2013 to $542 million in 2014 (23% on a reported basis). This increase represents an underlying revenue increase of 1% after adjusting for the 22% impact from the acquisition of ArthroCare Corp, 1% from the acquisition of a Brazilian distributor and 1% of unfavourable foreign currency translation. The revenue in the Other ASD (including Gynaecology and ENT) franchise increased by $73 million from $74 million in 2013 to $147 million in 2014 following the acquisition of ArthroCare Corp in 2014. Excluding the impact of this acquisition, underlying revenue in the Other ASD franchise, which includes gynaecology, grew by 10%. Smith & Nephew Annual report 2014            35 STRATEGIC REPORT Financial review and principal riskscontinued 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:                            2014  $ million              2013  $ million                  2014 $ million             2013  $ million                    Operating profit   626       620     Operating profit   123      190       Acquisition-related costs   107       7     Acquisition-related costs   11      24       Restructuring and rationalisation costs   33       44     Restructuring and rationalisation costs   28      14       Amortisation of acquisition intangibles and impairments   78       41     Amortisation of acquisition intangibles and impairments   51      47       Legal and other   (34)      –     Legal and other   32      –                 Trading profit   810       712     Trading profit   245      275                   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 Treatment and prevention products for hard-to-heal wounds RevenueSports Medicine 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 adjustingImplants and enabling technologies 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 introductionminimally invasive repair 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. 36Smith & Nephew Annual report 2014 Product Portfolio Development The medical devices industry has a rapid rate of new product introduction. The Group must be adept at monitoring the landscape for technological advances, have an efficient and valuable product development pipeline and secure protection for its intellectual property. The Group may also seek to acquire businesses as part our business strategy to augment the product portfolio or business scale in a certain geography. 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 receive regulatory approval to successfully commercialise a pipeline product –  Processes focused on identifying new products and potential disruptive technologies (internal and external) –  Improved productivity, prioritisation and allocation of R&D funds –  Increasing R&D investment to enhance clinical capability and invest in biomaterials –  Strengthen intellectual property rights and monitor and defend against infringement –  Global strategic marketing programmes –  Support an Emerging & International Market product portfolio –  Loss of market share, profit and long-term growthjoint     Link to Strategic PriorityFIND MORE ONLINE   To learn more about Smith & Nephew, to register to receive our news, or to explore opportunities to join us, Innovate for valueplease visit www.smith-nephew.com   Established Markets Emerging & International Markets Supplement organic growth through acquisitions Acquisitions and Business Development The Group may seek to acquire businesses or products as part of our strategy to augment the product portfolio or generate business scale in certain geographies. These acquisitions must deliver the expected returns and not create significant liability exposures or the Group may not meet its financial targets. Specific risks we may face Risk management actions Possible impacts –  Ineffective acquisition due diligence –  Inflated forecasts or projections may cause over-valuation of transaction –  Lack of timely adoption of Group standards policies and financial controls during integration could create additional liabilities –  Acquisitions in emerging markets may identify practices that must be ceased to meet Group standards –  Strong resources and processes to ensure rigorous review and integration of acquisitions or product related investments –  Mergers & Acquisitions Council consisting of senior executives that reviews acquisitions and business development transactions –  Board of Directors review of all significant transactions –  Detailed compliance due diligence and integration reporting processes –  Robust Internal Audit and Group Finance Controls –  Post acquisition review programme –  Loss of market share, profit and long-term growth Link to Strategic Priority Emerging & International Markets Supplement organic growth through acquisitions Established Markets Smith & Nephew Annual report 2014            37 STRATEGIC REPORT Financial review and principal riskscontinued From our beginnings as a small family pharmacy in Hull, England, we have grown in size and scope. Over the past six years, we have fundamentally changed the structure of our Company, creating greater alignment and presenting one face to our customers. We have brought pioneering products and technologies to market, such as JOURNEY II and PICO, and have successfully completed many significant acquisitions, widening our customer base around the world. We are proud of the work we do and share a mission to support healthcare professionals in their daily efforts to improve the lives of their patients. We achieve this by working together to deliver our strategic priorities. Every employee has a role in our success, and so it is crucial that all employees feel engaged in their work and know its importance. We start each year by setting clear and measurable objectives based on our strategy scorecard. The personal objectives of the Chief Executive Officer are cascaded through the organisation, with each employee setting aligned objectives according to his or her role. Through this process, each employee can clearly see how their efforts contribute to the overall success of the business, which drives execution, accountability and engagement. This engagement is measured through a biennial Global Employee Survey using the Great Place to Work Trust Index. In 2017, 88% of our global employees participated in this survey, providing meaningful results that have driven actions for improvement. We track our progress against these actions using regular pulse surveys. In 2017 we raised our overall Trust Index score by five percentage points, to 67%, meeting our target for improvement. We achieved Great Place to Work recognition in a further five countries, ahead of our target of two more. In total we have received recognition in nine countries. In addition to the Trust Index, we have implemented a culture dashboard which includes key metrics such as employee retention, business performance and feedback from new hires. The foundation of this dashboard is our values: to Perform, Innovate and Earn Trust. It provides a clear framework for our senior leaders to track progress and identify areas for additional focus, action or reinforcement. 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 2      OVERVIEW SMITH & NEPHEW ANNUAL REPORT 2017 CHAIRMAN’S STATEMENT  PROVIDING LEADERSHIP  The Board approaches 2018 with optimism. Olivier has built a strong foundation and we expect to attract someone of the highest calibre to accelerate business performance from this base. DEAR SHAREHOLDER One of the core duties of a Board is to Strategic Priorityensure that companies evolve to meet the ever changing challenges and opportunities they face. A Board must set the pace in this, refreshing and strengthening its membership with deeper expertise, new perspectives and greater diversity. Since becoming Chairman in 2014 I am pleased with the evolutionary changes we have made at Smith & Nephew. I believe these build on the successes of the past and position the Company well for further progress. STRENGTHENING THE BOARD We have been able to attract new Non-Executive Directors of high calibre to replace Board members retiring after completing their service. Angie Risley, who joined in September 2017, is currently Group HR Director of J Sainsbury plc and was previously Non-Executive Director of Arriva plc, Biffa plc and Serco plc where she was also chairman of the Remuneration Committee. Marc Owen, recently retired from the Executive Committee of Fortune 500 healthcare business McKesson Corp, where he was Chairman of Celesio AG and President of McKesson Speciality Health, and previously a healthcare and technology specialist at McKinsey, joined in October 2017. Roland Diggelmann, Chief Executive Officer at Roche Diagnostics and a member of the Corporate Executive Committee of F. Hoffmann-La Roche Ltd, and previously a senior executive at Zimmer GmbH, will join on 1 March 2018. Marc and Roland strengthen the Board’s knowledge of commercial healthcare and the medical devices sector while Angie will provide effective leadership to our Remuneration Committee when Joe Papa steps down at the AGM in April. Joe has been a highly valued colleague and exemplary steward of Smith & Nephew. On behalf of the whole Board, I thank him for his service. CHIEF EXECUTIVE OFFICER In October Olivier Bohuon notified the Board of his intention to retire by the end of 2018, after seven years as Chief Executive Officer. Under Olivier’s leadership Smith & Nephew has undergone important and necessary change and he has significantly strengthened the foundations of our Company. As Smith & Nephew enters its next chapter, the Board is determined to build on this. SMITH & NEPHEW ANNUAL REPORT 2017 OVERVIEW      3 Olivier continues to lead Smith & Nephew and drive the Company’s growth initiatives and operating plans. In this he is supported by our new Chief Financial Officer, Graham Baker, who joined in March 2017. The Board has been impressed with Graham’s strong start as he quickly developed his understanding of the business and we welcome his commercial acumen and attention to detail. Our views of Graham have been echoed by the positive shareholder feedback we have received. GOVERNANCE AND CULTURE In 2017 the Board invested significant time meeting local management and employees and understanding market dynamics. These  included visiting our offices in Dubai, Tokyo and Hull, as well as some Board members spending time with our salesforce to better appreciate their role and meeting customers. In addition to giving us commercial insight, such activities let us get anecdotal evidence of the culture at Smith & Nephew, something the Board puts great value on. We strive to set the tone from the top, and review data to demonstrate performance, but it is only by meeting employees from all levels of the Company that we can be certain that Smith & Nephew’s values of I perform, I innovate and I earn trust are being lived across the business. We conducted our regular review of strategy and Group structure at our annual strategy meeting in October, ensuring the continued close alignment of Board and management on our expectations and current direction. We upgraded our Risk Management process and strengthened our internal team in this area. Our Senior Independent Director, Ian Barlow, conducted a Board Effectiveness Review which identified some areas of further improvement which we are focusing on, such as deepening our knowledge of the competitive landscape to enable us to better support management develop and deploy resources to win in our chosen markets. I encourage you to read more about these and other matters in our Governance section starting on page 50. 2017 PERFORMANCE The Board receives regular updates on the performance of the business from the CEO and CFO, together with members of the senior management team attending Board meetings over the course of the year. We could clearly see areas of the business where the Company excelled in 2017, such as Global Operations where we have improved quality and supply, and R&D, where we have an exciting new product pipeline. It is no coincidence that both of these areas of the business have effective leaders who impressed the Board during 2017. Whilst the trading performance of the Group was better than in 2016, and we delivered within our guidance, we continue to endorse the Chief Executive’s view that this business can and should deliver better results and reinforce the need for continued focus on driving better execution. The 2017 full year dividend of 35.0¢ per share reflects the strong growth in adjusted earnings per share. The Board approaches 2018 with optimism. Olivier has built a strong foundation and we expect to attract someone of the highest calibre to accelerate business performance from this base. Thank you for your support and engagement in 2017 and the Board looks forward to serving you into an exciting next chapter for Smith & Nephew. Yours sincerely, Roberto Quarta Chairman                       FINANCIAL HIGHLIGHTS             $4,765m +2% +3%   35.0¢ +14%     Revenue Reported Underlying1   Dividend per share     Group revenue was up 2% on a reported basis (including -1% headwind from the 2016 Gynaecology business disposal) and 3% on an underlying basis, in line with guidance.   The 14% year-on-year increase reflects the strong growth in adjusted earnings per share.     $934m +17%    $1,048m +3%    87.8¢ 0%     Operating profit   Trading profit1   Earnings per share (EPS)     Operating profit margin of 19.6% is up 240bps year-on-year due to more favourable non-trading items.   Trading profit margin1 was 22.0%, up 20bps year on year, in line with guidance.   In 2016 EPS benefited from the gain on the disposal of the Gynaecology business.     94.5¢ +14%   14.3% +280bps   5%       Adjusted Earnings per share1 (EPSA)   Return on Invested Capital1 (ROIC)   R&D expenditure     Reflects one-off tax benefits, improvements in trading profit margin and the tax rate on trading1.   Reflects improvements in operating profit, the lower tax rate and a stable asset base.   To drive innovation, we maintain our investment in R&D at around 5% of Group revenue.                 1 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181.      FINANCIAL REVIEW PAGE 36 OUR BOARD OF DIRECTORS PAGE 50 GOVERNANCE PAGE  56 4      OVERVIEW SMITH & NEPHEW ANNUAL REPORT 2017 CHIEF EXECUTIVE OFFICER’S REVIEW STRONGER   SMITH & NEPHEW In 2018, I expect Smith & Nephew to build on 2017 by delivering another year of improved performance driven by our strong product portfolio and pipeline of innovative products. DEAR SHAREHOLDER We delivered on our promises to improve the top and bottom line in 2017. Our healthy balance sheet, good cash generation and increased dividend demonstrate the robust foundations underpinning our business. In 2018, I expect Smith & Nephew to build on 2017 by delivering another year of improved performance driven by our strong product portfolio and pipeline of innovative products. STRATEGIC PRIORITIES In my first year as Chief Executive, in 2011, we set five strategic priorities that have shaped a fundamental management and operational restructuring of the Group as a foundation to improving its growth and profit profile. Through these priorities we continue to drive our business forward. In 2017 I was pleased with the resultant commercial performance in many areas. In Knee Implants we had an outstanding year, Trauma and Extremities and Advanced Wound Devices also, and we returned the Emerging Markets to double-digit revenue growth. Of course, there are some areas that did not meet my expectations, such as in Arthroscopic Enabling Technologies and European Wound Care. These are not because of new issues, but they are taking longer to improve than expected. We are attacking the underlying issues with renewed vigour in 2018. You can read more about our performance against each of the strategic priorities in the next few pages (pages 10–15). I would like to draw your attention to how our strong new product portfolio reflects our decision of a few years ago to increase our investment in disruptive R&D and technology acquisitions. SMITH & NEPHEW ANNUAL REPORT 2017 OVERVIEW      5 One of our best recent achievements was to create a global R&D organisation that became fully operational in 2017 and is building on these successes. We now have greater visibility across our development portfolio to ensure we back the winners of the future in areas such as digital, robotics and biologics. We are making better decisions and hitting milestones consistently, and this will underpin our success for many years to come. ACCELERATING PERFORMANCE & INNOVATION As we have transformed Smith & Nephew, so our markets and industry have changed. We are seeing an increasingly competitive environment: new selling models, new entrants, pricing pressure and increasing costs – which in some markets are outpacing our growth. We also see great opportunity to invest behind pioneering technologies which take market share, offer a wider selection of commercial terms to suit more customers, expand our reach in the emerging markets and start to realise the benefits of the digital revolution for our industry. In late 2017 we undertook a review of our business to look for opportunities to achieve higher growth targets, strengthen our competitive position, and make us more agile to changes in the market. As a result, in early 2018 we introduced the APEX programme, which stands for ‘Accelerating Performance and Execution’. APEX will make key enhancements to our business and ways of working over the next five years. We expect this programme to deliver $160 million of annualised benefits by 2022. APEX is now possible because of the work put in to create our strong Group structure, and it will build on this robust base. More information on APEX can be found on page 14. BUILDING A WINNING CULTURE Our success as a Company is made possible by talented employees working together for our shared mission: to support healthcare professionals in their efforts to improve patients’ lives. This is why being a great place to work is important to us, and why every two years we measure our progress toward this goal with our Global Employee Survey. Our survey tool is the Great Place to Work Institute’s Trust Index, and in 2017 we performed strongly across the dimensions of vision, recognition, pride and equality. We now have nine countries accredited as a Great Place to Work. We put great store by our culture, and work to embrace diversity, encourage progression, and reward success. We also want our employees to put something back into their communities. Our People section on pages 25–28 describes our commitments and actions across all of these areas. LOOKING TO THE FUTURE In October 2017 I announced my decision to retire from Smith & Nephew by the end of 2018. As I looked ahead to the next long-term phase of growth, I decided that it was the right time to announce my retirement plans, providing ample time to identify a successor and ensure a smooth transition. In the meantime, I remain resolutely focused on delivering our commitments for 2018, while positioning the Company for further success. Looking further ahead, our greater focus on commercial execution gives us confidence we will outgrow our markets and the new APEX programme supports our expectation of improved trading profit margin. Yours sincerely, Olivier Bohuon Chief Executive Officer OUR STRATEGIC PRIORITIES Our strategic priorities guide our actions to support healthcare professionals and transform our growth profile. BUILD A STRONG POSITION IN ESTABLISHED MARKETS FOCUS ON EMERGING MARKETS INNOVATE FOR VALUE   SIMPLIFY AND IMPROVE OUR OPERATING MODEL   SUPPLEMENT ORGANIC GROWTH WITH ACQUISITIONS   STRATEGIC PRIORITIES UPDATE PAGE 10 OUR PEOPLE PAGE 25 6      OVERVIEW SMITH & NEPHEW ANNUAL REPORT 2017 WHO WE ARE ONE GLOBAL BUSINESS WITH MORE THAN 15,000 EMPLOYEES OUR VALUES AND HOW WE ACT Our values shape everything that we do as a business and form the basis of our relationships with all our stakeholders. Performance Innovation Trust Performance means being responsive to the needs of our customers and their patients, setting ourselves clear goals and standards and achieving them. Innovation means being energetic, creative and passionate about everything we do, anticipating customers’ needs and overcoming barriers and developing opportunities. Trust is something we understand that we have to earn and we strive to operate with integrity and take an ethical approach to business.                                 AN INTEGRATED BUSINESS                                  UNITED STATES (US)       OTHER ESTABLISHED MARKETS       EMERGING MARKETS                                    The United States is the Group’s largest market representing 48% of our global revenue. Due to its commercial importance to the Group, its revenue is reported separately. The United States is also home to a number of our manufacturing facilities.       Other Established Markets comprise commercial operations in Europe, Australia, Japan, Canada, and New Zealand, We have manufacturing facilities in the UK, Germany and Switzerland.       Emerging Markets include our commercial businesses in China, Asia, India, Russia, Middle East, Africa and Latin America. These generated 16% of Group revenue in 2017. We have manufacturing facilities in China, Costa Rica, India, Russia and Curacao.         2017 revenue       2017 revenue       2017 revenue         $2,306m       $1,678m       $781m         0% +2%       0% 0%       +13% +12%         Reported Underlaying1       Reported Underlaying1       Reported Underlaying1                                           ORTHOPAEDIC RECONSTRUCTION AND TRAUMA                                                   SPORTS MEDICINE                                                   ADVANCED WOUND MANAGEMENT                                                   GLOBAL FUNCTIONS2                                                                   1    These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181.       2    Commercial Excellence including Global Marketing, R&D, Manufacturing & Supply Chain, Central Support.   SMITH & NEPHEW ANNUAL REPORT 2017 OVERVIEW      7 SELLING NINE PRODUCT FRANCHISES KNEE IMPLANTS SPORTS MEDICINE JOINT REPAIR ADVANCED WOUND CARE HIP IMPLANTS ARTHROSCOPIC ENABLING TECHNOLOGIES ADVANCED WOUND BIOACTIVES TRAUMA & EXTREMITIES OTHER SURGICAL BUSINESSES ADVANCED WOUND DEVICES SUPPORTING HEALTHCARE PROFESSIONALS IN MORE THAN 100 COUNTRIES Revenue by products Revenue by geography A KNEE IMPLANTS $984m A UNITED STATES $2,306m B HIP IMPLANTS $599m B OTHER ESTABLISHED MARKETS $1,678m C TRAUMA & EXTREMITIES $495m C EMERGING MARKETS $781m D SPORTS MEDICINE JOINT REPAIR $627m E ARTHROSCOPIC ENABLING TECHNOLOGIES $615m F OTHER SURGICAL BUSINESSES $189m G ADVANCED WOUND CARE $720m H ADVANCED WOUND BIOACTIVES $342m I ADVANCED WOUND DEVICES $194m 8      OUR BUSINESS & MARKETPLACE SMITH & NEPHEW ANNUAL REPORT 2017 OUR BUSINESS MODEL HOW WE CREATE VALUE THE RESOURCES WE NEED OUR PEOPLE Engaging, developing and retaining our more than 15,000 employees is important to us and we work hard to be a great place to work as well as a responsible corporate citizen. RESEARCH & DEVELOPMENT Innovation is part of our culture and we invest 5% of our revenue to develop new products that will help improve patients’ lives. MANUFACTURING & QUALITY We operate our global manufacturing efficiently, and at the highest possible standards, to ensure product quality at competitive pricing. SALES & MARKETING We support our customers in over 100 countries. Our commercial teams are highly specialised with an in-depth knowledge across the full range of product franchises. ETHICS & COMPLIANCE We are committed to doing business the right way and apply strict business principles to the way we deal with our customers and partners. TRAINING & EDUCATION Every year, thousands of healthcare professionals attend our training courses around the world. Education is fundamental to how we support our customers.     THE RESOURCES WE NEED PAGE 25  A FOCUS ON   PERFORMANCE  OUR VALUE PROPOSITION Our mission is to support healthcare professionals by providing advanced medical devices that they use in their daily efforts to improve the lives of their patients. PIONEERING APPROACH We take a pioneering approach to the design of our products and services. Smith & Nephew has a long history of innovation, dating back to our foundations in the 19th century, and today we support customers to manage and prevent disease states, and enable swifter recovery for their patients. ENSURING WIDER ACCESS We strive to secure wider access to our advanced technologies for more customers globally. In emerging markets we have built an entrepreneurial business resourced to reach and support an ever greater number of customers in delivering affordable healthcare. ENABLING BETTER OUTCOMES We seek to enable better outcomes for patients and healthcare systems, providing high quality products and appropriate training to improve clinical outcomes, enabling healthcare professionals to treat more patients and improving the economic outcome for payers. SMITH & NEPHEW ANNUAL REPORT 2017 OUR BUSINESS & MARKETPLACE      9  CREATING   PRODUCTS   FOR OUR   CUSTOMERS   We have leadership positions in Orthopaedic Reconstruction and Trauma, Advanced Wound Management and Sports Medicine: We service our customers through our dedicated and highly trained global sales force and selected third party sellers: –  Knee Implants – Surgeons –  Hip Implants – Nurses – Trauma & Extremities – Nurse specialists – Sports Medicine Joint Repair – Physicians, GPs – Arthroscopic Enabling Technologies – Healthcare systems – Other Surgical Businesses – Procurement groups – Advanced Wound Care – Payers, administrators – Advanced Wound Bioactives – Retail, consumers, patients –  Advanced Wound Devices  OUR PRODUCTS PAGE 18 THE OUTPUT OF WHAT WE DO FINANCIAL PERFORMANCE Targeting higher revenue growth and a better trading profit margin. $4,765m Revenue $934m $1,048m Operating Profit Trading Profit1 CAPITAL ALLOCATION FRAMEWORK Prioritising the use of cash and ensuring an appropriate capital structure. $269m Dividend IMPROVED QUALITY OF PATIENTS’ LIVES Providing our advanced medical devices in more than 100 countries. 100+ countries TRAINING AND EDUCATION Supporting HCPs and ensuring the safe and effective use of our products. 45,000+ surgeon training instances GREAT PLACE TO WORK Supporting and encouraging employees to live our values. 15,000+ employees A SUSTAINABLE BUSINESS Working in a sustainable, ethical and responsible manner everywhere we operate. 160+ years of proud history 1   These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181. 10      OUR BUSINESS & MARKETPLACE SMITH & NEPHEW ANNUAL REPORT 2017 STRATEGIC PRIORITIES MAXIMISING OUR PERFORMANCE Smith & Nephew has a clear vision to build a successful, sustainable business. This vision is encapsulated in our corporate value proposition – supporting healthcare professionals by taking a pioneering approach to the design of our advanced medical products and services, by securing wider access to our diverse technologies for more customers globally, and by enabling better outcomes for patients and healthcare systems. We are focused on transforming the growth profile of the business while delivering this proposition. We are working to rebalance the Group towards higher growth opportunities. Over the last five years, Smith & Nephew has materially improved the mix of higher growth potential to lower growth businesses, shifting from one-third higher growth to over 50% today. Our strategic priorities, introduced in 2011, guide our actions in delivering these twin aspirations of supporting healthcare professionals and transforming our growth profile. OUR STRATEGIC PRIORITIES         Simplify    BUILD A STRONG POSITION IN ESTABLISHED MARKETS Build on existing strong positions, win market share through greater product and commercial innovation and drive efficiencies to liberate resources.  SEE OPPOSITE     FOCUS ON EMERGING MARKETS Deliver leadership in the Emerging Markets by building strong, direct customer relationships, widening access to our premium products and developing portfolios designed for the economic mid-tier population.  PAGE 12     INNOVATE FOR VALUE Deliver pioneering products and business models that improve clinical and health economic outcomes and widen access across geographies and patient groups.  PAGE 13     SIMPLIFY AND IMPROVE OUR OPERATING MODEL Pursue maximum efficiency in everything we do, streamline our operations and manufacturing, remove duplication and build strong global functions to support our commercial teams.  PAGE 14     SUPPLEMENT ORGANIC GROWTH WITH ACQUISITIONS Build our platform by acquiring complementary products or businesses in our higher growth segments and manufacturing and distribution capabilities in the Emerging Markets.  PAGE 15 SMITH & NEPHEW ANNUAL REPORT 2017 OUR BUSINESS & MARKETPLACE      11 BUILD A STRONG POSITION IN ESTABLISHED MARKETS Established Markets for Smith & Nephew are the US, Europe, Australia, Japan, Canada and New Zealand. Smith & Nephew delivered 84% of its revenue from these countries in 2017. In the United States, our single largest country representing 48% of global revenue, reported revenue growth was flat and underlying growth was 2%. The Other Established Markets growth rate was flat on both an underlying and reported basis. In 2017 we focused on improving our commercial execution. With a simpler and more agile commercial structure in each country, supported by global functions, we sought to drive improved performance and greater efficiency. This was supported by sales force excellence initiatives including a sharper focus on both health economic and clinical evidence to support our products. In Reconstruction, the Knee Implants franchise performed well, with the JOURNEY™ II Total Knee System driving good growth, as did the LEGION™ Revision Knee System. In Hip Implants, the new REDAPT™ Revision and POLARSTEM™ Cementless Stem systems were well received. In Trauma & Extremities, new clinical evidence supported increased uptake of our TRIGEN™ INTERTAN™ hip fracture system. Sports Medicine Joint Repair performance was driven by good demand for our shoulder repair portfolio, and we added an exciting new technology when we acquired Rotation Medical (see page 15 for more). Arthroscopic Enabling Technologies was impacted by continued softness in mechanical resection. The roll-out of our LENS™ visualisation and WEREWOLF™ COBLATION™ systems are underway and we expect an increasing contribution from these in 2018. In the US, and other countries, we are seeing a shift towards day-case surgery for total joints starting to take place in Ambulatory Surgery Centre (ASCs), something Smith & Nephew is uniquely positioned to benefit from. Through Sports Medicine we are already a partner to many ASCs. We believe we can leverage this customer knowledge and relationships to improve the performance of our knee implants franchise. Our portfolio is well-suited for ASCs where early mobility and efficiency are key, as is our robotic NAVIOTM Surgical System due to its small footprint, portability and cost. The Advanced Wound Care franchise delivered strong growth in the US, but was held back by softer market conditions in Europe. In Advanced Wound Bioactives, SANTYL™ benefited from a new analysis demonstrating its effectiveness in advancing pressure ulcers through the healing process2, improving performance in the second half of the year. Advanced Wound Devices performed strongly across the year, led by the continued success of our operating modelsingle use negative pressure wound therapy (sNPWT) device PICO™. $3,984m Revenue from Established Markets 84% of Group revenue 0% +1% Reported Underlying1 WHY THIS KPI IS IMPORTANT We use this KPI to track the relative strength of our position in these markets. HOW WE PERFORMED Growth in the US, our largest market, was offset somewhat by softer conditions in some other markets. 1 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 38 and 178–181. 2 Advances in Wound Care. Gilligan, A.M., et al. Comparative effectiveness of Clostridial Collagenase Ointment to medicinal honey for treatment of pressure ulcers. Volume 6, Number 4 (April 2017). SUPPORTING CUSTOMERS AT THE ECC “It’s very humbling to know we are helping improve patients’ outcomes.” Natalia Zielinska Bioskills Laboratory Manager Smith & Nephew is proud to support surgeons and nurses by enabling them to learn from experts in their field of speciality. We do this at our state-of-the art training and innovation centres. In early 2017 we opened the Expert Connect Centre (‘ECC’) in Croxley Park, Watford, on the outskirts of London, UK. This is already establishing itself as a flagship destination for healthcare professionals from the UK, Europe and the Emerging Markets. 12      OUR BUSINESS & MARKETPLACE SMITH & NEPHEW ANNUAL REPORT 2017 FOCUS ON EMERGING MARKETS Our Emerging Markets represent those outside the Established Markets, including Brazil, Russia, India and China. The Emerging Markets accounted for 16% of Smith & Nephew’s revenue in 2017. In 2017 we returned our Emerging Markets business to sustainable double-digit revenue growth, up 13% on a reported basis and 12% on an underlying basis. This was a significant improvement over the flat underlying performance of 2016. In China, our largest Emerging Markets country, we delivered double-digit revenue growth as we improved our commercial execution. In the oil-dependent Gulf States we returned to growth by focusing on securing more private healthcare business to compensate for the reduction in government tenders. The majority of our other Emerging Markets continued to do well across 2017. We have been early investors in many of the Emerging Markets. There continue to be quarterly fluctuations in the growth rates, and differences in performance between countries, so we look at the longer term trends when making decisions, and those are very favourable. We also see the next wave of sustained growth coming from the ‘mid-tier’, essentially growth from widening access to a greater proportion of the population in these countries. We are addressing this by steadily building a dedicated product portfolio and specific distribution model. We are well positioned to continue to drive strong growth from the Emerging Markets over the medium term. The much improved performance in 2017 is in line with where we see the medium term prospects for this increasingly important segment of Smith & Nephew’s business. $781m Revenue from Emerging Markets 16% of Group revenue +13% +12% Reported Underlying1 WHY THIS KPI IS IMPORTANT We use this KPI to track the growth of Emerging Markets relative to global growth. HOW WE PERFORMED Performance in the Emerging Markets improved strongly over the previous year. 1 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 38 and 178 – 181. RETURNING CHINA TO GROWTH “We have seen a return to double-digit growth in the attractive Chinese market.” Olivier Bohuon Chief Executive Officer China is our largest Emerging Market country. Here we faced challenges in 2016 as the market growth slowed down. In 2017 we improved our commercial execution and management of, and involvement in, the channel inventory. Looking to the medium term, we believe that our growth prospects in China remain very attractive. SMITH & NEPHEW ANNUAL REPORT 2017 OUR BUSINESS & MARKETPLACE      13 INNOVATE FOR VALUE In 2017 we began to benefit from a suite of exciting new products, solutions and business models as we deliver on our strategic priority to innovate for value. In robotics, NAVIO is a unique and compelling system. In 2017 we successfully extended its indications and introduced it to new countries such as India. We launched the total knee arthroplasty (TKA) application for our JOURNEY II, LEGION and GENESIS™ II Total Knee Systems. Surgeons completed the world’s first robotics-assisted bi-cruciate retaining total knee replacement procedures. This new approach used NAVIO to implant the new JOURNEY II XR (bi-cruciate retaining total knee system) currently in limited market release. This is the first and only bi-cruciate retaining robotics application commercially available. In the Emerging Markets we continue to build our mid-tier portfolio. Our ANTHEM™ Total Knee System, which, alongside the ORTHOMATCH™ Universal Instrumentation Platform, has been designed to provide wider market access to affordable knee treatments, performed well following its 2016 launch. During the year we launched into more markets, including Russia and Saudi Arabia, and introduced a new Cruciate Retaining (CR) variant, extending the options available to surgeons. In Sports Medicine our new LENS™ Surgical Imaging System and WEREWOLF™ COBLATION™ System for resecting soft tissue are being rolled out to customers. In Reconstruction we expanded our REDAPT™ Hip and LEGION™ Knee revision systems. In Advanced Wound Management our pioneering disposable single-use negative pressure wound therapy (sNPWT) device PICO™ continued to perform strongly and we extended our ALLEVYN LIFE foam dressing range with a new non-border version. We also focus on providing customers with the evidence that demonstrates the effectiveness of our innovative products. In 2017, PICO benefited from new clinical evidence showing its effectiveness at reducing surgical site infections1 and the TRIGEN™ INTERTAN™ hip fracture system also performed strongly supported by new clinical evidence2. We continue to develop new business models to address changing or unmet customer needs. During 2017 we ran the first study of our innovative Episode of Care Assurance Program (eCAP) that combines our hip and knee implants with PICO and ACTICOAT™ Flex 7 Antimicrobial Barrier Dressings. The first results showed eCAP delivering a 97% decrease in hospital readmission rates following total joint replacement surgery (based on 1,380 joint arthroplasties with only two readmissions, a readmission rate of only 0.145% as compared to published rates of 5.3% or more). $223m R&D expenditure 5% of Group revenue WHY THIS KPI IS IMPORTANT Through this KPI we monitor our investment in R&D. HOW WE PERFORMED The strong new product portfolio reflects increased investment in R&D and technology acquisitions. 1  O’Leary, D.P. et al, Prophylactic negative pressure dressing use in closed laparotomy wounds following abdominal operations. A randomised, controlled, open-label trial: The PICO Trial. Annals of Surgery, published online 06 December 2016. 2   Smith & Nephew INTERTAN claims brochure “The evidence is in ...” WORLD-CLASS R&D IN HULL “Britain is a global leader in medical technology innovation. Partnerships such as this between Smith & Nephew and University of Hull further strengthen our position at the forefront of global medical research and development.” Emma Hardy MP for Hull West & Hessle In 2017 we announced a long-term partnership with the University of Hull to create one of the world’s largest Wound Care Research Clusters with the aim of developing scientific insights and innovative treatments. This includes the creation of eight PhD studentships and a programme of collaboration between Smith & Nephew’s new Hull Research & Development centre and the University’s new Health Campus. 14      OUR BUSINESS & MARKETPLACE SMITH & NEPHEW ANNUAL REPORT 2017 SIMPLIFY AND IMPROVE OUR OPERATING MODEL Since 2011 Smith & Nephew has undertaken two successful efficiency programmes that have delivered significant savings and created an integrated Group structure. As announced with our Third Quarter 2017 Results, we believe that we now have the Group structure to allow us to strengthen our competitive position by driving further opportunities to accelerate performance through better execution, while at the same time realising savings through greater efficiency. In 2017 we completed our assessment of these opportunities and started to implement a programme called APEX – Accelerating Performance and Execution in early 2018. APEX is expected to deliver an annualised benefit of $160 million by 2022, with around three-quarters of this expected by 2020, for a cash cost of up to $240 million, of which a charge of around $100 million is expected in 2018. APEX has three workstreams: 1. MANUFACTURING, WAREHOUSING AND DISTRIBUTION We have already made significant improvements over the last two years, and see further opportunities to simplify in line with best practices to reduce overall cost, while improving quality and delivery through: –  A best practice facility footprint with larger manufacturing hubs supported by speciality facilities where appropriate. –  A product portfolio that meets the needs of our customers and complies with regulations, while minimising cost, complexity and inventory. –  A supply chain that is streamlined and efficient so that we are positioned to achieve the highest levels of delivery at benchmark cost. 2. GENERAL AND ADMINISTRATIVE (G&A) EXPENSES We have improved our G&A expense ratio over the last five years, but with our global function structure we are now able to identify additional areas of opportunity to reduce costs and improve service through: –  Best-in-class Global Business Services that includes a full-spectrum of support services delivered quickly and efficiently, enabling full focus on our customers and business objectives. –  Service hubs in locations that align to our regional needs and deliver the best value for money. –  System infrastructure that drives maximum efficiency, including rationalisation of legacy IT systems and adopting a ‘cloud-first’ strategy. 3. COMMERCIAL EFFECTIVENESS Whilst the commercial opportunities and competitive environment continue to evolve with changing customer expectations, new go-to-market approaches and price pressure, we expect to improve overall productivity and accelerate top line growth through: –  Increased sales and marketing effectiveness. –  Selective refinement of structures and territories to meet customer and market demands. –  Being more responsive to customers’ use of tenders and changing service level demands. –  More accurate demand forecasting to improve inventory management. 19.6% Operating Profit Margin 22.0% Trading Profit Margin1 WHY THIS KPI IS IMPORTANT We use this KPI to track our underlying profit growth and trading profitability. HOW WE PERFORMED Trading profit margin was up 20bps, in line with guidance. 1 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181. Based on the preliminary work undertaken when I took over as CFO, we undertook a thorough review of our business over the last few months. Our objective was to look afresh at opportunities to strengthen our competitive position and be more efficient. We have now substantially completed this analysis and begun executing our programmes…” Chief Financial Officer A MORE AGILE STRUCTURE “Based on the preliminary work undertaken when I took over as CFO, we undertook a thorough review of our business over the last few months. Our objective was to look afresh at opportunities to strengthen our competitive position and be more efficient. “We have now substantially completed this analysis and begun executing our programmes…” Graham Baker Chief Financial Officer SMITH & NEPHEW ANNUAL REPORT 2017 OUR BUSINESS & MARKETPLACE      15 SUPPLEMENT ORGANIC GROWTH WITH ACQUISITIONS Whilst our focus in 2017 has been on improving our execution across our existing business, we have made one acquisition and a number of strategic agreements that give us access to new technologies. In 2017 we acquired Rotation Medical, Inc., the developer of a novel tissue regeneration technology for shoulder rotator cuff repair, for an initial cash consideration of $125 million and up to $85 million over the next five years, contingent on financial performance. Its bioinductive implant is highly complementary to our Sports Medicine portfolio, serving an unmet clinical need and providing a compelling new treatment option for our customers2,3,4. We signed distribution agreements with Leaf Healthcare, a developer of a unique wireless patient monitoring system for pressure ulcer/injury prevention, and MolecuLight i:XTM, a handheld point-of-care imaging device that uses fluorescence imaging to display potentially harmful concentrations of bacteria in wounds in real-time. 2017 marked the third anniversary of our largest acquisition, ArthroCare. This strengthened our Sports Medicine business, with highly complementary product portfolios and customer relationships. ArthroCare also had a strong pipeline of innovations, many of which have been launched since the acquisition. The ArthroCare acquisition has met all of the three-year targets that we set, many ahead of time. The Board periodically reviews all acquisitions to evaluate longer-term performance and capture lessons learned to help improve strategy and process. Collectively we are pleased with the performance of the technology and Emerging Markets acquisitions we have made. We continue to seek further opportunities to strengthen our technology and product portfolio and Emerging Markets business. 1    These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181. 2    Preliminary investigation of a biological augmentation of rotator cuff repairs using a collagen implant: a 2‑year MRI follow-up Bokor, Sonnabend, Deady, Cass, Young, Van Kampen, Arnoczky published in Muscles, Ligaments and Tendons Journal 5(3):144‑150 (2015). 3    Histologic Evaluation of Biopsy Specimens Obtained After Rotator Cuff Repair Augmented With a Highly Porous Collagen Implant Arnoczky, D.V.M., Shariff K. Bishai, D.O., M.S., F.A.O.A.O., Brian Schofield, M.D., Scott Sigman, M.D., Brad D. Bushnell, M.D., M.B.A., Jan Pieter Hommen, M.D., and Craig Van Kampen, Ph.D. Arthroscopy: The Journal of Arthroscopic and Related Surgery, 33(2):278‑283 (2016). 4    Evidence of healing of partial-thickness rotator cuff tears following arthroscopic augmentation with a collagen implant: a 2‑year MRI follow-up. Bokor, Sonnabend, Deady, Cass, Young, Van Kampen, Arnoczky. Muscles, Ligaments and Tendons Journal 6(1):16‑25 (2016). ARTHROCARE In 2014 we acquired ArthroCare for $1.5 billion to strengthen our Sports Medicine business through complementary product portfolios and customer relationships. $50m+ of additional sales from cross-selling $85m of total synergies on trading profit1 level WHY THIS KPI IS IMPORTANT We use this KPI to demonstrate the returns from acquisitions. HOW WE PERFORMED ArthroCare has met or exceeded all of the three-year targets, many ahead of time. We achieved both the cost and revenue synergies totalling $85m on a trading profit1 level, and the Return on Invested Capital in year three exceeded our target. STRENGTHENING SPORTS MEDICINE “We are proud of the impact our technology has made in healthcare and are excited by the opportunity to reach many more customers and their patients as an integrated part of Smith & Nephew’s extensive Sports Medicine portfolio.” Martha Shadan Chief Executive Officer, Rotation Medical, Inc. The bioinductive implant from Rotation Medical, Inc. has shown the ability to heal by inducing the growth of new tendon-like tissue2,3,4. With its small sales force, Rotation Medical, Inc. achieved revenue of $17m in 2017. We expect rapid growth as we roll out the product across our large Sports Medicine sales force, first focusing on the US where the product has FDA approval. 16      OUR BUSINESS & MARKETPLACE SMITH & NEPHEW ANNUAL REPORT 2017 OUR MARKETPLACE ATTRACTIVE LONG-TERM TRENDS $34 billion Smith & Nephew’s addressable segment in medical devices1 4% Annual growth rate of Smith & Nephew’s addressable segment1 HEALTHY FUNDAMENTALS, BUT COST REMAINS AN ISSUE According to a study commissioned by the Bill and Melinda Gates Foundation (Lancet, April 2017) global healthcare spend, amounting to c. $9 trillion in 2014, is set to grow at a real rate of c. 3% per annum per capita, reaching c. $16 trillion in 2030 and c. $24 trillion in 2040, representing c. 8% of the global economy. The medical devices and supplies segment of healthcare is today worth approximately $340 billion per annum. Within that, Smith & Nephew’s addressable segment is approximately $34 billion, growing at around 4% annually. The main drivers for healthcare demand include demographic shift towards older populations, increases in lifestyle related ailments such as obesity, advances in technology leading to increased scope for treatment, and economic growth increasing the access and demand for healthcare – especially in the Emerging Markets. Additionally, patients increasingly seek to influence the choice of care as they become more and more informed about the range and nature of treatment options available. Today healthcare expenditure already constitutes a significant share of the overall global economy, especially in developed markets where populations are ageing rapidly. As an example, the share of US GDP spent on healthcare has reached nearly 17% and is set to continue to rise (Lancet, April 2017). As a result, cost and cost control remain the dominant issues across the sector and healthcare systems increasingly shift towards more efficient and effective value-based care. SHIFT TOWARDS VALUE RATHER THAN VOLUME The traditional approach to healthcare provision has been symptom and volume (fee-for-service) oriented which – in combination with current demographic trends – has put upward pressure on healthcare costs. In response, stakeholders are increasingly seeking to shift the focus from ‘break-fix’ to a more holistic and value-based approach focused on disease prevention and treatment results (fee-for-outcome). Healthcare practitioners are no longer the only decision-makers, but are part of larger multi-stakeholder purchasing processes. Economic stakeholders have increasing influence on the purchase process for medical devices. New payment models, such as bundled procedure payments, risk sharing, or quality incentives/penalties, are shifting the focus from clinical utility and safety alone to clinical outcomes and health economic performance, which in turn drives demand for Health Economic and Outcomes Research (HEOR) to demonstrate clinical end economic value. As an example, the US Centers for Medicare & Medicaid Services (CMS) aims by 2018 to spend 50% of its Medicare fee-for-service payments through alternative payment models and link 90% of its fee-for-service to quality (CMS, Jan 2015). FOCUS ON LOWERING COSTS AND INCREASING EFFICIENCY The desire to lower costs and increase efficiency gives rise to several trends including, for example: healthcare providers increasingly seeking to treat patients in outpatient or community settings; the increasing use of digital technologies to ensure that care is as efficient and effective as possible; the acceptance of ‘good enough’ products in some circumstances; and the sector increasingly seeing efforts to cooperate across the value chain. As an example, the UK National Health Service (NHS) is automating data exchange between its institutions and suppliers and has mandated all suppliers to provide pricing information through the Global Data Synchronization Network (GDSN) by October 2018 (NHS, Feb 2016). SMITH & NEPHEW ANNUAL REPORT 2017 OUR BUSINESS & MARKETPLACE      17 GOVERNMENTS, REGULATIONS & COMPLIANCE Governments and other public bodies are key stakeholders in our marketplace. In the US, where healthcare spending is higher as a percentage of GDP than most other countries, politicians and regulators are focused on reducing cost and simplifying the regulatory burden on the industry. Although common ground is hard to find, there is a general consensus that the US healthcare system needs to be restructured. In 2017, the European Union reached agreement on a new set of Medical Device Regulations which entered into force on 25 May 2017. These have a three-year transition period; therefore will fully apply in EU Member States from 26 May 2020. These regulations will impose tougher requirements of market entry and post market surveillance of medical devices. Although healthcare systems are less costly in Europe than in the US, strained government budgets and demographic challenges are driving an increased focus on value-based healthcare and requirements to demonstrate the value of innovation through evidence. Additionally, some uncertainty exists around the UK’s exit from the European Union where the regulatory impact is not yet clear. In China, which in recent years has focused on, and succeeded with, increasing access to healthcare, there is a strong focus on compliance and cost control. In 2017 the country introduced the two invoices system which effectively limits length of the supply chain thus increasing transparency and lowering cost to the end consumer. Also in 2017 Chinese regulators initiated a process to lower prices on medical devices. The initial focus of these efforts is on hip implants, drug-eluting stents and implantable cardioverter-defibrillators (ICDs). The major regulatory agencies for Smith & Nephew’s products include the Food and Drug Administration (FDA) in the USA, the Medicines and Healthcare products Regulatory Agency (MHRA) in the UK, the Ministry of Health, Labour and Welfare in Japan, the China Food and Drug Administration and the Australian Therapeutic Goods Administration. Legislation covering corruption and bribery, such as the UK Bribery Act and the US Foreign Corrupt Practices Act, applies to all our global operations. We, and other companies in the industry, are subject to regular inspections and audits by regulatory agencies and notified bodies, and in some cases remediation activities have required, and will continue to require, significant financial and resource investment. SEASONALITY Orthopaedic reconstruction and sports medicine procedures tend to be higher in the winter months when accidents and sports related injuries are highest. 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 our Advanced Wound Management franchises. In the US, out-of-pocket costs for health insurance plans are tied to medical expenses in a calendar year. As a result, households who have reached their deductible (or out-of-pocket) cap may find that accessing care later in the year comes at a lower cost, which can encourage more of them to try and schedule any required treatments or procedures in the final months of any given year. COMPETITION Across our franchises we have a number of competitors which differ with respect to both product focus, geographic reach and overall scale. Whereas our key surgical competitors are generally larger and more exposed to the US, our key wound competitors are generally not US centric. In Orthopaedic Reconstruction and Trauma we are one of four leading players as we compete against Stryker (US), Zimmer Biomet (US) and Johnson & Johnson (US). In Sports Medicine we hold a leading position behind Arthrex, while also competing against the aforementioned companies. Our Advanced Wound Management business is the second largest in our marketplace. We lead the somewhat fragmented Advanced Wound Care sub-segment alongside Mölnlycke (Sweden). In Advanced Wound Devices we are the primary challenger to US based NWPT incumbent Acelity (US). In Advanced Wound Bioactives our key products lead their respective categories.                                     MARKET SIZE1                   $5.5bn +6%     $8.5bn +5%     $14.5bn +2%     $5.5bn +4% Sports Medicine2     Advanced Wound Management     Hip & Knee Implants (Recon)     Trauma & Extremities             A SMITH & NEPHEW 22%     A SMITH & NEPHEW 15%     A SMITH & NEPHEW 11%     A SMITH & NEPHEW 9% B ARTHREX 32%     B ACELITY 17%     B ZIMMER BIOMET 33%     B DEPUY SYNTHES3 45% C DEPUY (MITEK)3 14%     C MOLNLYCKE 10%     C DEPUY SYNTHES3 21%     C STRYKER 26% D STRYKER 11%     D CONVATEC 7%     D STRYKER 20%     D ZIMMER BIOMET 11% E OTHERS 21%     E OTHERS 51%     E OTHERS 15%     E OTHERS 9% 1   Data used in 2017 estimates generated by Smith & Nephew is based on publicly available sources and internal analysis and represents an indication of market shares and sizes. 2   Representing access, resection and repair products. 3   A division of Johnson & Johnson.     18      OPERATIONAL REVIEW SMITH & NEPHEW ANNUAL REPORT 2017 OUR PRODUCTS THE PRODUCTS WE TAKE TO MARKET Smith & Nephew has nine global product franchises A KNEE IMPLANTS $984m B HIP IMPLANTS $599m C TRAUMA & EXTREMITIES $495m D SPORTS MEDICINE JOINT REPAIR $627m E ARTHROSCOPIC ENABLING TECHNOLOGIES $615m F OTHER SURGICAL BUSINESSES $189m G ADVANCED WOUND CARE $720m H ADVANCED WOUND BIOACTIVES $342m I ADVANCED WOUND DEVICES $194m KNEE IMPLANTS 2017 revenue $984m +6% Reported +5% Underlying1 Smith & Nephew offers an innovative range of products for specialised knee replacement procedures. Knee replacement surgery involves replacing the worn, damaged or diseased portion of a knee with an artificial joint. Every year more than two million patients receive total, partial or revision knee replacements worldwide. Smith & Nephew’s knee systems include the LEGION/GENESIS II Total Knee System, a comprehensive system designed to allow surgeons to address a wide range of knee procedures, and our JOURNEY II family of Active Knees. The anatomical shape of the JOURNEY II is designed to reproduce normal knee kinematics and thereby delivers improved functional outcomes and high patient satisfaction. In 2017 we progressed the limited market release of our JOURNEY II XR, an innovative bi-cruciate retaining knee implant, which is designed to retain the anterior and posterior cruciate ligaments (ACL/PCL) and deliver normal perception of movement and muscle control2. These systems also feature VERILAST™ Technology, our advanced bearing surface. The LEGION Primary Knee with VERILAST Technology has been laboratory-tested to 30 years of simulated wear. While lab testing is not the same as clinical performance, the tests showed significant reduction in wear compared to conventional technologies. Our knee systems utilise our VISIONAIRE™ Patient-Matched Instrumentation, whereby a patient’s MRI and X-Rays are used to create customised cutting guides that allow the surgeon to achieve optimal alignment of the new implant. In 2017 we expanded the geographic scope of the ANTHEM Total Knee System, which, alongside the ORTHOMATCH Universal Instrumentation Platform, has been designed to provide a wider market access to affordable knee treatment. ANTHEM is tailored to meet the anatomical needs of patients from Asia, the Middle East, Africa and Latin America and the ORTHOMATCH instrumentation platform reduces weight, footprint and unnecessary cost without compromising on quality or clinical outcomes. In 2017 we expanded the geographic scope of the system which is now available in many markets including India, South Africa, Mexico, Colombia, Chile, Russia and the Middle East. We began the limited market release of a cruciate retaining version in 2017. In early 2017 we launched the NAVIO Total Knee Arthroplasty (TKA) system, adding to the indications offered on our leading robotics platform. In the fourth quarter, we initiated the limited market release for the NAVIO XR system, which we believe will be a key technology enabler for the JOURNEY II XR knee. The robotics team continues to expand to major geographies such as India, South Africa and Australia. For more information on NAVIO see page 22. In 2017 performance in this franchise was driven by strong demand for the JOURNEY II Total Knee System supported by growth from the LEGION Revision Knee System and ANTHEM Total Knee System. 1    These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181. 2    Moro-Oka, Taka-Aki, Marc Muenchinger, Jean Pierre Canciani, and Scott A Banks. ‘Comparing in Vivo Kinematics of Anterior Cruciate-retaining and Posterior Cruciate-retaining Total Knee Arthroplasty’. Knee Surgery, Sports Traumatology, Arthroscopy 15.1. (2007):93:99 Web. SMITH & NEPHEW ANNUAL REPORT 2017 OPERATIONAL REVIEW      19  RENEWING   ACTIVE LIFESTYLE  Today’s fastest growing segment of knee replacement patients is seeking a return to a more active lifestyle1 Traditional knee replacement options don’t meet the need for higher functionality, improved motion or long-term durability2,3,4,5. Most significantly, these systems fall short in providing a return to a normal pattern of motion meaning less satisfaction for patients. For orthopaedic surgeons seeking treatment solutions beyond traditional knee replacements, JOURNEY II Active Knee Solutions have been engineered to empower patients to return to an active lifestyle. JOURNEY II is a seamless, next generation family of partial and primary knee designs, including a new bi-cruciate retaining JOURNEY II XR. JOURNEY II is intended to restore patients to an unmatched level of function, motion and durability. HIP IMPLANTS 2017 revenue $599m 0% Reported 0% Underlying1 Smith & Nephew’s Hip Implants franchise offers a range of specialist products for reconstruction of the hip joint. This may be necessary due to conditions such as arthritis causing persistent pain and/or as a result of hip fracture. Every year more than two million patients worldwide undergo total, resurfacing and revision hip replacement procedures. For Hip Implants, Smith & Nephew has developed a range of primary hip systems. Core systems include the ANTHOLOGY™ Hip System, SYNERGY™ Hip System, the POLARSTEM Femoral Hip System, the R3 Acetabular System and the POLARCUP™ Dual Mobility Hip System. This diversity exemplifies our commitment to providing surgeons with implant and instrumentation options that meet the specific demands of their patients and preferred surgical approach, most notably the direct anterior or posterolateral approach. We also market the BIRMINGHAM HIP Resurfacing (BHR) System, an important option for surgeons treating suitable patients. Smith & Nephew’s portfolio also includes the REDAPT Revision Femoral System. The need to perform a revision can occur for a variety of reasons including infection, dislocation, or failure of the implants to achieve biologic fixation. REDAPT is designed to turn such complex hip revisions into efficient, reproducible surgeries, allowing surgeons to effectively recreate a patient’s unique functionality, while quickly and easily addressing issues such as poor bone quality. The REDAPT Revision Femoral System comprises a monolithic stem and a Fully Porous Shell. A Fully Porous Acetabular Cup with CONCELOC™ Technology was introduced in 2016. To allow ingrowth, an additive, or 3D printing, manufacturing process is used to produce an entirely porous implant that mimics the structure of cancellous bone. The 3D printing method allows for complex design geometries that would be difficult, expensive or impossible to achieve with traditional manufacturing methods. For example, solid reinforcements can be built directly into the porous structure to provide extra strength in precise locations. In 2017 we introduced a number of REDAPT Augments to be used in conjunction with the fully porous shell which will allow surgeons to treat more difficult acetabular revisions. In 2017 performance in this franchise was better in the second half of the year, driven by new REDAPT Revision and POLARSTEM Cementless Stem systems. 1    These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181. RENEWING ACTIVE LIFESTYLE 1     US Department of Health and Human Services Agency (HHSA) for Healthcare Research and Quality (AHRQ) Knee Replacements Up Dramatically Among Adults 45 to 64 Years Old. AHRQ News and Numbers, November 3, 2011. Agency for Healthcare Research and Quality, Rockville, MD. 2     Phil Noble et al; Does total knee replacement restore normal knee function? 2005; CORR. (431): 157‑65. 3     Huch K, Müller KA, Stürmer T, Brenner H, Puhl W, Günther KP. Sports activities 5 years after total knee or hip arthroplasty: the Ulm Osteoarthritis Study. Ann Rheum Dis. 2005 Dec; 64 (12):1715‑20. 4     Comparing patient outcomes after THA and TKA: is there a difference? Bourne RB, Chesworth B, Davis A, Mahomed N, Charron K. Clin Orthop Relat Res. 2010 Feb; 468(2):542‑6. Epub 2009 Sep 4. 5     Functional comparison of posterior cruciate-retained versus cruciate-sacrificed total knee arthroplasty. Dorr LD, Ochsner JL, Gronley J, Perry J. Clin Orthop Relat Res. 1988 Nov; (236):36. 20      OPERATIONAL REVIEW SMITH & NEPHEW ANNUAL REPORT 2017 TRAUMA & EXTREMITIES 2017 revenue $495m +4% Reported +4% Underlying1 Our Trauma & Extremities franchise supports healthcare professionals by pioneering solutions for surgeons to stabilise severe fractures, correct bone deformities, treat arthritis, and heal soft tissue complications. For Trauma, the principal internal fixation products are the TRIGEN family of intramedullary (IM) nails (TRIGEN META-NAIL System, TRIGEN Humeral Nail System and TRIGEN INTERTAN), EVOS™ Plating System and the PERI-LOC™ Plating System. In 2016 we unveiled new evidence showing that the TRIGEN INTERTAN hip fracture system allows patients to experience lower risk of implant failure and re-operation; faster time to fracture union; and a high return to pre-fracture status2. The EVOS Mini Fragment Plate and Screw System is a dedicated Trauma mini fragment system. This is a stainless steel highly versatile system with a multitude of plate geometries and longer screw lengths than standard mini fragment systems. In 2017, we introduced the EVOS Small Fragment system for lower extremity fractures and general trauma utilisation. This new system features more points of fixation and greater breadth of plate options. EVOS Small takes an evolutionary approach to simplifying and unifying small fragment plating systems. For extremities and limb restoration, we offer the TAYLOR SPATIAL FRAME™ Circular Fixation System as well as a range of plates, screws, arthroscopes, instrumentation, resection and suture anchor products including foot and ankle and hand and wrist specialists. In addition, we introduced INVISIKNOT™, a unique syndesmotic fixation device for the ankle. 2017 saw the global launch of the ATLAS™ Hip Fracture Nail in South Africa and India. It is the first Smith & Nephew nail specifically designed for the Emerging Markets. In 2017 performance in this franchise was driven by growth from our TRIGEN INTERTAN hip fracture system where new clinical evidence continued to support increased uptake. 1     These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181. 2     Smith & Nephew INTERTAN claims brochure “The evidence is in ...” SPORTS MEDICINE JOINT REPAIR 2017 revenue $627m +7% Reported +6% Underlying1 Our 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 the repair of soft tissue injuries and degenerative conditions of the knee, hip and shoulder. Our franchise operates in a large, growing market where unmet clinical needs lend room for procedural and technological innovation. Smith & Nephew is well positioned both to innovate and to reach customers globally. Key products for knee repair include the FAST-FIX™ family of meniscal repair systems, the ENDOBUTTON™ and ULTRABUTTON™ fixed and adjustable loop devices for knee ligament reconstruction, BIOSURE™ interference screws for ligament procedures, and CARGELTM for the repair of articular cartilage.  FIRST AND ONLY  First and only bi-cruciate retaining robotics application 2017 saw the world’s first robotics-assisted bi-cruciate retaining total knee replacement procedures, utilising our NAVIO robotics-assisted surgical system and the JOURNEY II XR bi-cruciate retaining total knee system. The JOURNEY II XR has the potential to deliver the best possible outcome for the surgeon and patient through the preservation of important anatomical structures such as the Anterior Cruciate Ligament (ACL). The NAVIO robotics-assisted surgical system enables accurate tibial implant placement to deliver a more reproducible surgical technique. We are proud to be the only company to offer the unique combination of NAVIO robotics-assistance and the JOURNEY II XR Knee System. SMITH & NEPHEW ANNUAL REPORT 2017 OPERATIONAL REVIEW      21 For shoulder, Smith & Nephew markets a suite of products for Rotator Cuff Repair (RCR), one of the most common sports medicine procedures. These include ULTRATAPE™, a suture that provides greater tendon-to-bone contact when compared to traditional #2 suture and may enhance repair2, FIRSTPASS™ ST, a sterile-packaged retrograde suture passer that eliminates the steps of loading and unloading needles and cartridges; MULTIFIX™ S, an all-PEEK knotless screw-in anchor; and HEALICOIL™, a family of suture anchors featuring open architecture that allows new bone to fill the fenestrations between screw threads. All these products can be used together or in conjunction with other existing products from the Smith & Nephew portfolio in a single procedure, significantly expanding the breadth of our RCR Solutions. In 2017 we acquired Rotation Medical, Inc., the developer of a novel tissue regeneration technology for RCR, for an initial cash consideration of $125 million and up to $85 million over the next five years, contingent on financial performance. The Rotation Medical Rotator Cuff System incorporates a breakthrough technology and technique that balances biomechanics and biology to enhance the body’s natural healing response, helping tendons heal by inducing growth of new tendon-like tissue4,5,6. Rotation Medical is highly complementary to our Sports Medicine portfolio, serving an unmet clinical need and providing a compelling new treatment option for our customers. The Smith & Nephew joint repair portfolio includes two next-generation anchors made of soft, all-suture material – Q-FIX™ and SUTUREFIX™. The Q-FIX All-Suture Anchor is ideal for a variety of arthroscopic shoulder and hip repairs, offering fixation performance superior to commonly used all-suture anchors and traditional anchors7,8. The SUTUREFIX Ultra anchor is an attractive option for procedures in which anatomic space is very limited9 while still delivering high fixation strength10,11,12. Smith & Nephew offers joint repair implants made from REGENESORB™, including versions of the HEALICOIL™ suture anchors for shoulder repair and BIOSURE™ interference screws for knee repair. REGENESORB™ is an advanced biocomposite material shown to be absorbed and completely replaced by bone within 24 months in pre-clinical studies13,14. Smith & Nephew supports specific joint repair procedures for shoulder, knee and hip with a line of instruments, positioners and holders, including SPIDER2™/T-MAX procedure-enabling limb positioning systems and ACUFEX™ Hand Held Instruments. In 2017 performance in this franchise was driven by strong demand for our leading shoulder repair portfolio. ARTHROSCOPIC ENABLING TECHNOLOGY 2017 revenue $615m -3% Reported -3% Underlying1 Our Arthroscopic Enabling Technologies (AET) franchise includes high definition imaging solutions, industry leading energy based and mechanical resection platforms, and fluid management and access portfolios. AET platforms work in concert to facilitate access to various joint spaces, visualise the patient’s anatomy, resect degenerated or damaged tissue and prepare the joint for a soft tissue repair. Products in this franchise are often used in conjunction with products from our Sports Medicine Joint Repair franchise. Key AET products include the LENS™ Integrated visualisation system which provides outstanding image quality and functionality in a simple three-in-one Console (CCU, LED Light Source and Image Management System), Camera Head and iPad application. We also offer the WEREWOLF and QUANTUM™ 2 COBLATION™ controllers and a wide range of high performance COBLATION Technology radio frequency (RF) wands to precisely ablate, resect and coagulate soft tissue and enable haemostasis of blood vessels. The WEREWOLF COBLATION System is the latest innovation in our market-leading COBLATION technology. Featuring an all new controller and designed to support a broad variety of wands, WEREWOLF delivers an unparalleled range of performance capabilities and advanced safety features – WEREWOLF carries broad indications across Sports Medicine. DYONICS™ Shaver blades provide superior resection due to their sharpness and reduce clogging with their debris evacuation capabilities, GoFLO™ and Double® Pump RF fluid management consoles expand the joint space while providing haemostasis and maintaining the saline environment necessary to perform arthroscopic procedures. Within an operating room, our AET products are typically kept together in an arthroscopic tower, often comprising a visualisation or camera system, COBLATION or energy based resection controllers, mechanical resection or blade controllers and fluid management or pump components. Because of the strong link between the arthroscopic tower and consumables, we will showcase our industry leading tower components, such as LENS, COBLATION and DYONICS shaver blades, when selling the broader Sports Medicine portfolio. In 2017 performance in this franchise was impacted by continued softness in mechanical resection and the legacy RF technology during the year. Our new LENS visualisation system and WEREWOLF COBLATION system are growing in share within our portfolio and we expect a gradual improvement in 2018. 1    These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181. 2    Shive, M., MD, et al. BST-CarGel Treatment Maintains Cartilage Repair Superiority over Microfracture at 5 Years in a Multicenter Randomized Controlled Trial. Cartilage 2015; Vol 6(2) 62‑72. 3    Potter L, Moore C. Increased contact area utilizing the ULTRATAPE Suture for rotator cuff repair. Bone&JointScience: Our Innovation in Focus. 2014;4(3):1‑4. Lit no: 02056. 4    Preliminary investigation of a biological augmentation of rotator cuff repairs using a collagen implant: a 2‑year MRI follow-up Bokor, Sonnabend, Deady, Cass, Young, Van Kampen, Arnoczky published in Muscles, Ligaments and Tendons Journal 5(3):144‑150 (2015). 5    Histologic Evaluation of Biopsy Specimens Obtained After Rotator Cuff Repair Augmented With a Highly Porous Collagen Implant Arnoczky, D.V.M., Shariff K. Bishai, D.O., M.S., F.A.O.A.O., Brian Schofield, M.D., Scott Sigman, M.D., Brad D. Bushnell, M.D., M.B.A., Jan Pieter Hommen, M.D., and Craig Van Kampen, Ph.D. Arthroscopy: The Journal of Arthroscopic and Related Surgery, 33(2):278‑283 (2016). 6    Evidence of healing of partial-thickness rotator cuff tears following arthroscopic augmentation with a collagen implant: a 2‑year MRI follow-up. Bokor, Sonnabend, Deady, Cass, Young, Van Kampen, Arnoczky. Muscles, Ligaments and Tendons Journal 6(1):16‑25 (2016). 7    ArthroCare Report #P/N 54231‑01 Rev. A; ArthroCare Report #P/N 49193‑01 Rev. A; ArthroCare Report #P/N 51963‑01 Rev. A. 8    Douglass NP, Behn AW, Safran MR. Cyclic and Load to Failure Properties of All-Suture Anchors in Synthetic Acetabular and Glenoid Cancellous Bone. Arthroscopy (26 January 2017). 9    Smith & Nephew Evaluation Reports 15002113, 15002112, 15002117. 10  Smith & Nephew 2011. Validation REPORT ULTRABRAID II SUTURE – BIOCOMPATIBILITY – 15001076. 11  Smith & Nephew 2013. Competitive Claims REPORT, SutureFix – 15002059. 12  Smith & Nephew 2013. Validation REPORT, Hip Suturefix XL – 15001076. 13  Data on File, Smith & Nephew report 15000897. 14  Results of in vivo simulation have not been shown to quantitatively predict clinical performance. 22      OPERATIONAL REVIEW SMITH & NEPHEW ANNUAL REPORT 2017 OTHER SURGICAL BUSINESSES 2017 revenue $189m -11% Reported2 +7% Underlying1 The Other Surgical Businesses franchise includes our Ear, Nose & Throat (ENT) business and the NAVIO robotic surgical business, acquired at the start of 2016. In ENT we offer surgeons a wide variety of market leading technologies to address some of the most common pathologies in otolaryngology. Our COBLATION technology has been used to remove tonsils and adenoids for over 15 years and is preferred by surgeons and patients for its ability to remove tissue at low temperatures with minimal damage to surrounding tissue. With its ease of use and strong clinical history, COBLATION Technology is also marketed for use in turbinate and laryngeal procedures. Our RAPID RHINO™ Carboxymethylcellulose (CMC) Technology is featured in both dissolvable and removable nasal and sinus dressings and epistaxis treatment products. When mixed with water, CMC forms a cushioning gel that naturally drains from the body after several days and supports healing by maintaining a moist physical environment. The NAVIO Surgical System is a next generation handheld robotics platform designed to aid surgeons with implant alignment, ligament balancing and bone preparation. Furthermore, the NAVIO robotics-assisted system does not require a preoperative image, such as a CT scan. This allows patients to receive the benefits of robotics-assistance without the extra steps, costs and radiation associated with additional preoperative imaging. In 2017 we successfully expanded the NAVIO platform into total knees, which comprise 80% of all knee replacement surgeries globally. The total knee arthroplasty (TKA) application supports Smith & Nephew’s JOURNEY II, LEGION Primary and GENESIS II Total Knee Systems. Also during 2017 surgeons completed the world’s first robotics-assisted bi-cruciate retaining total knee replacement procedures. With this launch, NAVIO now offers both partial and total knee options that include the first and only robotics-assisted bi-cruciate retaining knee procedure, commercially available today. In 2017 performance in this franchise was driven by the Ear, Nose & Throat business and continued demand for our hand-held robotics NAVIO Surgical System including the new Total Knee Application. The decline in reported revenues reflects the impact of the disposal of the Gynaecology business in 2016. ADVANCED WOUND CARE 2017 revenue $720m 0% Reported 0% Underlying1 The Advanced Wound Care (AWC) franchise consists of several groups of brands, including exudate management, infection management and our cornerstone range of products. Exudate management products focus on providing appropriate wound fluid absorption and evaporation properties to promote an optimal wound healing environment. This will reduce the burden a wound has on the patients and help them to get on with their lives and at the same time diminish costs for materials and nursing time. Our key growth brand in this space is ALLEVYN LIFE, an innovative dressing designed to improve the quality of life for patients with chronic wounds, as well as helping healthcare professionals reduce the costs of frequent dressing changes. Further research was published in 2017, with a Randomised Controlled Trial (RCT) showing how the use of ALLEVYN LIFE, when combined with standard care, reduced the rate of pressure ulcers in the sacrum by 71%3. Silver and iodine drive our infection management portfolio. Our silver-based products (ACTICOAT, DURAFIBER™ Ag and ALLEVYN Ag) provide clinicians with a range of solutions to address individual patient needs in managing wound infection. ACTICOAT is well positioned to address the need for highly effective, fast-acting local antimicrobials in the care of serious infection on a wide range of wounds, including surgical incisions and chronic wounds. Our cadexomer iodine based product, IODOSORB™, has a unique mode of action to deliver low level, slow release elemental iodine without cytotoxic effects and effectively eradicates biofilms. A recent expert consensus showed biofilms contribute to the delay in healing of chronic wounds4. Smith & Nephew’s cornerstone range offers a wide selection of wound care products, which means we have one of the most comprehensive ranges of wound care solutions in the industry. These products include our film and post-operative dressings, skincare products and gels. OPSITE�� is one of our most pioneering products and has become the global standard of care in post-operative dressings. IV3000™, a specialist premium dressing for intravenous lines, continues to perform well. PROSHIELD™ & SECURA™ are proven preventative skin care products which help maintain and protect skin integrity. In 2017 performance in this franchise was impacted by softer market conditions in Europe, which offset strong growth in the US. 1   These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181. 2   Reflects reduction in revenue following sale of Gynaecology business in 2016 (2016 Gynaecology revenue: $37m). 3    Forni C., D’Alessandro F., Gallerani P., Genco R., Bolzon A,, Bombino C., Mini S., Rocchegiani L., Notarnicola T., Vitullia A., Amodeo A., Celli G. Effectiveness of Using a New Polyurethane Foam Multi-layer Dressing in the Sacral Area to Prevent the Onset of Pressure Ulcer in the Elderly with Hip Fractures. Poster presented at EPUAP 2017. 4    Schultz G., Bjarnsholt T., James G. A., Leaper D. J., McBain A. J., Malone M., Stoodley P., Swanson T., Tachi M., Wolcott R. D. for the Global Wound Biofilm Expert Panel. Consensus guidelines for the identification and treatment of biofilms in chronic non-healing wounds International Journal of Tissue Repair and Regeneration (in press). SMITH & NEPHEW ANNUAL REPORT 2017 OPERATIONAL REVIEW      23  OWN THE DISEASE  Helping customers get closer to zero... Smith & Nephew supports healthcare professionals in reducing the human and economic cost of wounds through pioneering solutions that improve outcomes and at the same time conserve resources for health systems. Our aim is to help our customers get closer to zero surgical site complications, pressure ulcer incidence, delay in wound healing, diabetic foot amputations, and waste of healthcare. Customer insights have confirmed the need to augment our treatment offering with solutions that support the clinician in making informed decisions and achieving consistency of practice. In 2017 we entered two distribution relationships for innovative products in the Pressure Ulcer Prevention and Infection Management categories – Leaf and MolecuLight i:X – which extended our solutions beyond treatment options. LEAF An estimated 2.5 million pressure ulcers/injuries are treated each year in US acute care facilities alone1, with the cost to treat a single full thickness pressure ulcer/injury as high as $70,0002 and an estimated annual burden of $11 billion3. Proven prevention strategies focus on protecting vulnerable areas, maintaining skin integrity and consistent offloading through patient turning. However, despite the best efforts, maintaining these schedules with a consistent execution is often difficult. In particular, turning regimes for patients at high risk can be difficult to adhere to, going against the latest best practice guidance. The Leaf Patient monitoring system is a patient worn wireless sensor which monitors the patient’s position. The constant processing of the positional data facilitates real time alerts to patient needs and turning schedules. This data can help reduce the incidence of hospital-acquired pressure injuries and help improve operational efficiency as part of a full protocol of care. In an independently conducted RCT4 evaluating optimal patient turning, Leaf induced a 43% relative increase in turning protocol compliance in high-risk patients. Patients treated with Leaf were 73% less likely to develop a pressure injury. MOLECULIGHT i:X Currently wound assessments are made with the naked eye which can lack the accuracy required to most effectively guide clinical decision making.5 Using fluorescence, MolecuLight i:X quickly, safely, and easily visualises potentially harmful bacteria6,7,8 in wounds which may otherwise lack signs or symptoms of infection. It enhances a clinician’s ability to choose the right therapy, at the right time for their patient6,7 and can help to guide wound sampling and debridement6,9,10, monitor wound progression7,8, improve patient engagement5,9 and simplify wound documentation6. Clinical data from wound assessments demonstrates that incorporating the MolecuLight i:X into standard of care facilitated more objective medical decision making and led to up to nine times faster wound healing6 and 54% more accurate swabbing.11 MolecuLight i:X is not yet available in the US. 1    Sen et al. Wound Rep Reg 2009. 17:763‑771. 2    Reddy et al. Preventing Pressure Ulcers: A Systematic Review. JAMA, August 23/30 2006 Vol 296, No 8 (Reprinted). 3    Russo et al. Hospitalizations Related to Pressure Ulcers, 2006. HCUP Statistical Brief #64. December 2008.  Agency for Healthcare Research and Quality, Rockville, MD. http://www.hcup-us.ahrq.gov/reports/statbriefs/sb64.pdf. 4    Pickham D. et al. Effect of a wearable patient sensor on care delivery for preventing pressure injuries in acutely ill adults: A pragmatic randomized clinical trial (LS-HAPI study). International Journal of Nursing Studies 80 (2018) 12–19. 5    Hoeflok J et al. Pilot clinical evaluation of surgical site infections with a novel handheld fluorescence imaging device. Proceedings of the Annual Military Health System Research Symposium (MHSRS); 2014 Aug 18–21; Fort Lauderdale, FL. 6    DaCosta RS et al. Point-of-care autofluorescence imaging for real-time sampling and treatment guidance of bioburden in chronic wounds: first-in-human results. PLoS One. 2015 Mar 19;10(3). 7    MolecuLight Inc. PN 1189 MolecuLight i:X User Manual. 2016. 8    MolecuLight Inc. Case Study 0051 Track Wound Size and Bacterial Presence with the MolecuLight i:X. 2016. 9    Raizman R. Point-of-care fluorescence imaging device guides care and patient education in obese patients with surgical site infections. Presented at: CAWC 2016. Proceedings of the Annual Canadian Association of Wound Care Conference (CAWC); 2016 Nov 3‑6, Niagara Falls, ON. 10  Raizman R. Fluorescence imaging positively predicts bacterial presence and guides wound cleaning and patient education in a series of pilonidal sinus patients. Proceedings of the Annual Wounds UK Conference; 2016 Nov 14‑16; Harrogate, UK. 11  Ottolino-Perry K et al. Improved detection of wound bacteria using fluorescence image guided wound sampling in diabetic foot ulcers. Int Wound J. 2017 Feb 28. doi: 10.1111/iwj.12717. 24      OPERATIONAL REVIEW SMITH & NEPHEW ANNUAL REPORT 2017 ADVANCED WOUND BIOACTIVES 2017 revenue $342m 0% Reported 0% Underlying1 Our Advanced Wound Bioactives (AWB) franchise focuses on the commercialisation of novel, topical biologic and skin substitute products that provide a unique approach to debridement, dermal repair and tissue regeneration. Currently, our AWB portfolio includes Collagenase SANTYL Ointment (the only FDA-approved biologic enzymatic debriding agent for chronic dermal ulcers and severe burns), OASIS® Wound Matrix and Ultra Tri-Layer Matrix (naturally-derived, extracellular matrix replacement products indicated for the management of both chronic and traumatic wounds) and REGRANEX® (becaplermin) Gel 0.01% (an FDA-approved platelet-derived growth factor for the treatment of lower extremity diabetic neuropathic ulcers). Our most significant product by sales is SANTYL Ointment, which plays an integral role in removing necrotic or dead tissue in chronic dermal ulcers (such as pressure ulcers, diabetic ulcers, and venous ulcers) and severely burned patients. SANTYL Ointment is often considered as the reference debridement product, especially in the hospital and nursing home markets. Additionally, in 2017 we continued to see growth in the use of SANTYL Ointment by office-based physicians and have been able to stabilise the nursing home market. We continue to focus on further establishing the value of SANTYL Ointment in treating patients. We are also working to lower overall treatment costs, improve outcomes and patient satisfaction, and further educate physicians, patients, and payers on the critical role that SANTYL Ointment plays in moving patients forward through the healing process. The wound bioactives market growth continues to be impacted by changes in the reimbursement landscape that are driving increases in out-of-pocket expenses for patients and access in general across all sites of care. The US is the largest market and represents the current focus for our AWB franchise. SANTYL Ointment is also available in Canada. OASIS is accessible in a number of other Established MarketsMarkets. In 2017 performance in this franchise reflected SANTYL returning to growth in the second half of the year as it benefited from new analysis of its effectiveness in advancing pressure ulcers through the healing process offset by the reimbursement environment for OASIS which remained a headwind, as expected. ADVANCED WOUND DEVICES 2017 revenue $194m +13% Reported +13% Underlying1 Our Advanced Wound Devices (AWD) franchise is comprised of our Negative Pressure Wound Therapy (NPWT) and surgical debridement businesses. The PICO system, our pioneering single-use, canister-free NPWT solution brings the effectiveness of traditional NPWT in a modern, small portable system2. It is designed for both open wounds such as pressure ulcers and closed incisions and leverages our leading dressing technology. In 2017 the evidence base supporting PICO in our target surgical indications continued to build. A Level 1 meta-analysis containing 10 Randomised Controlled Trials and 1,863 patients demonstrated significant reduction in surgical site infections (58% reduction, p<0.0001), significant reduction in dehiscence (26% reduction, p<0.01) and significant reduction in length of stay (0.47 days reduction, p<0.0001)3. This summation of the evidence demonstrates the positive impact PICO is having on patient outcomes and system costs. For our traditional NPWT system, RENASYS™, evidence was published demonstrating the effectiveness in the treatment of challenging wounds and its compatibility with ACTICOAT, where high bacterial burden is impacting wound progression4. This franchise also includes the VERSAJET™ Hydrosurgery system, a surgical debridement device used by surgeons to excise and evacuate non-viable tissue, bacteria and contaminants from wounds, burns and soft tissue injuries. In 2017 performance in this franchise was led by PICO, which continued to perform strongly across the year. 1    These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181. 2    Hurd, T., et al. Use of a portable, single use, negative pressure wound therapy device in home care patients with low to moderately exuding wounds. A case series. Ostomy Wound Management. March 2014. Vol.60. Issue 3. 3    V. Strugala & R. Martin, Meta-analysis of comparative trials evaluating a prophylactic single-use negative pressure wound therapy system for the prevention of surgical site complications. Surgical Infections (2017). DOI 10.1089/sur.2017.156. 4    Hurd, T., et al. A Retrospective Comparison of the Performance of Two Negative Pressure Wound Therapy Systems in the Management of Wounds of Mixed Etiology. Adv Wound Care (New Rochelle). 2017 Jan 1;6(1):33–37. SMITH & NEPHEW ANNUAL REPORT 2017 OPERATIONAL REVIEW      25 OUR RESOURCES THE RESOURCES WE NEED TO DELIVER OUR PRODUCTS OUR PEOPLE Engaging, developing and retaining our more than 15,000 employees is important to us and we work hard to be a great place to work as well as a responsible corporate citizen.   SEE OPPOSITE RESEARCH & DEVELOPMENT Innovation is part of our culture and we invest 5% of our revenue to develop new products that will help to improve patients’ lives.   PAGE 28 MANUFACTURING & QUALITY We operate our global manufacturing efficiently, and to the highest possible standards, to ensure product quality at competitive pricing.   PAGE 29 SALES & MARKETING We support our customers in over 100 countries. Our commercial teams are highly specialised with an in-depth knowledge across the full range of product franchises.   PAGE 30 ETHICS & COMPLIANCE We are committed to doing business the right way and apply strict business principles to the way we deal with our customers and partners.   PAGE 32 TRAINING & EDUCATION Every year, thousands of healthcare professionals attend our training courses around the world. Education is fundamental to how we support our customers.   PAGE 32    OUR  PEOPLE EmergingWE ARE PIONEERS WITH A PURPOSE Smith & International MarketsNephew is a company of pioneers, extending access to advanced medical technologies and enabling better outcomes for patients globally. We’ve been doing this since 1856.    CELEBRATING EXCELLENCE  The CEO Awards salute employees at all levels who make outstanding contributions for the benefit of Smith & Nephew. In 2017 Lorraine Belleville, a Packaging Operator and Team Coordinator at our Mansfield facility in the US, was recognised for her significant contributions to Mansfield’s improvement of ‘Finished Goods’ production by nearly 30% since 2016. Lorraine took initiatives to improve the flow of work at the facility by introducing important tools such as a tracking scheme, daily production sheet and visual management.   Business Operations 26      OPERATIONAL REVIEW SMITH & NEPHEW ANNUAL REPORT 2017 WE ENCOURAGE AND REWARD HIGH PERFORMANCE We set ambitious targets and we achieve them by creating a sense of purpose and urgency. While achievement of these targets is crucial, our Performance Management Process measures not only what was achieved, but also that the behaviours displayed in doing so match our core values. Smith & Nephew’s compensation philosophy is to pay for performance. This means compensating employees for sustained performance that helps deliver timely and tangible results to drive the business forward. By following this philosophy we have found that we not only attract, retain, and motivate talent, but it also helps drive better business results and provides an equitable work environment. We are Living Wage Accredited in the UK, voluntarily paying above the government required minimum as we believe employees should receive fair compensation for the work they do. The Company’s ‘Going the Extra Mile’ global employee recognition programme is used by executives, managers and employees alike to recognise and reward performance and our corporate values. We are committed to working with employees to develop each individual’s talents, skills and abilities. Employee advancement is merit-based, reflecting performance as well as demonstration of core competencies which include our values, with an emphasis on ethics and integrity. We prioritise the development and promotion of existing employees whenever possible. Each year Smith & Nephew conducts a comprehensive global development and capability review process to identify high potential employees and ensure they have well defined career development plans. The Board reviews succession plans for key executive roles and such plans are in place for other critical positions across our business. In 2017, we added to our development programme three new opportunities: Leadership Edge, Pioneer and Continuous Learning Journeys. In 2017, 560 employees have participated in these programmes. These are designed to embed and enhance essential leadership skills for new and experienced managers, respectively through a combination of guided and self-service learning tools. Our ‘myLearning’ self-directed online learning portal was nominated for a Learning Technologies Award for the ‘Best Online Distance Learning Programme’ this year. Employees are provided with opportunities to develop their skills and career through new assignments and on the job experiences.  BUILDING A LEADERSHIP CAREER  Laura Whitsitt has built a leadership career at Smith & Nephew. Laura Whitsitt began her career at Smith & Nephew as an intern in product development. Thirty years later and now Senior Vice President of Research & Development for Orthopaedics, Laura says she still sees opportunities for growth and development. “I am often asked why I have stayed at the same company for so long. It’s important to me to learn and grow and be challenged, and I’ve always had those opportunities at Smith & Nephew.” In the male-dominated industry of orthopaedics, Laura says she has always felt respected for her expertise. Among the highlights of her career is designing the Company’s first and only spinal systems and managing them through to successful launch. Far from a barrier, Laura believes her perspective as a female leader has worked in her favour, and has added value. “As a woman I bring a different viewpoint to the table, and that’s especially important in R&D,” she says. Laura says she has seen real progress over her career in adding more female leaders to the ranks at Smith & Nephew, but there is more to do. “Mentoring has been very valuable, and I have certainly seen a positive change in the number of females in managerial roles. The more diversity we have at higher levels of the Company, the more momentum we have to build on.”       NUMBER OF EMPLOYEES1 2017 15,933 59% 41% Total employees Male Female 804 74% 26% Senior managers2 and above Male Female 12 75% 25% Board of directors Male Female 1    Number of employees at 31 December 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 and Directors of our subsidiary companies. SMITH & NEPHEW ANNUAL REPORT 2017 OPERATIONAL REVIEW      27 WE FOSTER AND EMBRACE DIVERSITY OF EXPERIENCE, BACKGROUND AND IDEAS Smith & Nephew’s global diversity and inclusion programme, called ‘Valuing Difference’, is designed to highlight the value of bringing different ideas and perspectives in from our work and personal experiences. Through storytelling and manager tools and discussion guides, the programme encourages open dialogue and an appreciation of the benefits of diverse teams. We believe that diversity fuels innovation and are committed to employment practices based on equality of opportunity and the ability of the person to perform the essential functions of the job, regardless of colour, creed, race, national origin, sex, age, marital status, sexual orientation or mental or physical disability. When we recognise and appreciate these differences, they can help us better reflect the wide range of cultures, customers, and patients we serve, so we can better meet their needs and be a better business – thereby building credibility with all. Diversity is regarded as an asset and it is further guarded by our global policies regarding ‘Diversity and Inclusion’ and ‘Respectful Workplace’. Our Valuing Difference Programme is sponsored by Chief Executive Officer Olivier Bohuon, and Steering Committee members include our Chief Human Resources Officer, Members of the Executive Committee and Regional Presidents. Together, the committee agrees the strategy which is then executed at the regional and country-level in order to have the greatest possible impact. Local diversity councils meet regularly and work to translate strategy to local needs, execute specific actions and share best practice. An example of a Valuing Difference Initiative is the ‘Elevate’ programme, which was attended by more than 275 female professionals in 2017. Elevate is specifically designed to develop our female leaders and includes a mix of skill development and motivational support. The programme has been highly successful, with the majority of participants stating they prioritise making time to attend the monthly webinar sessions and more than one-third promoted or changed roles in the past year. Gender diversity and equity are important areas of focus for us. Our goal is to have 33% women in senior management positions by 2020, in accordance with best practice as defined in the Hampton Alexander Report. Currently just over a quarter of senior management roles are held by women, in line with the FTSE100 average as defined by the 2017 Hampton Alexander Review. We are also committed to ensuring that our performance management and associated rewards are equitable and free from any unconscious gender bias. The UK government has introduced a requirement that all employers publish their gender pay ratio in the UK by 4 April 2018, which we will do on our website. We recruit, employ and promote employees on the sole basis of the qualifications and abilities needed for the work to be performed. We do not tolerate discrimination on any grounds and provide equal opportunity based on merit. We do not use any form of forced, compulsory or child labour. We support the Universal Declaration of Human Rights of the United Nations. This means we respect the human rights, dignity and privacy of the individual and the right of employees to freedom of association, freedom of expression and the right to be heard. As a global medical technology business, Smith & Nephew recognises that we have a responsibility to take a robust approach to preventing slavery and human trafficking. Smith & Nephew is committed to preventing slavery and human trafficking in its corporate activities, and its supply chains. Our full policy on preventing slavery is available on our website. WE DO THE RIGHT THING EVEN WHEN NO ONE IS WATCHING All employees receive our Code of Conduct and Business ContinuityPrinciples when they join the Company, and renew their training and commitment to the Code on an annual basis. Smith & Nephew’s Global Compliance Programme not only helps our businesses comply with laws and regulations, but also creates the culture of trust we deem essential to our success. Our comprehensive programme includes: Board and executive oversight committees; global policies and procedures; on-boarding and annual training for employees and managers; training for third-party sellers; monitoring and auditing processes; and reporting channels and recognition for demonstrating our values. Annual training is required of all employees and any stakeholders who represent Smith & Nephew. Through our global intranet, we provide resources and tools to guide employees to make decisions that comply with the law, local industry code and our Company Code of Conduct. We require advance approval for significant interactions with healthcare professionals or government officials and we regularly assess existing and emerging risks in the countries in which we operate. See page 32 for more information on our global compliance programme. WE VIEW INNOVATION AS AN ESSENTIAL SKILL Innovation is owned by all of us who question the status quo, dare to propose new solutions and seek to be the best at what we do for the benefit of our customers. At Smith & Nephew, we recognise that innovation includes the entire value chain within our organisation from R&D to engineering, manufacturing, distribution, sales, marketing, and even facility utilisation and investment strategy. We also acknowledge only a few innovations will be truly disruptive, while others will result in equally as important incremental changes. To help aid this, Smith & Nephew has introduced an Innovation Council to support its culture of innovation and signal its importance in the Company’s continued success. The Council consists of ‘Innovation Champions’ who reflect the diversity of the Smith & Nephew employee base and have a strong appetite for trying new things. These champions will be responsible for generating creative ways to embed this value and look for opportunities to raise innovative opportunities to the leadership team and to celebrate success.   28      OPERATIONAL REVIEW SMITH & NEPHEW ANNUAL REPORT 2017 Unexpected WE CARE ABOUT EACH OTHER’S WELLBEING AND THE SUSTAINABILITY OF SMITH & NEPHEW Each of us treats our Company’s resources and the world’s natural resources as if they were our own, and we take our responsibility to our communities seriously. Smith & Nephew not only applauds, but also supports the donations of employees’ time and resources. We encourage all our employees to volunteer their time and talents by providing eight hours per year paid time for volunteer efforts. Many functions structure their team building activities around group volunteering opportunities such as Make a Wish Foundation events could disruptand the Helping Hands Project which builds prosthetic hands for amputees in third-world countries. Charity efforts are also coordinated across entire sites, and beyond. In 2017, Smith & Nephew brought together many local companies in Hull with a ‘More Together’ initiative to raise tens of thousands of pounds for local charities. Smith & Nephew was also a major sponsor of the Hull City of Culture celebrations, with employees contributing to and benefiting from the year of activities on-site and across the city. Our social responsibility strategy is to materially contribute to the delivery of our Company Mission by engaging employees to prioritise philanthropic resources and efforts on areas that align with our business strategy and values. Resources include product donations, matching gifts, and employee volunteerism. We believe selection and management of charitable and non-profit organisations and activities is best accomplished at the local level within the framework of our social responsibility strategy. Each location’s Site Leadership Council and/or Camaraderie Council will design, construct, and operate the local programme, including arrangement of funding. These Councils build out the local social responsibility programme, selecting charitable organisations and activities that best engage the local employee population and underpin our Mission. We Innovate. We Perform. We earn Trust. We are Smith & Nephew.  RESEARCH &  DEVELOPMENT (R&D) $223m Investment in R&D in 2017 Smith & Nephew has a single global R&D function, led by affecting eitherthe President of Global R&D, reporting directly to the Chief Executive Officer. This team strives to increase value created by research and development by focusing on three imperatives: Disruptive Innovation that matters, flawless execution of new product development, and compelling evidence of clinical and economic value. The Portfolio Innovation Board drives our innovation strategy and framework. This Board  identifies and selects only those projects that will make a key facility or system ormeaningful difference to our customers and their patients. This includes continuing to invest in incremental innovation to improve existing products in a largeway that improves outcomes. It also involves driving greater efficiency through innovation, potentially reducing our costs of goods. For instance, by making instrument sets more procedure and patient-specific, we will reduce complexity and cost, to the benefit of customers and the Company. Finally, by seeking more meaningfully disruptive products and services, we will harness transformational innovation to provide access to new technologies to people across the world. Second, the team challenges itself to execute flawlessly. This means developing the right product at the right cost and quality, supported by clinical evidence, in a timely manner. 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 rationale, and are technologically feasible. The R&D function works closely with the marketing, clinical, regulatory affairs, manufacturing and supply chain management teams to ensure we can produce new products to clinical, cost and time specifications. Finally, we look to support our innovations with compelling evidence of clinical and economic value. The global R&D function includes our Clinical, Medical and Scientific Affairs teams, led by the Chief Medical Officer. This team ensures that, from conception, plans are developed to support product launches with the evidence increasingly required by clinicians, payers and regulators. Our products undergo clinical and health economic assessments both during their development and post-launch. During 2017 we secured a long-term partnership with the University of Hull to create one of the world’s largest Wound Care Research Clusters with the aim of developing scientific insights and innovative treatments. This includes the creation of eight PhD studentships and a programme of collaboration between Smith & Nephew’s new Hull R&D centre and the University’s new Health Campus, both of which opened in 2017. We also announced a three-year partnership with Imperial College London to develop enhanced surgical techniques relating to ligament function, biomechanics and soft tissue injuries of the knee, including the most common injuries of torn menisci and anterior cruciate ligament rupture. See opposite page. We also continue to invest in scouting for new technologies, identifying complementary opportunities in our core and adjacent segments. In addition, we invest in small companies developing compelling technologies in our franchise areas through our incubation fund, and provide our expertise to help the development process, including supporting clinical studies, and typically secure preferred access to technology as it nears market readiness. In 2017, we invested $223 million in R&D, in line with our commitment, set out in 2011, to maintain our investment level at around 5% of revenue. We expect to maintain this proportion going forward, but to realise greater benefit through our new structure and strategic focus. SMITH & NEPHEW ANNUAL REPORT 2017 OPERATIONAL REVIEW      29  INNOVATING THROUGH PARTNERSHIP  Smith & Nephew is working with Imperial College London to develop enhanced surgical techniques relating to ligament function, biomechanics and soft tissue injuries of the knee, including the most common injuries of torn menisci and anterior cruciate ligament rupture. “The partnership with Smith & Nephew is priceless for our work. It allows a strategic attack on the unanswered biomechanical issues in knee surgery. Knowing funding is secure for three years allows a step-by-step ‘due diligence’ approach to investigating these issues rather than sporadic studies. This is the best way to translate from the lab to patient care” said Mr Andy Williams, Lead Surgical Researcher, Imperial College London and Fortius Clinic. Meniscus repair is one of the greatest challenges of Sports Medicine. By combining the clinical expertise of Imperial College with our pioneering approach to new product development we expect to be able both to advance surgical techniques and accelerate the development of next generation products.  MANUFACTURING  & QUALITY GLOBAL OPERATIONS Smith & Nephew takes great pride in its expertise in manufacturing products to the highest quality and ensuring they reach our customers in a timely manner. We operate manufacturing facilities in a number of employees.countries across the globe, and a number of central distribution facilities in key geographical areas. Products are shipped to individual country locations which hold small amounts of inventory locally for immediate supply to meet customer requirements. Manufacturing is a dynamic process and our Global Operation leadership team is focused on successfully supporting delivery of the Group’s strategic priorities by ensuring our footprint and expertise is ready to respond to geographical growth, new product development, greater external regulatory scrutiny and the commercial pressure to be ever more efficient. Quality has always been paramount to Smith & Nephew. We have a unified Quality Assurance and Regulatory Affairs team to ensure consistency across our country business units. Requirements of global regulatory agencies have become more stringent in recent years and we expect them to continue to do so. We are continuing to expand our portfolio globally through new product development and by registering our existing products in new markets. In order to meet the expectations of regulators and support this added complexity we continued to invest in our Quality and Regulatory expertise in 2017. 30      OPERATIONAL REVIEW SMITH & NEPHEW ANNUAL REPORT 2017 OUR MANUFACTURING FACILITIES Our largest manufacturing operation is based in Memphis (Tennessee, US). The businessMemphis facilities produce key products and instrumentation in our Knee Implant, Hip Implant and Trauma franchises. These include the JOURNEY II and LEGION knees, the ANTHOLOGY Primary Hip System and key Trauma products such as the PERI-LOC Plating System, REDAPT and TRIGEN Intramedullary Nails. In addition to this, Memphis is home to the design and manufacturing process of the VISIONAIRE patient matched instrumentation sets, and OXINIUM™ Oxidised Zirconium. This patented metal alloy is available for many of our knee and hip implant systems as part of our VERILAST technology. In Sports Medicine, our Alajuela (Costa Rica) facility, opened in 2016, manufactures COBLATION technology. Our Mansfield  (Massachusetts, US) facility manufactures products for minimally invasive surgery including the FAST FIX 360 Meniscal Repair System, FOOTPRINT™ PK Suture Anchor, DYONICS Platinum Shaver Blades, ENDOBUTTON CL Ultra and the HEALICOIL PK suture anchor. The Aarau (Switzerland), Tuttlingen (Germany), Beijing (China) and Devrukh (India) facilities manufacture a number of surgical device products including key reconstruction and trauma products and the PLUS™ knee and hip range. The Warwick (UK) facility produces the BIRMINGHAM™ Hip Resurfacing System. Our Oklahoma City (Oklahoma, US) facility produces and services electro/mechanical capital equipment as well as single use sterile devices and also reliant on certain key suppliersassembles some of our NPWT devices using components from third parties. The majority of our wound management products are manufactured at our facilities in Hull, Suzhou and Curaçao. These include pioneering products such as PICO and ALLEVYN Life as well as our complex silver coating technology for ACTICOAT. In Suzhou, we also manufacture our wound care products for the mid-tier in the Emerging Markets. Manufacturing of our Advanced Wound Bioactive products takes place in Curaçao and at various third party facilities in the US. PROCUREMENT We procure raw materials, components, finished products and packaging materials.materials from suppliers in various countries. These purchases include metal forgings and castings for orthopaedic products, optical and electronic sub-components for sports medicine products, active ingredients and semi-finished goods for Advanced Wound Management as well as packaging materials across all product ranges. Suppliers are selected, and standardised contracts negotiated, by a centralised procurement team wherever possible, with a view to ensuring value for money based on the total spend across the Group. On an ongoing basis, we work closely with our key suppliers to ensure high quality, delivery performance and continuity of supply. We outsource certain parts of our manufacturing processes where necessary to obtain specialised expertise or to lower cost without undue risk to our intellectual property. Suppliers of outsourced products and services are selected based on their ability to deliver products and services to our specification, and adhere to and maintain an appropriate quality system. Our specialist teams work with and monitor suppliers through on-site assessments and performance audits to ensure the required levels of quality, service and delivery. GLOBAL SUPPLY CHAIN Our Global Supply Chain function ensures that our products reach our internal and external customers where and when they are needed, in a compliant and efficient manner. Bringing together people, knowledge and expertise helps us meet our objectives and our customers’ expectations, driving us to become more competitive, responsive and integrated. We operate three main holding warehouses for surgical products, one in each of Memphis, Baar (Switzerland) and Singapore. These facilities consolidate and ship to local country and distributor facilities. Our distribution hubs for advanced wound products are located in Neunkirchen (Germany), Derby (UK) and Lawrenceville (Georgia, US).  SALES &  MARKETING Our customers are the providers of medical and surgical treatments and services in over 100 countries worldwide, ranging from orthopaedic surgeons to wound care nurses, general practitioners and other clinicians, but increasingly also economic stakeholders. These include purchasing professionals in hospitals, healthcare insurers, materials managers and others. We serve these customers through our sales force and other channels. Our sales representatives are highly trained and skilled individuals. Becoming a sales representative requires intense training, including passing a strict certification programme. Depending on their area of specialism, representatives in our surgical businesses must be able to demonstrate a detailed knowledge of all the surgical instruments used to implant a device, or have specific understanding of the various surgical techniques a customer might use. In our advanced wound management business, sales representatives must have a detailed understanding of how patients live with wounds and how clinicians seek to prevent and treat them, as well as deep knowledge of the clinical and economic benefits of using our products within treatment protocols. Once a sales representative is certified, they typically spend the majority of their time working directly with and supporting customers, or identifying and contacting new customers. They help to provide in-hospital support to aid in the safe and effective use of our range of advanced medical technologies and techniques. Our Global Commercial Organisation oversees all commercial activities (sales, marketing, market access, and commercial strategy) across the Group for our full line of business. The organisation is led by two regional sales presidents for the US and International, and our Chief Marketing Officer (CMO). Within our International region there are several regional leaders for Europe & Canada, Asia Pacific and Latin America. Our sales forces in the Established Markets are specialised by channel and consist of a mixture of independent contract workers and employees. In our Emerging Markets we operate through direct selling and marketing operations led by country managing directors, and through third party sellers.   SMITH & NEPHEW ANNUAL REPORT 2017 OPERATIONAL REVIEW      31 Smith & Nephew has three global marketing teams who set the strategic direction of our businesses, guide our research & development teams by specifying new products & services needed to realise those strategies, and develop the promotional assets and guidance to commercialise our products. They utilise a variety of traditional and novel means to market to our customers, including scientific congresses, commercial trade shows, advertising in medical journals and, increasingly, digital channels. These include product websites, social media channels, mobile applications and our professional educational platform called Education & Evidence. Also reporting to our CMO is the global Commercial Excellence team, which drives numerous initiatives to strengthen commercial execution in both the sales organisation and our global marketing teams. There is a strong focus on Sales Force Excellence to increase efficiency and effectiveness of our sales teams, and on Pricing to increase discipline in our transactional pricing and define better value creation strategies for our innovative products. Other activities in Commercial Excellence include strategic planning, business intelligence and market research, digital marketing, and marketing communications. In addition, our Health Economics and Outcomes Research (HEOR) team generates evidence on the economic impact of our products and provides supporting assets and tools to commercialise our products. They do this through collaboration with leading medical centres in the world as well as existing registries that track usage of our products. The HEOR team also reports to our CMO.  A DAY IN THE LIFE…  Mustafa works as a Territory Manager in our Sports Medicine franchise in the UK. “Every day is different. My time is split between supporting customers and their operating theatre teams in hospitals, meeting with potential customers, learning and researching techniques and trends, and keeping in touch with my colleagues, the business and my existing customers. “My favourite part of the job is the interactions I have with my customers. I believe that we sell solutions rather than products, so everything I do is about helping my customers to find answers to the problems they face, to enable better outcomes for their patients. “We’re very lucky in the UK to be able to offer an excellent training facility to the surgeons we support. It’s a great feeling to be able to support a consultant to refine their surgical techniques. I’m also a mentor providing expertise and guidance on our Resection and Camera products to my colleagues in the UK.” 32      OPERATIONAL REVIEW SMITH & NEPHEW ANNUAL REPORT 2017  ETHICS &  COMPLIANCE CODE OF CONDUCT AND BUSINESS PRINCIPLES Smith & Nephew earns trust with customers, healthcare professionals, government authorities, patients 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 vendors who provide us with services and distributors and independent agents that sell our products. Our Code of Conduct and Business Principles 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 we operate. We are committed to upholding our promise in our Code of Conduct that we will not retaliate against anyone who makes a report in good faith. GLOBAL COMPLIANCE PROGRAMME: EXISTING ELEMENTS Smith & Nephew has implemented what we believe to be a world-class Global Compliance Programme that helps our businesses comply with laws and regulations. This comprehensive compliance programme includes: Board and executive oversight committees; global policies and procedures; on-boarding and annual training for employees and managers; training for distributors and agents and higher-risk vendors; monitoring and auditing processes; reporting channels and employee-recognition for demonstrating our values in their everyday work. We provide resources and tools to guide employees to make decisions that comply with the law, local industry codes and our Company Code of Conduct. We conduct review and approval in advance for significant interactions with healthcare professionals or government officials. We regularly assess existing and emerging risks in the countries in which we operate. We assess the compliance controls in Smith & Nephew’s businesses. We conduct audits, supported by data analytics, and local monitoring. We review the issues our testing generates to identify patterns. New distributors and other higher-risk third parties are subject to screening and are contractually obligated to comply with applicable laws and our Code of Conduct. Compliance training and certifications are included in this process. Managing Directors are required to complete an annual certification to the Chief Executive Officer to confirm the implementation of required policies. Managers and employees make an annual compliance certification and conflict of interest disclosure. Executive management, managers and employees have a compliance performance objective customised to their role. GLOBAL COMPLIANCE PROGRAMME: NEW ELEMENTS IN 2017 In 2017, we created an Ethical Leadership model, which includes four pillars: Advise, Lead, Observe, and Coach or Report. We introduced this model during annual manager training, reinforced the model through further communications, and gave managers resources they can use to raise awareness of compliance risks and rules. We benchmarked our whistle-blower programme against industry metrics. The benchmarking confirmed that all Smith & Nephew reporting and substantiation rates met industry practices. We conducted a comprehensive review of the guidelines recently issued by the US Department of Justice on compliance programme effectiveness and by the International Organisation of Standards on Anti-Bribery Management Systems, and are also identifying any actions needed to align to this new guidance. We applied enhanced standards prospectively for new, potential partners and retrospectively for existing distributors. We also developed new guidelines for distributors or agents who need to enter the operating room when acting on our behalf. We worked with our Procurement colleagues to integrate compliance controls into the Company’s new purchasing system. We also conducted a comprehensive review of the types of complementary workers we engage to ensure they receive appropriate anti-bribery and corruption compliance training and will implement an updated training strategy in 2018.  TRAINING &  EDUCATION Smith & Nephew is dedicated to helping healthcare professionals improve the quality of care for patients. We are proud to support the development of surgeons and nurses by providing skills training and education on our products and techniques. In February 2017, we inaugurated our ‘Expert Connect Centre’ in the UK. This new centre for HCP training is a state-of-the-art learning environment with the latest audio-visual capabilities and 14‑station bio-skills laboratory for all levels of HCPs from around the globe. In 2017, we provided more than 45,000 instances of training to surgeons through our Smith & Nephew training centres in the US, UK and China, as well as running many courses at third party centres around the world. Working under expert guidance, attendees learn new techniques and refine skills, to ensure the safe and effective use of our products. These courses are attended by residents, fellows and practicing surgeons who work together to review, discuss and train on current and forward-looking surgical techniques in their areas of clinical expertise. Our courses help up-and-coming surgeons develop trust and gain the experience and confidence necessary to become experts in their field. Thousands of nurses receive face-to-face training from Smith & Nephew representatives every year, including attending courses at our centres, and through our representatives visiting them at their place of work. In 2017 almost 45,000 clinicians in the US alone benefited from our wound care educational resources. In addition, we provide healthcare professionals our online resources such as the Global Wound Academy, The Wound Institute and, for surgeons, our Education and Evidence website. Recently we began utilising innovative, digital technologies to accelerate the learning experience of surgeons. In 2017 we doubled the number of healthcare professionals trained digitally on Smith & Nephew products and techniques to 180,000. SMITH & NEPHEW ANNUAL REPORT 2017 OPERATIONAL REVIEW      33 SUSTAINABILITY SUSTAINABILITY IS BETTER BUSINESS TAKING SUSTAINABILITY TO THE CORE OF THE BUSINESS We began to deliver in 2017 our commitment to sustainability embodied in our refreshed Group Sustainability Strategy. This strategy, approved in 2016, both drives and is driven by implementation of the Group Business Strategy, ensuring that all three main aspects of sustainability – economic prosperity, social responsibility and environmental stewardship – advance as one. This is a summary report of our sustainability activities and progress in 2017. Our annual Sustainability Report, published at the same time as this Annual Report, describes the Group Sustainability Strategy and its associated goals in more detail. It also specifies targets to move our performance towards these goals, and provides further information regarding our 2017 progress. It is available on our website. GROUP SUSTAINABILITY STRATEGY Smith & Nephew has been and remains committed to working in a sustainable, ethical and responsible manner everywhere we do business. We are proud of our achievements over many years, as witnessed by our recurring inclusion in leading indices such as FTSE4Good and the Dow Jones Sustainability Index. Sustainability is a journey, and in 2016 we thought deeply about our destination for the longer-term. The result was a new Group Sustainability Strategy. At the heart of this are ten long-term aspirational goals. These encompass all aspects of our business, and will inform and drive our business strategy for years to come. The Board has endorsed these and executive management is behind them. These goals are set out overleaf. The Board has evaluated the social and environmental risks as part of their ongoing risk management duties and has concluded that none of these risks are material in the context of the Group managesas a large product portfoliowhole. Longer term goals need medium-term SMART (specific, measurable, achievable, realistic and timebound) targets to ensure we are making the right progress. And we have taken such targets through 2020. These targets are discussed in more detail in the 2017 Sustainability Report which is available on our website. 2017 was a large product inventory. Salesyear in which our refreshed sustainability strategy was put into action. We delivered improvements across our traditional areas of focus: employee health and operation planningsafety, carbon emissions and supply chain managementwater consumption. In addition, we began to get a fuller understanding of our impacts in the areas of material efficiency, life cycle environmental impacts, and labour practices. We adopted a social responsibility strategy which will drive employee engagement and improve the communities in which we operate. EMPLOYEE SAFETY, WELLNESS AND VOLUNTEERING A healthy and safe working environment is fundamental to the way we work at Smith & Nephew. We must ensure that the products neededsafety of our employees and those who work with us is given the highest priority when we perform our daily activities in our offices around the world, when we visit customers and in our manufacturing environment. Engagement with the communities in which we operate continued to broaden and deepen through the active attention of site leadership, establishment and empowerment of local camaraderie councils, broader application of company-paid volunteering allowance, and increase in the company match for employee donations to charity. We continue to strengthen and deepen employee wellness programmes with a focus on enabling healthy lifestyle choices. SOCIAL RESPONSIBILITY STRATEGY IMPLEMENTATION In 2017, we developed and adopted a social responsibility strategy aimed at improving the alignment of our charitable donation, volunteering, wellness and professional development with both our Group Business Strategy and the needs and desires of our employees. The aim is to positively impact both employee engagement and the quality of life in communities in which we operate. We have improved our understanding of compliance to labour standards in our value chain, product and service attributes which are available atimportant to customers and our employees’ view of the right placerole of the organisation in society. In 2018, we will use these and time.other social success factors, informed by our Group Business Strategy as well as our Company values, to deploy a series of platforms and actions which advance our cause. SUSTAINABILITY VISION AND MISSION We envision a world in which healthcare professionals have access to the solutions they need to help patients restore their health, engage in society, enhance the environment and improve their wellbeing. Our sustainability strategy aims to achieve this vision. It outlines the steps we’ll take with a view to leading our industry in the development and use of products and services that: –  Satisfy unmet health needs and promote greater access to treatment; –  Offer easier, better, faster and more effective treatment, enabling productive engagement in society; –  Prioritise materials that are reused, remanufactured, or recycled; –  Are manufactured using raw materials sourced from an environmentally and socially sound supply chain; –  Use natural resources efficiently; –  Are manufactured by processes that are not hazardous to people or the environment; and –  Implement the most sustainable product options. Our plan focuses on both the foundational and competitive advantage elements required to deliver our value proposition sustainably. We employ a continuous improvement approach based upon the implementation of forward-looking solutions (such as investing in new materials and processes that provide significant benefits with respect to human rights, safety, energy, waste and/or communities) and bridging technologies to secure future game-changing performance.   34      OPERATIONAL REVIEW SMITH & NEPHEW ANNUAL REPORT 2017 In a fast changing, complex, global business, high performing talent OUR PERFORMANCE IN 2017 Our 10 long-term aspirational goals 2020 targets Progress since 2016  1 Zero work-related injuries and illnesses across the value chain. –  10% reduction in Total Injury Rate (TIR) from 2016 actual. –  In 2016 the TIR = 0.52, in 2017 TIR = 0.35 (33% lower). 2 Water: Total water impacts of our products and solutions are balanced with local human and ecosystem needs. –  Water footprint (1) available for products accounting for 75% of revenue and (2) considerations embedded in new product development process. –  Total potable water consumption at S&N sites no higher than 2016 actual. –  Products accounting for 75% of revenue identified. Water footprint tools identified. –  Work plan under development, will be approved and commenced in 2018. –  Water reduction of 10%. 3 Waste: All materials are either shipped as part of product or returned for beneficial use. –  Total material efficiency estimated for products accounting for 75% of revenue –  80% or more of waste generated reused, recycled or recovered. –  Products accounting for 75% of revenue identified. Material efficiency tools identified. –  Work plan under development, will be approved and commenced in 2018. –  We currently reuse, recycle or recover energy from 77% of our total waste, up from 74% in 2016. 4 Carbon: 80% absolute reduction in total life cycle greenhouse gas emissions by 2050. –  Estimate total life cycle greenhouse gas emissions of products accounting for 75% of revenue. –  Total Scope 1 & 2 greenhouse gas emissions reduced by 10% from 2016 actual. –  Products accounting for 75% of revenue identified. Total lifecycle greenhouse gas emissions tools identified. –  Work plan under development, will be approved and commenced in 2018. –  In 2017 the reduction is 7%. 5 Ethical Business Practices: All activities are conducted in compliance with applicable International Labour Organization (ILO) conventions, involve no environmental degradation, and are free from corruption. –  Labour practices throughout the supply chain associated with products accounting for 75% of revenue compliant with applicable ILO conventions. –  Products accounting for 75% of revenue identified. Gap assessment to applicable ILO conventions completed for internal operations. Engagement with upstream suppliers and downstream distributors and agents ramping up. 6 Zero Product-related and service-related patient injuries. –  Robust system in place to detect, record, investigate and eliminate root cause of product-related and service-related patient injuries. –  Systems are in place to detect, record and investigate patient injury incidents. Patterns in the data are being used to craft models which will allow identification of at-risk attributes. 7 Robust social responsibility programmes that contribute to the attraction and retention of top talent. –  Social responsibility strategy which aligns philanthropy, employee volunteering and wellness to the business strategy in place. –  Social responsibility strategy in place. Alignment of current initiatives to the strategy under way. 8 Products and services are aligned to market economic, social and environmental expectations and anticipate future market conditions: –  All products have identified and clearly-described sustainability attributes. –  R&D and NPD processes deliver environmental-, social-, and healthcare economically-advantaged innovations. –  Sustainability attributes described for products accounting for 75% of revenue Robust emphasis on sustainability attributes of new products/services in place. –  Products accounting for 75% of revenue identified. Product/service sustainability attributes agreed. –  New product development (NPD) sustainability focus planning under way. 9 Strategic risks and opportunities are understood and business activities are aligned to risk appetite. –  Enterprise risk management arrangements are embedded in the routine business decision-making process. –  Risk register reinvigorated. Deep dive programme instituted with focus on both assurance that all relevant risks have been identified and effectiveness of mitigating actions is accurately assessed. –  Actions to further embed into the business decision-making process are planned for 2018. 10 Environmental, social, and economic impacts of (1) potential acquisitions, (2) technologies to be extended to Emerging Markets, (3) innovative business models, (4) cost-of-quality reduction initiatives, and (5) manufacturing siting, functional optimisation and site utilisation alternatives are fully understood and appropriately balanced. –  Formal programmes in place to measure/assess the economic, social and environmental impacts of (1) potential acquisitions, (2) technologies to be extended to Emerging Markets, (3) innovative business models, (4) cost-of-quality reduction initiatives, and (5) manufacturing siting, functional optimisation and site utilisation alternatives. –  Launched our Enterprise Risk Management Policy and Manual. –  Trained our risk champions in risk identification and mitigation. –  Introduced a product focused approach to risk management. –  Conducted a number of ‘deep dives’ into several key risks. –  Tools and standards to address new technologies are being developed to support our NPD work above.  These targets are discussed in key positionsmore detail in our 2017 Sustainability Report which is a business critical requirement.available on our website.   SMITH & NEPHEW ANNUAL REPORT 2017 OPERATIONAL REVIEW      35   CO2e REPORTING        2017       2016       2015  CO2e emissions (tonnes) from:             Direct emissions   9,451    9,822    11,011 Indirect emissions   76,107    82,415    77,191 Total   85,558    92,237    88,202 Intensity ratio             CO2e (t) per $m sales revenue   17.8    19.6    19.2 CO2e (t) per full-time employee   5.2    5.9    6.0   Specific risksRevenue: 2017: $4.8bn; 2016: $4.7bn; 2015: $4.6bn. Full-time employee data: 2017: 16,333; 2016: 15,584; 2015: 14,686. Notes 2015 data adjusted to exclude acquisitions in Russia and Colombia. 2017 data includes all data, including acquisitions since 2016. CO2e  reporting methodology, materiality and scope. We report the carbon footprint of our Scope 1 and 2 greenhouse gas (GHG) emissions in tonnes of CO2 equivalent from our business operations for the calendar year ended 31 December 2017. Our focus is on the areas of largest environmental impact including manufacturing sites, warehouses, R&D sites and offices. Smaller locations representing less than 2% of our overall emissions are not included. Acquisitions completed before 2017 are included in the data, with more recent ones being excluded and this is in line with our established policy for integration of acquired assets. Each year we facework with an independent partner to verify our sustainability data and gain assurance. Our GHG emissions reporting represents our core business operations and facilities which fall within the scope of our consolidated financial statements. Primary data from energy suppliers has been used wherever possible. Risk management actionsWe report our emissions in two ‘scopes’. Scope 1 figures include: Direct sources of emissions mainly comprise the fuels we use on-site, such as gas and heating oil and fugitive emissions arising mainly from the losses of refrigerant gases. Possible impactsScope 2 figures include: Indirect sources of emissions such as purchased electricity and steam we use at our sites. –  Catastrophe could render one ofLocation-based emissions are calculated in compliance with the Group’s production facilities out of action –  A significant event could impact key leadership or a large number of employees –  Issues with a singleWRI/WBCSD GHG Protocol Corporate Accounting and Reporting Standard and have been calculated using carbon conversion factors published by BEIS/DEFRA for 2017. We have applied the emission factors most relevant to the 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 including DEFRA 2017 (for UK locations), IEA 2015 (for overseas locations) and for key productsthe US we have used the US EPA ‘Emissions & Generation Resource Integrated Database’ (eGrid) for the regions in which we operate. All other emission factors for gas, oil, steam and key suppliersfugitive emissions are taken from DEFRA, 2017. –  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  GETTING SERIOUS   ABOUT SOLAR  In line with our aspiration to reduce carbon emissions, we are investing in more efficient energy solutions, such as solar power. Devrukh, India At our Devrukh site in India, we are running one of our largest renewable energy projects. By installing the 426 kVA roof top solar panel system, we aim to produce enough energy to provide the site with free power for 25 years, whilst reducing carbon emissions by up to 44% per annum. We are already achieving a cost saving of 44% per year and expect a return on investment in less than five years. The 1,330 solar panels will also enable us to reduce the inside temperature of the manufacturing floor by five to ten degrees celsius, creating a safer and more pleasant working environment for our employees. Suzhou, China In April 2017, we installed 24 sets of solar water heater units on the roof of one of our buildings in Suzhou. The system can produce around 12 tonnes of 55˚C hot water every day for the site’s hot water system and will save 291 tonnes of steam every year.         Link 36      FINANCIAL REVIEW SMITH & NEPHEW ANNUAL REPORT 2017 CHIEF FINANCIAL OFFICER’S REVIEW  BUILDING A MORE  COMPETITIVE  BUSINESS  I am excited by the prospects for 2018 and beyond as we realise the opportunities in front of us. DEAR SHAREHOLDER I am delighted to Strategic Priorityaddress you for the first time in the Annual Report as your Chief Financial Officer. Under Olivier’s leadership, Smith & Nephew has made significant organisational changes to create a strong global business. I believe that we are just starting to see the benefits of these changes, and I am excited by the prospects for 2018 and beyond as we realise the opportunities in front of us. I am very much looking forward to working with Olivier and, in due course, his successor, to make this happen. 2017 PERFORMANCE Group revenue in 2017 was $4,765 million, an increase of 2% on a reported basis and 3% on an underlying basis1. This was an improvement from underlying growth of 2% in 2016. Trading profit1 was $1,048 million, and the trading profit margin1 was 22.0%, up 20bps on 2016. I am pleased to report that both our underlying revenue growth and trading profit margin improvements were in-line with our guidance. The reported operating profit for 2017 was $934 million, up from $801 million in 2016, with the year-on-year increase primarily reflecting a gain of $54 million from the settlement of an intellectual property matter, no restructuring charges and lower amortisation and impairment of acquisition intangibles in 2017. The tax rate on trading results1 was 17.1% (2016: 23.8%). This is a considerable reduction on the 2016 rate and is mainly due to a one-off benefit following the conclusion of a US tax audit, further progress in improving our tax rate, tax provision releases following expiry of statute of limitations and a beneficial geographical mix of profits. The reported tax rate of 12.7% was a result of the lower tax rate on trading results and also included a $32 million net benefit from US tax reform. Adjusted earnings per share1 (EPSA) was up 14% at 94.5¢ as a result, and this is reflected in the 14% increase in our full year dividend distribution for 2017. Basic earnings per share (EPS) was 87.8¢ in line with the previous year. SMITH & NEPHEW ANNUAL REPORT 2017      FINANCIAL REVIEW      37 I am pleased to report that trading cash flow1 was $940 million, up from $765 million in 2016, with a higher trading profit to cash conversion ratio1 of 90% as we improved our working capital management. As the result of improved operating profit, the lower tax rate and a stable asset base we saw an improvement in Return On Invested Capital1 (ROIC-as defined on page 39) from 11.5% in 2016 to 14.3% in 2017. CAPITAL RETURNS The appropriate use of capital on behalf of shareholders is important to Smith & Nephew. The Board believes in maintaining an efficient, but prudent, capital structure, while retaining the flexibility to make value-enhancing acquisitions. This approach is set out in our Capital Allocation Framework which we used to prioritise the use of cash and ensure an appropriate capital structure. Our commitment, in order of priority, is to: –    Continue to invest in the business to drive organic growth; –    Maintain our progressive dividend policy; –    Realise acquisitions in-line with strategy; and –    Return any excess capital to shareholders. This is underpinned by maintaining leverage ratios commensurate with solid investment grade credit metrics. IMPROVING COMPETITIVENESS On joining Smith & Nephew I was asked by Olivier and the Board to look afresh at efficiency opportunities within our business. Some preliminary analysis highlighted a number of areas of opportunity, and we conducted a detailed assessment of these during the final months of 2017. Our conclusion was that we now have the Group structure in place which lets us act on these further opportunities. Through better execution and efficiency we can and will strengthen our competitive position. We are calling this work the APEX programme, standing for ‘Accelerating Performance and Execution’, and we completed our planning and started to take action in early 2018. Our three workstreams are focused on clear and obtainable improvements in the Group’s manufacturing, warehousing and distribution footprint, reducing our general and administrative expenses, and driving greater commercial effectiveness. More details on APEX and each of these workstreams can be found on page 14. APEX is expected to deliver an annualised benefit of $160 million by 2022, with at least half of this expected by 2020, for a one-off cash cost of up to $240 million. SUCCESSFUL ACQUISITION During the year, we continued to seek further opportunities to strengthen our technology and product portfolio. In December we acquired Rotation Medical, Inc., the developer of a novel tissue regeneration technology for shoulder rotator cuff repair, for an initial cash consideration of $125 million and up to a further $85 million over the next five years, contingent on financial performance. I am excited by the potential for this new technology and we remain alert to further opportunities to bring other disruptive innovations into the Group. OUTLOOK We expect the overall dynamics in our markets to be similar in 2018 to those seen in 2017. Against this backdrop, the Group expects to continue to deliver an improved performance in 2018 driven by our by our strong product portfolio and pipeline of innovative products. In terms of revenue, we expect our underlying growth to be in the range of 3% to 4% (which equates to 7% to 8% in reported terms at exchange rates prevailing on 2 February 2018). In terms of trading profit margin we expect to drive a further 30‑70bps improvement over 2017. As a result of the recently enacted US tax reform, we expect a tax rate on trading results in the range 20% to 21%, barring any changes to tax legislation or other one-off items. In 2018, we will continue to push for further success as we build a more competitive Smith & Nephew. I look forward to helping to drive this, and to delivering on our commitments for the benefit of all of our stakeholders. Yours sincerely, Graham Baker Chief Financial Officer FINANCIAL HIGHLIGHTS $4,765m Revenue +2% +3% Reported Underlying1 87.8¢ 0% Earnings per share EPS 94.5¢ +14% Adjusted earnings per share (EPSA)1 1    These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181. 38      FINANCIAL REVIEW SMITH & NEPHEW ANNUAL REPORT 2017 FINANCIAL REVIEW DELIVERING ON OUR COMMITMENTS GROUP PERFORMANCE HIGHLIGHTS FOR THE YEAR ENDED 31 DECEMBER        2017 $ million      2016 $ million      Change $ million Consolidated income statement             Revenue   4,765    4,669    96  Operating profit   934    801    133  Trading profit1   1,048    1,020    28  Profit before tax   879    1,062    (183) Attributable profit   767    784    (17) EPS   87.8¢   88.1¢   (0.3¢) EPSA1   94.5¢   82.6¢   11.9¢ Consolidated balance sheet             Goodwill and intangible assets   3,742    3,599    143  Other non-current assets   1,393    1,216    177  Current assets   2,731    2,529    202  Total assets   7,866    7,344    522  Total equity   4,644    3,958    686  Non-current liabilities   1,876    2,038    (162) Current liabilities   1,346    1,348    (2) Total liabilities   3,222    3,386    (164) Total liabilities and equity   7,866    7,344    522  Net debt1   1,281    1,550    (269) Consolidated cash flow statement             Cash flows from operating activities    1,273    1,035    238  Trading cash flow1   940    765    175  Free cash flow1   714    457    257  NON-IFRS MEASURES The underlying increase in revenues, by market, reconciles to reported growth, the most directly comparable financial measure calculated in accordance with International Financial Reporting Standards (IFRS), as follows:                         Reconciling items   2017 $ million 2016 $ million Reported growth % Underlying growth % Acquisitions/ Disposals % Currency impact % US 2,306  2,299  0% 2% (2%) 0% Other Established Markets 1,678  1,679  0% 0% 0% 0% Emerging Markets 781  691  13% 12% 0% 1% Total 4,765  4,669  2% 3% (1%) 0% Trading profit reconciles to operating profit, the most directly comparable financial measure calculated in accordance with IFRS, as follows:             2017 $ million 2017% 2016 $ million 2016% Operating profit 934 19.6% 801 17.2% Acquisition-related costs (10) (0.2%) 9 0.2% Restructuring and rationalisation costs – – 62 1.3% Amortisation and impairment of acquisition intangibles 140 2.9% 178 3.8% Legal and other (16) (0.3%) (30) (0.7%) Trading profit 1,048 22.0% 1,020 21.8% RESULTS OF OPERATIONS In 2017, we delivered reported revenue growth of 2% and underlying revenue growth1 of 3%. Revenue growth on a reported basis was flat across our US and other Established Markets, with a strong performance in Japan driven by Sports Medicine and Knee Implants counterbalanced by a soft wound care market in the UK where we have now taken steps to adapt our business in response. In our Emerging Markets reported revenue growth was 13% and underlying growth1 was 12% in 2017. In China, our largest Emerging Markets country, we delivered double-digit revenue growth as we improved our channel management. In the oil-dependent Gulf States we returned to growth by focusing on securing more private healthcare business to compensate for the reduction in government tenders. We are well positioned to continue to drive strong growth from the Emerging Markets over the medium term. Operating profit of $934 million (2016: $801 million) is after integration and acquisition costs, as well as amortisation and impairment of acquisition intangibles and legal and other items. The year-on-year increase in operating profit primarily reflects a gain of $54 million from the settlement of an intellectual property matter, no restructuring charges and lower amortisation and impairment of acquisition intangibles in 2017. The sale of the rights to distribute certain non-core products contributed $19m to operating profit in 2017. In 2016 similar product disposals along with provision releases from favourable legal matter outcomes contributed $18m. Trading profit1 was $1,048 million (2016: $1,020 million). Trading profit margin1 was 22.0%, up 20bps year-on-year, in line with guidance. In 2017, selling, general and administrative expenses included a $10 million credit relating to acquisition-related costs (2016: $9 million charge), $16 million credit for legal and other costs primarily related to the settlement of patent litigation (2016: $30 million credit for legal and other primarily related to a $44 million curtailment credit related on UK post-retirement benefits) and $140 million charge for amortisation and impairment of acquisition intangibles (2016: $178 million charge). Research and development expenditure as a percentage of revenue remained broadly consistent at 4.7% (2016: 4.9%) with expenditure of $223 million in 2017 compared to $230 million in 2016. SMITH & NEPHEW ANNUAL REPORT 2017     FINANCIAL REVIEW      39 Profit before tax in 2016 includes the $326 million profit on disposal of the Gynaecology business. The Group has completed its review of the new US tax reform legislation, as enacted in December 2017, including the reduction of the US federal tax rate from 35% to 21%, which came into effect on 1 January 2018. As a result, the Group expects a positive impact on its tax charge for future years in addition to the one-off tax benefit in 2017 as discussed below. Parts of the new legislation are subject to questions of interpretation, and further regulations may be issued in the future to clarify or change certain elements, which may affect future tax charges. Included in the total tax charge is a $32 million net benefit as a result of US tax reform legislation which comprises a benefit from a revaluation of deferred tax balances included within changes in tax rates, partially offset by a current tax charge relating to the deemed repatriation of foreign profits not previously taxed in the US. Our reported tax rate of 12.7% (2016: 26.2%) has decreased due to the $32 million net benefit in 2017 from US tax reform, the lower tax rate on trading results and the impact of the Gynaecology disposal in 2016. Our trading tax rate1 is 17.1% (2016: 23.8%) with the reduction due to a one-off benefit following the conclusion of a US tax audit, further progress in improving our tax rate, tax provision releases following expiry of statute of limitations and a beneficial geographical mix of profits. BALANCE SHEET Goodwill increased by $183 million as a result of $132 million arising on the acquisition of Rotation Medical, Inc. and favourable currency movements of $51 million. Intangible assets decreased by $40 million with net movements relating to additions, disposals and transfers of $70 million relating to intellectual property, distribution rights and software acquired together with $61 million recognised with the acquisition of Rotation Medical, Inc. Amortisation and impairment during 2017 was $202 million and there were favourable currency movements of $31 million. Other non-current assets increased by $177 million primarily due to a $67 million increase in property, plant and equipment with additions offsetting depreciation, and the recognition of retirement benefit assets of $62 million for our UK and US pension schemes. Current assets increased by $202 million with trade and other receivables increasing $73 million primarily due to $45 million of foreign exchange, inventories increasing $60 million primarily due to foreign exchange and cash increasing $69 million due to the timing of receipts. Non-current liabilities decreased by $162 million primarily due to payments made against our borrowing facilities. Current liabilities decreased by $2 million as a $73 million increase in trade and other payables arising from a $37 million foreign exchange increase and a $28 million timing difference on the payment of expenses associated with a patent litigation gain, which was partially offset by a $59 million decrease in bank overdrafts and loans and $18 million decrease in provisions. CASH FLOW Cash generated from operations of $1,273 million (2016: $1,035 million) is after paying out $3 million (2016: $24 million) of acquisition-related costs, $15 million (2016: $62 million) of restructuring and rationalisation expenses and $25 million (2016: $36 million) relating to legal and other costs. Trading cash flow1 increased by $175 million primarily related to working capital movements. Free cash flow1 increased by $257 million primarily related to working capital movements and lower cash outflows for acquisition-related costs, restructuring and rationalisation expenses and legal and other costs. During the year ended 31 December 2017, the Group purchased a total of 3.2 million (2016: 24.0 million) ordinary shares at a cost of $52 million (2016: $368 million) as part of the ongoing programme to buy back an equivalent number of shares to those vesting as part of the employee share plans. 2016 share repurchases included a $300 million share buy-back programme following the disposal of the Gynaecology business. DIVIDENDS The 2016 final dividend of 18.5 US cents per ordinary share totalling $162 million was paid on 10 May 2017. The 2017 interim dividend of 12.3 US cents per ordinary share totalling $107 million was paid on 1 November 2017. LIQUIDITY AND CAPITAL RESOURCES The Group’s policy is to ensure that it has sufficient funding and facilities in place to meet foreseeable borrowing requirements. The Group’s net debt decreased from $1,550 million at the beginning of 2017 to $1,281 million at the end of 2017, representing an overall decrease of $269 million. At 31 December 2017, the Group held $155 million (2016: $38 million) in cash net of bank overdrafts. The Group had committed facilities available of $2,425 million at 31 December 2017 of which $1,425 million was drawn. Smith & Nephew intends to repay the $13 million of bank loans due within one year by using available cash and drawing down on the longer-term facilities. The principal variations in the Group’s borrowing requirements result from the timing of dividend payments, acquisitions and disposals of businesses, timing of capital expenditure and working capital fluctuations. Smith & Nephew believes that its capital expenditure needs and its working capital funding for 2017, as well as its other known or expected commitments or liabilities, can be met from its existing resources and facilities. The Group’s planned future contributions are considered adequate to cover the current underfunded position in the Group’s defined benefit plans. RETURN ON INVESTED CAPITAL Return On Invested Capital1 (ROIC) is a measure of the return generated on capital invested by the Group. It provides a metric for long-term value creation and encourages compounding reinvestment within the business and discipline around acquisitions with low returns and long payback. ROIC increased from 11.5% in 2016 to 14.3% in 2017 as a result of the improved operating profit, the lower tax rate and a stable asset base. ROIC is defined as: Net Operating Profit less Adjusted Taxes (Opening Net Operating Assets +Closing Net Operating Assets)/2 14.3% +280bps Return On Invested Capital1 (ROIC) WHY THIS KPI IS IMPORTANT ROIC measures the return generated on capital invested by the Group. HOW WE PERFORMED ROIC was up 280bps year-on-year driven by improved operating profit, the lower tax rate and a stable asset base. 1    These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181.     Simplify and improve our operating model     Established Markets Emerging & International Markets 38Smith & Nephew Annual report 2014       40      RISK SMITH & NEPHEW ANNUAL REPORT 2017 RISK REPORT OUR APPROACH TO RISK OUR RISK MANAGEMENT PROCESS Our Enterprise Risk Management process is based on a holistic approach to risk management, leveraging the best risk identification and risk treatments already in place throughout our Business Areas and Product Groups whilst incorporating the same risk processes into the strategic planning process. Our belief is that the strategic and operational benefits of managing risk are achieved when Enterprise Risk Management is aligned with the strategic and operational goals of the organisation and our process and governance structure firmly aligns to this approach. In carrying out our business we face many risks and uncertainties and our Risk Management Policy and Enterprise Risk Management Manual ensure that our Risk Community can identify, review and report risks at every level of our business. At the very top of our structure is our Board, setting our risk appetite and monitoring the application of our risk framework through strategy, execution and practically through the outputs of regular risk ‘deep dives’ by the business and Group Risk Team. The Board cascades our risk appetite throughout our organisation through the Risk Committee, Risk Owner Community and our Management Group with a formal ‘bottom up’ process ensuring that risks are escalated back through the process to our Board and form our Principal Risks as appropriate. Providing rigour and independence across this process is our Executive Committee and the Group Risk Team. At the third line of defence is our Internal Audit Function, providing an annual opinion on the effectiveness of our Risk Management process to the Group Risk Committee chaired by the Chief Executive Officer and then to the Board and its committees. Roles Responsibilities Board of Directors and Board Committees –   Responsible for regular oversight of risk management and for our annual strategic risk review –   Monitors risks through Board processes (Strategy Review, Disclosures, M&A, Investments, Disposals) and Committees (Audit and Ethics & Compliance), management reports and deep dives of selected risk areas –   Audit Committee is responsible for ensuring oversight of the process by which risks relating to the Company and its operations are managed and for viewing the operating effectiveness of the Group’s Risk Management process Group Risk Committee –   Reviews external/internal environment for emerging risks –   Reviews risk register updates from Business Areas –   Identifies significant risks and assesses effectiveness of mitigating actions Business area/ Product Risk Groups –   Business Area/Product Group Risk champion provides support to ensure a framework is designed and implemented for alignment to the requirements of the Enterprise Risk Management Framework –   Carry out day-to-day risk management activities –   Identify and assess risk –   Implement strategy and mitigating actions to treat risk within Business/Product Risk Groups –   Risk Champions lead regular risk register updates Group Risk Team –   Manage implementation of all aspects of the Group’s approach to Enterprise Risk Management including implementation of processes, tools and systems to identify, assess, measure, manage, monitor and report risks –   Facilitates implementation and coordination through Risk Champions –   Provides resources and training to support process –   Prepares Board and Group Risk Committee reports based on Business Area and Product Group updates Annual assessment of effectiveness – Internal audit and control functions   SMITH & NEPHEW ANNUAL REPORT 2017 RISK      41 RISK MANAGEMENT LIFE CYCLE – OUR SEVEN-STEP PROCESS Our risk management life cycle was refreshed and updated in 2017 to align with our new approach to include Product Safety, Regulation,Groups within our risk portfolio. Our Risk Management Policy was launched in May with sponsorship from the Chief Executive Officer and Litigationa revised manual aligning to the new structure was launched shortly after. Risks continue to be managed through a ‘bottom up’ and ‘top down’ process, with monthly oversight from the Executive Committee and quarterly reports to the Board Committees. An overview of our ‘seven step’ process can be found below: An overview of the Risk Management and Reporting Process 1 Risk Identification IDENTIFYING risks associated to achievement of our objectives by function and product and at the Group level. Early and continuous risk identification including existing and horizon risks. 7 Monitoring and review MONITORING of risks and actions by management, the accountable Executive and Board. Coordinated and ongoing monitoring of the internal and external risk environment to respond to emerging and horizon risks. 2 Gross (inherent) Risk assessment ASSESSING the level of inherent (gross) risk. 6 Risk Reporting REPORTING the status of our most significant risks through the ‘bottom up’ business area processes and the ‘top down’ Executive Committee and Board process. Demonstrating appropriate management of, and response to, our risk profile. 3 Current Control identification IDENTIFYING existing controls to mitigate risks 5 Risk Response Planning IDENTIFYING additional actions required to meet our expected risk tolerance level and ASSIGNING risk owners, timeframes and actions for ongoing management and reporting. 4 Net (residual) Risk ASSESSING the level of residual (net) risk after mitigation so that risk levels are managed within defined tolerance thresholds without being over controlled or foregoing desirable opportunities.   42      RISK SMITH & NEPHEW ANNUAL REPORT 2017 2017 PRINCIPAL RISKS We assess our Principal Risks in terms of their potential impact on our ability to deliver our Strategic Priorities. These links are highlighted across the following pages and further information on the Strategic Priorities is found on page 10.  LEGAL AND COMPLIANCE RISKS Our global remit results in heavy regulation across multiple jurisdictions. There is increasing public scrutiny of ethics in business and ‘doing the right thing’ has become part of our licence to operate. National regulatory authorities enforce a complex seriespattern 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 and may also inspect for compliance with appropriate standards, including those relating to Quality Management Systems (‘QMS’) or Good Manufacturing Practice (‘GMP’) regulations. Design or manufacturing defects in products could result in product recalls and liability claims and impact revenues, profits and reputation. Specific risks we face Risk management actions Possible impacts –  Defective products supplied to Smith & Nephew or failure in design or manufacturing process   –  New technology, product or processes changed by Smith & Nephew or supplier result in product deficiencies –  Failure to implement programmesOperating across this increasingly complex and supporting resources to ensure product quality and regulatory compliance –  Failure to manage, process and analyse customer complaints and adverse event data –  Global QARA organisation to create a single Quality Management System –  Standardised Group quality management and practice –  Monitoring and auditing programmes to assure compliance –  Group-wide product complaint and registration systems –  Group-wide practices to drive design, and production line performance and dependability –  Design for manufacture in product development –  Post launch review of product safety and complaint data –  Loss of revenue, profit and reduction in share price –  Negative impact on brand/ reputation Link to Strategic Priority Simplify and improve our operating model Established Markets Emerging & International Markets Compliance with Laws and Ethical Behaviour Business practices in the healthcare industry are subject to increasing scrutiny by government authorities. The trend in many countries is towards increased enforcement activity for bribery and corruption. The Group is also subject to increased scrutiny under US healthcare laws (e.g. False Claims Act) and in the EU for data protection. Acquisitions and expansion into emerging markets may require additional compliance controls. Specific risks we face Risk management actions Possible impacts –  Violation of anti-corruption, healthcare, or data privacy laws could result in fines, loss of reimbursement and harm reputation –  Cultures in certain geographies and in acquired businesses may not fully support the Group value to Earn Trust –  Rapid growth in Emerging & International Markets with increasing numbers of distributors –  Third parties retained by the Group may be involved in improper activities which result in penalties or loss of reputation. –  Failure to conduct adequate due diligence or to integrate appropriate internal controls into acquired businesses could result in fines and impact return on investment –  Strong Board and Executive oversight bodies supported by a global Office of Ethics & Compliance –  Code of Conduct/Global Policies and Procedures (‘GPPs’) providing guidelines for ethical behaviour and controls for significant compliance risks –  Training and e-resources to guide employees and third parties with ethical and compliance responsibilities –  Monitoring and auditing programmes to verify implementation –  Minimum acceptable financial procedures adopted by all businesses wholly owned by the Group –  Independent reporting channels for employees and third parties to report concerns with confidentiality –  Robust investigation procedures to ensure adequate reviews and documentation with significant issues escalated to and monitored bydynamic legal and compliance headsenvironment, including regulations on bribery and corruption, with poor legal and compliance practices can lead to fines, penalties, reputational risk and competitive disadvantage. We have adopted a proactive, holistic approach, which guides the Company towards a culture of compliance and turns the resolution of legal and compliance issues into a source of competitive advantage.   –  Controls for significant interactions with Health Care Professionals and Government Officials –  Higher risk third parties including distributors and agents subject to screening, compliance requirements, training and oversight processes –  Due diligence reviews and integration plans and reporting for acquisitions –  Risk assessments to determine resources and controls for higher risk markets –  Loss of profit and reduction in share price –  Negative impact on brand/ reputation Link to Strategic Priority Simplify and improve our operating model Emerging & International Markets Established Markets Smith & Nephew Annual report 2014            39 STRATEGIC REPORT Sustainability Protecting the future Risk Tolerance In complying with legal and compliance requirements, we have an extremely low tolerance. Change from 2016   No Change Link to strategy Compliance with applicable laws and regulations and doing the right thing is part of our licence to operate and underlies all our Strategic Priorities.       STRATEGIC PRIORITIES PAGE 10 Oversight Ethics & Compliance Committee Examples of risks –  Failure to act in an ethical manner consistent with our Code of Conduct. –  Violation of anti-corruption or healthcare laws, breach by employee or third party representative. –  Failure to respond adequately to changes in legislation/regulation. –  Misuse or loss of personal information of patients, employees, research subjects, consumers or customers results in violations of data privacy laws, including General Data Protection Regulations. Actions taken by management –Ethics & Compliance Committee oversees our ethical and compliance practices. –  All employees are required to undertake annual training and to certify compliance on an annual basis with our Code of Conduct and Business Principles. –  Group monitoring and auditing programmes in place. –  Confidential independent reporting channels for employees and third parties to report concerns. We care about our customers CYBER SECURITY High profile incidents coupled with increasing government focus has resulted in raised awareness of the extent and helping improve people’s lives. We also care about the people who work for us, the environment in which we operatepotential impact of cyber security breaches. Our increasing business dependence on networked systems and the societiesInternet, the design of new products, connectable products and embedded software and the rapidly evolving cyber security threat landscape provides us with risk exposure not experienced in whichprior years. In response to this we do business. Addressing unmet social need with more affordable products gathered pacehave undertaken an exercise to understand our threats and vulnerabilities to target cyber security investment 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.right places.   Risk Tolerance In managing our cyber risk and the possible disruption and reputational impact we have a low to moderate tolerance for Cyber Security Risk. Change from 2016   Included as ‘other risk’ in 2016 Link to strategy Given our strategic priority ‘Innovate for value’ and an increasing focus on connected products we must deliver our technology solutions in compliance with laws and regulations and in a way that protects any vulnerability to Cyber Risk.   STRATEGIC PRIORITIES PAGE 10 Oversight Audit Committee Examples of risks –Loss of Intellectual Property/major data privacy breach or significant impact on business operations from Malware   or Ransomware outbreak. –  Cyber Security is not considered in the design of new products with more products being connectable/having embedded software. Actions taken by management –  Security information and event management (SIEM) in place providing real-time analysis of security alerts generated by applications and network hardware. –  Annual Penetration Testing, endpoint protection and Intrusion detection/prevention. –  Annual Mandatory training and continuous awareness training for end-users. –  Security Governance structure in place including a Cyber Security Steering Committee. 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. 40Smith & Nephew Annual report 2014     Water Reducing water consumption continued to be a challenge in 2014, however there was a reduction of 7% achieved as a result of a breakthrough in water consumption at our Memphis manufacturing facility where 66% of Smith & Nephew’s water is consumed. Waste The annual increase of 13% in total waste was offset by moving landfill waste to recycling or energy recovery. A transient increase created by commissioning new capacity in China and the one-off event of disposing of waste arising from the Hull flood increased the total waste by 8%. In 2014, we carried out a thorough waste audit in order to implement more initiatives to manage and reduce our waste. Energy and CO2 The energy increase of 15.2 GWh (9%) since 2011 has been dominated by the transient impact of commissioning new manufacturing capacity in China accounting for 10 GWh whilst continuing production in the UK. The effect of recently acquired businesses accounted for 8.7GWh of the increase. The underlying reduction of 3.5 GWh (2%) reflects the implementation of efficiency improvements in our manufacturing facilities. Transferring manufacturing to China from the UK and acquiring capacity in India has resulted in higher emissions factors and increased CO2 emissions. Greenhouse gases Methodology, materiality and scope The data reported relates to areas of largest environmental impact including manufacturing sites, warehouses, research and offices. Smaller locations representing less than 2% of our overall emissions are not included. Acquisitions completed before 2014 are included in the data. All emissions fall within the scope of our consolidated financial statement and we have used the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (Revised Edition) as guidance for this process. Primary data from energy suppliers has been used wherever possible. The Biotherapeutics and the Sushrut Adler acquisitions are included in the data for 2014 for the first time. Data from the ArthroCare acquisition is excluded and is in line with our established policy for integration of acquired assets. Our emissions have been calculated by using specific emissions factors for each country outside the US and regional factors within the US. We have used the US EPA ‘Emissions & Generation Resource Integrated Database’ (eGRID) for US regions and the UK Government DEFRA Conversion Factors for Greenhouse Gas Reporting for elsewhere. The emissions from all years have been recalculated using the most up-to-date factors available in 2014. Fugitive emissions are included from the manufacturing and research locations and arise from the losses of refrigerant gases.     2014      2013    CO2e Emissions (tonnes) from:   Direct emissions   11,213      10,152      Indirect emissions   74,797      68,795      Total           86,010                  78,947          Intensity ratio   CO2e (t) per $m revenue*   19.5      19.4      CO2e (t) per full-time employee*       6.9            7.5        Revenue data: 2014 – $4.4 billion, 2013 – $4.1 billion Full-time employee data: 2014 – 12,437, 2013 – 10,520 SMITH & NEPHEW ANNUAL REPORT 2017 RISK      43  NEW PRODUCT INNOVATION, DESIGN & DEVELOPMENT INCLUDING INTELLECTUAL PROPERTY Our product portfolio is becoming increasingly complex, especially as we move to more innovative connected product technologies and our strategy of ‘owning the disease’. Our success relies on investing in safe products and platforms and aligned internal and external design and development innovation in order to compete effectively. The need to be nimble and considered in our approach to protecting our products, process and Intellectual Property is essential.   * Notes: 2013 data adjusted to exclude Healthpoint (Biotherapeutics) and 2014 data adjusted to exclude ArthroCare. By order of the Board, 25 February 2015 Susan Swabey Company Secretary Smith & Nephew Annual report 2014            41 extremely low tolerance. At the top of their game   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.   No Change   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. 44Smith & Nephew Annual report 2014         STRATEGIC PRIORITIES PAGE 10 Risk Tolerance In pursuit of our strategy to be innovative but safe in our product offering we have a moderate to high tolerancefor risk. Change from 2016   No Change Link to strategy Our Strategic Priority to ‘Innovate for Value’ depends heavily on our ability to continue to develop new innovative products and bring them to market.   STRATEGIC PRIORITIES PAGE 10 Oversight Board Examples of risks –   Insufficient long-term planning to respond to competitor disruptive entries into marketspace. –   Inadequate innovation due to low R&D investment, R&D skills gap or poor product development execution. –   Lower value business segment investment, such as product maintenance and line extension projects. –   Competitors may assert patents or other intellectual property rights against the Company, or fail to respect the Company’s intellectual property rights. Actions taken by management –   Newly created Global Research & Development (R&D) organisation and governance framework providing strategic direction for allocation of R&D investments across all businesses. –   R&D charter to transform our Innovation pipeline and drive our corporate strategy to Innovate for Value. –   Strengthened Clinical Affairs programme integrated with Global Marketing. –   Cross functional New Product Design and R&D processes focused on identifying new products and potentially disruptive technologies and solutions. –   Monitoring of external market trends and collation of customer insights to develop product strategies. –   Careful attention to intellectual property considerations.  QUALITY AND REGULATORY Global regulatory bodies continue to increase their expectations on manufacturers and distributors of medical devices. Our products are implanted into human bodies and therefore Patient Safety is of paramount importance. The European Medical Device Regulations, launch of ISO13485 2016, the Medical Device Single Audit Programme and the tightening of the Chinese YY standards have increased the focus on clinical and technical evidence, supplier controls and continual product risk reduction. Risk Tolerance Our response to this risk continues to be critical and our ability to align and exceed the standards required to ensure safe and compliant products is the key driver for our extremely low tolerancefor risk in this area. Change from 2016   Modified Principal Risk in 2017 – formerly included as Operational Risk – Quality and Business Continuity Link to strategy Our Strategic Priority to ‘Simplify and Improve our Business Model’ requires us to operate effectively and efficiently and to produce compliant products of the highest quality to our customers.   STRATEGIC PRIORITIES PAGE 10 Oversight Board Ethics & Compliance Committee Examples of risks –   Defects in design or manufacturing of products supplied to, and sold by, the Company could lead to product recalls or product removal or result in loss of life or major injury. –   Significant non-compliance with policy, regulations or standards governing products and operations regarding registration, manufacturing, distribution, sales or marketing. –   Failure to obtain proper approvals for new or changed technologies, products or processes. Actions taken by management –   Comprehensive product quality processes and controls from design to customer supply are in place. –   Careful attention to intellectual property considerations. –   Standardised monitoring and compliance with quality management practices through our Global Quality Assurance and Regulatory Affairs organisation. –   Incident management teams in place to respond immediately in the event of an incident relating to patient safety. –   Governance framework in place for reporting, investigating and responding to instances of product safety and complaints.   24% $5bn Nearly a quarter of Smith & Nephew revenue Global Sports Medicine market with Smith & Nephew came from Sports Medicine in 2014 having 24% market share in 2014 (see page 20) Smith & Nephew Annual report 2014            45 Better by design   44      RISK SMITH & NEPHEW ANNUAL REPORT 2017  PRICING AND REIMBURSEMENT Our success depends on our ability to sell our products profitably in spite of increasing pricing pressures from customers, and governments providing adequate funding to meet increasing demands arising from demographic trends. The prices we charge are therefore impacted by budgetary constraints and our ability to persuade customers and governments of the economic value of our products, based on clinical data, cost, patient outcomes and comparative effectiveness. We further face challenging market dynamics, such as consolidation of customers into buying groups, increasing professionalisation of procurement departments and the commoditisation of entire product groups, which continue to challenge prices. Risk Tolerance In implementing innovative pricing strategies, we have a moderate to high tolerance for risk and are willing to accept certain risks in pursuit of new business opportunities. Change from 2016   No Change Link to strategy Our Strategic Priorities to ‘Build a Strong Position in Established Markets’ and to ‘Focus on Emerging Markets’ depends on our ability to sell our products profitably in spite of increased pricing pressures from governments.   STRATEGIC PRIORITIES PAGE 10 Oversight Board Examples of risks –   Reduced reimbursement levels and increasing pricing pressures. –   Systemic challenge on number of elective procedures. –   Lack of compelling health economics data to support reimbursement requests. –   Risk of adverse trading margins due to fluctuating foreign currency exchange rates across our main manufacturing countries (US, UK, Costa Rica and China) and where our products are sold. Actions taken by management –   Development of innovative economic product and service solutions for both Established and Emerging Markets. –   Appropriate breadth of portfolio and geographic spread to mitigate exposure to localised risks. –   Incorporating health economic components into the design and development of new products. –   Emphasising value propositions tailored to specific stakeholders and geographies through strategic investment and marketing programmes. –   Holding prices within acceptable ranges through global pricing corridors.  BUSINESS CONTINUITY AND BUSINESS CHANGE Operating with a Global Remit, increased outsourcing and more sophisticated materials and product technology has made our manufacturing and supply chain process far more complex, leading to a greater potential for disruptive events. Ensuring our ability to continually execute and operate key sites and facilities in order to develop, manufacture and sell our products within this environment is a key strategic priority of the organisation. In addition, the pace and scope of our business ‘change’ initiatives increases the execution risk that benefits may not be fully realised, costs of these changes may increase, or that our business as usual activities may not perform in line with our plans. Risk Tolerance In operating our business, executing our change programmes and in managing our suppliers and facilities we have a low to medium tolerance for this risk. Change from 2016   Modified Principal Risk in 2017 – formerly included as Operational Risk – Quality and Business Continuity Link to strategy Our Strategic Priority to ‘Simplify and Improve our Business Model’ requires us to operate effectively and efficiently and to ensure continuity of supply of products and services to customers.   STRATEGIC PRIORITIES PAGE 10 Oversight Board Examples of risks –  Failure or significant performance issues experienced at critical/single source facilities. –   Disruption to manufacturing at single or sole source facility (lack of manufacturing redundancy). –   Supplier failure impacts ability to meet customer demand (single source suppliers). –   Natural disaster impacts ability to meet customer demand. –   Significant ‘change’ prevents our projects and programmes such as APEX achieving the intended benefits and disrupts existing business activities. –   Political and economic ‘uncertainty’ in the countries in which we operate, e.g. Brexit. Actions taken by management –   Comprehensive product quality processes and controls are in place from design to customer supply. –   Emergency and incident management and business recovery plans are in place at major facilities and for key products and key suppliers. –   Second source suppliers identified for critical components or products. –   Undertaking risk based review programmes for critical suppliers. –   Project Management Governance and toolkits and project Steering Committee Oversight to support successful execution of programme and projects. Executive Committee and Audit Committee oversight of Risks to change programmes. –   Brexit Steering Group regularly monitors the evolving impact of Brexit and oversees our response. SMITH & NEPHEW ANNUAL REPORT 2017 RISK      45  MERGERS AND ACQUISITIONS As the Company grows to meet the needs of our customers and patients, we recognise that we are not able to develop all the products and services required using internal resources and therefore need to undertake mergers and acquisitions in order to expand our offering and to complement our existing business. In other areas, we may divest businesses which are no longer core to our activities. It is crucial for our long-term success that we make the right choices around acquisitions and divestments. We have a deep knowledgewell-defined cross-functional process for managing risks associated with mergers and acquisitions that is subject to scrutiny from executive management and the Board of the needs of surgeons and nurses, we understand the economic pressures healthcare payers work under,Directors. Risk Tolerance In acquiring new businesses and business models, we have a moderate to high tolerancefor commercial risk and are willing to accept certain risks in pursuit of new business. Change from 2016   No Change Link to strategy Our Strategic Priority to ‘Supplement Organic Growth with Acquisitions’ depends on our ability to identify the right acquisitions, to conduct thorough due diligence and to integrate acquisitions effectively.   STRATEGIC PRIORITIES PAGE 10 Oversight Board Examples of risks –   Failure to identify appropriate acquisitions or to conduct effective acquisition due diligence. –   Failure to integrate newly acquired businesses effectively, including Company standards, policies and financial controls. Actions taken by management –   Acquisition activity is aligned with corporate strategy and prioritised towards products, franchises and markets identified to have the greatest long-term potential. –   Clearly defined investment appraisal process based on return on capital, in accordance with Capital Allocation Framework and comprehensive post-acquisition review programme. –   Undertaking detailed and comprehensive cross-functional due diligence prior to acquisitions. –   Compliance risks included as part of due diligence reviews, integration plans and reporting for acquisitions.  TALENT MANAGEMENT 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 Marketspeople management, effective succession planning 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. 46Smith & Nephew Annual report 2014 Realising potential The ability to attract and retain talented employeestalent is essentialof great importance to achieving our business goals. This is why onethe success 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 proudCompany. In the current economic environment of strong competition 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 dimensionsreduced spending, retention 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 concerntop talent is a critical factorrisk which requires a strong process in how wellrelation to retention and how quickly they are ableengagement. Failure to get backdo so can result in risks in our ability to peak. During 2014, Smith & Nephew signed upexecute Company strategy and achieve business objectives in relevant functions and to be effective in the UK’s Time to Change programme, showing our employees being open about mental health concerns will lead to support, not discrimination,chosen market/discipline and embarked on a global wellness initiative to support all employees.leadership of newer workforce which may impact the Company’s future success.   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 Risk Tolerance We have 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. 14,000 Our employees support healthcare professionals in more than 100 countries 23% of our senior managers are female 52Smith & Nephew Annual report 2014 CORPORATE GOVERNANCE Our Board of Directorsmoderate tolerance for this risk. Change from 2016   Included as ‘other risk’ in 2016 Link to strategy All our strategic priorities rely on ensuring we have the right talent within our organisation to deliver maximum efficiency in everything we do and to build strong leaders for the future.       STRATEGIC PRIORITIES PAGE 10 Oversight Board Examples of risks –   Loss of key talent and lack of appropriate succession planning in context of required skill sets for future business needs. –   Loss of competitive advantage due to an inability to attract and retain Top Talent. –   Loss of intellectual capital due to poor retention of talent. Actions taken by management –   Formal Talent Review process where the Executive Team has accountability for managing talent. –   Identification of high performing individuals and practices to plan for the succession of key roles. –   Consistent and robust performance Management process. –   Development of strategic skills resourcing plan by functional areas.     46      RISK SMITH & NEPHEW ANNUAL REPORT 2017 Roberto Quarta (65)Commercial execution We continue to make good and strong progress delivering our priorities and are proud of the pace with which our strategic and operational decisions are quickly translated into actions. Effective communication and engagement with our customers are critical to the long-term success of our business. We are confident that we have the right priorities, structures and capabilities across the Group and we acknowledge that only strong and continued execution will keep us ahead of our competitors and best placed to serve our customers. Failure to execute our priorities will impact our ability to continue to grow our business and serve our customers. Risk Tolerance In continuing to execute our priorities in an innovative, safe, profitable and compliant way we have a low to moderate tolerance level. Change from 2016   Modified Principal Risk in 2017 – previously incorporated into other principal risks  Link to strategy All Strategic Priorities   STRATEGIC PRIORITIES PAGE 10 Oversight Board Examples of risks –   Failure to adequately execute our strategy from high-level ambition to specific actions to make the ambition a reality. –   Inability to keep pace with significant product innovation and technical advances to develop commercially viable products. –   Failure to appropriately adapt our priorities and execution when conditions change meaning that transformational programmes do not deliver the expected outcomes. –   Failure to engage effectively with our key stakeholders to meet their evolving needs leading to loss of customers. Actions taken by management –   Strengthened our commercial platform by creating a global commercial organisation with a remit to drive commercial performance across the Group through sales force excellence and pricing discipline. –   Newly created Global Research & Development organisation and supporting governance framework. –   Improved Market Development and Launch Execution – Commitment to ‘win’ profitably in our target markets. –   Strategic planning process clearly linked to business and Group Risk. –   Global transformational programmes in place providing agile opportunities for efficiencies, growth and a strengthened competitive position.   DEEP DIVES COMPLETED IN THE YEAR (Group Risk Team/Board and Audit Committee Reviews) Olivier Bohuon (56) Julie Brown (52) Chairman Chief Executive Officer Chief Financial Officer JoinedDuring the Board in December 2013year, the risks identified through the ‘bottom up’ and appointed Chairman following election by shareholders on 10 April 2014. He was also appointed Chairman of‘top down’ processes were mapped against each other with the Nomination & Governance Committeemost significant risks forming our Principal Risks. These risks and a Member of the Remuneration Committee on that day. Career and Experience Roberto is a graduate and a former Trustee of the College of the Holy Cross, Worcester (MA), US. He started his career as a manager trainee at David Gessner Ltd, before moving on to Worcester Controls Corporation and then BTR plc, where he was a divisional Chief Executive. Between 1985 and 1989 he was Executive Vice President of Hitchiner Manufacturing Co. Inc., where he helped the company to expand internationally. He returned to BTR plc in 1989 as Divisional Chief Executive, where he led the expansion in North America and was appointed to the main board. From here he moved to BBA Aviation plc, as CEO from 1993 to 2001 and then as Chairman, until 2007. He has held several board positions, including Non-executive Director of Powergen plc, Equant N.V., BAE Systems plc and Foster Wheeler AG. His previous Chairmanships include Italtel Group S.p.A. and Rexel S.A. He is currently Chairman Designate of WPP plc, and will shortly retire as Chairman of IMI plc, the global engineering group as soon as a suitable replacement is appointed. He is a partner at Clayton, Dubilier & Rice and he is aour tolerance levels were discussed with each member of the InvestmentExecutive Committee of Fondo Strategico Italiano Spa. Skillsseparately and Competencies Roberto’s careercollectively in private equity brings valuable experienceAugust and were presented to the Board particularly when evaluating acquisitions and new business opportunities. He has an in-depth understanding of differing global governance requirements having servedduring the Strategy Review in September 2017. A further ‘bottom up’ exercise was carried out in November to validate that the risk profile had not significantly changed since the initial exercise in June. No changes were required to our risk profile as a director and Chairmanresult of this exercise, which was also formally validated by each Accountable Executive. Throughout 2017, a number of UK and international companies. Since his appointment as Chairman in April 2014, he has conducted a comprehensive review into the composition ofdifferent risk topics were presented to the Board and conductedits Committee and specific ‘Deep Dive’ reviews were also completed by the search for new Non-executive Directors resulting in the appointment of Vinita BaliGroup Risk Team as follows. Board and Erik Engstrom.Audit Committee Deep Dives   NationalityLegal, Compliance and Quality   American/Italian JoinedDuring the Boardyear the Ethics & Compliance Committee meetings considers papers from the quality and was appointed Chief Executive Officerregulatory, legal and compliance teams. In 2017, the meetings have covered topics including preparation for General Data Protection Regulation (GDPR) in April 2011. He is a MemberEU, Medical Device Regulations (MDR), FDA & Notified Body Inspection Activities, the Global Quality and Compliance Audit programme, Transactions with Compliance Risks and the outcome of the Nomination & Governance Committee.significant Investigations.       CareerStrategic: Research and ExperienceDevelopment and M&A OlivierThe Board has hadconsidered a highly successful careerreport from the R&D team covering topics/risks in relation to execution, driving high value Innovation Projects and investment in Clinical Evidence and associated strategies to manage these risks. Each Board meeting considers Corporate Development. For 2017, this has focused on the lead up to, and our acquisition of, Rotation Medical. Retrospective reviews have also happened during the year on previous acquisitions compared to the expectations in the pharmaceutical industry. He holds a doctorate from the University of Paris and an MBA from HEC, Paris. His career has been truly global. He started his career in Morocco with Roussel Uclaf and then, with the same company, held a number of positions in the Middle East with increasing levels of responsibility. He joined Abbott in Chicago as head of their anti-infective franchise with Abbott International, before becoming Pharmaceutical General Manager in Spain. He subsequently spent 10 years with GlaxoSmithKline, rising to Senior Vice President & Director for European Commercial Operations. He then re-joined Abbott as President for Europe, became President of Abbott International (all countries outside of the US), and then President of their Pharmaceutical Division, which was a $20 billion business, encompassing manufacturing, R&D and commercial operations. He joined Smith & Nephew from Pierre Fabre, where he was Chief Executive. Skills and Competencies Olivier has extensive international healthcare leadership experience within a number of significant pharmaceutical and healthcare companies. His global experience provides the skillset required to innovate a FTSE100 company with a deep heritage and provide inspiring leadership. He is a Non-executive Director of Virbac group. Nationality   French Joined the Board as Chief Financial Officer in February 2013.deal models.       Manufacturing Operations CareerThroughout the year, the Board has received presentations from the global operations team with oversight of operational matters, particularly relating to the manufacturing footprint and Experiencethe risks associated with the current footprint and the proposals to mitigate these risks. Julie is a graduate, Chartered Accountant Functional Oversight The Board and FellowAudit Committee receive regular updates throughout the year from functions such as IT, Tax, Treasury and Financial operations. The Audit Committee also receives an update three times during the year on progress of risk management across the organisation. IT/Cyber The Audit Committee received reports on IT and Cyber security, including an assessment of the Instituteexisting risks and benchmarking against industry standards. HR Annual discussion at the Board in relation to talent succession, culture and values. Group Risk Team Deep Dives A series of Taxation. She trained with KPMG before working at AstraZeneca PLC, where she served as Vice President Group Finance, and ultimately, as Interim Chief Financial Officer. Prior to that she was Regional Vice President Latin America, Marketing Company President AstraZeneca Portugal, and Vice President Corporate Strategy and R&D Chief Financial Officer. In both Julie’s country and regional roles, trading margins increased significantly, improving the efficiency and profitability of the business. Her experience encompasses many areas of the healthcare value chain including Commercial, Operations, R&D and Business Development. She has led multi-billion dollar cost saving and restructuring programmes in Operations, R&D and the Commercial organisations and led major refinancing programmes, including the issuance of $2 billion US bonds. Julie has so far in her career, fulfilled two Non-executive Directorships with the NHSplanned ‘Deep Dives’ have been completed in the UKyear across our Business and Product Group Risk Areas, including PICO, Total Knees and ALLEVYN product Groups, Compliance and Europe/Canada Business Areas. These reviews have been newly introduced in 2017 to supplement reports provided to the Board and primarily cover an ‘independent’ assessment of compliance to the British Embassy.expected Risk Management Framework and in particular the adequacy of stated mitigating activities. The results are reported through the Risk Champions and Accountable Executives to the Audit Committee and are tracked and monitored to resolution by the Group Risk Team.   Skills SMITH & NEPHEW ANNUAL REPORT 2017 RISK      47 2018 RISK MANAGEMENT PLAN Our work will continue in 2018 to evolve and Competencies Julie has deep financial expertisestrengthen our approach to managing risks across the organisation, including our business areas and understanding of the healthcare sector, which has enabled herproduct groups. We will continue to leadensure a major transformation project at Smith & Nephew designedtruly collaborative approach to simplifyrisk management with risk accountability sitting squarely with management and improvea proactive Group Risk Function influencing decision making through effective challenge and timely consultation. 2018 will see innovation further driven through a new Global Enterprise Risk Management tool, more regular and sophisticated risk reporting across the organisation and deliver margin accretion. She isfurther embedding Risk Appetite into decision making. 2018 RISK MANAGEMENT TIMELINE Q1 2018  Q2 2018 Q3 2018 Q4 2018  Q1 2019  Internal Audit –  2019 Risk Based Internal Audit Plan Preparation –  Risk Management Effectiveness Review report to the next Audit Committee Deep dive risk reviews Group Risk Team –  Refresh Enterprise Risk management Policy and process –  Monthly reports to Executive Committee –  Risk Champion/Owner training –  Report to Audit Committee –  Monthly reports to Executive Committee –  Facilitate ‘top down’ review process –  One to Ones with Executive Committee and Board –  Monthly reports to Executive Committee –  Prepare 2019 Enterprise Risk Management Strategy –  Prepare Review of Principal Risks –  Report to Audit Committee Business/Product Risk Areas –  Quarterly Risk Review by Senior Leadership Team –  Quarterly Risk Review by Senior Leadership Team –  Risk Register refresh and submission to Group Risk Team –  Quarterly Risk Review by Senior Leadership Team –  Quarterly Risk Review by Senior Leadership Team –  Risk Register refresh and submission to Group Risk Team annual certification Executive Committee –  ‘Top Down’ Review of Principal/Significant Risks –  Approve Principal Risks Board –  Review of significant risks Audit Committee –  Review and approval of the Group’s 2017 Risk Management Process and Viability Statement –  Receive report from the Group Risk Team and review Enterprise Risk Management process –  Receive report from the Group Risk Team and review Enterprise Risk Management process –  Review and approve Principal Risks 48      RISK SMITH & NEPHEW ANNUAL REPORT 2017 OUR VIABILITY STATEMENT HOW WE ASSESS OUR PROSPECTS During the year, the Board has carried out a recognised leaderrobust assessment of the Principal Risks affecting the Company, particularly those which could threaten the business model. These risks and the actions being taken to manage or mitigate them are explained in detail on pages 42–46 of this Annual Report. In reaching our Viability Statement conclusion, we have undertaken the following process: –    The Audit Committee reviewed the Risk Management process at their meetings in February, April, July and November, receiving presentations from the Group Risk function, explaining the processes followed by management in identifying and managing risk throughout the business. –    In the summer, a series of detailed one-to-one discussions were held with a proven abilityeach member of the Executive Committee and the Group Risk Team. In these discussions, the Executives were asked to build teams. Her commercial experienceconsider the significant risks which they believed could seriously impact the profitability and future prospects of the Company and the principal risks that would threaten its business model, future performance, solvency or liquidity. –    As part of the annual Strategy Review in Latin America is of particular benefit as we continue to grow in emerging markets. She has heldSeptember, the Board considered and discussed the principal risks which could impact the business model over the next three years and discussed with the management team how these risks were being managed and mitigated. –    Throughout the year, a number of senior commercial roles as well as financial positions, making her a versatile Chief Financial Officer. Nationality   British 54Smith & Nephew Annual report 2014 Vinita Bali (59) Independent Non-executive Director Ian Barlow (63) Independent Non-executive Director The Rt. Hon Baroness Virginia Bottomley of Nettlestone DL (66) Independent Non-executive Director Appointed Independent Non-executive Director in April 2012. She is a Member ofdeep dives into different risks were conducted by the Remuneration Committee and joined the Nomination & Governance Committee on 10 April 2014. Appointed Independent Non-executive Director on 1 December 2014. She will join the Remuneration and Ethics & Compliance Committees on 1 April 2015. Appointed Independent Non-executive Director in March 2010 and Chairman ofBoard, the Audit Committee in May 2010. He was appointed a Member ofand the Ethics & Compliance Committee looking into the nature of the risks and how they were mitigated, as detailed on 2 October 2014.page 46 of this Annual Report. Career and Experience Vinita holds an MBA from–    Throughout the Jamnalal Bajaj Institute of Management Studies, University of Bombay and a bachelor’s degree in economics from the University of Delhi. She commenced her career in India with the Tata group, and then joined Cadbury India, subsequently working with Cadbury Schweppes plc in the UK, Nigeria and South Africa. From 1994, she heldyear, a number of senior global positions in marketingdeep dives into specific risk areas were conducted by the Group Risk Team, the results of which were presented to and general management at discussed by the Audit Committee. ASSESSMENT PERIOD The Coca-Cola Company based inBoard have determined that the USthree-year period to December 2020 is an appropriate period over which to provide its Viability Statement. This period is aligned to the Group’s Strategic Planning process and South America, becoming Presidentreflects the Board’s best estimate of the Andean Division in 1999 and Vice President, Corporate Strategy in 2001. In 2003, she joinedfuture viability of the consultancy, Zyman Group as Managing Principal, again based in the US. Until recently, Vinita was Managing Director and Chief Executive Officer of Britannia Industries Ltd, a leading Indian publicly listed food company. Currently, Vinita is a Non-executive Director of Syngenta AG, Titan Company Ltd and CRISIL (Credit Rating Information Services of India) Ltd. She is also a board member of GAIN (Global Alliance for Improved Nutrition). Skills and Competencies Vinita has an impressive track record of achievement with blue-chip global corporations in multiple geographies including India, Africa, South America, the US and UK, all key markets for Smith & Nephew. Additionally, her strong appreciation of customer service and marketing brings deep insight to the Company as we continue to develop innovative ways to serve our markets and grow our business.   Nationality   Indian   Career and Experience Ian is a Chartered Accountant with considerable financial experience both internationally and in the UK. He was a Partner at KPMG, latterly Senior Partner, London, until 2008. At KPMG, he was Head of UK tax and legal operations, and acted as Lead Partner for many large international organisations operating extensively in North America, Europe and Asia. Ian’s previous appointments include Non-executive Director and Chairman of the Audit Committee of PA Consulting Group and Non-executive Director of Candy & Candy. He was Chairman of WSP Group plc and of Think London, the inward investment agency. He is currently Lead Non-executive Director chairing the Board of Her Majesty’s Revenue & Customs; Non-executive Director of The Brunner Investment Trust PLC; Non-executive Director of Foxtons Group plc; Board Member of the China-Britain Business Council and Chairman of The Racecourse Association. Skills and Competencies Ian’s longstanding financial and auditing career and extensive board experience add value to his role as Chairman of the Audit Committee. It was of particular benefit when leading the selection process for the new external auditor in 2014. His appointment as an additional member of the Ethics & Compliance Committee recognises the close links between the activities and oversight role of both committees. His work for a number of international companies gives added insight when reviewing our global businesses. Nationality   British Career and Experience Virginia gained her MSc in Social Administration from the London School of Economics and Political Science following her first degree. 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 Culture, Media and Sport. Virginia was formerly a director of Bupa and Akzo Nobel NV. She is currently a director of International Resources Group Limited, member of the International Advisory Council 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 and Trustee of The Economist Newspaper. Skills and Competencies Virginia’s extensive experience within government, particularly as Secretary of State for Health brings a unique insight into the healthcare system both in the UK and globally, whilst her experience on the Board of Bupa brings an understanding of the private healthcare sector and an insight into the needs of our customers. Her long association with Hull, the home of many of our UK employees also brings an added perspective. Nationality   British   Smith & Nephew Annual report 2014            55 CORPORATE GOVERNANCE Our Board of Directorscontinued 2017 SCENARIOS MODELLED Scenario 1 – Pricing Link to Strategy Link to Principal Risks –  Pricing and reimbursement pressures or currency exchange volatility (Principal Risk) – leading to a major loss of revenues and profits. Action taken: We have modelled a 1% reduction in annual price growth/decline for each year from 2018.  –Pricing  and Reimbursement Scenario 2 Operational risk –  Execution risk – our inability to launch new products losing significant market share to the competition. Action taken: We have modelled a 1% reduction in annual volume growth rates each year from 2018. –  Product liability claims – giving rise to significant claims and legal fees. Action taken: We have modelled a one-off significant product liability claim in 2019. –  Temporary loss of key production capability – resulting in our inability to manufacture a key product for a period of time. Action taken: We have modelled the loss of a factory, resulting in the loss of production and sales of a key product for two years from 2019. –New Product Innovation, Design & Development (including Intellectual property) –Commercial Execution Scenario 3 – Legal regulatory and compliance risks  –  Regulatory measures – impacting our ability to continue to sell key products. Action taken: We have modelled the complete loss of revenue from a key product for each year from 2018. –  Bribery and corruption claims – giving rise to significant fines. Action taken: We have assumed a one-off significant fine in 2019.  –Legal and Compliance –Quality and Regulatory Scenario 4 – Cyber security  –  Inability to issue invoices or collect money for a period of time. –  Action taken: We have modelled one of our key regions being unable to invoice sales and collect cash for one month in 2019. –Cyber Security Other –  Political and economic forces – for example political upheaval, which could cause us to withdraw from a major market for a period of time. Action taken: We have modelled the loss of revenue and profits from a medium sized business due to withdrawal from a market from 2019. –Business Continuity and Business Change     SMITH & NEPHEW ANNUAL REPORT 2017 RISK      49   Erik Engstrom (51)				SCENARIO TESTING For the purpose of testing the viability of the Company, we have undertaken a robust scenario assessment of the principal risks and some other risks, which could threaten the viability or existence of the Company. These have been modelled as follows: Michael Friedman (71)				In carrying out scenario modelling of the principal and significant risks on the previous page we have also evaluated the impact of a severe but plausible combination of these risks actually occurring over the three-year period. We have considered and discussed a report setting out the terms of our current financing arrangements and potential capacity for additional financing should this be required in the event of one of the scenarios modelled occurring. We are satisfied that we have robust mitigating actions in place as detailed on pages 42–46 of this Annual Report. We recognise, however, that the long-term viability of the Company could also be impacted by other, as yet unforeseen, risks or that the mitigating actions we have put in place could turn out to be less effective than intended. Brian Larcombe (61)VIABILITY STATEMENT
Independent Non-executive Director				Independent Non-executive Director				Independent Non-executive Director
Appointed Independent Non-executive Director onHaving assessed the principal risks, the Board has determined that we have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over a period of three years from 1 January 20152018. In our long-term planning we consider horizons of both five and Memberten years. However, as most of our efforts are focused on the coming three years, we have chosen this period when considering our viability. Our conclusion is based on our current Strategic Plan approved by the Board in January 2018, having regard to longer-term strategic intentions, yet to be formulated in detail. However, we operate in a changing marketplace, which might cause us to adapt our Strategic Plans. In responding to changing external conditions, we will continue to evaluate any additional risks involved which might impact the business model. By order of the Audit Committee.Board, on 22 February 2018 Susan Swabey Company Secretary       Career and Experience Erik is a graduate of the Stockholm School of Economics (BSc) and of the Royal Institute of Technology in Stockholm (MSc). In 1986, he was awarded a Fulbright scholarship to Harvard Business School, from where he graduated with an MBA in 1988. Erik commenced his career at McKinsey & Co. and then worked in publishing, latterly as President and Chief Operating Officer of Random House, Inc. and as President and Chief Executive Officer at Bantam Doubleday Dell, North America. In 2001, he moved on to be a partner at General Atlantic Partners, a private equity investment firm focusing on information technology, internet and telecommunications businesses. Between 2004 and 2009, he was Chief Executive of Elsevier, the division specialising in scientific and medical information and then from 2009 Chief Executive of Reed Elsevier.   Skills and Competencies Erik has successfully reshaped Reed Elsevier’s business in terms of portfolio and geographies. He brings a deep understanding of how technology can be used to transform a business and insight into the development of new commercial models that deliver attractive economics. Nationality   Swedish				Appointed Independent Non-executive Director in April 2013. He was appointed Chairman of the Ethics & Compliance Committee on 1 August 2014. Career and Experience Michael graduated with a Bachelor of Arts degree, magna cum laude from Tulane University and a Doctorate in Medicine from the University of Texas. He completed postdoctoral training at Stanford University and the National Cancer Institute, and is board certified in Internal Medicine and Medical Oncology. In 1983, he joined the Division of Cancer Treatment at the National Cancer Institute and went on to become the Associate Director of the Cancer Therapy Evaluation Program. Michael was most recently Chief Executive Officer of City of Hope, the prestigious cancer research and treatment institution in California. He also served as Director of the institution’s 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 also Deputy Commissioner and Acting Commissioner at the US Food and Drug Administration (FDA). He has served on a number of boards in a non-executive capacity, including Rite Aid Corporation. Currently, Michael is a Non-executive Director of Celgene Corporation and Non-executive Director of MannKind Corporation. Skills and Competencies Michael understands the fundamental importance of research, which is part of Smith & Nephew’s value creation process. His varied career in both the public and private healthcare sector has given him a deep insight and a highly respected career. In particular his work with the FDA and knowledge relating to US compliance provides the skillset required to Chair the Ethics & Compliance Committee and resulted in a smooth handover during 2014. Nationality   American				Appointed Independent Non-executive Director in March 2002, Member of the Audit Committee, Nomination & Governance Committee and Remuneration Committee, and appointed Senior Independent Director on 10 April 2014. Career and Experience Brian graduated with a Bachelor of Commerce degree from Birmingham University. He spent most of 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 has held a number of Non-executive Directorships. He is currently Non-executive Director of gategroup Holding AG and Non-executive Director of Kodak Alaris Holdings Limited. Skills and Competencies Brian’s experience in private equity is particularly useful to us when evaluating acquisitions and new business opportunities. His long service as a Non-executive Director has provided continuity throughout a period of change and his corporate memory and wise counsel continues to support our new Chairman. As Senior Independent Director and member of the Nomination & Governance Committee, he plays an active role in succession planning and the search for new Non-executive Directors. In 2014, he led an insightful review into the effectiveness of the Board. Nationality   British