MANAGING DIRECTOR LAWRENCE KINET

SMITHS MEDICAL IS A LEADING SUPPLIER OF DEVICES USED DURING CRITICAL AND INTENSIVE CARE, SURGERY, POST-OPERATIVE CARE DURING RECOVERY, AND IN A SERIES OF HIGH-END HOME INFUSION THERAPIES. WE ARE FOCUSING ON DEVELOPING TECHNOLOGIES THAT OFFER BOTH CLINICAL AND ECONOMIC ADVANTAGES TO HEALTHCARE PROVIDERS IN AREAS WHERE WE HAVE A COMPETITIVE EDGE AND WHERE THERE ARE OPPORTUNITIES FOR GROWTH.

During 2003, the world market for medical devices continued to grow steadily, in line with increased healthcare spending in the advanced economies, driven by ageing populations and strong demand for new technology. Smiths Medical benefited from these trends, although its underlying performance was masked by the impact of currency translation, mainly from a weaker US dollar, which reduced reported sales by £20m and profits by £5m. Over half of the division's sales are generated in the United States.

The decline in operating margin was limited to the first half and was largely due to the one-off costs of launching the new Cozmo™ insulin delivery pump. Margins in the first half dipped to 16%, recovering to 20% in the second half, so averaging 18% for the year. The company aims to maintain Medical's margin while progressively increasing investment in research and development. Currently, approximately 20% of products are less than three years old and there is a pipeline of new products, which secure the highest margins.

Devices that have been the focus of recent investment accomplished strong sales growth. More than 3,000 diabetes sufferers purchased the Cozmo™ insulin pump. US hospitals purchased our needle protection devices in growing numbers, following the expansion of an increasingly comprehensive product range. Infusion and Airway, our largest businesses, achieved steady growth while continuing to introduce new products.

STREAMLINED STRUCTURE
In June, we formed Smiths Medical into a single global identity in order to improve further the focus with which we sell to our customers. In the United States, Smiths Medical has been organised around two broad product categories: Medication Delivery and Patient Monitoring, which includes the infusion pumps already described and pulse oximetry; and Anaesthesia and Safety Devices, including single-use devices for anaesthesia, airway management and patient temperature management during surgery or other intensive care procedures.

Specialised sales forces have been assigned to each of these sectors and a team established to manage relationships with the big hospital group purchasing organisations in the United States. Smiths Medical International now coordinates sales through a worldwide distributor network. The drive to manufacture the highest quality products at the lowest price has continued, with increased production at our global assembly facility in Tijuana, Mexico. By the end of the financial year, Tijuana assembled about half of our devices and employed more than 1,500 people.

INNOVATIVE PRODUCTS
Reducing the cost of manufacturing has allowed us to increase investment in product development without reducing or damaging margins. We increased research and development spending by 14% in the year and aim to grow this further to the industry norm of 5-6% of sales.

Current developments include a second version of the Cozmo™ pump, which integrates a glucose monitor. We are working on this development with our partner, TheraSense, a leader in glucose monitoring technology. It is anticipated this product will be ready some time early in 2004. In emergency and critical care, we have introduced a significant product enhancement for our level 1^® fast flow fluid warmer devices that shuts off flow to the patient if the device detects the presence of air in the fluid delivery line. In our Airway business, we have launched a laryngeal mask that supports day care surgery and a ventilator for taxing military environments.

OUTLOOK
Investments in new products will stimulate sales growth, while maintaining margins. Similarly, the larger and more focused sales force will generate growth, while our continuous drive for efficiency improves manufacturing quality and profitability.