Smith & Nephew, the UK’s largest manufacturer of orthopaedic and other medical equipment, is considering a $2 billion (£1.05 billion) sale of its wound management division to finance a proposed merger with US rival Biomet.

S&N is eager to expand its presence in the artificial limb and joint reconstruction business, a $21 billion market which is growing rapidly as a result of the developed world’s rapidly ageing population.

Biomet, a specialist in the production of artificial joints and limbs, controls about 11 per cent of the market while S&N commands 9 per cent.

A combined group would be well positioned to compete with the three market leaders, Zimmer, Stryker and DePuy, a subsidiary of Johnson & Johnson, each of which has a market share of about 20 per cent.

S&N said in a statement yesterday that discussions with Biomet were at a “very preliminary stage”.

“No agreement has been reached, and there can be no assurance that any transaction will be proposed or completed.”

But sources close to S&N say that the mooted tie-up could be partly financed through a sale of the group’s wound management unit, which makes a range of dressings, ointments and surgical equipment.

S&N shares slipped 2 per cent yesterday amid concern that any deal would involve a sizeable rights issue.

Analysts said the deal made strategic sense but could prove problematic. “Biomet and S&N are sub-scale and would be more competitive if put together,” said Peter Cartwright, analyst at Evolution Securities. “But implementation might be tricky because they are both engineering-led companies.”

Orthopaedic surgeons, the companies’ main customers, often have enormous loyalty to a particular manufacturer and trying to fuse together their product ranges “might be messy”, Mr Cartwright said.

S&N, which also owns an endoscopy business, made the merger announcement immediately before reporting a 50 per cent rise in third-quarter net profits to $93 million, up from $62 million last year. Sales rose 11 per cent to $679 million, boosted by the introduction of a new hip implant product and better performance in its orthopaedic division.

“We are encouraged by the modest improvement in the US market, but European market conditions remain challenging,” said Christopher O’Donnell, chief executive.

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