Market Report: Analysts talk up Smith & Nephew's bid potential

Despite the blue-chip index slumping yesterday to its lowest level since December, Smith & Nephew managed to advance by 3.5p to 718.5p after analysts said that its takeover credentials had received a boost from a study into one of its major rival's devices.

The prosthetics manufacturer's move came after Navid Malik, of Matrix, highlighted a recent report about a hip replacement product made by Johnson & Johnson. According to the findings, issued jointly by the British Hip Society and the British Orthopaedic Association using data obtained from four surgeons, the US giant's ASR XL Acetabular hip system has a failure rate much higher than was previously thought.

The device was recalled by J&J last August, when the company said about 13 per cent of patients would need further operations within five years. Yet the new study said its data showed a failure rate of 49 per cent at six years and 21 per cent at four years.

Mr Malik said if the findings were validated by other surgeons, then the damage to J&J's hip business could be "significant" and S&N's Birmingham Hip Resurfacing device might benefit as a result. "This is an astonishing level of failure for what is one of the market-leading products in the metal-on-metal space," he added.

Describing S&N as "a highly attractive takeout target", he also said the news improved the chances of it receiving an approach, and claimed that it would "put even more pressure on J&J to look for acquisitions". Bid speculation surrounding S&N has been rampant in recent months, and there were reports in December that it had rebuffed an approach from J&J.

Overall, the FTSE 100 plummeted 92.01 points to 5,845.29 as sentiment was knocked by a variety of bad news. As well as the ongoing unrest in Libya, Spain's debt rating was downgraded to Aa2 by Moody's, while disappointing economic data from the US and China did not help matters.

Only 11 companies finished in the blue, including GlaxoSmithKline, which managed to climb by 3.5p to 1,187.5p after the US Food and Drug Administration gave its new lupus drug the green light. The approval is the final step for Benlysta in America, and was described by Emmanuel Papadakis, of Collins Stewart, as "a turning point" for the group.

The index's biggest gainer was Shire, which rose by 29p to 1,796p after Morgan Stanley upgrading its rating to "equal-weight". The broker claimed the market had underestimated a number of postive factors about the group, including its human genetic therapies business.

Arm Holdings, whose chip technology is used in Apple's iPad, is normally more used to finishing on the leaderboard, having gained about 20 per cent this year alone, but yesterday it was left with the wooden spoon after falling 51.5p to 522.5p. The Cambridge-based company was picked out by JPMorgan Cazenove, with its analysts warning that "[computer] tablet supply in 2011 could overshoot demand by 17.2 million units or about 36 per cent". In Europe, Arm was likely to be affected the most by "poor non-Apple tablet sales", it added.

A strong update helped Wm Morrison push up 4.5p to 285p as its annual underlying profit came in just above expectations. The supermarket chain's preliminary results were eagerly anticipated, amid hopes that it would announce a shares buyback, and it did not disappoint, unveiling a plan worth £1bn.

Aggreko, however, did not enjoy the same reaction to its annual figures, and the generator supplier fell back 99p to 1,390p. Its revenue for the year was given a boost by a number of major sporting occasions that took place in 2010, including the Winter Olympics in Vancouver, Canada, and the World Cup in South Africa. However, it warned that its trading profit would remain steady because there were no equivalent events this year.On the FTSE 250 index, Home Retail dropped 12.4p to 198.5p after warning that its annual profit could come in as much as £13m below its previous forecast of £263m. However, the market was raising a glass to Punch Taverns, which lifted by 4.5p to 75.5p thanks to the news that its sales for the second quarter were up more than 8 per cent.

TalkTalk Telecoms was also sharply up, gaining 6.5p to 141p, but traders dismissed the idea that this was because vague bid speculation linking it to Vodafone had re-emerged.

They pointed instead to the sale of shares last month by David Ross – the co-founder of Carphone Warehouse, from which TalkTalk demerged – which increased the size of its free float. As a result, its weighting was upgraded in Wednesday's latest quarterly review of indices, prompting a rush from tracker funds for its shares.

On the Alternative Investment Market, the pawnbroker H&T said its gross profit had increased by 30 per cent thanks in part to the strength of the gold price. However, it edged back by 0.62p to 320p after making cautious noises about the year ahead.