Smith & Nephew , Europe's largest artificial hip and knee maker, is to spin off its biologics business into a new U.S.-based joint venture that will be majority owned by healthcare private equity firm Essex Woodlands.

The move provides a cash injection and long-term funding for research in the high-tech area at a time when the British company has been struggling with tough markets for its main products.

S&N said on Wednesday it would receive $98 million (62 million pounds) cash, which will be used to pay down debt, and a $160 million five-year note from the joint venture. The venture will be known as Bioventus and owned 51 percent by Essex Woodlands.

S&N, along with competitors, has been hit by low demand for hip and knee replacements as people postpone elective procedures because of concerns about job cuts.

It reported disappointing third-quarter results two months ago, and Olivier Bohuon, who became chief executive last April, said at the time that S&N needed to adapt faster to meet market challenges.

Bohuon said the biologics deal offered a solution that would benefit the company in several ways.

In a single act, we have given our existing biologics business the resources to address longer-term development projects, retained access to the exciting area of orthobiologics, realised value for reinvestment in nearer-term opportunities, and freed up management resource to focus on driving efficiencies in established markets, he said.

The transaction is expected to be completed in the next few months and will be modestly earnings dilutive, the company added.

Navid Malik, an analyst at Merchant Securities, said the initiative made sense for the long term, since it would ensure increased resources for one of the most innovative parts of the orthopaedics market, which still requires heavy investment.

S&N already markets a number of biological products, including Exogen for bone healing, and the aim is to develop new products to heal and treat joint and bone conditions without invasive surgery.

Shares in S&N were up 0.6 percent at 630 pence at 0836 GMT in a flat London stock market.

S&N will transfer the majority of its U.S. biologics team and clinical therapies business to Bioventus, in which it will have a 49 percent stake. For the time being, S&N will continue to distribute clinical therapies products outside the United States.

Its biologics and clinical therapies business had sales of $223 million in 2010, of which $33 million came from sales outside of the United States.

Essex Woodlands, a global venture capital and growth equity firm, has $2.5 billion under management.

(Reporting by Ben Hirschler; Editing by Will Waterman)