Smith & Nephew , Europe's largest artificial hip and knee maker, posted 9 percent lower third-quarter trading profit, saying its costs were too high for the subdued orthopaedics market.

Shares in the group, which also has endoscopy and advanced wound management units, fell as much as 7.5 percent to a 12-week low after the earnings fell short of market expectations.

Olivier Bohuon, who became chief executive in April, said he was disappointed with the margin.

Our cost base in orthopaedics was too high, he told reporters on Friday.

We have to adapt to meet market challenges -- we are all seeing lower growth and greater pricing pressure. We have been addressing this issue but we did not do this fast enough.

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

Bohuon said he was reducing manufacturing costs, improving operations in established markets and simplifying management to save $150 million (93 million pounds) a year.

There would be an unspecified number of job cuts, he said.

The company's shares were trading 1.5 percent lower at 548 pence at 9:59 a.m. British time, the third biggest faller in a 0.7 percent stronger FTSE 100 index <.FTSE>.

Broker Numis said the orthopaedic margins were nothing short of horrendous.

Analyst Mike Mitchell at Seymour Pierce also said the margin performance would come under the spotlight, with the orthopaedics business remaining the drag.

He said his full-year adjusted operating profit margin of 23.7 percent was now looking optimistic.

We expect the stock to come under pressure while the market assesses the ability of the recently-arrived CEO to address near-term costs, he said.

CONFIDENT Q4 WILL BE BETTER

Bohuon said he was confident that the trading profit margin would rise above 24 percent in the fourth quarter from 19.8 percent in the third.

Smith and Nephew's fall in profit to $205 million overshadowed top-line growth of 10 percent, taking revenue to a better-than-expected $1.03 billion.

Adjusted earnings per share edged up by just 0.6 percent to 16.2 cents, short of analysts' forecasts of 0.7 cents, according to a Thomson Reuters I/B/E/S poll.

Tough trading conditions have become entrenched in the orthopaedics sector as unemployment remains high in established markets and governments and insurers demand price cuts.

Last month, Zimmer said third-quarter U.S. sales were flat, while growth in Europe and Asia was flattered by currency.

It was the same story at Johnson & Johnson's DePuy unit, and Stryker reported continued softness in reconstructive markets.

S&N said its orthopaedics revenue grew 3 percent in the quarter, led by its knee products which carry a 30-year wear claim.

Its hip business shrank by 2 percent, however, reflecting some concerns about metal-on-metal technology, and the group said prices in orthopaedics fell by around 3 percent in the quarter.

The company said it still expected to grow full-year revenue in orthopaedic reconstruction, sports medicine and advanced wound management faster than the market.

Analysts expected S&N to report revenue of $1.02 billion and earnings per share of $0.17, according to a Thomson Reuters I/B/E/S poll of eight brokers.

(Editing by Hans-Juergen Peters and Mike Nesbit)