Sales probe to wipe $25m off Smith & Nephew profit

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The medical technology group Smith & Nephew has slashed $25m (£12.7m) off its profits forecast for the year after uncovering "unacceptable sales practices" in its Plus Orthopaedics unit, a company it bought only last year.

David Illingworth, the chief executive, refused to be drawn on what exactly has happened at the company's continental European subsidiary, nor on whether the problems related to illegal or unethical issues.

S&N said the problems related largely to Plus's activities in Greece, although business elsewhere on the Continent has also been affected. The disclosures will lead to a $200m sales loss this year and a $25m drop in profits.

While that represents a relatively small write-down, of about 3 per cent of consensus forecasts for the year's profits, the announcement drew sharp criticism from market analysts who complained that the company had given no details of problems when the group's 2007 full-year figures were announced in February.

Mr Illingworth admitted yesterday that the company has been investigating the problem for some time, but refused to say for how long. "This is shocking news in every way," said Jeremy Batstone-Carr, an analyst at Charles Stanley. "They have divulged very little so far, and why has it taken nine months to come out?"

Smith & Nephew, which specialises in orthopaedic and reconstructive treatments, bought Switzerland's Plus Orthopaedics, a private company, for nearly $900m in June in a competitive bidding process. "We relied on what they told us at the time. You have to rely on the representations given to you," said Mr Illingworth. "We did a good job on due diligence and will be aggressively pursuing our options with the vendors."

However, the group's scrutiny of Plus is likely to be questioned by investors, particularly as the company has repeatedly said its growth depends on bolt-on acquisitions.

Analysts said that the issue was likely to relate to unlawful practice. "This has clearly got to be a question of illegality," said one follower of the company who asked not to be named. "If it was an ethical question, they could clean it up and carry on, but they have ceased selling. Clearly they are hoping for some sort of redress."

Mr Illingworth claimed that the group was being as open as possible, but said that he could not give certain details, on the advice the company's lawyers, who he also refused to name.

He added that the company had worked hard in recent days to publish the announcement alongside the group's first-quarter figures, though some analysts said this might have been a ploy to distract from disappointing figures. Pre-tax profits were down $5m to $126m, while the group's share price dropped nearly 13 per cent to 570p.