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S&N Launches Investigation Into Swiss Deal

Company discovers Plus Orthopedics giving kickbacks to purchasers

By: Michael Barbella

Managing Editor

function floatContent(){var paraNum = “3” paraNum = paraNum – 1;var tb = document.getElementById(‘floating-con’);var nl = document.getElementById(‘floating-target’);if(tb.getElementsByTagName(“div”).length> 0){if (nl.getElementsByTagName(“p”).length>= paraNum){nl.insertBefore(tb,nl.getElementsByTagName(“p”)[paraNum]);}else {if (nl.getElementsByTagName(“p”).length == 3){nl.insertBefore(tb,nl.getElementsByTagName(“p”)[2]);}else {nl.insertBefore(tb,nl.getElementsByTagName(“p”)[0]);}}}} Smith & Nephew, the UK-based medical devices group, is considering clawing back some of the $889m it paid last year for its Swiss rival Plus Orthopedics after unearthing “unethical” sales practices by the company’s offices in several European countries led by Greece.

The group estimated it would lose $100m in annual sales as a result of stopping commercial tactics by Plus – believed to include kickbacks to purchasers – which it had not identified during due diligence.

Shares in Smith & Nephew fell 13 per cent on Thursday after it made its probe public. It estimated the problems would cost it $25m in annual earnings and slightly more in 2008 because of the costs of the inquiry.

David Illingworth, who took over as chief executive last year after the deal, said: “We are going to pursue all of our legal options. I hope we will wrap up investigations fairly quickly.”

He also on Thursday added to the growing threats to move out of the UK if the government proceed with plans to tax corporate profits earned abroad. “Our international board encourages us to keep the question of tax domicile under review.”

Smith & Nephew added: “We are disturbed about the current trends concerning corporation tax in the UK.”

The comments come after Shire, the speciality pharmaceuticals business, decided last month to shift its tax domicile from the UK to Ireland. AstraZeneca said it was lobbying to prevent changes but had made no “formal” decision to move.

Pharmaceutical companies are under particular scrutiny from tax authorities and shareholders are keen to see better returns at a time of derating driven by scepticism over product pipelines.

Mr Illingworth said that when Plus was being integrated with S&N’s own orthopaedics division, sales practices had been found that did not meet the UK group’s ethical standards.

Of the $100m a year of sales affected, about $60m had been made in Greece. Sales were affected in other continental European markets but not in the UK or US. Analysts said the discovery could make S&N more vulnerable as a takeover target.

Group sales in the first quarter rose 22 per cent to $911m. Excluding acquisitions and currency gains, the underlying increase was 2 per cent. Profit before tax fell from $131m to $126m.

SOURCE: The Financial Times Limited

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