'Kickbacks' probe deals Nephew a losses blow

Shares in the knee and hip replacement giant were limping today after S&N, a British champion in the global medical technology market, admitted it will have to give up $100 million (£50.7 million) of revenues this year after uncovering dodgy sales practices.

Chief executive David Illingworth said he expected profits to be cut by more than $25 million in 2008 because of the problem.

In a statement to the Stock Exchange that prompted a 44p slide in the FTSE 100 company's stock to 611p, S&N said questionable practices had been uncovered among salesmen in Plus, the Swiss orthopaedic group it bought for £460 million last year.

It is believed a six-month internal probe has identified sales representatives who may have been accepting kickbacks from the sale of artificial joints.

News of the emerging scandal will pile the pressure on Illingworth, the American who replaced S&N's former driving force Sir Chris O'Donnell when he quit last year amid shareholder recriminations.

Illingworth was caught up in a fiasco last autumn when the company had to recall hundreds of badly made knee implants, forking out compensation of up to £50,000 a time as patients had to have them removed.

While the acquisition of Pluswas the last deal done by O'Donnell before his departure, Illingworth will have been fully involved in the takeover as his then chief operating officer.

"We have undertaken a thorough investigation of these sales practices," S&N said in today's first-quarter results, in which it reported a 4% fall in earnings per share as the company recorded operating profits of $142 million.

S&N said the probe, being conducted by external lawyers and investigators, is ongoing, but has already seen the dropping of sales contracts worth $10 million in the first three months of the year.

The statement continued: "We currently expect revenues in a full 12-month period to be reduced by about $100 million. A large part of this issue relates to Greece where proforma 2007 revenues were $60 million. We do not expect to recover these lost revenues. We have taken prompt, decisive action to ensure that the sales practices we uncovered within Plus in continental Europe have been stopped."

Plus was supposed to be the business to help transform S&N. It doubled S&N's market share in joint replacements in Europe, where it competes against the giants of the industry such as Zimmer, making S&N the fourth-largest orthopaedics group in the world.

However, some saw the deal as the muddled response to O'Donnell's embarrassing failure to land Biomet, the American artificial joints group.

S&N was outmanoeuvred in a £5.5 billion bid battle - a reversal that eventually led to O'Donnell's departure.

A spokesman for S&N refused to comment on whether criminal charges may result.