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May-01-2008Smith & Nephew Cuts Sales Targets on Plus Unit Probe (Update2)(topic overview)
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More questionable sales practices popped up in the medical device business. This time, word comes via the U.K., where device maker Smith & Nephew dropped $900 million last year to buy the Swiss implant maker Plus. Today, the company's CEO said that Smith Nephew, in integrating its operations with Plus, "uncovered certain sales practices in parts of Europe which are unacceptable." The finding is likely to mean a revenue hit of $100 million over the course of a year, the company said. Shares fell sharply on the London market, and they're down more than 10% in U.S. trading this morning. The company didn't go into details about the unacceptable practices, but it said "a large part of this issue relates to Greece." Last year, Medtronic said the SEC was looking into its sales practices in Greece and a few other European countries. [1] Selling, general and administrative expenses rose to $480 million from $392 million a year earlier and research and development expenses edged up to $33 million from $32 million. Moving forward, Smith & Nephew said that it aims to reap significant benefits from the Plus acquisition and to move ahead with its Earnings Improvement Program that continues to drive material margin enhancement across the group. The company expects that its revenue will be reduced by about $100 million during a 12- month period, impacted by the changes it is making to harmonise the Plus sales practices with Smith & Nephew policies. The company anticipates about 70% of the reduction in revenues in its Reconstruction business, and about 30% in Trauma. In the conclusion part, Smith & Nephew stated that although this has been a challenging quarter in parts of its business in Europe, it has taken firm action and are confident that the overall business is in a strong position for continued strong sustainable profitable growth.[2] Smith & Nephew said bringing the orthopedics unit into line with the rest of the group would reduce full-year revenues by $100 million. Chief executive David Illingworth said: "We have taken prompt, decisive action to ensure that the sales practices we uncovered within Plus in continental Europe have been stopped and this has impacted our performance this quarter and will continue to do so for the rest of the year."[3] David Illingworth, chief executive at Smith & Nephew, said: "We have taken prompt, decisive action to ensure that the sales practices we uncovered within Plus in continental Europe have been stopped and this has impacted our performance this quarter and will continue to do so for the rest of the year." "As soon as these actions came to light we took prompt decisive action and began an independent review of the situation which has progressed a long way but is not yet 100 percent complete." Most of the activity - about $60 million - appears to have taken place in Greece, where Smith & Nephew has now virtually closed down its operations.[4]
LONDON (Thomson Financial) - Smith & Nephew Plc., the UK-based orthopaedics specialist, reported first-quarter pretax profits down to $126 million compared with $131 million last year and said it expects sales to be cut by $100 million in the full year because of 'unacceptable practices' it discovered during the integration of its Plus division. 'As soon as these actions came to light we took prompt decisive action and began an independent review of the situation which has progressed a long way but is not yet 100 percent complete,' chief executive David Illingworth told journalists on a conference call. 'What we can tell you at this point is that the majority of these issues are in Greece and we've moved to put a stop to these unacceptable practices. 'These practices are against the ethics and policies of Smith & Nephew and some people were acting in a way entirely unacceptable to us. He said the company will pursue 'with vigour' all of the available options that it has with the vendors and added it will pursue whatever remedies it has with 'particular gusto'.[5]
Trading profit margin, or the operating profit as a percentage of sales adjusted for one-time items, rose to 20 percent in the quarter from 19.9 percent a year earlier, the company said. Smith & Nephew, whose Birmingham hip product has helped it grow faster than the market for replacement hips and knees, began a cost-cutting program this year aimed at raising earnings by at least $100 million in 2009. That program is "on track,'' Illingworth said. The U.S. Securities and Exchange Commission told the company in September that it was investigating "certain marketing practices'' in the orthopedics reconstruction operations in Germany, Poland and Greece "with reference to the U.S. statute known as the Foreign Corrupt Practices Act,'' Smith & Nephew said March 31 in its annual report.[6] The medical devices company paid $889 million for Plus Orthopedics, a Swiss orthopedics company, in 2007. As well as the $100 million impact on sales, Smith & Nephew said profits would fall by around $25 million this year. It has launched an investigation into the sales practices which emerged while Plus was being integrated into the company, and will hire legal and forensic accounting experts to examine the practices. Its share price tumbled 6 per cent to 615½p.[4] Knee and hip replacement firm Smith & Nephew revealed a 100 million U.S. dollar (''50.2m) revenues blow today after uncovering "unacceptable" sales practices at a recently-acquired orthopaedics business. The group indicated that the discoveries at Plus, bought last July for 889 million U.S. dollars (''446.7m), could cost it around 25 million U.S. dollars (''12.6m) in lost profits this year.[7] As part of the integration of Plus with the Group's Reconstruction and Trauma and Clinical Therapies business segments, the company uncovered certain unacceptable sales practices in parts of Europe. The company, which have undertaken a thorough investigation, said that the unacceptable sales practices impacted its first-quarter performance, mainly in Greece, and will continue to impact performance over the course of the year. According to Smith & Nephew, the harmonization of the Plus sales practices directly reduced its quarterly revenue in Europe by about $10 million.[2] London-based S&N;, which is the world's fourth biggest maker of medical devices, said: "As part of the integration of Plus, we uncovered certain sales practices in parts of Europe which are unacceptable to Smith & Nephew. We have immediately moved to harmonise these practices with Smith & Nephew's standards. "This has impacted our first quarter performance, predominantly in Greece, and will continue to impact performance over the course of the year."[7]
Medical devices group Smith & Nephew has seen its share price slump over 5pc today, after revealing 'unacceptable sales practices' at its recently required Plus subsidiary had led to a multi-million pound hit on its financial performance.[8]
Chief Executive David Illingworth added the issues that came to light during the integration would not affect the medical device maker's strategy to seek out "bolt-on" acquisitions. He also said despite the extra costs arising from the investigation, he still saw future benefits from the Plus deal. "In the course of the integration some things came to light we were very suspicious of," he told a conference call with reporters. "These business practices are unacceptable to Smith & Nephew."[9] Chief executive David Illingworth said: "While we are pleased with our performance across most of the business we did have one issue to deal with in the former Plus business in Europe. "We have taken prompt, decisive action to ensure that the sales practices we uncovered within Plus in continental Europe have been stopped and this has impacted our performance this quarter and will continue to do so for the rest of the year."[8] "We have taken prompt action to ensure sales practices have been stopped," said chief executive David Illingworth. "This has impacted our performance this quarter and will continue to do so for the rest of the year." He said profits would be hit by the sales decline, the time it would take to adjust the cost base, as well as having to pay for the investigation into the problems.[10]
Full year profits are expected to be off by $25 million, the company said. Chief Executive Officer David Illingworth told reporters that it's too early to say whether the probe will end in a criminal prosecution, and would not rule out legal action against its former owners.[11] The shares declined the most in two years. The company "almost closed down'' its operation in Greece, where most of the questionable sales occurred, Chief Executive Officer David Illingworth said today on a conference call. He wouldn't give details on the workers' actions or say how many were involved.[12] The U.K. company "virtually closed down'' the Plus operation in Greece, where most of the questionable practices occurred, Chief Executive Officer David Illingworth said today on a conference call after the implant maker reported that first- quarter earnings unexpectedly fell. He declined to give details on the workers' actions or say how many were involved.[6]
While we are pleased with our performance across most of the business we did have one issue to deal with in the former Plus business in Europe," chief executive David Illingworth said. He added that S&N; had taken firm action and is confident that the overall business is in a strong position for continued strong sustainable profitable growth.[13] Despite the issues with the recently-aqcuired business, further acquisitions remain a key part of strategy for Europe's biggest medical device maker, Chief Executive David Illingworth added during a telephone briefing with reporters.[14]
Shares of Europes biggest medical device maker sank 11 percent following news the company had hired outside legal and accounting experts to look into a Plus Orthopaedics, the Swiss company it bought last year for nearly $1 billion (503 million pounds).[15] The company reported adjusted earnings per share up 14 percent to 12.8 cents, compared with 11.2 cents last year, at the low end of analysts' consensus forecasts of 12.3 cents and 14.2 cents. Revenues from its reconstruction segment were up 2 percent at $377 million.[5] Excluding items, adjusted profit attributable to the equity holders reached $114 million, up from $106 million last year and adjusted earnings per share rose to 12.7 cents from 11.2 cents.[2]
Stryker Corp., also based in the U.S., said two days later that earnings for the quarter rose 19 percent, aided by $62 million in added revenue from foreign exchange gains. The shares had gained about 15 percent this year before today, while the FTSE 100 Index has fallen about 6 percent. Johnson & Johnson shares are little changed in New York trading this year, while Stryker has declined about 13 percent.[12] The company also reported relatively healthy first quarter results, with revenue rising to $911 million, up 22 per cent from the same time last year, on strong demand for the company's new Birmingham hip. This will be threatened later this year by the launch of Corin Group's rival Cormet implant in the United States.[4] Quarterly revenue grew 22% to $911 million from $744 million in the last year quarter. The company noted that the absence of two more sales days compared to last year lowered its sales by 2% to 3%.[2] Revenue rose 22% from last year, though early Easter reduced sales by about 2% to 3% across the orthopaedics industry as a whole. The London-based company also said that its revenue will be reduced by about $100 million during the 12- month period as part of its effort to harmonise the Plus sales practices with the company's policies.[2] Revenues in Trauma and Clinical Therapies unit reached $151 million, up from $136 million last year, but were impacted by the harmonisation of sales practices in Europe and by a disappointing performance in the U.S. Sales practice changes directly reduced revenue by about $6 million, or about 20% points of growth in Europe.[2]
Smith & Nephew said the problems were mainly in Greece and forecast a resulting drop in 2008 sales and profits by about $100 million and $25 million, respectively. Weak margins in the wound-management business related to new products in the United States and 11 percent growth in its key U.S. hip replacement business that was below analyst expectations of 16 percent growth also hurt the stock, he added. "This has caught everybody on the blindside," said Charles Weston, an analyst at NomuraCode Research. "Most people would have expected them to find any sales issues like this quite quickly."[9] LONDON, May 1 (Reuters) - Smith & Nephew (SN.L: Quote, Profile, Research ) said problems related to sales practices in its Plus business will cost the company more than $25 million in lost profits in 2008, company officials said on Thursday.[14] Smith & Nephew, the FTSE 100 medical-equipment group, today warned that "unacceptable" sales practices in a business it bought last year will cost it more than $100 million (£50 million) in lost sales this year.[4]
Medical equipment group Smith & Nephew is on the slide after it warned its full year revenues will be hit to the tune of $100m following the discovery of untoward sales practices at a European acquisition. These occurred at Swiss group Plus Orthapedics, bought almost exactly a year ago, and were apparently most prevalent in Greece.[10] May 1 (Bloomberg) -- Smith & Nephew Plc, Europe's largest maker of knee and shoulder implants, reduced its revenue forecast after "unacceptable'' sales practices triggered a probe at the Plus Orthopedics unit.[6] May 1 (Bloomberg) -- Smith & Nephew Plc, Europe's largest maker of knee and shoulder implants, said first-quarter profit unexpectedly fell after "unacceptable'' sales practices hurt European revenue.[12]
The company said that over the quarter revenues had been hit by 2pc and profit by 0.5pc due to the 'harmonisation of the sales practices of Plus in Europe'.[8]
The company's shares dropped more than 6% after the announcement, which offset an otherwise healthy first quarter update from S&N.; Estimating the annual impact from the harmonisation at 100 million dollars, S&N; added: "We do not expect to recover these lost revenues, but we see no ongoing impact on the continuing robust growth of the business, including the Plus revenues unaffected by the changed sales practices." About 70% of the reduction in revenues will be in the orthopaedic reconstruction business, with the remaining 30% in its trauma arm.[7] Medical technology company Smith & Nephew posted a four per cent first quarter dip in earnings per share after discovering dubious sales tactics at unit Plus Orthopedics.[3] Smith Nephew, which also makes wound treatments and keyhole surgery instruments, said earnings per share before items and amortisation rose to 13 cents from 11 cents a year ago.[15]
Smith & Nephew, which reported higher adjusted quarterly per share earnings, said the internal probe was nearing completion but it did not provide many further details.[9]
"We are confident we know what the issues are. It's hard to predict exactly the end of this probe, but we're close enough to the end of the investigation to put some clarity on it.'' Smith & Nephew, whose Birmingham hip product has helped it grow faster than the market for replacement hips and knees, began a cost-cutting program this year aimed at raising earnings by at least $100 million in 2009. That cost-savings program is "on- track,'' Illingworth said.[12] The probe comes after Smith Nephew agreed to pay about $29 million as part of a settlement last year involving three other medical device makers over a government probe into consulting deals prosecutors said were made with surgeons to sway decisions on which hip and knee implants to give to patients.[15] Following the conclusion of a U.S. Department of Justice probe into the medical device industry in September last year, Smith & Nephew and peers Zimmer Holdings Inc. (ZMH), Stryker Corp. (SKY) and Johnson & Johnson (JNJ) disclosed millions of dollars in payments to U.S. surgeons. That was supposed to draw a line under the matter, she said.[11]
Smith & Nephew posted first-quarter sales of $911 million, up 22 percent compared with $744 million last year.[5] Smith & Nephew's operating profit increased 12% to $142 million for the quarter from $127 last year.[2] Overall, the world's fourth largest maker of medical devices Thursday reported operating profit rose 12% to $142 million for the quarter ended March 28, compared to $127 million a year earlier.[11] Johnson & Johnson, the U.S. maker of DePuy artificial hip and knee products, said on April 15 that first-quarter profit rose 40 percent, while medical device revenue gained 7.2 percent to $5.7 billion.[12]
The artificial hip and knee joint group added sales and profits for the year would be hit because of the issues with Plus, a Swiss company bought last year for nearly $1bn. "We have undertaken a thorough investigation of these practices which has made significant progress, but is not yet fully complete. [13] The London-based company bought Switzerland's closely held Plus Orthopedics Holding AG last year for $889 million in cash and debt to get more artificial hips, knees and smaller joints. "The synergies they're hoping to get from Plus are more than offset by the costs of integration, considering the costs that management will have to deal with to limit damage of whatever practices these are,'' Blue Oar analyst Mick Cooper said in an interview. "This is bad news.''[6]
Smith & Nephew bought private Swiss company Plus Orthopedics in 2007 for $889 million in a deal that doubled the company's share of the European orthopaedic reconstruction market. In a conference call with reporters, Mr Illingworth said he could not rule out a criminal prosecution or legal action against the company's former owners.[3] LONDON (SHARECAST) - Smith & Nephew shares tumbled as it revealed it had discovered $100m of overstated sales at its recently acquired Plus Orthopaedics business.[13]
Charles Weston, an analyst at Nomura Code Securities, said the division's performance was "shockingly bad". Smith & Nephew also had a bad quarter at its U.S. trauma operations, where growth was just 1% on the year-ago quarter. CEO Illingworth said he was "not happy" with this performance. He said Smith & Nephew plans to shake up management and the sales force at trauma and bring it closer to its core reconstruction business.[11] Orthopaedic reconstruction revenue rose 8% excluding Plus and was up 7% in the U.S. driven by the new Birmingham hip, though analysts were slightly disappointed with the growth in the hip replacement business and also the level of margins in the wound management division.[13]
Total revenue, helped by BHR sales and favorable exchange rates between the dollar and other currencies, rose 22% to $911 million, compared to $744 million a year earlier. That's towards the top end of analysts' forecasts of between $860 million to $930 million.[11] During the quarter revenue rose to $911 million but missed analysts forecasts.[15]
Revenue rose 22% to $911 million, compared to $744 million a year earlier.[16] Orthopaedic reconstruction revenues rose to $377 million from $262 million last year.[2]
Quarterly revenue in Endoscopy segment grew 4% to $194 million from $177 million a year earlier, on 14% strong rest of the world growth and 10% higher European growth.[2] Revenues were 911 million U.S. dollars (''457.7m) for the period, representing underlying growth of 2% year.[7]
Revenue, including acquisitions and currency movements, increased 22 per cent to $911 million.[3] Analysts on average were forecasting an adjusted per-share profit of 13 cents and revenue of $932 million, according to Reuters Estimates.[15] Revenue will be reduced by about $100 million in 2008, cutting profit by about $25 million.[6]
Revenue will be reduced by about $100 million during a 12- month period, London-based Smith & Nephew said.[12] First-quarter net income dropped 8.8 percent to $83 million, or 9.3 cents a share, Smith & Nephew said.[6] Smith & Nephew fell 85 pence, or 13 percent, to 570 pence in London, the biggest drop since September 1988. The shares had gained about 15 percent this year before today, while the FTSE 100 Index has fallen about 6 percent.[6] Shares in Smith & Nephew took a hammering on the news, falling 10.38 per cent to 587p by 15:00 BST on the London FTSE 100 index.[3]
On a per share basis, earnings declined 4% to 9.3 cents from 9.6 cents per share last year.[2]
Trading profit in the quarter was $182 million, representing reported growth of 23 per cent.[3] Trading profit was $182 million, up 23% from $148 million last year.[2] Profits will be hit by about $25 million in the full year, as a result of the problems, the company said.[5] The company's first-quarter profit attributable to equity holders of the parent was $83 million, lower than $91 million year earlier.[2]
Trading profit margin, or the operating profit as a percentage of sales adjusted for one-time items, rose to 20 percent in the quarter from 19.9 percent a year earlier, the company said.[12] The company said the discovery of the sales practices centered around reconstruction and trauma businesses, principally in Greece. Lost revenue from these units could reduce revenues by around $100m (£50m) over the 12 month period, the company said.[8] The SEC investigation isn't related to today's announcement about sales practices in Greece, external company spokesman Jon Coles said in a telephone interview. "But of course, Smith & Nephew is keeping the SEC informed during the investigation process,'' he said.[6] Europe's biggest medical device maker said it has launched an investigation into the "unacceptable" sales practices of the recently-acquired Greek business but did not reveal any details.[3]
LONDON, May 1 (Reuters) - Smith & Nephew Plc (SN.L: Quote, Profile, Research ) on Thursday disclosed that an internal probe had turned up "unacceptable" sales practices at a newly acquired unit, warning the problems would hit sales and profits in 2008.[9]
"Maybe now we have to look at European sales practices," Game said. She added the problems appeared to be temporary and should not have an effect beyond 2008. There was further bad news for Smith & Nephew investors Thursday when the company reported weak quarterly result at its advanced wound management unit, where U.S. sales fell 13%.[11]
The company's Advanced Wound Management segment, saw sales up 2 pct at $189 million.[5] The median estimate of seven analysts surveyed by Bloomberg was $97 million. "It's going to take us time to work out the full implications,'' Charles Stanley analyst Jeremy Batstone-Carr said in an interview. "It's all about the impact of these Plus sales practices.''[12]
The company acquired Plus Swiss orthopaedic company Orthopedics Holding AG in May, for $889 million in cash, including assumed debt.[2] Revenue for the three month period grew 22pc to $911m, while operating profit was up 23pc to $182m. Both these results were inflated by the addition of income from the $1bn acquisition of Swiss company Plus Orthopaedics.[8] We currently expect revenues, in a full twelve month period, to be reduced by about $100m". A large part of this issue relates to Greece where pro-forma 2007 revenues were $60m, it said, adding it could knock $25m off profits.[13]
Smith & Nephew, the biggest maker in Europe of knee and shoulder implants, is also trying to lift profits by at least $100m in 2009 through cost cuts.[8] Profit before taxation came in at $126 million, down from $131 million in the previous year.[2] The median estimate of seven analysts surveyed by Bloomberg was for profit to increase to $97 million.[6]
S&N; reported operating profits up 12% to 142 million U.S. dollars (''71.4m) for the quarter ended March 28.[7] Operating profits rose by 12% to '142m and underlying earnings by 13% to 12.8c, but stated earning fell by 4% to 9.3c.[13]
Revenues for the first quarter rose 22% to $911m, up 2% on an underlying basis, with demand strong for the new Birmingham hip. [13] Demand for the companys new Birmingham hip helped offset some of the shortfall related to the Plus business, the company said.[15] The company has taken some "actions'' against employees and is considering options against the former owners of Plus. "A large proportion of these customer relationships were lost,'' Illingworth said. "We are confident we know what the issues are'' and the probe may be complete in "a matter of weeks,'' he said.[6] Mr Illingworth said that Smith & Nephew would "pursue whatever remedies we have with particular gusto". He claimed that there would be "significant benefits" from the Plus acquisition in the future.[4] Smith & Nephew brought in outside legal and accounting help to aid the internal investigation, Illingworth said.[6] Smith & Nephew brought in outside legal and accounting help to aid the investigation, Illingworth told reporters on a conference call.[12]
While commenting on the first-quarter performance, David Illingworth, Chief Executive, said, 'Our performance in the quarter was mixed. [2] The sales issues in Greece clouded otherwise largely positive first quarter results.[8]
SOURCES
1. Health Blog : Smith & Nephew Finds 'Unacceptable' Sales Practices in Europe
2. Smith & Nephew Q1 Profit Falls - Update [SNN] - RTTNews, Today's Top Stories, Global Newswires, ToDay's Top News,Global Business news .
3. "Unacceptable" sales tactics hit Smith & Nephew profits
4. Smith & Nephew to take $100m hit on Plus deal - Times Online
5. Smith and Nephew Q1 pretax down, finds 'unacceptable practices' in Greece UPDATE - Forbes.com
6. Bloomberg.com: U.K. & Ireland
7. Smith & Nephew takes sales hit - Yorkshire Post
8. Smith & Nephew slumps over sales revelations - Telegraph
9. UPDATE 3-Smith & Nephew launches internal probe, shares fall | Industries | Healthcare | Reuters
10. Smith & Nephew's Greek tragedy | Market Forces | Guardian Unlimited
11. 3rd UPDATE: Smith & Nephew Fiscal Year Revenue Seen Down $100 Million, Shares Fall
12. Bloomberg.com: Europe
13. ShareCast - News you can use
14. Smith & Nephew sees profit loss due to Plus issues | Deals | Mergers & Acquisitions | Reuters
15. Smith Nephew launches probe - International Herald Tribune
16. UPDATE: Smith & Nephew Fiscal Year Sales Seen Down $100 Million
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