Smith & Nephew, the FTSE 100 medical equipment group, gave warning that unacceptable sales practices in a business that it bought last year would cost it more than £50 million in lost sales this year.

Europe’s largest medical devices company paid $889 million (£450 million) for Plus Orthopedics, a Swiss company. As well as the impact on sales, Smith & Nephew, which makes artificial hips and knees as well as instruments for keyhole surgery, said that profits would fall by about $25 million this year.

It has begun an investigation into the sales practices, which emerged while Plus was being integrated into the company. Its shares closed down almost 13 per cent, or 85p, at 570p yesterday.

David Illingworth, chief executive of 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 action and began an independent review of the situation, which has progressed a long way but is not yet 100 per cent complete.”

Mr Illingworth said that the investigation was not linked to surgeons receiving rewards from the company for using its devices. The company said that it did not expect to recover these lost revenues, but claimed that the continuing growth of the business, including the rest of Plus, would be unaffected.

Mr Illingworth said that he would continue in his job and that no senior executives had resigned or been asked to leave. The company declined to say whether the sales practices would lead to a criminal inquiry, but said that it was carrying out a “legal inquiry” and that it would “pursue every possible option” to resolve the issue. It is understood that lawyers and forensic accountants rather than police are investigating the sales discrepancies.

Most of the unacceptable activity – involving about $60 million worth of sales – appears to have been in Greece, where Smith & Nephew has virtually closed down its operations as part of the investigation. Greece provided about a third of Plus’s sales. The company plans to reopen its operations there, but as a direct operation rather than through a distribution network.

Mr Illingworth said that Smith & Nephew had warranties in place as part of the acquisition and would “pursue whatever remedies we have with particular gusto” against the vendors of Plus. He claimed that there would be “significant benefits” from the Plus acquisition in the future but conceded: “It certainly looks less attractive financially than it was.”

Charles Weston, a Nomura Code Research analyst, said: “This has caught everybody on the blind side. I was surprised and disappointed that they have owned the business for so long and something this important hasn’t come out. This makes it a bad deal for Smith & Nephew. It seemed to be a good strategic move before as it was difficult for them to gain critical mass.”

The company reported relatively healthy first-quarter results yesterday, with revenue rising to $911 million.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive