Orthopedic companies settle DOJ probe, face SEC scrutiny; Medtronic loses a patent suit to Johnson & Johnson, releases new spinal device

More than two years of legal wrangling have come to an end as federal prosecutors settled with five orthopedic device companies after an investigation into allegations the companies paid kickbacks to surgeons to use their products.

In March 2005, the companies–Zimmer, Johnson & Johnson’s DePuy Orthopaedics division, Smith & Nephew, Stryker Corp. and Biomet Inc.–received subpoenas from the US Department of Justice (DOJ) through the US attorney’s office in Newark, NJ, seeking information pertaining to consulting contracts, professional service agreements and other agreements.

Biomet, DePuy, Zimmer (all based in Warsaw, IN) and London, UK-based Smith & Nephew (US headquarters are in Memphis, TN) have entered deferred-prosecution agreements, through which they will avoid criminal prosecution on a conspiracy charge if they adopt industry overhauls and complete 18 months of corporate monitoring. They also agreed to pay a total of $311 million to settle the criminal and civil probes.

 

Zimmer will pay the largest share amounting to $169.5 million, which the company said it would record as an expense in the third quarter. DePuy will pay $84.7 million; Smith & Nephew will pay $28.9 million, and Biomet will pay $26.9 million. None of the companies admitted to any wrongdoing.

 

Stryker of Kalamazoo, MI did not pay a fine as part of its agreement. It voluntarily cooperated with prosecutors and agreed to enter a non-prosecution pact. Stryker also agreed to adopt overhauls and to undergo corporate monitoring for the 18-month period.

Zimmer agreed to be monitored by former US Attorney General John Ashcroft, along with participating in a five-year “corporate integrity agreement” with the US Department of Health and Human Services‘ Office of Inspector General.

DePuy said it planned to work closely with its external monitor and the government to help “bring greater clarity to the marketplace for the benefit of customers and patients.” Biomet also said it intended to work with the independent monitor, the DOJ and the Office of Inspector General to institute and review additional healthcare compliance practices and procedures.

Smith & Nephew said it believed that the settlement wouldn’t be materially adverse to the company. “We have worked closely with the US Department of Justice to refine compliance procedures which apply across the industry and enable the best outcome for the patient, the surgeon, the hospital, private payers and Medicare,” David J. Illingworth, CEO of Smith & Nephew, said in a statement.

“This industry routinely violated the anti-kickback statute by paying physicians for the purpose of exclusively using their products,” said US Attorney Christopher J. Christie. “Prior to our investigation, many orthopedic surgeons in this country made decisions predicated on how much money they could make–choosing which device to implant by going to the highest bidder. With these agreements in place, we expect doctors to make decisions based on what is in the best interests of their patients, not the best interests of their bank accounts.”

While one chapter in this saga may have come to a close, another may have opened. Four of the five companies involved in the DOJ investigation revealed in October that they received letters from the US Securities and Exchange Commission (SEC) about plans to investigate possible violations of the Foreign Corrupt Practices Act. The inquiry centers around allegations that the companies made payments to physicians in European countries as an enticement to use certain products.

Biomet, Smith & Nephew, Stryker and Zimmer–in addition to Medtronic’s Memphis-based Sofamor Danek spine and biologics unit–have been contact ed about possible violations of the anticorruption act. As of press time, Johnson & Johnson’s DePuy unit had not been notified.

In a research note, Michael S. Matson, senior analyst of medical device equity research at Wachovia Capital Markets, LLC in New York City, noted that the SEC probe might be an extension of the settled investigation of consulting arrangements between orthopedic device makers and US-based surgeons.

“We suspect this may be related to surgeon consulting arrangements,” Matson wrote in a research note. “We suspect that Zimmer and possibly other orthopedic firms may have abused consulting arrangements internationally just as they did in the US.”

Matson said he expects this will “take time to play out,” noting that the DOJ investigation took more than two years and that he predicts this investigation would be similar.

A spokesperson for Smith & Nephew told Orthopedic Design & Technology that he didn’t feel the two investigations were related. The SEC could not be reached for comment.

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“Orthopedic companies settle DOJ probe, face SEC scrutiny; Medtronic loses a patent suit to Johnson & Johnson, releases new spinal device“. Orthopedic Design & Technology. FindArticles.com. 20 Aug, 2011. http://findarticles.com/p/articles/mi_7114/is_7_3/ai_n28475566/

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