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| OtisMed's OtisKnee device--Courtesy of OtisMed |
Stryker ($SYK) inherited a host of problems since acquiring OtisMed in 2009, facing allegations from the U.S. Department of Justice (DOJ) that the company and its former chief executive officer illegally distributed knee replacement surgical devices after the FDA refused to approve the product. Now, Stryker and OtisMed have agreed to pay more than $80 million to resolve the DOJ case, laying criminal and civil complaints to rest.
Newark, NJ-based OtisMed and former CEO Charlie Chi pled guilty in Newark federal court to intentionally introducing adulterated medical devices into interstate commerce, defrauding and misleading consumers by marketing its OtisKnee product. The companies will hand over $34.4 million in fines and $5.16 in criminal forfeiture to settle criminal charges, and will pay $40 million plus interest to resolve the civil liability case, the DOJ said in a statement. Chi will be sentenced by U.S. District Judge Claire Cecchi on March 18, 2015, and could face a year in prison and a $100,000 fine.
"It is vital that products like the OtisKnee are subjected to the appropriate level of scrutiny," U.S. Attorney Paul Fishman said in a statement. "Patients … should be entitled to trust that the devices their doctors are using are safe, effective, tested and approved. OtisMed and Charlie Chi betrayed that trust."
The DOJ acknowledged in court filings that Kalamazoo, MI-based Stryker did not know about OtisMed's criminal conduct when it acquired the company in November 2009, pointing out that OtisMed and Chi had shipped OtisKnee cutting guides before the companies' deal took place. In September 2009, the FDA denied OtisMed premarket clearance for the device, saying the company failed to demonstrate that its product was as safe and effective as other devices on the market. But Chi directed OtisMed employees to organize a mass shipment of the devices and suggested ways to hide the evidence from FDA regulators, the DOJ said in a statement.
As part of the case's resolution, OtisMed will be excluded from participating in all federal health care programs for a period of 20 years and Stryker will work with government officials to make sure its other devices are in compliance, according to the DOJ statement.
In the meantime, Stryker continues to invest in meaningful M&A to keep its ship afloat. Under the stewardship of CEO Kevin Lobo, the company last year bought Chinese orthopedics giant Trauson Holdings for $764 million and shelled out an eye-popping $1.7 billion for robot-assisted surgery outfit Mako ($MAKO). In May, Stryker explored a bid for British rival Smith & Nephew ($SNN) and then decided not to make an offer. But the devicemaker could be set to make another bid for Smith & Nephew, as the 6-month waiting period imposed by U.K. takeover laws has passed.
- read the DOJ's statement
- get Stryker's announcement
- here's OtisMed's plea agreement (PDF)
- read OtisMed's settlement agreement (PDF)
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