Stryker (NYSE:SYK) agreed to pony up $80 million to settle a federal beef over its OtisMed subsidiary, after the company and its former CEO pleaded guilty to distributing knee replacement surgery cutting guides without FDA clearance, the company and prosecutors said today.
Stryker agreed to pay $76.6 million plus interest to settle the whistleblower lawsuit, in which OtisMed and former CEO Charlie Chi pleaded guilty, according to the New Jersey U.S. attorney’s office. OtisMed also agreed not to participate in federal healthcare programs for 20 years, according to a press release.
Stryker inherited the beef when it acquired OtisMed in 2009, later offering to pay $33 million to settle the federal investigation. The misconduct occurred before the acquisition and "without Stryker’s prior knowledge or acquiescence," the prosecutors said.
Prosecutors said OtisMed sold more than 18,000 of the devices between May 2006 and September 2009, for revenues of some $27 million. But after an application for 510(k) clearance from the FDA was rejected in 2009, OtisMed’s board unanimously voted to stop shipment. Chi disregarded that vote, the prosecutors said in a prepared statement.
“Chi directed OtisMed employees to organize a mass shipment of all OtisKnee devices that had been manufactured but had not yet been shipped and suggested ways for the employees to hide the shipments from FDA regulators," according to the release. "At Chi’s direction, OtisMed shipped approximately 218 OtisKnee guides from California to surgeons throughout the United States, including 16 to surgeons in New Jersey. Both Chi and OtisMed admitted that Chi ordered the distribution a week after the FDA denied OtisMed’s request for clearance."
Although Stryker was a distributor for OtisMed at the time, it was unaware of the FDA’s denial of clearance, prosecutors said.
"At the time the shipments were made in September 2009, Stryker executives were not aware that OtisMed and Chi had shipped cutting guides after the FDA had rejected the company’s application for marketing clearance for the device. Stryker, OtisMed’s parent corporation, cooperated with the government with regard to OtisMed’s pre-acquisition conduct throughout the investigation," they said in the statement.
Chi pleaded guilty before U.S. Magistrate Judge Mark Falk to 3 counts of introducing adulterated medical devices in interstate commerce, according to the release, and is slated to be sentenced by Judge Claire Cecchi March 18, 2015. He faces a maximum sentence of 1 year in prison and a $100,000 fine, or twice the gain or loss from the offense, for each count.