(Story updated at 5:10 p.m. ET.)
Stryker Corp. is facing stiff penalties, including $80 million in fines and settlements, related to allegations that a subsidiary distributed a device used in knee replacement surgery without approval from the Food and Drug Administration.
OtisMed Corp., a subsidiary Stryker purchased in November 2009, and its former CEO Charlie Chi pleaded guilty Monday to distributing knee replacement surgery cutting guides despite the FDA's rejection of the company's application for marketing clearance. A federal judge fined the company $34.4 million and ordered $5.16 million in criminal forfeiture. OtisMed also agreed to pay $40 million in a separate but related civil settlement.
OtisMed will be excluded from participation in Medicare and Medicaid for 20 years, the Department of Justice announced Monday.
Stryker on Monday said in a statement: “Stryker is committed to conducting its affairs ethically and lawfully. In resolving the OtisMed matter, the DOJ acknowledged that OtisMed's criminal conduct 'occurred prior to Stryker's acquisition of OtisMed and without Stryker's prior knowledge or acquiescence.'”
Chi’s attorney, Peter Harvey with Patterson Belknap Webb & Tyler in New York City, said Monday, “OtisMed had been shipping cutting guides for orthopedic surgeons for three years with full knowledge of the FDA.” He noted that Chi pleaded guilty to three misdemeanor charges that essentially amounted to regulatory offenses.
“They’re criminalizing something about which they had knowledge from the day Otismed started shipping these products,” Harvey said. He added that OtisMed has essentially been nonfunctional for the past two years, so exclusion from Medicare and Medicaid won’t affect it.
Surgeons used the device in question, the OtisKnee orthopedic cutting guide, to help them make accurate bone cuts in patients before implanting artificial knee prostheses. According to the Department of Justice, none of the company's claims about the tool were evaluated by the FDA before they were used in ads and others promotional materials.
In 2008, the company submitted a pre-market notification to the FDA seeking clearance to market the device. Until then, it had falsely represented to doctors and others that it was exempt from such pre-market requirements, according to the Department of Justice. But Harvey said OtisMed hadn’t sought FDA approval before then because it was led to believe by the FDA that the devices were Class 1 medical devices that did not need FDA approval.
The FDA denied OtisMed's submission, saying the company hadn't proved the device was as safe or effective as others. OtisMed's board of directors decided to halt shipment of the devices, but Chi and others went ahead with the shipments, according to the Department of Justice. Chi allegedly suggested ways employees might hide the shipments from FDA regulators, according to the Department of Justice.
Chi and OtisMed admitted that Chi ordered the devices be sent a week after the FDA's denial, according to the Department of Justice.
Harvey, however, said Chi only shipped those devices that were needed by surgeons for already-scheduled surgeries.
Chi is scheduled to be sentenced March 18.
The civil settlement resolves claims filed by whistle-blower Richard Adrian. In successful cases, whistle-blowers are entitled to a percentage of the money the government is able to recover. Adrian will get about $7 million, according to Justice.
Follow Lisa Schencker on Twitter: @lschencker