BB&T

The past month hasn't been the best of times for a group of large orthopedics manufacturers. In late September four of the major players making hip and knee replacements paid multi-million-dollar fines to the U.S. Department of Justice (DoJ) to settle charges of paying kickbacks to physicians as inducements to use their products. Those four and a fifth company - together producing about 95% of implants in the hip and knee sector — also agreed to a variety of corporate reforms.

Shortly after these settlements were reported, the U.S. Securities and Exchange Commission sent letters to a group of orthopedic manufacturers, informing them of a probe into possible violations of the Foreign Corrupt Practices Act.

The four companies agreeing to pay fines of about $311 million are Biomet (Warsaw, Indiana); DePuy Orthopaedics (Raynham Massachusetts), a unit of Johnson & Johnson (New Brunswick, New Jersey); Smith & Nephew (S&N; London); and Zimmer Holdings (Warsaw, Indiana).

According to a statement by the office of U.S. Attorney Christopher Christie, the companies also consented to federal monitoring and a variety of reforms related to improper consulting contracts with surgeons.

Additionally, the DoJ reported settling with a fifth major firm in the sector, Stryker (Kalamazoo, Michigan). Stryker will pay no civil settlement, but it also agreed to corporate reforms, including 18 months of federal monitoring, Christie's office said.

Under the agreements, Zimmer will pay $169.5 million; DePuy, $84.7 million; S&N, about $28.9 million; and Biomet, $26.9 million. While all the companies will be monitored, Zimmer, the biggest offender -- or at least the one paying the largest fine — appears to have drawn the most scrutiny and will be monitored by former U.S. Attorney General John Ashcroft.

Prosecutors said that the companies violated anti-kickback law "routinely." However, none of the companies was required to admit to any wrongdoing, and they denied any adverse impact on patient care.

But in a statement Christie said, "[M]any 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."

As often happens, apparent bad news was taken by Wall Street as a positive, with analysts saying it was the best pathway out of a potential legal morass.

The total settlement was "in the ballpark" of what Wall Street had been expecting, one analyst told Reuters, though the analyst asked not to be named. "More than half of it was paid by Zimmer ... my guess is that the government found more fraudulent issues there."

The DoJ began its investigation in early 2005, and the five companies were subpoenaed by the U.S. Attorney's Office in Newark, New Jersey. The subpoenas sought information pertaining to consulting contracts, professional service agreements and other agreements concerning remuneration is provided to orthopedic surgeons.

Zimmer was one of the companies that commented on the settlement: "We believe this resolution is in the best interest of our stockholders, and we are pleased that the settlement preserves our ability to collaborate with physicians to enhance patient quality of life," said David Dvorak, president/CEO of Zimmer. "Importantly, the resolution agreements clearly define how we and our key competitors will interact with physician collaborators, thereby establishing a standard of conduct across the industry."

He added: "We believe that Zimmer is well positioned to abide by the requirements of the settlement due to our current Corporate Compliance Program, which we began developing in 2004 and implemented in 2005." He added that Christie had acknowledged "that Zimmer's current program already addresses many of the compliance related requirements that are contained in the agreements with the orthopedic companies."

Shortly after reports of the DoJ monetary settlements and corporate reform agreements, Zimmer, Stryker, Biomet, S&N and Medtronic (Minneapolis) received letters from the SEC, informing them that the agency was conducting "informal" investigations concerning their potential violations of the Foreign Corrupt Practices Act. All companies said they plan to cooperate with the SEC.

At least one analyst said it was likely that the SEC probes might be related to the previously settled Department of Justice investigation.

Among the companies that had signed the DoJ settlements, DePuy said it had not received correspondence of this type from the SEC.