Enron-style troubles have been unearthed in a variety of high-tech arenas this year and healthcare has no immunity against these kinds of problems. Amongst a series of shareholder lawsuits charging overstatement of company prospects, followed by reversals of fortune, one of the largest healthcare industry firms to be hit with these accusations is PerkinElmer (Boston, Massachusetts). Among smaller firms, CryoLife (Kennesaw, Georgia) was battered by a series of such suits last month and also faces a troubling liability suit in the death of a patient.

Thus far, more than a half-dozen shareholder suits have been filed against PerkinElmer. Doubtless, one of the issues to be thrashed out will be the role played by Arthur Andersen, the company's accounting firm. In late June, PerkinElmer dismissed Andersen and retained Deloitte & Touche as its independent accountant. Besides charging that the company misstated its business prospects, the suits also charge that PerkinElmer executives sold stock prior to a plunge in the company's stock price, reaping more than $18.4 million overall.

The sell-offs were followed closely by restatements of the company's financial projections and steep drops in the company's share prices. The restatements revealed that instead of achieving projected 16 cents to 17 cents per share earnings, PerkinElmer said that it would only reach a breakeven point and that its revenues are likely to decline further because of general weakness across all of its divisions.

CryoLife also had a series of class actions filed against it, after various disclosures concerning quality problems in its tissue processing operations, followed by sharp declines in its share price. The company's problems likely will be compounded by its initial statements that it had not received official notifications about those problems, followed by acknowledgement that it had received notices from both the FDA and the Centers for Disease Control and Prevention (CDC; Atlanta, Georgia).

It was then hit with a liability suit filed by the family of a Minnesota resident who died shortly after receiving transplanted knee cartilage tissue processed by the company. Surgeons implanted the cartilage in the knee of 23-year-old Brian Lykins last November, and Lykins died four days after the procedure. Subsequently, health officials said they found a bacterium both in his body and the cadaver from which the cartilage was taken.The suit seeks damages unspecified in court filings, but the family's attorney reportedly has said that they could run to $50 million. The suit claims that CryoLife left the cadaver unrefrigerated for 19 hours — well beyond safe levels — and failed to test the tissue for the dangerous bacterium, Clostridium sordellii. A company spokesman said CryoLife does not comment on pending litigation.

The CDC said in March that at least 11 people had contracted bacterial infections after receiving tissue transplants from CryoLife. Lykins was the only such patient who died. Health officials determined he died from septic shock, which was traced to the infected tissue, according to officials representing the Minnesota Department of Health. An attorney for the Lykins family told the Atlanta Journal-Constitution that he believed most tissue banks were honest and safe, but he referred to CryoLife as "a rule-breaking maverick." He told the AJC, "If they didn't test the tissue, and they didn't sterilize the tissue, they're completely at fault."

In other news on the legal front, Baxter International (Deerfield, Illinois) in late July reached settlement agreements with the families of patients in the U.S., Spain and Croatia whose deaths were linked to one kind of the company's kidney dialysis filters. Last November, the company reported that a fluid used in manufacturing might have played a role in the deaths, after initially denying any potential link. The products have since been pulled from the market worldwide. Spanish officials were the first to link one of the company's dialyzers to 15 deaths in that country in late August of last year. Since then, more than 50 deaths worldwide have been linked to the dialysis filters. However, Baxter declined to disclose the total number of deaths of which it is aware.

In November, Baxter said confirmatory tests had determined that a small number of its A and AF dialyzers might have contributed to the deaths. A processing fluid, a perfluorohydrocarbon compound used in the manufacturing process of less than 10% of the company's A and AF series dialysis filters was blamed for the fatalities. Baxter acquired the filter lines in question via its acquisition of Althin Medical (Lund, Sweden) in March 2000. The company said last November that it would take a charge of up to $150 million to cover the costs of discontinuing the product line, for litigation and for other related costs. While renal systems account for around one-third of Baxter's $7.6 billion in annual sales, the dialyzer filters in question account for only 0.2% of sales.

Link replaces Rietiker as Centerpulse CEO

The board of directors of Centerpulse (Zurich, Switzerland) last month approved reorganization of the company's executive management, a step, it said, that will also include the expansion of the executive committee. Chairman Max Link will take over the duties of chief executive officer from Stephan Rietiker, who left the company. In a statement, the company praised the work of Rietiker, specifically crediting him with creating the settlement agreement covering litigation of its hip and knee implants in the U.S.

Central functions will be maintained at the company's Zurich headquarters and will be managed by Urs Kamber (finance), Gabor-Paul Ondo (legal/ taxes), Matthias Moelleney (human resources) and Beatrice Tschanz (communications). The expanded executive committee will include the following division presidents: Richard Fritschi (Orthopedics Europe/Asia), David Floyd (Orthopedics USA), Dennis Wallach (Spine-Tech) and Steven Hanson (Dental).

The division presidents will continue to manage their businesses as separate and independent units, the company said. It also said that the company's Biologics and Strategic Development Division will be disbanded and integrated into the various divisions, with Thomas Zehnder, former head of that division, taking on new duties within the company.

Centerpulse's statement said that the executive reorganization "is aimed at enhancing the successful development the company has made in recent months." Link added, "We plan on simplifying work processes while moving closer to the markets ... The four divisions will again assume full responsibility for all the significant operative functions they require to be successful." Centerpulse's subsidiary companies develop, produce, and distribute medical implants and biological materials for cardiovascular and orthopedic markets worldwide.

Apligraf market rights sought

Survival efforts by tissue engineering firm Organogenesis (Canton, Massachusetts) appeared to take another step backward last month with the announcement that it has laid off 26 more of its employees and is seeking a new round of capital infusion in order to reacquire the marketing rights of its lead product, Apligraf, from Novartis Pharma AG (Basel, Switzerland). Executives of the company said it might need as much as $40 million to reacquire the rights to Apligraf from the pharmaceutical house, a goal that it conceded was very much an uphill proposition. Additional funds also will be needed to launch its own marketing and sales system for the product, Organogenesis said.

The company said that the workforce reduction and other reorganizational activities would help it to reduce its burn rate from $2.5 million per month to about $1.5 million per month. In a conference call, Steven Bernitz, president and chief executive officer of Organogenesis, said that the pharmaceutical giant is probably not particularly interested in acquiring Apligraf outright, since the product only produces "in the neighborhood of $30 million a year and [Novartis] would have trouble devoting a lot of resources to it." Additionally, he said that Novartis might be able to gain back some of its investment by "facilitating transfer back to the people that developed it" — that is, Organogenesis. "Apligraf is what our company is all about, Bernitz said. "We really want to focus our own commercial efforts on Apligraf."

Bernitz also reviewed recently declining sales for Apligraf, primarily over the last two quarters, thus preventing the company from meeting its financial projections, another reason why it was moving forward with the reacquisition efforts and other restructuring initiatives. The company's problems have been highlighted by lowered earnings reports, employee layoffs and a series of statements indicating that the firm was attempting to develop other product opportunities. Organogenesis was the first company to gain FDA approval for a mass-produced product containing living human cells, but it has been unable to move that platform to a variety of other cash-producing product lines.

Lumenis to relocate manufacturing

Lumenis (Yokneam, Israel) said it plans to relocate the company's manufacturing operations and service depot from Santa Clara, California, to company facilities in Utah and Israel. Because of this action, the company said a reduction of 150 jobs in Santa Clara would result, with a recruitment of approximately 75 new employees in Salt Lake City and Israel. The company said the completed moves are expected to yield annual savings of $10 million.

Lumenis expects to complete the transition, which began in 1Q02, by March 2003, incurring approximately $7 million in one-time costs. The global center for the Ophthalmic and Surgical business units will remain in Santa Clara, including sales, marketing, research and development, and certain service functions. None of the moves will affect Lumenis' Pleasanton, California, facility, which will continue to be the global operations base for the company's Aesthetic business.

Lumenis, formed by the union between ESC Medical Systems and Coherent Medical Group, makes laser and intense pulsed light devices. Its systems are used in a variety of aesthetic, ophthalmic, surgical and dental applications.

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