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Tough Medicine For Medical Device Makers

The Securities and Exchange Commission said in October this year it is investigating possible violations of the U.S. Foreign Corrupt Practices Act by the leading manufacturers of orthopedic implants. Biomet Inc., Stryker Corp., Zimmer Holdings Inc., Smith & Nephew plc and Medtronic Inc. all made announcements about the SEC's investigation and denied violating any laws. In September this year, four of them plus Depuy Orthopedics (part of Johnson & Johnson) paid $310 million to settle charges they paid kickbacks to induce U.S. doctors to buy their products.

Medtronic wasn't part of the domestic case. But it now confirms that the SEC and the Department of Justice are asking for information about payment practices abroad that might violate the FCPA. Medtronic -- based in Minneapolis -- does business in some 120 countries and employs more than 37,000 people worldwide. The company's latest Form 10-Q disclosed these details about the FCPA investigation:

"On September 25, 2007, the Company received a letter from the SEC requesting information relating to any potential violations of the U.S. Foreign Corrupt Practices Act in connection with the sale of medical devices in an unspecified number of foreign countries, including Greece, Poland and Germany. The letter notes that the Company is a significant participant in the medical device industry, and seeks any information concerning certain types of payments made directly or indirectly to government-employed doctors. A number of competitors have publicly disclosed receiving similar letters. On November 16, 2007, the Company received a letter from the Department of Justice requesting any information provided to the SEC. The Company intends to cooperate with both requests."

Doctors at government-owned or managed hospitals overseas are "foreign officials" for purposes of the FCPA. That means payments to them intended to obtain or retain business might violate the antibribery provisions. Application of the FCPA to overseas doctors made the headlines in 2002, when the SEC settled civil and administrative proceedings against Syncor International Corp. and the DOJ settled criminal FCPA charges against Syncor's Taiwan subsidiary. Payments to doctors have since resulted in FCPA enforcement actions against DPC (Tianjin) Co. Ltd. -- the Chinese subsidiary of Los Angeles-based Diagnostic Products Corporation -- and Micrus Corporation.

Those cases -- and the current investigation of Medtronic and its peers -- demonstrate the compliance risks involved when doing business with foreign hospitals that are owned or controlled by government authorities. The companies face a dilemma. Often the only way to promote their products is through direct contact with local physicians. Much of that contact is educational and might include, for example, sponsoring the doctors' evaluations of the companies' products and subsidizing the presentation of papers at medical seminars. The payments, however -- unless expressly permitted by the written laws or regulations of the host country -- can violate the FCPA.

The investigations of Medtronic and its peers will lead to better compliance practices by companies dealing with government-linked hospitals overseas. Another result, we suspect, will be that more countries -- with the backing of the global medical industry -- will pass laws and regulations to allow some level of financial support from foreign companies to local doctors for product evaluations and related programs.

Medtronic Inc. trades on the New York Stock Exchange under the symbol MDT.

View Medtronic's Form 10-Q (December 4, 2007) Here.

Full post as published by The FCPA Blog on December 05, 2007 (boomark / email).