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Medical Device Makers to Pay $311 Million to Settle Probe

Reuters
Thursday, 27 Sep 2007 | 3:34 PM ET

Four medical device implant makers will pay about $311 million and agree to federal monitoring and other reforms to settle a government probe into improper consulting contracts with surgeons, federal prosecutors said Thursday.

The financial agreement was reached with Biomet, Johnson & Johnson unit DePuy Orthopaedics, Smith & Nephew and Zimmer Holdings, the office of U.S. Attorney Christopher Christie said in a press release.

A fifth company, Stryker, will pay no civil settlement, but it is part of the pact and has agreed to the reforms, including 18 months of federal monitoring, according to the news release.

Under the pacts, Zimmer will pay $169.5 million, DePuy will pay $84.7 million, Smith & Nephew about $28.9 million and Biomet $26.9 million, according to prosecutors.

On the New York Stock Exchange, Stryker shares rose $1.05 to $68.95; JNJ moved up 19 cents at $65.58; and Zimmer rose 78 cents to $81.92.

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The total settlement was "in the ballpark of what Wall Street was expecting," said one analyst, who 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 analyst said.

Zimmer's net earnings "will look terrible, but investors will ignore this," the analyst said.

The net effect of the settlement, said the analyst, is positive since it eliminates a negative overhang that dates back a couple of years.

"It doesn't look like it changes anything competitively for the companies," the analyst added.

Anti-Kickback Violations

Anti-Kickback Violations

Prosecutors said that the device industry routinely violated anti-kickback law by paying physicians to exclusively use their products.

"Prior to our investigation, many 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," Christie said in a statement.

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"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."

Zimmer, which did not admit any wrongdoing, said in a news release that it would recognize an expense of $169.5 million in the third quarter and would be subject to oversight by a federal monitor for 18 months.

Earlier in the day, Smith & Nephew, a British company, said in a statement that it was in advanced discussions with Christie's office to agree to a settlement and that it believed the resolution of the matter "will not be materially adverse to the company."

Stryker declined to comment, while the other companies were not immediately available.

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