Stryker Files Lawsuit Over Federal Government Inquiry

The US government is seeking a broad array of information from Stryker Corp. amid a probe regarding alleged improper reimbursement claims and potential violations, and the medical device maker is fighting back in court by claiming the request is “oppressive and overly broad.”

The subpoena from the Department of Health and Human Services (HHS) adds to regulatory pressure on Stryker, which is also grappling with FDA-related issues, and may be the result of the unique way the company resolved a big probe into the industry’s relationships with surgeons. Stryker didn’t pay a fine last year, as four competitors did, but its deal didn’t hold certain government agencies back from pursuing the company further, according to analysts.

“We believe that the fact that Stryker is not released from further investigation…will come as a surprise to most investors, who had thought that the company had emerged from the settlement relatively unscathed,” Piper Jaffray analyst Matt Miksic said.

Stryker denied any wrongdoing regarding issues involved in this inquiry. Miksic still sees significantly increased risk Stryker will have to pay a fine, but “little fundamental downside for the stock.”

Stryker shares have suffered this year amid the regulatory issues and a recall of replacement hip parts, and are off about 12% since late December, when Stryker reached the highest point in its 11 years on the New York Stock Exchange.

Four Stryker rivals paid the government a combined $311 million to resolve allegations they paid off surgeons through consulting deals to win favor for their products. They also signed deferred-prosecution deals and obtained a release protecting them from further investigation and prosecution, Miksic noted.

At least some of the companies that paid fines aren’t facing this increased government pressure. According to JPMorgan analyst Michael Weinstein , Stryker may be under the gun because of how it handled the government deal last year.

Stryker signed a non-prosecution pact due to its cooperation, and at the time analysts thought the company was being rewarded for good behavior. But it now appears the door wasn’t closed on further scrutiny.

“Our read from the filings and the history behind the case is that HHS is going after and arguably punishing Stryker for its decision in September 2007 not to agree to a civil settlement along with the other manufacturers of orthopedic implants,” Weinstein said.

HHS handed Stryker the new subpoena at issue in February.

The company filed its complaint on Aug. 15 against the HHS office of inspector general and the Department of Justice in US District Court for the District of New Jersey.

Specifically, the subpoena involves an investigation into allegedly false or otherwise improper Medicare and Medicaid reimbursement claims, plus potential violations of the “Physician Self-Referral Law” and the “Anti-Kickback Law,” Stryker said.

The subpoena required “the production of voluminous documents including, but not limited to, documents pertaining to corporate structure, management, research, sales, marketing, personnel, and consultants far beyond (Stryker’s) Orthopedic Division and well outside any relationship to Medicare and Medicaid providers,” the company said.

Among Stryker rivals, Zimmer Holdings Inc. and Smith & Nephew PLC confirmed they haven’t received such a subpoena. Of the two other companies involved in the government settlement last year, a spokeswoman for Johnson & Johnson’s DePuy said the company had no comment on the matter.

Privately held Biomet noted in an emailed statement that it has reported its material events in its public filings, and has nothing else to report. It also noted that, unlike Stryker, it entered into corporate integrity and civil settlement agreements as parts of the settlement last year.

Don White , a spokesman for the office of inspector general at HHS, confirmed the subpoena to Stryker but declined to say whether the orthopedic sector at large is still under review.

Companies under investigation often take a conciliatory public stance, saying broadly that they plan to cooperate. In this case, while Stryker detailed its cooperation attempts, it also took an unusual approach by complaining about the government intervention in a public court filing.

The company noted that it has produced more than 300,000 pages of information and has tried to explain, essentially, that the government has gone too far. But on Aug. 8, “in spite of the overwhelming and convincing evidence of Stryker’s innocence,” according to Stryker, the Justice Department said the probe would continue. The government said it would seek judicial enforcement if Stryker didn’t immediately comply, according to the filing.

“This must be really onerous,” said Raj Denhoy, an analyst with Thomas Weisel . “They probably have been pushed as far as they can (be).”

The subpoena is a further distraction for Stryker, which has also been grappling with three FDA warning letters related to various issues at company facilities. These issues haven’t thrown Stryker off its traditional rapid-growth course – it maintained full-year guidance after its second-quarter report – but they have sidetracked the company’s sales force and triggered increased compliance spending.

“All of this activity is no doubt requiring significant resources and management attention, which otherwise could be spent on the business,” Weinstein said. He expects an eventual settlement with the government regarding the latest inquiry.

SOURCE: Dow Jones Newswires