Orthofix Inches Closer to Resolving Legal Matters

Orthofix International N.V.’s long, arduous legal battle with the federal government finally is nearing an end.

The Lewisville, Texas-based company is finalizing agreements to resolve a U.S. Department of Justice (DOJ) investigation into its bone growth stimulation business. The case includes a pending qui tam federal lawsuit accusing Orthofix and several other medical device firms of misleading doctors into prescribing bone-growth stimulation devices to patients for longer periods of time than necessary, thereby defrauding government programs such as Medicare. The lawsuit claims the devices generally are used only for three to six months, then left to collect dust in homes and clinics. The Boston Business Journal quoted one document as stating, “These devices can often be found selling on eBay for $50.”

The qui tam suit—pending in U.S. District Court in Massachusetts—argues in favor of renting the bone-growth stimulation devices to patients rather than selling them for retail prices of more than $3,000. Manufacturers of these products, the plaintiffs contend, have received up to $175 million from Medicare since 1998; during that time, they add, claims for bone-growth devices have skyrocketed 250 percent.

Orthofix International is prepared to pay $43 million to close the federal investigation while its subsidiary, Orthofix Inc., is reportedly ready to plead guilty to obstructing a 2008 federal audit. Both entities are expected to enter into a five-year corporate integrity agreement with the U.S. Health and Human Services Department’s Office of Inspector General (OIG). Orthofix management expects the agreement to impact the company’s fourth-quarter 2011 earnings by $10.5 million (pre-tax); the company will use about $9 million from a Blackstone Medical Inc. escrow fund to cover the one-time charge.

“I am very pleased with the substantial progress made regarding these three legal matters, which removes a significant amount of risk and uncertainty for the company,” Orthofix President and CEO Robert Vaters said, noting that the company had made “significant improvements” to its compliance practices, personnel, and financial standing. “I look forward to a stronger focus on the company’s operations, including investments in R&D to position the company for long-term growth, while maintaining earnings improvement.”

In addition to the near-resolution of the federal bone-growth stimulation investigation, Orthofix has reached an agreement in principle with the U.S. Attorney’s Office in Massachusetts to pay $32 million to resolve an investigation into its Blackstone Medical subsidiary (Orthofix bought Blackstone in 2006). Blackstone was named in a number of lawsuits and Orthofix received several subpoenas from various government agencies concerning allegations that the spinal implant maker violated the federal False Claims Act by providing allegedly inappropriate payments and other items of value to physician consultants, U.S. Securities and Exchange Commission (SEC) filings show.

Orthofix will fund this resolution with proceeds received from the escrow fund it established after acquiring Blackstone. The final settlement is subject to the negotiation and approval of definitive agreements with the U.S. Attorney’s Office, the DOJ and the OIG.

The company also reached an agreement in principle with the DOJ to settle criminal violations of the Foreign Corrupt Practices Act (FCPA) that it voluntarily reported to the U.S. government in June 2010 concerning its former Mexican orthopedic distribution entity. In the first quarter of 2011, the company spent $3 million to establish an accrual in connection with this case based on the results of its own internal investigation and an analysis of similar FCPA resolutions.

As the result of recent discussions with the DOJ and staff at the SEC, Orthofix will take a charge of approximately $4.5 million in the fourth quarter of 2011 to establish an additional accrual in anticipation of a proposed criminal and civil resolution of this matter. Final resolution is subject to the negotiation and execution of definitive agreements with the DOJ.