(Updates with details on potential fine; adds background)
By Jon Kamp
Of DOW JONES NEWSWIRES
Stryker Corp.'s (SYK) small Biotech unit, the unit's former president and three current sales managers were charged in U.S. federal court on Wednesday with alleged improper promotion of bone-growth products.
The U.S. Attorney's Office in Massachusetts also announced the indictments in a press release. Conviction on the charges could mean significant fines and could exclude the Biotech business from federal and state health-care programs, Stryker said in its own release. It added that this could have a material impact on the Biotech business.
It's a tiny business for Stryker, but one that has had problems over the years, including a Food and Drug Administration panel's rejection in March of Stryker's bid to use "Op-1" bone-growth products more broadly. They are only approved in the U.S. today for very limited use in trauma situations and spinal surgery.
The Justice Department alleged that Stryker's Biotech unit promoted the products for an unapproved use involving mixture with a bone-void filler called "Calstrux."
"It is alleged that some of these untested 'recipes' called for medical personnel to mold the combined product into 'cigars,' 'Tootsie Rolls' or 'Vienna sausages,'" the U.S. Attorney's Office in Massachusetts said in a press release.
The indictment also alleged that the company made false statements about the number of patients treated annually with OP-1.
If convicted, Stryker Biotech faces a fine of at least $500,000, while the three sales managers and former unit President Mark Philip face imprisonment and fines.
Efforts to reach Philip late Wednesday were unsuccessful.
"The company is disappointed with this action and still hopes to be able to reach a fair and just resolution of this matter," Stryker said in a release. It disclosed in March that the Biotech division was the target of a federal grand jury investigation.
The FDA issued a warning letter to Stryker's Biotech unit last year involving issues that included the falsification of hospital-approval documents used under the FDA rule that allows limited use of OP-1. Stryker said at the time that it discovered that problem and reported it before the FDA inspection that prompted the warning.
Meanwhile, the company announced last week that the Biotech warning letter has been resolved following an FDA reinspection. The company still has three warning letters related to issues the FDA found at other company plants, however, and is spending more than $200 million over three years to improve quality and compliance.
Morgan Stanley analyst David Lewis said in a note to investors that the commercial and profitability implications of the charges against Stryker Biotech "are likely to be less significant than the negative perception." He estimated that OP-1 represents only about $60 million in sales but $30 million to $50 million in annual operating losses.
Stryker posted $6.72 billion in total sales last year.
Shares of the Kalamazoo, Mich., company, which has its Biotech headquarters in Massachusetts, lost 4.2% to $46.00 on Wednesday and were recently unchanged in after-hours trading.
-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com