Orthopedics Firms under New Scrutiny from Justice Department

Late last month, five leading orthopedics manufacturers received subpoenas from the U.S. Department of Justice (DoJ). Similar to an earlier DoJ inquiry into orthopedic firms initiated in March 2005, the new round of subpoenas requests documents regarding “possible violations of federal criminal law, including possible violations of the antitrust laws.” Receiving the latest subpoenas were Biomet Inc. (Warsaw, IN); DePuy Inc. (Warsaw, IN), a Johnson & Johnson company; Smith & Nephew plc (London); Stryker Corp. (Kalamazoo, MI); and Zimmer Holdings Inc. (Warsaw, IN).

Many of the targeted manufacturers promptly released statements indicating that they would cooperate fully with the investigation. At press time, it was still uncertain whether the latest round of subpoenas represents an extension of the action initiated by DoJ in March 2005 or a new, separate investigation.

Noting that the exact scope of the latest investigation is unclear, Jan Wald, medical technology analyst with A.G. Edwards Inc. (St. Louis), says the DoJ's new inquiry may go beyond the scope of the previously initiated investigation. “The March 2005 probe was primarily focused on the relationships—some would say cozy relationships—between implant manufacturers and orthopedic surgeons,” he says. “This latest round may well focus on company-funded research studies that are actually marketing programs. But the larger issue that may emerge here is the presence of an oligarchy, in which a few powerful companies control the prices of hundreds of implants for thousands of patients.”

Raj Denhoy, senior medical technology analyst with Piper Jaffray & Co. (Minneapolis), agrees that it is impossible to discern the exact nature of DoJ's latest inquiry into orthopedics firms. “While it's difficult to speculate, the latest investigation may take a different tack than the 2005 inquiry into surgeon-manufacturer relationships, focusing more on pricing and bidding practices within the industry,” he says. Denhoy notes that manufacturers are already under increasing pressure from hospitals to lower prices, particularly in the joint-replacement market for hips and knees.

DoJ's latest round of subpoenas covers documents dating back to 2001—a year earlier than those requested in the 2005 inquiry. Although the government has been tight-lipped regarding the inquiry, some analysts speculate that the investigation could last up to several years.

Although the orthopedics sector may take some short-term hits as a result of these antitrust investigations, industry observers do not expect the sector to sustain any permanent or even long-term damage. Fines are likely, and some company executives and orthopedic surgeons may find themselves facing criminal charges and potential jail time. But the more than 77 million baby boomers who will reach age 65 during the next 20 years will continue to create strong market demand for the latest advances in orthopedics.

© 2006 Canon Communications LLC

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