Federal prosecutors with a new mandate pursue fraud charges over alleged off-label promotion of a nasal stent. Is potential prison time a new risk of doing business in the medical device industry?

Nancy Crotti

The criminal trial of two former Acclarent executives is set to begin June 7--but the latest example of the U.S. Justice Department cracking down on medical device corporations' top brass.

The government's case claims that former Acclarent CEO William Facteau and the firm's VP of sales, Patrick Fabian, plotted a fraudulent scheme to promote the Relieva Stratus Microflow spacer for off-label use to deliver drugs. The alleged scheme drove up the startup's revenues and stock valuation, making the VC-based company an attractive takeover target for Johnson & Johnson.

Specifically, federal prosecutors have charged Facteau (now president and CEO of EarLens Corp. in Menlo Park, CA) and Fabian (now COO of NxThera in Maple Grove, MN) each with one count of conspiracy, three counts of securities fraud, four counts of wire fraud, and 10 counts of introducing adulterated or misbranded medical devices into interstate commerce. Facteau and Fabian have pleaded not guilty.

The suit also charges Acclarent with hiding a plan to pad its bottom line from potential suitors, including J&J, which bought the company in 2010 for $785 million. The indictment, brought in April 2015, states that Ethicon, a unit of J&J, was said to have instructed Facteau and Fabian to quit promoting the Stratus after it had discovered "extensive off-label use of the product of which Ethicon became aware through its due diligence process." After that, the two allegedly continued to instruct employees to sell the Stratus as a steroid delivery device in 2010 and 2011. Following the acquisition by J&J, Facteau walked away with roughly $30 million while Fabian took home $4 million.

The case against Facteau and Fabian is among the first to go to trial following a 2015 justice department memocalling for prosecution of individuals in corporate misconduct cases. Another federal trial, of a former division president at Allergan company Warner Chilcott, was set to begin today. The Warner Chilcott exec is charged with conspiring to pay doctors kickbacks so they would prescribe the company's medications, according to a report in the Wall Street Journal.  Both trials were to take place in federal court in Boston.

"Such accountability is important for several reasons," wrote Deputy Attorney General Sally Quillian Yates in the memo. "It deters future illegal activity, it incentivizes changes in corporate behavior, it ensures that the proper parties are held responsible for their actions, and it promotes the public's confidence in our justice system."

Prosecutors trying to trace illegal activities to the C-suite often have to comb through "millions" of corporate documents, which may be difficult to collect because of legal restrictions, the memo says.

Prosecutors Going Too Far?

The Yates memo represents the latest personal accountability crackdown that the federal government has pursued in recent years, according to Minneapolis regulatory compliance attorney Mark Gardner.  The justice department, FDA, and the Office of the Inspector General made similar declarations in 2009, resulting in cases like the current one against the former Acclarent execs.

And then there was the case of Vascular Solutions CEO Howard Root, who was recently acquitted of felony charges related to alleged off-label promotion of a laser ablation device for treating varicose veins. The litigation took five years, during which the company turned over millions of documents and spent $25 million. Thirty employees and 50 customers were interviewed. At trial, defense attorneys didn't call any witnesses, because they believed that cross-examination of prosecution's witnesses had proven what Root and Vascular Solutions had been saying all along: there was no illegal, off-label promotion.

"Some of these cases being brought are just really bogus cases," Gardner said, adding that he is not involved in the Acclarent case. The Justice Department declined to comment. Attorneys for Facteau and Fabian did not immediately respond to requests for comment.

When Acclarent was founded in 2004, healthcare company executives were rarely held liable for their role in promoting off-label uses of products. The company was once viewed as a proverbial Silicon Valley medtech success story. The company's Stratus device won FDA clearance on August 22, 2006 for use as a postoperative spacer in the sinus cavity for treating chronic rhinosinusitis. The device, containing a reservoir of hundreds of micropores, worked something like a leaky balloon. Although it could be theoretically used to deliver any therapeutic agent to the sinuses, it was cleared by FDA for use only with saline.

Acclarent was able to overcome long odds and the skepticism of many prominent ENT physicians regarding balloon sinuplasty and got significant traction in the market for a single-use disposable product with an $1800 price tag. After its FDA clearance, the company worked to expand the label indication to include steroids.

"Acclarent's ultimate (and transparent) goal in developing Stratus was to market a product that could deliver a variety of drugs to a particularly difficult-to-reach sinus," explains a memo filed in the case by Facteau and Fabian's attorneys.

In 2006, Acclarent began planning a study to test the device with the steroid known as Kenalog-40, which it hoped to use to ultimately expand its indication to include eluting steroids and other drugs. FDA responded that the study could represent "significant risk." Acclarent redesigned the study and achieved conditional approval to proceed in 2008--the same year the product underwent a full commercial launch. The majority of doctors using the device during this time period used it with fluids other than saline.

Before its full commercial launch, Acclarent obtained legal counsel that advised that the company sell the product for use with therapeutic fluids including steroids but not promote the product for that application until it had convinced FDA to expand its indication.

Accusations of Bad Behavior

Melayna Lokosky, a former sales rep for Acclarent, sued Acclarent, J&J, and that company's subsidiary, Ethicon, Inc., maintaining that Acclarent's management manipulated its sales reps to promote this off-label use to doctors. Further, she questioned the company's plan to promote the use of the Stratus to deliver the steroid Kenalog when that drug is indicated only for injections.

In her lawsuit, Lokosky maintained that Acclarent had set up to deceive FDA about the intended use of the device since the beginning. Further, Lokosky alleged that the device was ineffective for delivering any compound.

"Stratus didn't work with saline, Kenalog-40, or any substance. We, as reps, unknowingly sold a 100% useless device to our surgeons who in turn implanted them in their patients," she said.

Ultimately, however, Acclarent agreed to pull Stratus from the market in 2013 after it informed FDA that the product had been widely used for off-label uses in 2011. Nevertheless, FDA witnesses had testified that they were unaware of any serious adverse events related to off-label uses of the Stratus device, and FDA had not taken any enforcement actions against the company for off-label promotion at the time Fabian and Facteau were indicted.

Gardner, the Minneapolis lawyer, expects more such criminal prosecutions against healthcare company executives.

"These cases take a long time to build and now we're seeing some of the work from the past seven years on them," he said. "I think they will continue"

Nancy Crotti is a contributor to Qmed.

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