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Ethical Breaches Hurt Device Industry’s Reputation

MOVERS AND SHAKERS 2006

Analysts think Crawford's conduct hurt the agency and that he should have known better.
Although the vast majority of people in the device industry try to stay within the lines when it comes to ethical business practices, some seem intent to cross the line. Last year, executives from AbTox Inc. (Mundelein, IL) were convicted for selling unapproved devices, former FDA commissioner Lester Crawford pled guilty to conflict of interest charges regarding stocks of FDA regulated companies, and two Cyberonics executives resigned following a stock options scandal. These actions might not be typical, but they generate bad publicity for the device industry and can blemish its reputation.

Fraudulence committed by AbTox executives led to damage and blindness in one eye in 18 patients, with the problems starting more than a decade ago. FDA approved a small gas sterilizer for stainless-steel surgical instruments without tubes or hinges. Company executives instead claimed they had approval for a larger device that sterilizes a range of non-stainless-steel instruments. In 1998, AbTox issued a voluntary recall on the device, and FDA sent out an alert for the Plazlyte sterilization system, stating it never approved the product. FDA also warned hospitals and doctors to stop using the product, as it caused serious eye injuries. AbTox filed for bankruptcy in 1998.

A judge found Caputo responsible for sterilization devices that harmed 18 patients.

In 2006, following a nine-week trial, Ross Caputo, president and CEO, was sentenced to 10 years in prison, and Robert Riley, vice president of regulatory affairs, received a six-year sentence. They were also ordered to reimburse hospitals $17 million for the devices. Mark Schmitt, former director of marketing, and Marilyn Lynch, former director of clinical services were also indicted and pled guilty in the case. The company sold 168 devices, worth more than $18 million in sales.

Margaret O'K. Glavin, associate commissioner for regulatory affairs at FDA, called the convictions proof that FDA is committed to ensuring devices are safe and effective. “Our criminal investigations aggressively pursue those that endanger the public health by manufacturing and selling unsafe products,” she said.

In another incident, former FDA commissioner Crawford got into trouble for owning certain stocks. About a year after his sudden resignation, Crawford pled guilty to conflict of interest charges and falsely reporting information about stocks he owned in companies regulated by FDA, including at least one medical device company. Senior FDA employees are restricted from owning shares in companies regulated by the agency.

Given Crawford's past experience in the agency, some people can't understand how he could have fallen victim to such a scandal. “With all his years of service at FDA as deputy commissioner and acting commissioner, it's a terrible shame for a man with his talents and experience to go out in that fashion,” says Jonathan Kahan, partner at Hogan & Hartson (Washington, DC). “I believe it hurt the agency for that to occur.”

Larry Pilot, partner at McKenna, Long & Aldridge LLP (Washington, DC), shares the same sentiment and notes that Crawford was involved in the agency in the 1970s, when pressure regarding public disclosure was intense. “It was such a major issue, so he should have recognized the importance of full disclosure.”

Each misdemeanor charge that Crawford faces carries a maximum penalty of up to one year in prison. At press time, Crawford was scheduled to face sentencing in January.

Pilot speculates that ethical problems in the device industry could be part of a larger issue facing the country. “If there are ethical breaches in the agency or within the community that are subject to regulation, it probably has more to do with deterioration in society and a willingness to tolerate or accept what used to be unacceptable,” says Pilot.

The corporate world is also seeing more attention given to bad practices, but enforcement isn't far behind. “There's been increased scrutiny over the past six to 12 months, and companies that did violate are being called out on it,” says William Plovanic, managing director and equity research analyst at First Albany Capital (Chicago).

Despite overcoming adversity and gaining FDA approval for a controversial vagus nerve stimulator, Cyberonics Inc. (Houston) faced problems that shook the company's executive structure. Last November, following an audit committee that found problems in the way the company reported certain stock option grants, Robert “Skip” Cummins, president and CEO, and Pamela Westbrook, vice president and CFO resigned. The company's cofounder and former CEO, Reese Terry, was named interim CEO.

“I think the company has been under a microscope for a long time and not just because of the options, but also because of the behavior of Skip Cummins himself,” says Jan Wald, medical device analyst at A. G. Edwards & Sons Inc. (St. Louis). He notes that Cummins had a very aggressive approach to handling FDA and CMS issues regarding the company's vagus nerve stimulator. (At press time, A.G. Edwards or its officers owned stock in Cyberonics, and the firm was looking into doing investment-banking business with Cyberonics.)

An investor advisory had called attention to the timing of the company's June 2004 option grants. It was reported that after receiving positive regulatory news about its stimulator, Cyberonics approved stock option grants for company executives. The following day, the company's shares soared, along with the options' value.

As a result of the audit committee's investigation, Cyberonics stated it would adopt a policy that limits the granting of options to certain time periods. In addition, it will require approval of all option grants, and institute a policy that states that all internal approvals of award grants must be in writing before the award is granted. Cyberonics must also restate its financial statements for fiscal years 2000 to 2005, along with fiscal periods ending July 29, 2005; October 28, 2005; and January 28, 2006.

Although ethical problems within Cyberonics have done their damage, the situation may also provide new opportunities. New management could be beneficial to Cyberonics, and Wald suggests the possibility that the company could be acquired within the next year due to the attractiveness of the fast-growing and underpenetrated neurological market.

Copyright ©2007 Medical Device & Diagnostic Industry
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