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Why a Company Acquired by J&J Is Accused of Major Fraud

Before Johnson & Johnson acquired Acclarent for $785 million in 2010, its top executives were engaged in a host of fraudulent activities in anticipation of an eventual payday at the sinus balloon catheter company, according to federal prosecutors.

Qmed Staff

Two former executives of sinus balloon catheter startup Acclarent are accused of a host of fraudulent activities and skirting of FDA rules in the years leading up to the company's 2010 acquisition by Johnson & Johnson.

Federal prosecutors have charged two former Acclarent executives, William Facteau (aged 45; now living in Atherton, CA)  and Patrick Fabian (aged 48; now living in Lake Elmo, 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.

The charges, filed in U.S. District Court in Massachusetts, read like a case study on how not to enhance the value of your young medical device company as you seek the eventual payday that comes with either going public or being acquired.

"This is a complicated area of regulatory law. I think that the prosecutors have got it absolutely wrong," said Facteau's lawyer Leo Cunningham when contacted by Qmed.

"Bill Facteau is a guy who has worked hard all his life. He's extremely ethical. I've been representing executives like him for over 20 years, and I've prosecuted people. And Bill is one of the good guys. That's what we think the evidence is going to show once it's blatantly understood," said Cunningham, who is a partner at is a partner in Wilson Sonsini Goodrich & Rosati in Palo Alto, CA.

Fabian could not be immediately reached for comment. Facteau is presently chairman and CEO of Earlens Corp., while Fabian is listed as chief commercial officer of NxThera.

Among the allegations is the charge that the company's former CEO and vice president of sales marketed its Relieva Stratus Microflow Spacer sinus balloon catheters for off-label use--for delivering steroids rather than opening sinuses. The indictment states that the sinus balloon catheter had in fact been designed for the purpose of delivering drugs (mainly steroids) through small holes in the balloon, yet deceived FDA about the intended use of the device. Specifically, the indictment states that the company informed FDA that device was intended to "mechanically maintain an opening to the sinus for 14 days and that the Stratus was to be used with saline." Yet the company allegedly marketed the device for its ability to deploy steroids from roughly 2008 to 2011.

The two allegedly anticipated that this action would boost the firm's revenue after the FDA specifically precluded the company to market the device for drug delivery until it had submitted further documentation (likely including additional testing and clinical data) to support that indication. The suit also charges Acclarent with hiding the plan to pad its bottom line from potential suitors, including J&J, which ultimately bought the company for roughly $785 million in 2010. The indictment 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 apparently continued to instruct employees to sell the devices as a steroid delivery device in 2010 and 2011. Following the acquisition, Facteau walked away with roughly $30 million while Fabian took home $4 million.

The lawsuit states that Facteau and Fabian illegally marketed the company's Stratus product illegally with the hope that it would help the company with its plans to either pursue an IPO or an acquisition by a larger firm.

They will be tried by federal prosecutors in Massachusetts. 

Each count of wire fraud and securities fraud has a maximum sentence of 20 years, while each conspiracy count and Food, Drug, and Cosmetics charge has a maximum sentence of five years and three years, respectively.

The charges stretch back to Acclarent's history as a startup, which the company was from 2004 to 2010. The company's sinus balloon catheter device, which was loosely modelled on balloon catheters used for angioplasty, had attracted interest from Johnson & Johnson. In early 2010, the company became a subsidiary of that company.

It is interesting to note that, in 2009, the journal Operative Techniques in Otolaryngology published an article describing the Acclarent sinus balloon stent as a drug-delivery device:

A new surgical tool, the Relieva Stratus (Acclarent, Inc.), is a drug-eluting sinus stent that was recently introduced into clinical practice as an option for minimally invasive treatment of chronic ethmoid mucosal disease. This device is easily and temporarily implanted into the ethmoid complex during routine endoscopic sinus surgery. It is infused with 0.3 mL of triamcinolone [a steroid] that slowly leeches out of the device to bathe the adjacent ethmoid sinus mucosa, thereby providing local and targeted delivery of this anti-inflammatory agent. The Stratus is typically retained for 14 to 28 days, thus providing a sustained release of medication while in place.  

In fact, the company had been promoting the device for this application to ear-nose-throat doctors in 2008, and had promoted it for this purpose at the 2008 meeting of the American Academy of Otolaryngology, prompting one doctor to write the following to Facteau, then the company's CEO:

  • Acclarent is marketing and making available for sale a new sinus implant for delivery of medications intended to eliminate the need for traditional surgery on the target sinus
  • The device is NOT FDA approved for use with any medication,
  • The device has no efficacy data to support its use for any degree of sinus inflammation
  • The device has limited safety data derived primarily from experienced rhinologists
  • The 2 papers being presented at AAO do not reliably address any of the above concerns and are pilot data at best.

According to the indictment, the Relieva Stratus worked poorly at delivering saline, yet the company was able to obtain a quicker path to market through the 510(k) pathway by maintaining its equivalence to a nasal stent already on the market. 

Refresh your medical device industry knowledge at BIOMEDevice Boston, May 6-7, 2015.

Brian Buntz is the editor-in-chief of MPMN and Qmed. Follow him on Twitter at @brian_buntz.Chris Newmarker is senior editor of MPMN and Qmed. Follow him on Twitter at @newmarker

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