A federal judge in Minnesota has granted a group of investors permission to pursue a class-action lawsuit against Medtronic over allegations that the med-tech company inflated its stock value by secretly paying doctors millions of dollars to conceal adverse events associated with its bone-growth product Infuse.
The last time a federal judge in Minnesota granted class-action status to an Infuse-related shareholder lawsuit, Medtronic and the plaintiffs quickly moved into settlement talks in 2012 that resulted in Medtronic agreeing to pay $85 million to the investors to resolve that litigation.
On Thursday a Medtronic spokesman noted the ruling in the latest case, West Virginia Pipe Trades Health and Welfare Fund vs. Medtronic, limits the scope of the lawsuit, and the company continues to believe the litigants' claims are without merit. "We intend to pursue a vigorous defense in this matter and will continue efforts to obtain a complete dismissal of the case," Medtronic spokesman Eric Epperson said in an e-mailed statement.
University of Minnesota Law School Prof. Brett McDonnell said the judge's decision to certify class-action status in a securities-law case like this one was an important step for the plaintiffs. "If you don't get a class certification, you're done," McDonnell said, "because it is not financially feasible to sue individually."
In his 31-page ruling Jan. 30, U.S. District Chief Judge John Tunheim ruled that the West Virginia Pipe Trades class-action suit is limited to shareholders who bought stock between Sept. 8, 2010, and June 28, 2011. About 6.5 million shares of Medtronic stock were traded daily during that period, and nearly 1,200 major institutions owned Medtronic stock in that time.
The only plaintiffs in the suit today are the West Virginia Pipe Trades Health and Welfare Fund, the state of Hawaii's retirement system and a German investment group called Union Asset Management Holding AG. Mitchell Hamline School of Law professor emeritus Dan Kleinberger said Thursday that the order to expand the pool of potential plaintiffs could fundamentally change the legal calculus behind a potential settlement.
Class certification paves the way for a discovery process in which Medtronic might have to reveal internal company records on its handling of Infuse to legal adversaries, and eventually to the public, which company executives might want to avoid.
"Even in situations where allegations are not as juicy as they are here," Kleinberger said, the prospects for disclosing company documents can be "fraught with bad publicity" and "are sometimes enough to induce reasonable corporate decisionmakers to start thinking about settling."
Medtronic is working to finalize settlements with about 6,000 Infuse patients in unrelated lawsuits and claims, following a December agreement to pay $12 million to five states to end their investigations into the controversial biotech product. The company has admitted no wrongdoing or liability in those cases.
Infuse is a complex product with a complicated legal history. The active ingredient is a genetically engineered biologic drug called recombinant human bone morphogenetic protein-2, or rhBMP-2, which only Medtronic has approval to sell in the U.S.
The Food and Drug Administration in 2002 approved sales of Infuse to treat lower back pain by using the chemical to spur bone growth to fuse vertebrae in the lower spine, but only from specific surgical approaches in combination with other devices. Using Infuse for spinal-fusion surgery is supposed to eliminate the pain and expense of having a secondary surgery to harvest living bone-graft material from the patient's own hip.
In recent years, independent researchers have concluded that Infuse carries such serious potential side effects and higher costs that it's difficult to find a clear rationale to use it in spinal fusion. "Earlier disclosure of all relevant data would have better informed clinicians and the public than the initial published trial reports did," a team of researchers in Oregon concluded in a report in the Annals of Internal Medicine in 2013.
Infuse was a key part of Medtronic's spine division, which reported $3.5 billion in revenue in 2008, 2009 and 2010. The West Virginia Pipe Trades plaintiffs say that safety risks discovered, but not reported, in the early clinical trials would have "threatened" Infuse sales goals if they were publicized.
The West Virginia Pipe Trades litigation centers on allegations that Medtronic paid physicians millions of dollars to conceal adverse events and side effects associated with Infuse use in early studies.
Specifically, they say Medtronic-affiliated doctors published research reports in medical journals that concealed Infuse adverse effects while overstating the disadvantages of traditional bone-graft procedures. The lawsuit accuses Medtronic employees of secretly editing those articles, while also concealing $210 million in company payments to the authors.
Medtronic argued in court filings that at least some of those payments were disclosed in the fine print of the early journal articles, which noted certain authors had received Medtronic payments "in excess of $10,000."
In his 31-page ruling Jan. 30, Tunheim wrote that describing millions of dollars in payments as simply being "more than $10,000" may be factual, but effectively omits conflict-of-interest information that could have tipped off doctors and investors.
After the Spine Journal revealed in June 2011 that past Infuse study authors had omitted adverse events while accepting millions in payments, stock analysts said the revelation diminished the value of the studies, and in some people's eyes, completely invalidated them.
"In the mind of the reasonable investor, payments totaling $210 million are something quite different than several payments 'in excess of $10,000,' " Tunheim wrote.
Medtronic maintains that payments to physician-authors were for legitimate purposes, including royalties on patents. "Physician-inventors, whose groundbreaking medical devices improve patients' lives, are entitled to compensation for their intellectual property. Medtronic does not compensate physicians for the use or endorsement of our products, and disagrees with any suggestion to the contrary," the company's statement Thursday said.
Joe Carlson • 612-673-4779 Jim Spencer • 202-662-7432