Legal tussle in market for medical devices

Posted: April 05, 2012

The emerging market for generic medical devices is the backdrop for a legal fight between Synthes Inc., and several former employees who created a company to sell similar products for less money.

Headquartered in Switzerland but with facilities in Chester County, Synthes is a global leader in selling plates, rods, screws, and power tools to fix broken bones, which is why Johnson & Johnson has agreed to pay $21.3 billion for Synthes.

Yearly global medical-device sales amount to about $300 billion and, with aging populations in developed nations, the market isn't going away. But lower-cost generic drugs are about 70 percent of pharmaceutical sales, and branded devices will face similar cost-control pressure.

"The payers are moving in our direction," said John Marotta, chief executive officer of Emerge Medical Inc. and a former Synthes sales consultant. "If you have a $6,000 total knee replacement and a $3,000 total knee replacement that is substantially equivalent, with the same clinical outcome, the market will choose the $3,000 knee. Hospitals, surgeons, and device companies are all competing for dollars as it moves in this direction."

In March 2011, Synthes sued Marotta and other former Synthes employees who joined him in starting Emerge, alleging, among other things, violations of non-compete agreements, attempts to steal customers, and illegal use of proprietary information.

On Tuesday, Marotta's Blue Bell-based attorney Anne Myers filed a counterclaim in federal court in Philadelphia, accusing Synthes of, among other things, antitrust violations, making misleading statements to Emerge customers, and trying to crush Emerge through litigation.

"They are sending letters to our customers that are misleading and harmful," Marotta said from Denver, where he lives. "Synthes is trying to eliminate a company that's purpose is to provide a cost-effective product to the American public. In my opinion, they use litigation, especially employment litigation, to deter competition in the marketplace."

A Synthes spokesman did not respond to an e-mail seeking comment. Phone messages left at the offices of company attorneys were not returned.

Devices have sometimes offered quicker routes to profits than drugs because the approval process is usually faster. The U.S. Food and Drug Administration does not even use the word "generic" in its approval process for most devices that are designed to be "substantially equivalent" to the original.

Last fall, Synthes reported that, for the first time, it had quarterly sales of more than $1 billion.

Synthes has filed numerous lawsuits against employees leaving for competitors. Patent law is another field of legal battle, but Marotta and Emerge say that Synthes doesn't have patents for the screws, nails, and wires that Emerge is trying to sell.

Beyond that, the legal filing in answer to the Synthes complaint says the sales approaches of the companies differ, with Synthes directing sales toward surgeons and Emerge selling its "Generic Device Fixation Hardware," to hospital administrators because "surgeons don't really care" what brand of screw or nail or wire is used to affix a rod or plate or replacement joint.

Assuming it survives the Synthes legal challenge, Emerge will still have to get past group purchasing organizations (GPOs) that many hospitals use for supplies of thousands of items, though GPOs have been accused of having conflicts of interest and not reducing costs as they were intended.

"Group purchasing organizations give incumbent device manufacturers a lock-in at hospitals in return for volume pricing and side fees that support the GPO's overhead," said University of Michigan business professor Erik Gordon, who follows the health-care industry. "Simple devices that can be sold directly to consumers or through doctors' offices will be the first wave."

Contact David Sell at 215-854-4506 or dsell@phillynews.com, or follow on Twitter @PhillyPharma. Read his PhillyPharma blog on philly.com.

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