As OtisMed pleads guilty to selling unapproved devices, current parent company Stryker must pay $80 million and carry out compliance efforts for violations that occurred prior to Stryker's acquisition of OtisMed.

Stryker will pay around $80 million to settle civil and criminal charges related to the illegal sale of OtisKnee products by its subsidiary OtisMed, before the company was bought. OtisMed admitted to never obtaining FDA approval before selling devices used by surgeons to make accurate bone cuts to implant prosthetic knees, pleading guilty in federal court in Newark, N.J., to one felony count of distributing misbranded medical devices with the intent to defraud.

OtisMed applied for FDA approval in October 2008, and 13 months later the regulator determined the company had failed to show it was safe and effective. Nevertheless, former CEO Charlie Chi then shipped 218 devices to surgeons, overruling his advisers and board.

According to prosecutors, OtisMed generated $27.1 million by selling more than 18,000 OtisKnee devices between May 2006 and September 2009, 75 percent of which were sold alongside a Stryker knee replacement system. However, OtisMed was acquired by Stryker in November 2009, and the DOJ acknowledged that the criminal conduct took place while OtisMed was still a privately held business, and “without Stryker’s prior knowledge or acquiescence.”

A lawyer who represented Stryker at the plea hearing said the company learned about the shipments only after it bought OtisMed. Stryker deputy general counsel Michael Cartier said the company will need to spend approximately $100 million to “try to make this right.”

OtisMed is set to pay a fine of $34.4 million and forfeit $5.16 million in a criminal case, while paying a civil fine of $41.2 million. It is also being barred from participating in federal healthcare programs for 20 years. Though Stryker is not being barred, the company agreed to cooperate with the government’s probe and maintain a compliance program. It will also conduct a review and audit concerning whether other marketed devices have the appropriate FDA approvals, providing the government with the results. Stryker also agreed to annual certifications from the president of Stryker’s orthopedics group and from Stryker’s board of directors on the subject of the effectiveness of the compliance program. Those measures are explained in a 40-page side agreement that states that the U.S. won’t prosecute Stryker as long as OtisMed fulfills its obligations within 90 days of the sentencing.