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Medical Device Company Exec Says to Expect More Scrutiny

Nov 5, 2008 | Parker Waichman LLP Medical device companies should be on the alert as the government is likely to pressure them into ensuring that third-party companies that distribute their devices in other countries do not pay bribes.  That advice came from Mark Augusti, an executive with device maker Smith & Nephew .

"There's going to be a big scrutiny on how we do business outside the U.S., and frankly—I'm speaking for everyone—in general, the device industry has not done well on monitoring distributor operations outside the U.S.," said Augusti, president of the firm’s new biologics unit.  Augusti was not alone and was one of five current and former medical device executives who spoke in a panel discussion at the sixth annual Musculoskeletal New Ventures Conference at the FedEx Institute of Technology located on the University of Memphis campus.  The conference convenes to allow start-up companies the ability to obtain financing from venture capitalists nationwide.  The start-ups design products to treat injuries and diseases such as arthritis and spine problems.

The Securities and Exchange Commission (SEC) has subpoenaed Smith & Nephew, as well as several other medical device companies under the Foreign Corrupt Practices Act.  The Act bans paying bribes in foreign countries.

Jon Serbousek, a former Medtronic executive and current orthopedics president at Biomet Inc., said good results have come from the federal government's settlement with five orthopedic companies.  Those companies paid a combined $310 million.  Serbousek believes it is possible to follow the law and pay doctors to help develop new products.

Venture capitalists try to earn back their investments in small companies by either selling the smaller companies off to larger, more profitable companies or by implementing public stock offerings.  But, in today’s bleak economic environment, venture capitalists are a bit more reluctant to invest for fear they might not see a return on their investments any time soon.  Also, the ongoing chaos in the financial markets is creating situations in which it is nearly impossible for small companies to sell themselves to the public and pay back their investors.

Panel executives said big companies like theirs will probably express increased caution about acquiring small companies, especially given the difficulty in integrating corporate cultures as well as the risk that such buy-outs could not turn out as planned.  With all of the changes occurring in the medical industry and in the financial markets, it is likely that small companies will begin to seek out cooperative partnerships with larger companies rather than obtaining buyers, said Shawn McCormick, vice president of business development at Medtronic.

Former venture capitalist Ted Davis, who scouts potential acquisitions for Arlington-based Wright Medical Group, suggests that the tough environment means start-up companies should concentrate on creating valuable products, "Focus on the fundamentals," he said.  The economic climate doesn't mean small companies with good products can't succeed, he added, but if you're running a company that is imitating someone else's idea, "you're in trouble."

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