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March 15, 2004

Cochlear taken by its ear

From: - Australia - Mar 15, 2004

By Richard Gluyas

SIX weeks into his job as Cochlear chief executive, Chris Roberts has been crash-tackled by the formidable force of US Attorney-General John Ashcroft and the Department of Justice.

And if the share market was hoping for soothing words from Roberts when the news broke on Friday, it was sadly disappointed.

Being new to the job, Roberts, understandably, could not assuage widespread fears of an adverse finding. He told this columnist: "Let's have a look at what the documents show."

The market's reaction was predictable. Cochlear shares went into freefall, shedding $3.67, or 16.3 per cent, to $18.90.

The heady days of November 2001, when the stock traded comfortably above $50, are now a forlorn memory.

While the precise details are unknown, even to Roberts, the investigation relates to age-old practices in the medical device and other industries.

It concerns that very fine line between legitimate entertainment and business expenses for wooing potential customers, on the one hand, and, to put it bluntly, kickbacks.

The relevant US laws cover the Medicare and Medicaid programs and include some criminal sanctions.

The ghost of Ashcroft's predecessor, the Clinton administration's Janet Reno, is lurking here.

In the mid-1990s, she secured generous federal funding to pursue several categories of wrongdoers.

Her highest priority was violent crime, closely followed by health industry malfeasance.

In the latter category, the hospital system represented the low-hanging fruit, before the Department of Justice turned its sights on the pharmaceutical companies.

Now, unhappily for Roberts, it's the turn of the medical device manufacturers.

The Cochlear chief can perhaps take some comfort from the fact that his is not a product liability matter, which led to such unpleasantness and cost for Cochlear's former Pacific Dunlop stablemate, Telectronics.

Telectronics' faulty heart pacemaker leads ultimately cost PacDun hundreds of millions of dollars.

Roberts, however, still has some testing times ahead, judging by the experience of Medtronic, the world's largest maker of pacemakers and spinal surgery devices, which has also been caught in Reno's expansive net.

In a Securities and Exchange Commission filing last September, Medtronic said the Department of Justice was investigating allegations that certain payments and other services provided to physicians constituted improper inducements.

Like Cochlear, Medtronic made no financial provision for the investigation.

However, it denied any wrongdoing.

Medtronic, a $US60 billion ($82 billion) company, said costs associated with the matter would not hurt its financial position but could be material for the consolidated results "of any one period".

The company reports its profit every quarter, and for the three months to January 23 boasted $US463.9 million in net earnings.

Roberts will be hoping Cochlear's concept of material is, well, materially different from Medtronic's.

The ear implant maker confirmed on Friday that the Department of Justice investigation would have a material impact on second-half earnings.

Cochlear's document gathering by itself would take four to six months.

Medtronic, meanwhile, is still navigating its way through Reno's legal maze.

In its latest SEC filing on March 5, the company said it had been served on November 21 with a government subpoena seeking documents.

The Medtronic board was overseeing a parallel investigation, in line with Cochlear's plans.

And all the while, the lawyers' billable hours are steadily mounting.

The Australian