SAN JOSE, Calif. (CN) - Stock prices for Intuitive Surgical dropped from $573 to $393 per share when it was found that the company had grossly underreported injuries and deaths caused by its da Vinci robotic surgery device, shareholders claim in a federal derivative complaint.
The City of Birmingham (Ala.) Relief and Retirement System sued the company's nine-member board of directors and its chief financial officer, alleging unjust enrichment and breach of fiduciary duty.
Intuitive's only product, the da Vinci system, is a robotic surgical device that uses a "targeted electrical charge to cut and cauterize a patient's tissue during surgery," according to the 67-page heavily redacted complaint.
The U.S. Food and Drug Administration initially approved the da Vinci robot for laparoscopic surgeries such as gallbladder and gastroesophageal surgery, and later authorized its use in other procedures such as chest surgery, certain cardiac surgeries and urologic procedures, the complaint states.
It has five main parts: a "high-definition, three-dimensional vision system" for the surgeon; a side cart for the patient; three to four robotic arms; EndoWrist attachments on the arms, which are the parts that cut into patients; and a computer system, according to the complaint.
Each device costs $1 million to $2.3 million. Around 43 percent of Intuitive's profits are from da Vinci sales; it gets the rest of its revenue from selling accessories for the device and service agreements, according to the complaint.
The FDA regulates the manufacture of surgical devices. Companies must submit medical device reports alerting the FDA of serious injuries or deaths caused by their device, and of any voluntary recalls issued by the manufacturer.
Once a manufacturer receives a notice of injury or death from a hospital, it has 30 days to pass the information along to the FDA. It must investigate each alleged malfunction and send the FDA a report about the event.
But Intuitive's board of directors put profits ahead of safety and "grossly underreport[ed]" complications caused by the da Vinci device, the shareholders claim.
They claim the board misclassified serious injuries and deaths as "other" and hid from the FDA "at least three voluntary recalls the company instigated to warn hospitals about the tendency of a part of the da Vinci device, known as the 'tip cover,' to malfunction, resulting in burning of the patient's internal tissue."
Intuitive developed the tip covers to go on the ends of the HotShears Monopolar surgical scissors, the most commonly used EndoWrist attachment for the da Vinci. Made of silicon or rubber, the covers prevent electrical charges from leaking into other tissues and organs that are not being operated on, the complaint states.
The shareholders claim many patients have suffered severe injuries from defective tip covers. For example, Sonya Melton told CNBC that she developed pneumonia and had "excruciating pain" after surgery to remove uterine fibroids because undetected electrical burns from the da Vinci had perforated her small intestine.
Another patent, Shawn Todd, told CNBC that her uterus had been burned during a da Vinci procedure, the complaint adds.
Several people have died from undetected electrical burns, such as Kimberley McCalla, who underwent da Vinci surgery for cervical cancer, according to the complaint. Eleven days later she had emergency surgery to sew up a laceration of the iliac artery, "but it was too late. After two more emergency operations, Kimberley died on August 25, 2013 after suffering small bowel damage 'incompatible with life,'" the complaint states.
The shareholders claim the board knew as early as October 2011 that tip covers designed for the Monopolar scissors "had a tendency to develop microcracks, causing inadvertent burning of the patient's internal organs and tissues," but hid this information from the FDA for almost two years.
In September 2012, the FDA met with Intuitive regarding its inaccurate medical device reports, according to the complaint. It ordered Intuitive to report adverse events correctly and code them properly as "injury" or "serious injury" in the Manufacturer and User Facility Device Experience, or MAUDE, database, which houses all medical device reports submitted to the FDA.
The shareholders say the number of medical device reports "increased exponentially" after this meeting, prompting the FDA to launch a safety probe into Intuitive and to issue a warning letter citing it for concealing patient injuries due to product defects in violation of the Federal Food, Drug & Cosmetic Act.
After several news agencies covered the FDA probe, Intuitive's stock prices fell from $573 to $510 per share, and five months later closed at $392.67, the complaint states.
According to a September 2013 study published in the Journal for Healthcare Quality, Intuitive underreported complications arising from the da Vinci device from January 2000 to August 2012, the complaint states.
Of 70 events described in legal documents the study's authors retrieved from MAUDE, LexisNexis and Pacer, Intuitive did not report more than 10 percent of adverse events to the FDA, "including deaths, perforations, and severe injuries," the complaint states.
Five cases were never filed at all, including an instance in which an Intuitive representative witnessed a patient's death during surgery, and two cases were filed "only after the Wall Street Journal and Reuters reported the story," the complaint adds.
It continues: "In addition to flagrantly failing to report deaths and other serious injuries to the FDA, Intuitive also misclassified the injuries that it actually reported, in order to minimize their import. On March 13, 2013, the company issued a press release ... admitting that until September 2012 the company had been improperly classifying serious injuries as 'other' in the MAUDE database. After that date, Intuitive elevated previously classified events from 'other' to the correct category of 'serious injury.'"
Reclassifying these events caused the number of serious injuries from da Vinci surgeries in 2012 to nearly double from 70 to 131, and incident reports for 2000-2012 "skyrocketed" to 4,603, according to the complaint.
That number climbed to 9,839 after an additional 5,236 cases were reported in 2013, though it is almost impossible to deduce how many were new cases and how many were backlogged from 2000-2012, the complaint states.
Death and injury reports also swelled from approximately 10 a month from August 2011 to August 2012 to 62 a month from September 2012 to December 2013, "a more than six-fold increase," the complaint states.
The shareholders also claim that defendants CEO Gary Guthart, CFO Marshall Mohr and Chairman of the Board Lonnie Smith knew that "Intuitive's long run of fraudulently concealing 'adverse events' from the MAUDE system was about to come to an abrupt end" and sold thousands of shares of stock from Feb. 6, 2012 to July 18, 2013, for almost $113 million.
Intuitive is facing at least 76 product liability lawsuits, several lawsuits from its insurers and a securities fraud class action, the complaint states.
The Courthouse News database contains more than 80 lawsuits involving the da Vanci robot.
The shareholders want the court to deem their case a proper derivative action, at least $75,000 in damages, restitution and disgorgement, and an order for Intuitive to "take all necessary actions to reform and improve its corporate governance and internal procedures."
They are represented by Walter W. Noss with Scott & Scott of San Diego.
Intuitive Surgical declined comment.
Here are the defendants: CEO Gary S. Guthart; Chairman of the Board Lonnie M. Smith; Craig H. Barrett, Ph.D.; Eric H. Halvorson; Amal M. Johnson; Floyd D. Loop, M.D.; Mark J. Rubash; George J. Stalk Jr.; Alan J. Levy, Ph.D.; senior vice president and CFO Marshall L. Mohr; and nominal defendant Intuitive Surgical Inc.