Boston Scientific Won Guidant - What A Prize

Evelyn Pringle June 24, 2006

In the second quarter of 2006, Boston Scientific may have lost 27% of its value, but in the first quarter, it did win a nearly two month bidding war with Johnson and Johnson over the heart device maker, Guidant, with a bid of $27.5 billion for the grand prize.

It probably seemed like a great deal when the bidding started. Guidant's heart device division accounted for about half of the company's $3.8 billion in sales in 2004. According to the February 28, 2006, New York Times, "Defibrillators, which cost up to $35,000 each, have a profit margin of about 75 percent."

The market for the devices certainly looked bright. According to the American Heart Association, cardiac pacemaker procedures have grown from under 50,000 in 1979 to more than 200,000 in 2003. In 2004, about 150,000 devices were implanted worldwide, and the market had been growing at a steady clip.

At the beginning of the new years, a market analysis in the January/February 2006, Medical Device Link, quoting Kalorama Information, reported that the 2005 US market for cardiovascular devices was expected to reach approximately $14 billion, and by 2014, it is expected to exceed $25 billion.

"Industry analysts estimate that drug-eluting stents and cardiac rhythm management devices account for nearly two-thirds of the total market," MX said, "which is growing at an annual pace of 16%."

"The cardiac rhythm management sector," it noted, "is growing at an annual rate of 20%." The US constitutes about 62% of the global market, valued at around $22.3 billion, according to MX.

That said, analysts say Boston shareholders are not likely to be viewing Guidant as a prize these days, considering that in January 2006, their stock value was a little over $26, and by mid-July it had dropped to about $16, and the litigation expenses the company inherited get higher by the week.

The "winner" was announced on January 25, 2006, and the next month documents filed with the SEC on February 6, 2006, noted that Boston's credit rating could be jeopardized and fall below investment grade status, due to the nearly $9 billion in debt the company would incur to finance the deal.

In addition, 3 days after the announcement, on January 28, 2006, the New York Times reported that Federal prosecutors had "opened a new front in their investigation into the Guidant Corporation by issuing a subpoena seeking records disclosed in a Texas lawsuit that indicate the company knew that some heart devices could catastrophically fail."

"The subpoena," the Times said, "specifically sought Guidant documents disclosed this month in a Texas state court."

"Among other things," it wrote, "the records indicate that company executives debated whether to warn doctors that some heart defibrillators could short-circuit."

"The records suggest," the Times said, "that Guidant might have sold potentially flawed devices."

The document request, served on lawyers representing plaintiffs in the Texas case, also indicates that federal prosecutors have merged their inquiry with an earlier investigation by the FDA's Office of Criminal Investigations, the Times reported.

The plaintiff's lawyer, Robert Hilliard, who is representing 2 patients in a claim against Guidant, provided a copy the subpoena to the Times, and said a federal investigator had asked him to retain all documents produced in the case.

The subpoena required him to turn over handwritten notes and PowerPoint slides that he obtained from Guidant during preparations for the case in Texas.

According to the Associated Press on January 28, 2006, the 10 pages of documents include notes from Fred McCoy, then president of Guidant's cardiac rhythm management division, that show a decision was made to sell inventory the executive described as having sporadic ''life-threatening'' defects.

In the January 30, 2006, Lawyers Weekly USA, Mr Hilliard said, documents obtained during discovery show that Guidant knew about problems with its devices as far back as April 2002, but failed alert doctors and patients for 3 years.

"They knew they were going to kill people based on this defect," Mr Hilliard told Lawyers Weekly.

He says, Guidant performed a risk analysis that showed there was a possibility the devices could short-circuit, and that, if they did, "the likelihood of death or serious injury was very likely."

Mr Hilliard also told Lawyers Weekly that Guidant violated federal regulations by redesigning the devices to eliminate the flaw in 2002, without informing the FDA. Meanwhile, he said, the company continued selling the older devices without notifying patients of the possible risks.

The subpoena reveals that the government is investigating Guidant for possible violations of health care statutes. Two legal specialists, consulted by the Times, said the broad range of the statutes cited, indicate the serious nature of the investigation and could mean Guidant may face civil or criminal charges.

"They are investigating in the broadest possible way," Joan Krause, a director of the Health Law and Policy Institute at the University of Houston told the Times.

"They are looking at potential fraud," she said, "involving government plans like Medicare, private health plans and employee benefit plans."

In addition to the SEC and FDA, the company is also being investigated by attorneys general on behalf of 34 states, according to the article, Litigation Mounts Over Guidant Heart Devices, in Lawyers Weekly USA, on January 30, 2006

Academic attorney, Barry Turner, who teaches ethics courses in the UK, says these government investigations could ultimately lead to the company's biggest nightmare by paving the road to victory for plaintiffs in lawsuits filed under the federal and state false claims statute, and the Sarbanes Oxley Act. Over the last two years Mr Turner has assisted US attorneys in lawsuit preparation for these types of cases.

In most instances, fines and damages in FCA actions, he says, come out of profits, which in turn cause the stock value to drop leading to lawsuits by shareholders under the Sarbanes Oxley Act.

When a product causes death and injuries, Mr Turner says, it is not the personal injury lawsuits that will hurt the company the most. "The subsequent shareholder class actions can result in criminal charges," he notes, "and sends the crooks to jail."

"When a medical device is put on the market," he states, "it is incumbent on the manufacturer to have carried out exhaustive tests to see that it is safe."

"If it is not safe it is a risk not just to the individuals who have the misfortune to have these products foisted on them," he explains, "but for those who have money tied up in the companies that make them."

"Where a company's board knowingly allows a faulty or dangerous product to be marketed, it risks shareholder funds," he says. "Shareholders will face huge losses, losses," he notes, "that would have been avoided if the truth had not been hidden."

"Of course," he continues, "company executives have to take risks and sometimes these go wrong." However, Mr Turner says, "There is a fundamental difference in taking calculated ethically sound risks and taking grossly negligent risks."

"If their investment has been attracted to a faulty product that the manufacturers knew about," he explains, "they have risked shareholder funds beyond the pale."

"The fraud in this industry," he says, "is not divided into that which injures and that which cheats taxpayers and stockholders out of their money."

"Those at the top of the company," he states, "gamble with the lives of patients and the money of stockholders in equal bad faith when they engage in fraudulent and dishonest behavior that allows a dangerous product to be marketed."

Other legal experts agree that Guidant executive may be in for trouble. "Company management should fear the prospect of being accused of deliberately refraining from physician disclosure in order to maintain a high market share that would enhance management's financial interests," says Genese Kay Dopson, special counsel at Sedgwick, Detert, Moran & Arnold LLP, in the May/June 2006, Medical Device Link.

"For example, in Guidant's case," she explains, "the aftermath of physician notification resulted in the decrease in the value of Guidant's stock."

"As a result," she notes, "a company that was in negotiations to acquire Guidant prior to the physician disclosure negotiated a lower bid as a result of the decrease in stock value."

And shareholders have, Ms Dobson says, initiated suits against Guidant for fraud.

In fact, it seems like it has been all downhill for the company, since June 2005. All total, Guidant has recalled or issued safety alerts on more than 200,000 pacemakers and about 88,000 defibrillators.

On June 20, 2005, the FDA issued a nationwide notification saying Guidant was recalling certain defibrillators because the devices could "develop an internal short circuit without warning, resulting in failure to deliver a shock when needed." The devices affected by the notification were:

PRIZM 2 DR, Model 1861, manufactured on or before April 16, 2002
CONTAK RENEWAL, Model H135, manufactured on or before August 26, 2004
CONTAK RENEWAL 2, Model H155, manufactured on or before August 26, 2004

However, critics say the warning from the FDA was once again, too little too late, in light of the fact that the agency knew as early as February 2005, that Guidant defibrillators were malfunctioning, and allowed 4 months to pass before issuing a public alert.

According to Mr Turner, "it is absolutely inevitable that there will be a catastrophic incident soon in the US involving medical products whether they are drugs or devices."

The FDA has significantly failed to protect US citizens, he says, and is totally inept at preventing such a catastrophe. "The manufacturers consciously intervened in FDA business with the FDA's own acquiescence." he states.

"Undermining the safeguard that the FDA was supposed to be," Mr Turner says, "was part of a strategy which placed dangerous products on the market."

"Product after product, he points out, "has now been exposed as dangerous, after approval and with clear evidence that the manufacturer knew that before marketing."

"It is only a matter of time," he warns, "before there is another Vioxx, possibly next time much worse."

"There is after all nothing to stop it," he warns, "and every indication that the pharmaceutical companies have no intention of stopping their current deceitful practices."

This assertion is obviously true because this is not Guidant's first encounter with the Justice Department. Hiding news about faulty products seems to be habitual for the company. In 2003, its subsidiary, Endovascular Technologies, pleaded guilty to 10 felony counts and agreed to pay over $92 million to settle criminal and civil charges of failing to notify the FDA about defective stents, that resulted in 12 patient deaths.

As part of the deal to settle the charges in that case, Guidant entered into a corporate integrity agreement with the Department of Health and Human Services, and agreed to comply with all regulations and reporting requirements of the FDA, and health care programs like Medicare. Guidant obviously did not live up to that agreement.

Shortly after the first recall, on June 24, 2005, Guidant warned doctors to stop implanting another group of its most advanced defibrillators because of a flaw that could cause a magnetic switch to become stuck in the off position, and lead to some of the approximately 40,000 units already implanted to not work properly.

"The move," the June 25, 2005 New York Times said at the time, "could have significant financial consequences for Guidant because it affects, for now, sales of many of the company's heart devices in the fastest-growing part of the market: advanced defibrillators that also act as pacemakers for both sides of the heart."

The warning included the Contak Renewal 3; Contak Renewal 4; Contak Renewal 3 and 4 AVT; and the Renewal RF. At the time, Guidant said it had received 4 reports of flawed switches among the 40,000 devices implanted.

Defibrillator sales, the Times reported, accounted for nearly 50% of Guidant's revenue of $3.8 billion and that analysts thought the types of models involved, known as cardiac resynchronization therapy, or CRT, devices, made up 40% to 50% of its defibrillator sales.

"The use of such devices," the Times said, "is growing rapidly in part because Medicare has greatly increased the number of older patients for whom it will pay for such devices."

A little over a month later, on July 18, 2005, Guidant informed doctors that replacements might be needed for 9 pacemaker models manufactured between 1997 and 2000, with some 28,000 implanted in patients worldwide. Due to failures, several patients with the implants had lost consciousness or developed possible heart failure, Guidant stated, and that one patient may have died.

Two months later, on September 22, 2005, Guidant issued a recall for some of its Insignia and Nexus pacemakers because of failures, including nine cases requiring emergency hospitalization. As of September 6, 2005, the company said, 36 out of 49,500 devices experienced loss of pacing output, while 16 out of 341,000 pacemakers suffered a telemetry failure.

Less than a month later, on October 13, 2005, the FDA issued an update about malfunctions occurring with the following defibrillators:

VENTAK PRIZM� 2 DR, Model 1861, manufactured on or before April 16, 2002
CONTAK RENEWAL�, Model H135, manufactured on or before August 26, 2004
CONTAK RENEWAL� 2, Model H155, manufactured on or before August 26, 2004.

The FDA said it was providing the update because Guidant had informed the agency that six additional clinical occurrences of failures had been reported since July 14, 2005, for a total of 21 failures, including 3 patient deaths, as of October 7, 2005.

On January 23, 2006, Guidant issued another warning to doctors about a problem with a batch of its older model pacemakers, and said, 19,200 patients were believed to be still using the devices manufactured between October 1998 and December 2000.

These devices carried a risk of a seal degradation, the company advised, that could allow moisture to seep inside the case and can pose "serious health consequences" for the user.

Less than a month later, on February 22, 2006, the Associated Press reported that Frederick McCoy Jr, the head of Guidant's cardiac device unit, acknowledged in a deposition that the company made changes to one of its defibrillators in 2002, and incorrectly told federal regulators it had no effect on the product's performance.

In the deposition, Mr McCoy said, Guidant made two repairs to the pacemaker in 2002, to keep it from short circuiting and that neither modification was approved by the FDA, and that only one repair was disclosed in an annual report.

Mr Hilliard told the Associated Press that Mr McCoy's testimony could prove that Guidant sold an unapproved defibrillator in a violation of federal law. "They've hung out every single doctor in the country if the device was unapproved," he said.

In the deposition, Mr McCoy also said he was not told about problems with the devices until May 2005.

In addition to all the lawsuits, and the stricter regulatory rules that are bound to be implemented as a result of the Guidant debacle, a Senate committee is considering passing legislation that would make it a crime for company executives to ship products with known defects.

On March 10, 2006, the Senate Judiciary Committee held a hearing on a proposed for criminal sanctions against executives, and witnesses who testified specifically pointed to the Guidant as an example of what happens when corporate executives put profits before human life.

Witness told the panel that the recall only happened because of the March 2005, death of Joshua Oukrop, a 21-year-old college student from Minnesota who received a flawed device.

After the student died, his doctors tried to get Guidant to alert physicians about the problem and when the company refused, they contacted the New York Times which in turn conducted an investigation. The first Guidant recall, was issued just as the results of the Times investigation were about to be made public.

Since the death of their patient, Guidant's most outspoken critics have been these doctors. They say that if the company had informed them of the problem, they could have quickly replaced defibrillator and saved their patient.

Dr Barry Maron, a Minneapolis cardiologist, testified at the Senate Judiciary hearing and explained how he and his colleague, Dr Robert Hauser, came to diagnose and treat the 21-year-old student in 1999.

He then told the panel how on March 14, 2005, three and a half years after receiving his defibrillator, Joshua died suddenly and unexpectedly while on vacation in Utah.

A post-mortem analysis of the defibrillator, Dr Maron said, found a short-circuiting defect that had caused the device to become electrically inoperative and fail.

"In other words," he testified, "when the defibrillator tried to issue a life-saving shock, the electrical energy short-circuited and was dissipated and did not enter Joshua's heart as it should have."

"Due to this defect," the doctor told the committee, "he was unprotected and died."

Shortly after that, Dr Maron said, in a meeting with 4 Guidant executives, he learned that the company had known about this specific defect and problem for over 3 years.

"It then fell upon me," he told the panel, "to inform Joshua's father, who also has a defibrillator for hypertrophic cardiomyopathy, of the developments."

"I cannot forget Mr Oukrop's reaction," Dr Maron said, "when told that Guidant had for several years known that his son's defibrillator was potentially defective and could not save him."

"Although he was controlled," Dr Maron recalled, "it was as if his last breath had left his body."

He testified that Joshua's father said: "I told Joshua that the defibrillator was his shot, that it would allow him to survive and live his life, and you are saying that they knew all along."

Probably only because the facts of this unfortunate scenario were documented in a series of New York Times articles in May of 2005, Dr Maron told the committee, "have these problems in this sector of the defibrillator industry---in what has come to be known as the Guidant Affair---now become evident to all."

He pointed out that the case involved the largest recall of defibrillators and pacemakers in the 25-year history of the industry. "To make it a crime to knowingly sell defective defibrillators to be implanted into high risk patients would I believe have the desired effect on the willingness of companies to make full disclosure," Dr Maron concluded.

Joshua's other physicians, Dr Robert Hauser, told the New York Times, he was irate to learn that the FDA was given the information about the defects in February 2005, and that if the agency had disclosed the problem, it might have saved Joshua's life.

As for the FDA, in what is becoming a common occurrence, the agency once again has managed to provoke the ire of the powerful Republican Senator from Iowa, Charles Grassley, who chairs the Senate Finance Committee which oversee Medicare and Medicaid, by refusing to turn over Guidant's annual reports to the New York Times, claiming the documents contained trade secrets.

After learning of the refusal, the Senator wrote a letter to the FDA commissioner, asking for an explanation of why the agency does not make all annual reports received from device makers available to the public. "The F.D.A. needs to find reasons to make information public rather than working overtime to withhold findings that the public deserves to know about," Senator Grassley said. "Amid the scrutiny of the last year, the F.D.A. has acknowledged that the public wants and needs to know, but so far the agency's actions haven't matched its words."

Over the past 2 years, the FDA and the pharmaceutical industry have both come under fire from Senator Grassley's committee for hiding the results of clinical trials that showed the dangers of Vioxx and the use of antidepressants with children for years. The Guidant situation now appears to have expanded the interest of the committee into the area of medical devices.

As of February 6, 2006, at least seven deaths have been linked to the devices recalled last year, according to the Associated Press. In its regulatory filing on February 22, 2006, Guidant said as many as 2,500 patients may seek damages and that the company had learned of approximately 1,700 claims the previous month, and expected more. Those claims are distinct from the claims already filed by patients in 211 individual and class action lawsuits in the US and Canada, Guidant noted.

A month later, in March 2006, an extremely damaging report was released by an independent panel, appointed to conduct a review of the product recalls, that said the company had relied too heavily on engineers to evaluate the safety of its products and said Guidant should have made a greater effort to consult doctors.

The report also revealed that Guidant had allowed about 4,000 faulty defibrillators to be implanted in patients after the company found a flaw in the devices in 2002.

On March 22, 2006, a report in Dow Jones Market Watch, said Guidant faces more than 200 individual and class action product liability suits tied to product recalls. "Only a small number of cases are thought to be tied to patient deaths, however," it said. "The vast majority involve living patients who allege problems with the devices."

The fact of the matter is, just about every kind of lawsuit known to man has been filed against company. A wrongful death suit was filed in St Paul, on March 21, 2006, on behalf of the wife of Allan Gohde, age 53, of Birchwood, WI, who died of sudden cardiac arrest on July 28, 2005, at his home.

In this case, to add insult to injury, at the funeral home, Ms Gohde heard a loud beeping noise coming from her husband's chest when she was giving him a last kiss and hug goodbye in his coffin. As it turns out, the beeping was from his defibrillator, which was among the devices recalled by Guidant.

After the funeral, the Prizm 1861 defibrillator was sent to Guidant for analysis and in a report to Mr Gohde's physician, the company stated that "high voltage damage" to the defibrillator had been found and that the beeping sound was a result of the shorted condition.

The report also said that, at the time of Mr Gohde's death, the defibrillator detected "ventricular fibrillation," attempted to shock and "became non-responsive during this attempt."

On February 11, 2002, Mr Gohde was implanted with a Prizm 1861 device that was later determined defective. Despite making design changes to correct the flaw, the lawsuit alleges, Guidant continued to sell defibrillators manufactured before April 2002, without disclosing that the devices contained a serious design flaw.

When Guidant did issue a recall on June 17, 2005, and reported that approximately 13,900 Prizm 1861 devices manufactured before the April 2002, change were implanted in patients and that at least 28 devices had short circuited because of the flaw, and had resulted in one death, Guidant recommended that the devices not be replaced.

Following Guidant's recommendation, the lawsuit alleges, Mr Gohde's physician did not replace the implanted device.

In an adverse event form later filed with the FDA, according to press release by the law firm handling the case, Guidant admitted that the defibrillator short-circuited and that the failure directly contributed to Mr Gohde's death.

"Guidant has an ethical responsibility and duty to its patients and their physicians for ensuring the safety of their implantable heart defibrillators," said Tara Sutton, Mr Gohde's attorney, of the law firm, Robins, Kaplan, Miller & Ciresi LLP.

"Mr. Gohde's death could have and should have been prevented, and this complaint serves as a notice that such conduct is not acceptable," Ms Sutton stated.

"They admitted to hiding a life-threatening defect in these defibrillators for three years," the press release said, "while continuing to sell them."

Another lawsuit suit filed in March 2006, involves Donald Whitting, of Norwalk, Conn, who received a 1298 Insignia pacemaker in September 2004, and died just two days later. Whitting's pacemaker model was recalled a year later in September 2005. This lawsuit also alleges Guidant should have informed patients about the dangers posed by the devices after hearing about the risks as far back as 2003.

According to the latest reports, "Guidant is facing approximately 60 state and federal class actions and about 145 individual lawsuits, many of which have been consolidated in a multidistrict proceeding, and has been informed of another 2500 individual claims that have not yet been filed," says Attorney Victoria Davis, a partner in the product liability group of Alston + Bird LLP in Atlanta, in the May/June issue of Medical Device Link.

"These lawsuits characteristically set forth claims for punitive damages for alleged willful, wanton, or deliberate acts," she explains.

Ms Davis also discussed the numerous regulatory investigations. "Fines could theoretically be imposed by multiple state and federal regulatory entities if violations are found," she says.

"On top of these financial concerns," she notes, "you have to take into account the costs of managing the public relations and investor relations regarding the recall, the lawsuits, and the regulatory investigations, and these costs can be significant as well."

Legal experts say punitive damages are bound to be a major concern for Guidant as well, because depending on the region of the country where a case originates; many punitive damage awards are not covered by insurance.

According to attorney, Brooks Magratten, of Vetter & White, in Providence, RI, in the January/February issue of MX, whether insurance coverage is allowed for punitive damages varies from state to state and many of the most populated states like California, Florida, Illinois, New Jersey, New York, and Pennsylvania, prohibit insurance coverage for punitive damages.

In those states, Mr Magratten says, no insurance carrier is permitted to reimburse a company for any punitive damages under the theory that punitive damages are intended to punish the wrongdoer and insurance thwarts the sting of the punishment.

Another issue of debate that will likely arise, experts say, involves the federal defense of preemption. Guidant will argue, they predict, that state law claims are preempted by federal law since the devices were subject to the FDA's premarket approval process.

But experts say they have serious doubts about the success of a preemption defense in this case. "If reports that Guidant knowingly distributed defibrillators that had known defects and deliberately did not disclose this to physicians are true, it does not seem like the Guidant experience is the poster child for seeking to extend preemption protections," says Genese Kay Dopson, special counsel at Sedgwick, Detert, Moran & Arnold LLP, in the May/June 2006 issue of MX.

On June 6, 2006, Texas Judge Jake Hunter, unsealed more documents containing information about Guidant's recalled defibrillators, saying he did not trust the company's claims that they contain trade secrets and an appeals court denied Guidant's challenge of the ruling

The records released contained the draft of a "Dear Doctor" letter written in January 2005, that disclosing the electrical flaws in the certain defibrillators and Guidant's intention to recall the devices not yet implanted. However, the letter was never sent.

The "product update" that was sent instead of the letter advised doctors to be alert for electrical problems, but did not specify any specific models.

Another document released describes how Guidant represented the problems with the devices to the FDA. A June 30, 2005, memo from a meeting the company requested to discuss the FDA's handling of a recall of 3 defibrillator models says:

"Guidant stated there is no evidence of a trend. There have only been two deaths involving two different implantable defibrillators and they feel that there is not a reasonable probability of serious adverse health consequences or death."

In light of the steady drizzle of damaging evidence, whether or not Boston shareholders ended up with a prize when they won Guidant seems to be more questionable every day. As it stand right now, industry analysts say the legal liabilities that Boston faces could run as high as $2 billion.