Boston Scientific Benefits as Guidant Liability Awards Diminish

If recent settlements are any indication, Boston Scientific Corp. (Natick, MA) may end up paying out significantly less in damage claims stemming from the failure of Guidant's cardiac pacemakers and implantable cardioverter defibrillators (ICDs) than it originally thought.

In June 2005, Guidant began issuing safety warnings and product recalls which eventually involved 88,000 ICDs and 200,000 pacemakers. The company was criticized for failing to properly notify physicians, patients, and FDA about the nature and extent of problems associated with the devices.

Shortly after Boston Scientific closed its $27 billion deal to acquire Guidant, in April 2006, the company reportedly set aside $331 million to settle such claims. By the end of that year, it revised the figure upward to $485 million. And according to its filing with the Securities and Exchange Commission, in May 2007 the company raised the fund further, to $732 million.

So far, however, the case settlements related to Guidant liability claims have fallen far short of even the lowest amount set aside. In July of this year, Boston Scientific announced a payout of $195 million to settle some 4000 claims with individual patients. The agreement was reached just two weeks before the consolidated claims were set to go to trial in a federal court in Minnesota.

Commenting on the settlement, Jim Tobin, president and CEO of Boston Scientific, said in a prepared statement, "We are pleased by this resolution, which is in the best interest of all involved. It will better allow us to focus our time and resources on developing innovative products to serve physicians and patients."

Last month, the company reached a $16.75 million settlement with 35 states and the District of Columbia. Under the terms of the agreement, Boston Scientific will replace its cardiac rhythm management (CRM) devices upon request, reimburse individual patients for up to $2500 in out-of-pocket costs, and extend the warranty period of the devices for another six months. The company also agreed to set up an advisory board that will evaluate the performance of the company's CRM devices; to fully disclose all product-service information, including product failures and safety recalls; and to establish a nationwide database to track the usage and performance of the devices. A key feature of the agreement is the requirement that Boston Scientific establish a patient safety officer position.

The multistate action was led by Oregon's attorney general, Hardy Meyers, who asserted that Guidant continued to sell the CRM devices even after the company knew they had the potential to malfunction. Hardy said the provisions of the settlement, particularly the establishment of the advisory board and the patient safety officer position, will create "an institutional conscience that will make the type of decisions Guidant made in the past impossible."

CEO Tobin described the settlement as "amicable." Under the terms of the agreement, Boston Scientific admitted no wrongdoing in the problems associated with the CRM devices.

A number of lawsuits are still pending in the United States, and 17 overseas claims have reportedly been filed. Nevertheless, most industry analysts are surprised by limited size of the settlements to date and believe that Boston Scientific may have dodged a bullet regarding Guidant liability claims.

"The numbers are much lower than we expected," says Daniel Owczarski, a medtech analyst with Belmont Harbor Capital (Chicago). "The initial speculation was at least $500,000, with a total payout of $1 billion—or more—certainly within the realm of a distinct possibility. There may be more cases out there, but I really don't see the settlement costs going anywhere near the original projections."

© 2007 Canon Communications LLC

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