Boston Scientific Juggling Guidant Deal, FDA Warning 4631

While the bidding war raged over the acquisition of Guidant Corp. (Indianapolis), it was generally acknowledged by members of the investment community that whichever company emerged as the victor would have to spend a great deal of time and money addressing Guidant's widely reported product quality problems. Yet just hours after Boston Scientific Corp. (Natick, MA) bested rival suitor Johnson & Johnson Inc. (J&J; New Brunswick, NJ) and nailed down its $27.2 billion bid, the company learned that, in addition to cleaning up the problems at Guidant, it now has to get its own house in order.

In a strongly worded, nine-page warning letter from FDA's Center for Devices and Radiological Health (CDRH; Rockville, MD), Boston Scientific was notified of “serious regulatory problems” with medical devices produced at its manufacturing facilities in Natick, MA; Maple Grove, MN; and Spencer, IN. Specific products cited were the Vaxcel implantable drug infusion port, the Enteryx device for treating acid-reflux disease, the Taxus drug-eluting coronary stent, and the Leveen needle electrode. The letter also referred to three earlier warnings regarding the company's production plants in Watertown, MA; Glens Falls, NY; and Quincy, MA. According to FDA, Boston Scientific's inability to address these issues in a timely manner indicated a “systemic problem with the entire corporate quality management system.”

According to CDRH director Daniel Schultz, MD, the warning to Boston Scientific was only the third time in FDA's history that the agency had issued such a broad-based warning to a medtech manufacturer. Schultz called on Boston Scientific “to resolve these serious violations promptly, and to do it not as it relates to specific products, but rather on a corporatewide basis.”

Boston Scientific president and CEO James Tobin described the warning letter as an “embarrassment,” and said, “We will work closely with FDA to resolve these outstanding issues, and we believe we are on track to do so promptly.” Earlier this month—less than two weeks after receiving the warning letter—the company met with FDA representatives in a session that Tobin described as “productive.”

Of particular concern to Boston Scientific is the stipulation in the warning letter that FDA will not approve any new products until the company's quality system is in order—a goal that Tobin pledged to reach by the end of June. FDA's provision delays the release of two stents for carotid artery applications that were scheduled for release in the second quarter. However, the U.S. market rollout of Liberté, the company's next-generation drug-eluting coronary stent, is still expected by October of this year.

Although the timing of the warning letter raised concerns in the investment community, FDA said it was coincidental and had nothing to do with Boston Scientific's merger with Guidant, a transaction the company still hopes to close by the end of the current quarter. However, the deal has yet to gain antitrust clearance from either the Federal Trade Commission or European regulators, and still needs to be approved by the shareholders of both companies.

Boston Scientific's acquisition of Guidant will provide the company access to the $10 billion market for heart rhythm management devices, which is growing at an annual rate of 20%. In contrast, worldwide sales of its market-leading Taxus stent declined by 12% in the fourth quarter of 2005—from $691 million to $606 million. In the United States, Taxus revenues during the same period fell to $398 million from $503 million in the year-ago quarter, a 21% decline. Taxus has about 54% of the U.S. market for drug-eluting coronary stents, down from 70% following its market introduction. The Cypher stent from J&J's Cordis Corp. (Miami Lakes, FL) has the remainder of the U.S. market, although other products are expected to come on line within the next several years.

Overall, Boston Scientific's 2005 revenues of $6.3 billion reflect a 12% gain over 2004 sales of $5.6 billion.

Guidant reported 2005 sales of $3.55 billion, a 6% decline from 2004 revenues of $3.77 billion. Sales losses were generally attributed to the fallout from damaging disclosures regarding device failures and product recalls. Sales of the company's signature heart rhythm management devices are now reportedly recovering. Guidant has regained its number-two ranking in the sector from St. Jude Medical Inc. (St. Paul, MN), which overtook Guidant at one point last year. Medtronic Inc. (Minneapolis) is the market leader. Guidant reports that the company's recovery is reflected in its sales guidance for 2006, which is expected to be in the $3.8 billion to $4.0 billion range.

While providing Boston Scientific with a much-needed new product line, the acquisition of Guidant also brings its heavy baggage of additional regulatory inquiries, likely enforcement actions, and protracted litigation stemming from product failures and the recall of its heart rhythm devices. Industry analysts believe that Guidant's liability costs could be as high as $2 billion.