Boston Scientific Corp. (NYSE:BSX) said it’s disappointed with federal prosecutors over a civil lawsuit filed by the U.S. Justice Dept. over its white elephant Guidant Corp. acquisition, but downplayed the suit’s ultimate financial impact.
"The company is disappointed that the federal government, after reaching a criminal resolution with Guidant LLC, has chosen to seek additional money in a civil lawsuit," the Natick, Mass.-based medical device giant said in a statement. "However, the company believes that the ultimate resolution of this matter should not have a significant financial impact."
The Justice Dept. filed a civil lawsuit yesterday accusing Guidant, which Boston Scientific acquired in 2006 for $27 billion, of causing healthcare providers to file fraudulent Medicare claims. Boston Scientific hastened to point out that the alleged misconduct, the concealment of design flaws in its implantable cardiac defibrillators and pacemakers, "took place from 2002 to 2005, well before Boston Scientific acquired Guidant in 2006."
In April 2010, the company pleaded guilty to criminal charges and forked over a $296 million penalty — the largest criminal penalty ever imposed on a device maker for violating the Food, Drug and Cosmetic Act, FDA commissioner Dr. Margaret Hamburg said at the time.
Guidant discovered a design flaw in the Ventak device in February 2002, after receiving reports of failures. By April 2002, according to court documents, it had fixed the flaws and begun producing a corrected version of the device — but didn’t recall the older, defective products.
“Instead, it continued selling its inventory of defective units without disclosing either to physicians or the public the design flaw or malfunctions that had led to device failures.” Guidant never mentioned the defects in subsequent press releases and filings with the Securities and Exchange Commission, according to the documents.
In 2004, the company began talks with Johnson & Johnson (NYSE:JNJ) over a possible merger. On Dec. 1 of that year Guidant put out a press release touting “highly positive news” about the potential for growth for its ICD and pacemaker businesses. Shares of Guidant rose nearly 8 percent in the week following the announcement, from about $65 per share to $70.
Two weeks later the J&J merger was revealed and Guidant’s stock again surged, eventually reaching $75 per share. But neither release mentioned the problems with the Ventak Prizm 2 DR; merger filings with the SEC were also silent on the defects.
Then, on March 13, 2005, 21-year-old Joshua Oukrop’s Ventak Prizm 2 DR short-circuited, killing him. Guidant told his doctor of the problems with the device, disclosed that it knew of 25 other such cases and told the physician that about 24,000 ICDs similar to Oukrop’s had been sold. When the doctor asked Guidant whether the other recipients would be told, the company said no, it did not want to “alarm” anyone, according to court documents.
The company kept its word in subsequent SEC filings and press releases, never mentioning the defect or Oukrop’s death. In fact, Guidant’s first public acknowledgment of the problem came in a letter to physicians issued about a month after its shareholders approved the JNJ deal, and then only because of an impending New York Times article that was to reveal the device’s flaws.
The FDA issued a national recall for the devices June 17, 2005; Guidant issued a physician communication and a press release the same day, disclosing 15 reports of failure of the Contak Renewal and Contak Renewal 2 defibrillators, out of approximately 16,000 implanted worldwide, and two memory error incidents among its four models of AVT defibrillators, out of about 21,000 implanted worldwide.