In a lawsuit filed in September 2018, Channel claimed that Boston Scientific spiked the deal over a former Channel employee’s scheme to embezzle nearly $3 million from the women’s health company.
Emeryville, Calif.-based Channel Medsystems developed Cerene, a cryogen-based endometrial ablation system designed to treat heavy menstrual bleeding that won CE Mark approval in the European Union in June 2017. The company has raised at least $47.6 million in a series of funding rounds that included Boston Scientific, which acquired a 20% stake for $20.6 million spread over two funding rounds.
In November 2017, the companies agreed to a deal that would have seen Boston acquire the remaining 80% for $275 million if it Cerene won FDA approval by Sept. 30, 2019, according to the lawsuit, but by May 2018, the agreement had foundered in the wake of the embezzlement scheme. Federal prosecutors charged former quality assurance VP Dinesh Shankar with six counts of mail fraud in April 2018. Shankar pleaded guilty to one count of mail fraud and was sentenced in February to spend 33 months in prison and to pay $2.6 million in restitution.
Channel was unaware that some of the documents Shankar falsified were contained in Channel’s submissions to the FDA seeking approval of the Cerene device, according to yesterday’s order. The FDA allowed Channel to fix the documents and approved Cerene in April 2018.
Boston Scientific accused Channel Medsystems of fraudulently inducing it into the deal and breaching the agreement. Channel then sued to enforce the buyout, claiming that Shankar’s theft didn’t affect Channel’s pivotal trial or impede its bid for pre-market approval from the FDA.
In yesterday’s ruling, the court agreed with Channel, concluding that Boston Scientific was not entitled to terminate the merger agreement and must close the deal. The court also ruled that Boston Scientific breached its obligation under the agreement to use “commercially reasonable efforts” to consummate the merger, and that it was not fraudulently induced to invest approximately $11 million in Channel from 2015 to 2017.
“In sum, the weight of the evidence demonstrates convincingly that Boston Scientific’s professed need — notwithstanding FDA approval of the Cerene device — to remediate and retest Cerene before placing it on the market is not objectively reasonable, and that Boston Scientific’s concerns about potential products liability litigation, competitive harm, and future regulatory action are based on little more than unsubstantiated speculation,” wrote judge Andre Bouchard. “… There is no legal basis to impute Shankar’s knowledge to Channel and … Channel did not act with reckless indifference to the truth.”
In an email to MassDevice, Boston Scientific said it is disappointed by the ruling and is evaluating its options. BSX was trading down 0.78% at $44.39 in early morning trading today.