The problems continue to mount for Boston Scientific Corp. (NYSE:BSX) and its beleaguered Guidant Corp. cardiac rhythm management division.
The $26 billion acquisition got off on the wrong foot soon after it closed in 2006, when the Natick, Mass.-based medical device maker was forced to recall tens of thousands of potentially defective Guidant pacemakers and defibrillators. The division — and its new corporate parent — struggled to recover thereafter, as BSX stock prices plunged and the division failed to capture the market share it once promised to snare.
Bad turned to worse March 15, when Boston Scientific halted shipment of its defibrillators and pulled all inventory from the field. Now a group of shareholders is suing the company, accusing it and former and current managers of deliberately concealing the divisions ills.
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The securities class action suit, filed in the U.S. District Court for Massachusetts, accuses Boston Scientific, former CEO James Tobin, his replacement Ray Elliott, and COO Sam Leno of hiding Guidant’s problems between April 20, 2009, and March 12 of this year. Citing company filings with the federal Securities and Exchange Commission and statements the executives made in press releases and during conference calls with analysts, the suit alleges that the men and the company made calculated, falsely rosy statements about the division designed to artificially boost Boston Scientific’s share prices.
“When BSX’s third quarter results were reported on October 19, 2009, it announced a surprising reversal in the CRM sales trend, reporting a paltry 7% growth in domestic sales, which it attributed to declining demand for its products and disappointing results from newly hired sales staff. The price of BSX common stock declined 15% on this news, causing a one-day loss of more than $2.4 billion in market capitalization,” according to court documents. “In fact, the decline in demand was caused because BSX, under pressure from government regulators, had begun to put a stop to certain illegal and unethical business practices that its sales force had been using to increase CRM sales and reverse the trends that had led to the enormous write-downs at the end of 2008, including the use of impermissible charitable contributions and other financial inducements that violate the federal Anti-Kickback Statute, the False Claims Act, or other federal healthcare program requirements.”
The suit also cites the November 2009 departure of the CRM division’s senior sales and marketing executive, William McConnell Jr., and Elliott’s move to cashier several BoSci sales staff and managers from its CRM division in Minnesota.
“The import of these announcements was not revealed until February 10, 2010, when BSX reported its full year results and lowered its financial guidance, explaining that it expected to lose up to $100 million in CRM sales due to the departure of a number of CRM sales personnel in the wake of ‘recent disciplinary action’ taken against them by the Company,” according to the complaint. “On this news, BSX’s common shares fell nearly 10%, wiping out an additional $1.2 billion in market capitalization and returning the share value to its level at the outset of the Class Period. As a Credit Suisse analyst remarked in a report issued after the call: ‘[T]he company gained share in 2009 however it now appears that such share gains may have been helped by questionable sales practices.'”
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A Heart Rhythm article (PDF) that found a potentially fatal design flaw in Boston Scientific’s Cognis and Teligen brand defibrillators also makes an appearance in the suit. According to the report’s examination of a Cognis device that malfunctioned shortly after implantation, the devices can deliver unnecessary and potentially life-threatening shocks due to a weak bond between the device’s body and the “header,” a part that holds the wires connected to the patient’s heart.
In addition to a rapid, public and vociferous response from the company, Elliott lambasted the journal for rushing the manuscript into print without checking with BSX engineers. Boston Scientific, which warned of the potential problem late last year, said it’s taken steps to correct the header bond problem, saying it believed the malfunctions were not caused by that issue but by problems with leads manufactured by other companies. The articles authors denied the charges.
And the March 15 shipment hold earns a mention in the suit:
“On this news, BSX shares dropped an additional 12.6%, to close at $6.80 per
share, on volume of 243 million shares, eliminating another $1.5 billion in market value for
beleaguered investors,” according to the lawsuit.
The suit seeks class action status, a jury trial, damages and interest, legal fees and “such equitable/injunctive or other relief as the Court may deem just and
proper.”
It’s not the first shareholders suit related to the Guidant deal. In October 2009, a federal appeals court upheld a lower court decision to toss a shareholders lawsuit against Guidant Corp. that accused the Boston Scientific subsidiary and its former managers of malfeasance related to a defibrillator recall and the BSX acquisition.
A month later, Boston Scientific settled a case with the U.S. Justice Dept., agreeing to pay penalties of $296 million and to Guidant pleading guilty to two misdemeanor counts of failing to supply certain information to U.S. regulators.
The Massachusetts Medical Devices Journal is the online journal of the medical devices industry in the Commonwealth and New England, providing day-to-day coverage of the devices that save lives, the people behind them, and the burgeoning trends and developments within the industry.
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