Medical Device Link.

Originally Published MX July/August 2003

BUSINESS NEWS

Following the agreement of Guidant Corp. (Indianapolis) to pay the largest fine ever levied for violating FDA's medical device reporting requirements, industry analysts are taking a close look at the company's prospects for a full recovery.

In June, Guidant pled guilty to 10 felony counts involving sales of misbranded products and making false statements to government regulators. The charges were brought after Guidant failed to disclose adverse events relating to the implantation procedure for the company's stent-graft device, the Ancure endograft system, manufactured by its wholly owned subsidiary, Endovascular Technologies Inc. (EVT; Menlo Park, CA). As part of its settlement with the U.S. Department of Justice, the company agreed to pay a fine of $92.4 million.

Following public disclosure of the plea agreement, Guidant CEO Ronald Dollens participated in a conference call with investors and journalists. Noting that EVT was a relatively recent acquisition (Guidant acquired EVT in 1997 for $170 million), Dollens observed that the problems at EVT highlight the need for company management to be on-site as soon as possible following a new acquisition. "Guidant has learned a painful lesson . . . and regrets what happened at Endovascular Technologies," he said.

Dollens's comments also sought to deflect investor concern about the future of the company. "Guidant's financial outlook remains strong. Potential liability from civil litigation is manageable. Our relationship with FDA is sound and the corporation is enjoying healthy growth."

Nevertheless, the company's plea agreement represents yet another setback in what has become a less-than-stellar year for the perennially high-flying device manufacturer.

In January 2003, Guidant pulled out of its proposed $3 billion acquisition of the Cook Group (Bloomington, IN), after Cook's drug-eluting stents failed to meet mutually agreed upon performance standards. In April, rival Johnson & Johnson (J&J; New Brunswick, NJ), received FDA approval for the first drug-coated stent in the U.S. market. And just prior to closure of the Ancure endograft plea agreement, Guidant was ordered to pay Cordis Corp. (Miami Lakes, FL), a division of J&J, $425 million for its infringement of a Cordis heart-stent patent.

In another setback of sorts, Guidant and other manufacturers of implantable cardioverter-defibrillators were disappointed with a recent Medicare ruling that extended coverage for the devices but fell far short of industry expectations.

How does the future shape up for Guidant?

Analysts note that Guidant—a former pacesetter in the market for drug-eluting stents—has now fallen well behind both J&J and Boston Scientific (Natick, MA).

Some industry observers and financial analysts share CEO Dollens's sense of optimism, noting that EVT represented less than 2% of Guidant's 2002 sales of $3.2 billion. Others wonder whether the specter of criminal conduct could prove more ominous, potentially resulting in greater regulatory scrutiny of Guidant's products, increased approval times, and costly delays.

The Department of Justice is still weighing the possibility of indicting several unnamed EVT employees. In addition, Guidant is facing a growing number of class action product-liability and shareholder suits.

Guidant's huge fine may have settled its score with the Department of Justice, FDA, and the Department of Health and Human Services. But the jury is still out on the near- and long-term ramifications of the company's admission of criminal conduct in covering up a malfunctioning medical device.

Copyright ©2003 MX