-NY Times
06/27/2006 - Boston Scientific said yesterday that it was recalling 23,000 heart pacemakers and defibrillators and recommended that 27,000 patients who already have the devices in their chests consult their doctors.
The company said that based on its inspections of devices recovered from a handful of patients and of scores of units removed from factory lines, it currently estimates that only two or three of the devices now implanted in patients have the defect — a faulty electrical component that could cause them to fail.
While Boston Scientific said that no deaths had been linked to faulty products, the announcement underscored the challenges that company has assumed in acquiring the maker of the devices, Guidant, which it bought in April for $27. 5 billion.
Shares of Boston Scientific fell $1.20, to $17.06. The price was down 6.5 percent from the Friday close, and went to its lowest point in four years. The stock has fallen 24 percent from $22.49, the price on April 21 when the Guidant deal was completed.
Boston Scientific knew that Guidant, the No. 2 maker of pacemakers and defibrillators, had quality-control problems — including defects in some of its defibrillators which came to light last year only after a doctor reported a patient's death to The New York Times.
Indeed, in reporting a new batch of quality problems yesterday, Boston Scientific cited its announcement as evidence of how quickly it was improving safety monitoring and public communication at Guidant. But many Wall Street analysts received the news, and the stock's further decline, as more evidence that Boston Scientific's strategy is a risky one for shareholders.
Analysts are concerned that Boston Scientific has acquired Guidant as the market is slowing for the most sophisticated defibrillators — $30,000 devices that restore normal rhythms when hearts stop beating or beat irregularly. There are also questions about growth in the business that has been Boston Scientific's mainstay — selling drug-coated stents that prop open coronary arteries.
Wall Street has also been worried about when Boston Scientific will be able to satisfy regulators that it has dealt with quality-control shortcomings cited in separate warning letters sent to Guidant in December and Boston Scientific in January. The Food and Drug Administration can bar the company from major product introductions until its demands are met.
Boston Scientific said yesterday that it hoped to have Guidant's operations ready for regulators to re-examine in August. But Boston Scientific said it could not complete an overhaul of its quality-control systems, as demanded in the January letter, before the fourth quarter because it has decided to have independent auditors review the changes before it asks the F.D.A. to approve them.
Boston Scientific executives insisted yesterday that gloomy forecasts about the company's prospects were unwarranted. "People will wake up two or three years from now and wonder what they were worried about," said James R. Tobin, the company's chief executive.
He and other executives at the company predicted that Guidant would soon resume double-digit growth and said that Boston Scientific's highly lucrative stent business remained strong and steady.
Boston Scientific, which had $6.3 billion in sales last year, saw Guidant as an opportunity to leap into a strong second place behind Medtronic in cardiac rhythm management implants like pacemakers and defibrillators, a $10 billion market. Boston Scientific also expected Guidant to strengthen Boston Scientific's tenuous market leadership in the $6 billion worldwide market for coronary stents.
Acquiring Guidant was also a way to keep it out of the hands of Johnson & Johnson, Boston Scientific's archrival in stents.
More than anything, though, acquiring Guidant was seen as a decisive answer to questions from restive Boston Scientific shareholders about how the company intended to cope with slowing sales as earnings growth slowed for its flagship product, the drug-coated Taxus stent.
Boston Scientific knew in advance that Guidant's crown jewel, its cardiac implant business, was tarnished. Implantable cardioverter defibrillators, or I.C.D.'s, as the devices are known, regulate irregular heartbeats and deliver electrical jolts to restart hearts that have stopped beating. But in some cases, defective insulation in some of Guidant's devices caused short circuits that left patients unprotected from potentially deadly seizures.
Boston Scientific executives acknowledged that yesterday's recall might be seen as a sign that Guidant's problems ran deeper than the company had realized. But they said that they had always regarded Guidant as an 18-month to two-year turnaround project and had anticipated running into the need for more recalls.
I.C.D. sales growth, which has been slowed in part by widespread reporting of Guidant's problems last year, remains a major concern for some analysts. Lawrence Biegelsen, who follows the device companies for Prudential Equity Research, recently sharply cut his estimate for worldwide growth in I.C.D. sales this year to 9 percent, from 16 percent.
Lawrence Keusch of Goldman Sachs is one who is advising investors to buy Boston Scientific. Mr. Keusch, who forecast last week that the stock would rebound to $25 within six months, predicted that sales of the implants would begin to impress investors again in the third quarter, when Boston Scientific would be able to compare the results with those Guidant reported last year after its recall began.
But Boston Scientific's stent business also faces stiffer challenges. A Johnson & Johnson stent, the Cypher, is currently the only rival to Taxus in the United States. And they are cheered that research is expanding the demand for Taxus in patients like diabetics, whose arteries pose a particular challenge.
But worldwide Taxus sales fell to $633 million in the first quarter, from $686 million a year ago. And in Europe, drug-coated stents from giants like Medtronic and Abbott Laboratories have already entered the market or are expected shortly.
