Boston Scientific Told to Fix Plant Flaws

By Jim McCartney, Pioneer Press, St. Paul, Minn.

Jan. 27–The same day it won the bidding war to buy Guidant Corp., Boston Scientific Corp. received a warning letter from federal regulators that at least one securities analyst thinks could hurt its stock price and the acquisition.

The U.S. Food and Drug Administration issued a rare corporate-wide warning Wednesday to the Natick, Mass.-based medical-device company for flaws in its reporting and quality-management system, including its key stent plant in Maple Grove, showing frustration with the company for not fixing problems cited in three previous plant warning notices.

The regulatory agency said it wouldn’t approve new medical devices or issue new export licenses for products affected by the quality-control problems until the problems are fixed.

“This could put a scare into investors, who could force the stock price down — and that could end up unraveling the (Guidant) deal,” said Jan Wald, a securities analyst with A.G. Edwards.

The Guidant acquisition would almost double Boston Scientific’s Twin Cities work force. Indianapolis-based Guidant employs about 3,300 at its plant in Arden Hills, while Boston Scientific has about 3,500 workers at plants in Maple Grove and Plymouth.

If Boston Scientific’s shares fall far enough, the offer would no longer be worth $80 a share to Guidant shareholders. Guidant’s board of directors could cite a “material adverse event” in calling off the deal — much the same as what Johnson & Johnson did late last year in reneging on a $76-a-share offer for Guidant after Guidant’s product recalls and warnings, Wald said.

To preserve the deal with J&J, Guidant ended up agreeing to the steep markdown price of $63 a share — a move that prompted Boston Scientific to make its own offer, eventually outbidding J&J.

Though the warning letter was issued Wednesday, it was not publicly disclosed by either Boston Scientific or the FDA until after the market closed Thursday.

In late trading Thursday, Boston Scientific shares fell 2 percent to $22.69, after having lost 39 cents, or 1.7 percent, to $23.15 at the close of regular trading. Guidant shares lost $1.01 in late trading to $74.25 after having gained 7 cents to close at $75.26 in regular trading.

Other analysts were less concerned Thursday about the overall impact of the FDA action.

“It is serious, but not deal-breaking and not that unusual,” said Thomas Gunderson, a securities analyst with Piper Jaffray Cos.

After all, the warning does not relate to the performance of Boston Scientific’s products or its manufacturing processes, and does not restrict the company from selling its devices.

“The good news is that this is not a recall, products are not being removed from hospital shelves, and no one has died,” said Harris Nesbitt Corp. analyst Joanne Wuensch, who also did not think the action would slow or hurt its Guidant merger.

The letter is “largely related to procedures, processes and timeliness of our corporate quality management,” said Paul Donovan, Boston Scientific spokesman.

The stepped-up regulatory action comes as Boston Scientific is taking over a company with its own regulatory problems. Guidant received a warning letter from the FDA last month saying that it hadn’t resolved problems at its Arden Hills plant that were detected in an earlier inspection — and said it wouldn’t approve new versions of Guidant’s heart-rhythm devices made here until the issues are resolved.

“Boston Scientific officials have said that ‘we know about these problems and we know how to deal with them,’” Wald said. “This indicates that maybe they don’t know how to deal with them.”

The FDA letter also underscores the challenges Boston Scientific faces in combining its global quality system with Guidant’s, Gunderson said.

FDA officials called the problems “serious” because Boston Scientific’s reporting system is not providing timely information about how its devices are performing in patients.

“That is part of the feedback loop that is critical for use to evaluate and recommend changes in devices to make them more safe and effective,” said Daniel Schultz, director of the FDA’s Center for Devices and Radiological Health.

In a press conference late Thursday, FDA officials said that in working through three previous warning letters with the company, Boston Scientific was not adequately addressing the problems. The fixes were not being addressed corporation-wide by top-level management, but more on a plant-by-plant basis by lower-level employees, Schultz said.

In its letter, the FDA complained that Boston Scientific failed to promptly report to regulators when devices were suspected of causing or contributing to a patient death or serious injury. The FDA also said the company didn’t report to the government, as required, some of the product recalls that it conducted.

Senior officials at the company have a meeting scheduled for Feb. 3 with the FDA, Schultz said.

“We hope to address these issues over the next few months, and then go back and reinspect the plants and verify the changes,” Schultz said.

The merger with Guidant stipulates that it be paid $42 a share in cash and $38 a share in Boston Scientific stock — leaving Guidant shareholders with about 36 percent of Boston Scientific’s stock.

The deal contains a provision on what happens if Boston Scientific’s shares go up or down significantly from now until the deal closes. If Boston Scientific’s average share price is less than $22.62, Guidant holders will receive 1.6799 Boston Scientific shares for each Guidant share they hold; if its average share price is higher than $28.86, that will reduce the number of shares to 1.3167.

If Boston Scientific shares go well below the $22.62 level, that could hurt the value of the deal for Guidant shareholders and prompt the Guidant board to call it off, Wald said.

Reports from Bloomberg News were used in this story.

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