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Boston Scientific Warned by FDA on Plants

Posted on: Friday, 27 January 2006, 12:00 CST

By MARK JEWELL

BOSTON - Boston Scientific Corp. shares dropped on Friday after federal regulators said they discovered problems in the medical device maker's quality control, a rare finding that could block new product approvals and jack up the price of the company's pending $27 billion Guidant Corp. deal.

The disclosure after markets closed Thursday sent shares of Boston Scientific down 5.4 percent in morning trading Friday on the New York Stock Exchange.

At $21.90, the shares sank below the $22.62 bottom-end threshold of a stock "collar" provision in the Boston Scientific buyout offer that Guidant accepted Wednesday to end Boston Scientific's bidding war with Johnson & Johnson.

The collar provision is designed to compensate Guidant shareholders in case Boston Scientific's shares decline before the deal closes. If the average closing price of Boston Scientific stock remains below the bottom end of the collar in a 20-day trading period leading up to the deal's expected closing by the end of March, Boston Scientific would have to hand over more of its shares to Guidant to make up for the reduced value of its stock. Boston's $80-per share offer for Guidant consists of $42 in cash and $38 in stock.

Meanwhile, Guidant reported Friday that its fourth-quarter profit fell 25 percent as a result of highly publicized product recalls that began over the summer. Guidant's shares were down 2.4 percent in morning trading to $73.46.

FDA officials who announced the warning involving Boston Scientific said it was only the third time in the agency's history it has issued such a broad companywide warning involving a medical device company's systems to identify potentially defective and unsafe products.

"We are directing them to resolve these serious violations promptly, and to do it not as it relates to specific products ... but rather to do it on a corporate-wide basis," said Daniel G. Schultz, director of the Food and Drug Administration office that regulates medical devices.

Natick-based Boston Scientific said it was cooperating with the FDA and hoped to fix the problems promptly.

Guidant spokesman Steve Tragash said his company had been aware of the issues from its due diligence talks with Boston Scientific in recent weeks.

"We do not expect this development to interfere with the progress of the pending merger between Guidant and Boston Scientific," Tragash said.

The FDA found violations in responding to doctors' reports about possible product defects and Boston Scientific's reporting of quality control issues at three Boston Scientific plants the agency inspected late last summer. The FDA also said the company's efforts to fix problems at three other sites cited in previous FDA warnings were inadequate.

The problems involve plants that make Boston Scientific's top-selling product, the Taxus drug-coated heart stent, as well as Vaxcel implantable drug infusion ports, Leveen needle electrodes, and Enteryx, a device used in surgery to treat acid reflux.

The FDA said it would hold off on approving any Boston Scientific applications to market potentially high-risk devices if the agency determines those products could be affected by the problems it identified.

Until Boston Scientific can convince the FDA the problems have been fixed, the agency also will in some cases not process foreign countries' requests for the FDA to certify that a Boston Scientific export product meets manufacturing standards.

"We will look at each certification individually in relation to the warning letter," said Murray Lumpkin, deputy commissioner for an FDA office overseeing international matters.

FDA officials declined to say whether they might take other steps such as seizing product inventory if Boston Scientific fails to promptly fix the problems, and they didn't say whether the problems had led to patient injuries or deaths.

FDA officials are scheduled to meet with top Boston Scientific executives Feb. 3.

"For this meeting, you should come prepared to discuss your current corporate strategy to bring all your facilities into compliance," the FDA's letter said.

The FDA said it sent the letter to Boston Scientific on Wednesday, several hours after Guidant accepted Boston Scientific's buyout offer.

The problems the FDA identified in the late summer inspections involved the company's headquarters and facilities in Maple Grove, Minn., and Spencer, Ind.

The FDA also cited continuing problems at sites where it had previously found shortcomings. These are in Watertown, Mass.; Glens Falls, N.Y., and Quincy, Mass.

The FDA letter also expressed concern about recent Boston Scientific recalls, including one involving nearly 100,000 stents in the summer of 2004 blamed on a manufacturing defect the company has said is now fixed. In October 2004, the FDA said its review had confirmed the problem had been fixed.

Boston Scientific said it had received both the warning letter and another notification from the FDA that its inspectors had found no problems at a stent manufacturing plant in Galway, Ireland.

"Although we are pleased with the result of the inspection of our largest plant, we have clearly not done enough to resolve the issues raised by the FDA last year," said Jim Tobin, Boston Scientific's president and chief executive. "We are confident we have addressed many of the issues, but others have not yet been fully resolved."

Meanwhile, Boston Scientific also is trying to secure shareholder and antitrust approval for its Guidant acquisition by the end of March.

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On the Net:

Boston Scientific: http://www.bostonscientific.com

FDA warning letter to Boston Scientific: http://www.fda.gov/foi/warning-letters/

Source: Associated Press/AP Online

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