Attorney Predicts Five Thousand Lawsuits Against Guidant

Boston, MAOn October 18, 2006, Boston Scientific announced financial earnings for the third quarter 2006, in a press release and reported net sales of $2.026 billion as compared to $1.511 billion for the third quarter of 2005, an increase of 34%.

The increase, Boston said, was primarily attributable to the inclusion of $491 million of net sales from its cardiac rhythm management (CRM) and cardiac surgery businesses.

Worldwide the company reported CRM sales of $446 million, which included $315 million of worldwide implantable cardioverter defibrillator sales and $131 million of pacemaker sales. In the US alone, CRM sales were $296 million, Boston said, and included $221 million in defibrillator sales and $75 million in pacemaker sales. This report paints a rosy picture, however, Boston also stated in a press release,

"The Company wishes to caution the reader of this press release that actual results may differ from those discussed in the forward-looking statements and may be adversely affected by, among other things, risks associated with new product development and introduction, clinical trials, regulatory approvals, competitive offerings, intellectual property, litigation, integration of acquired companies, the Company's overall business strategy, and other factors."

"Litigation" is the cautionary term that investors are paying attention to. On September 20, 2006, the Wall Street Journal reported that Boston was "in talks to settle hundreds of lawsuits filed against its recent acquisition, Guidant Corp.," quoting the plaintiffs' lead attorney.

The discussions reportedly involve the resolution of more than 500 cases filed against Guidant all over the country and consolidated in Multidistrict Litigation in the US District Court in Minnesota, according to the Journal.

However, Attorney Barry Hill, of the Hill Williams law firm, is part of a group with three other law firms that have 221 cases pending against Guidant, and on October 3, 2006, he told the West Virginia Madison Record, that there will probably be 5,000 cases consolidated into the Guidant MDL.

Adding to hundreds of individual and class actions lawsuits already filed, Johnson & Johnson has now filed a lawsuit against Boston and Abbott Laboratories, seeking at least $5.5 billion in damages related to J&J's failed bid to acquire Guidant.

The lawsuit alleges that Guidant leaked confidential information to Abbott in a "material breach of the terms of Guidant's merger agreement with J&J" and ultimately led to Boston winning the bidding battle to acquire Guidant for $27 billion.

According to the lawsuit, pending closure of the merger agreement with J&J, Guidant was prohibited from "soliciting alternative offers and had limited ability to respond to an unsolicited bid from another party", and was prohibited from "providing confidential business information to any other company unless that company was making an unsolicited takeover proposal."

The suit accuses Guidant of providing Abbott with confidential business information to determine whether Abbott would be willing to enter into an agreement with Boston.

The saga began back in December 2004 with J&J's proposal to buy Guidant, for $76 a share, or $25.4 billion, with 40% in cash and 60% in stock, and Guidant accepted the offer.

By adding pacemakers and defibrillators to its product list, J&J could improve its position with hospitals and cardiologists and Guidant also had a drug-coated stent in development, the Xience, and Rapid Exchange, a proprietary technology for implanting stents that was already very popular with heart surgeons.

The only stickler was that the Federal Trade Commission might require J&J to divest Guidant's interventional cardiology business, consisting of stents, guide wires, balloons, and other products used to implant the devices, as a condition for the deal to be approved.

In the end, the FTC required J&J to license Rapid Exchange to a competitor and J&J chose Abbott Labs to fill that position.

The deal began to unravel in March of 2005, when a 21-year-old student named Joshua Oukrop, died of a heart attack after his Guidant defibrillator short-circuited and failed to release the electrical charge that could have saved his life.

The student's doctors told Guidant that it should warn medical professionals about the defective defibrillators immediately and when Guidant refused, they went to the New York Times. With knowledge that a Times' story would be out in a matter of days, Guidant issued a recall for the faulty defibrillators in June 2005.

It has since become known that Guidant knew about the defect for about 3 years prior to the first recall and supposedly corrected the problem in new models but did not inform medical professionals about the faulty defibrillators already implanted or in outstanding inventory.

The Times continued to run stories about Guidant's defective products and over the next few months the company issued recalls for close 300,000 defibrillators and pacemakers.

By the beginning of November 2005, Guidant's stock value had dropped to the mid $50s from the mid $70s. As a result of the falling stock value, J&J cut its offer by about $6 billion, from $76 a share to $58, but then upped the offer again to $63 a share, and Guidant accepted the deal.

The next month Boston jumped in the race and on December 5, 2005, announced an intention to bid $72 a share for Guidant.

At the time, Boston's Taxus drug coated stent accounted for over 50% of Boston's operating profits. The device was approved for sale in early 2004, and it quickly snatched more than half the market from J&J's Cypher model, its only competitor.

Although Abbott had an agreement with J&J to license Rapid Exchange if the deal with Guidant went through, Abbott claims that the agreement did not preclude Abbott from negotiating with Boston.

And Boston came up with a much more lucrative deal. Rather than a license for Rapid Exchange, Boston offered to sell Guidant's entire interventional cardiology business to Abbott, including the Xience stent, a sales force, and its product pipeline.

For its part of the deal, Abbott agreed to pay $3.8 billion for Guidant's stent business and to lend Boston $700 million at a low interest rate.

On January 8, 2006, Boston announced its official bid of $72 a share topping J&J's latest bid by $9. The dueling company's went back and forth with bids for a little over a week and on January 17, 2006, Boston delivered the knockout punch with a bid of $80 per share, including 52% in cash and 48% in stock, for a grand total of $27 billion.

J&J walked away with a breakup fee of over $700 million.

But financial analysts say Abbott may be the biggest winner. Its stock has climbed 22% this year while Boston's shares are hanging at around the $15 mark.

In June 2006, Boston recalled 27,200 more Guidant defibrillators and acknowledged that additional recalls are likely.

Adding insult to injury, Boston's sales force has begun to jump ship. In fact, according to the September 23, 2006 Pioneer Press, things got so bad that in late August, Boston successfully asked a Ramsey County judge to issue a temporary restraining order to stop its rival St Jude Medical from hiring Boston employees.

Boston is also suing a former Guidant employee and St Jude for recruiting sales representatives in violation of non-compete agreements. Christopher Delgado, a former Baltimore area regional sales manager who now works for St. Jude, is accused of hiring 6 Guidant sales reps after he left in July 2006.

Finally, on October 23, 2006, the Boston Globe reported that "as more evidence emerges that suggests drug-coated stents have caused higher rates of blood clots than the older generation of bare-metal stents, doctors at many hospitals have recently begun shifting toward the older, bare-metal stents they replaced," quoting figures provided by Goodroe Healthcare Solutions LLC.

The slide is modest, the Globe notes, but says even tiny shifts in the stent market can hurt revenues. "Each percentage point of sales," it states, "is worth several million dollars per quarter."

According to the September 18, 2006 Boston Globe, the idea behind a stent is simple:

"After doctors clear out one of the arteries that feeds the heart, they install a tiny, strong wire sleeve to keep the artery open and the blood flowing smoothly. A drug coating on the mesh prevents the artery from scarring over the stent and re-clogging.

"Early studies showed that drug-coated stents were extremely effective at keeping vessels open, which prevents patients from having to return to the hospital for a procedure to re-clear the artery."

Boston and J&J are the only two companies with drug coated stents approved for sale in the US and since they arrived on the market, most heart surgeons have stopped using the bare-metal stents.

But over the past year, doctors have grown increasingly concerned about the risk of clots developing in patients with drug coated stents. Once again, it appears that a product that showed minimal risks in clinical trials involving a few thousand patients comes with serious risks that went undetected until after the device was implanted in millions of people.

For people who develop a clot, the situation is a matter of life and death because a clot inside a stent can cut off the blood supply to the heart and once implanted, stents cannot be removed.

According to Bloomberg News on October 23, 2006, recent studies show 2.9% of drug-coated stents could develop clots within three years. "More than 4 million people have received such stents since 2001," Bloomberg says, "which means clotting related to drug-coated devices may have caused as many as 20,000 heart attacks and 10,000 deaths worldwide."

The latest study, funded by Boston Scientific and released this month at the Transcatheter Cardiovascular Therapeutics conference in Washington, claims that its Taxus stent and J&J's Cypher model carry an equal risk of causing clots, while J&J claims that the Cypher is less likely after a year to cause clots.