At the time of purchase, the deal seemed solid for Boston because the Indianapolis-based Guidant was the second-largest manufacturer of implantable defibrillators. However, according to Boston's first quarter March 2007 SEC filing, the company is now facing over 75 class action lawsuits and 1,100 individual lawsuits involving Guidant defibrillators and pacemakers, up from 842 lawsuits listed in the company's November 2006 filing.
The Globe also reported that new lawsuits against the company are being filed at a rate of 3 per day. But medical experts say this is just the tip of the iceberg because many surviving family members will probably never know that a patient's death was caused by Guidant's defective products because heart devices are rarely evaluated to determine whether the unit was functioning correctly at the time of death.
According to analyst estimates cited by the Globe, Guidant related liabilities could reach $2 billion and since Boston acquired the firm in April 2006, Boston stock value has dropped about 29%.
As of December 31, 2006, according to SEC filings, Boston has set aside $485 million for legal matters, which represents a $100 million increase from the $384 million reported in September 2006 SEC filings.
Critic say the worst part of the Guidant debacle is that evidence is emerging that shows patients were implanted with defibrillators for profit and not need and the cost of a defibrillator can be as high as $35,000.
The January 2007, Journal of the American College of Cardiology, reported a study that found that as many as one third of defibrillators implanted in 768 patients between March 2001 and June 2004 for irregular heartbeats were unnecessary and therefore, up to a third of the patients received minimal benefits from the device.
In addition, documents have surfaced in litigation that show Guidant knew for years that the devices it was selling were flawed. A report by an independent panel appointed to review Guidant recalls was released in March 2006, and said the firm allowed about 4,000 potentially defective defibrillators to be implanted after the company learned of the malfunction in 2002.
Guidant executives tried to defend their actions by claiming the devices met all engineering projections and that notifying doctors about the flaw might have resulted in more harm than good by causing unnecessary surgery to replace the devices.
But the panel soundly rejected those arguments and concluded that defects need to be disclosed promptly, even when they occur in small numbers. "The Independent Panel believes," it wrote, "that under no circumstances should a potential or manifest risk of a preventable death be superseded by statistical analyses that indicate that performance remains with general guidelines."
By the time of that report, at least 7 patients had died because their defibrillators had failed to work due to an electrical defect.
Lawsuits filed by two Corpus Christi, Texas residents who had defibrillators implanted in 2001, alleged that Guidant officials "actively concealed the ... defect, suppressed reports, failed to follow through on FDA notification requirements, and failed to disclose a known defect to patients. Instead of revealing the defect, defendants continued to represent their product as safe for intended use, and continued to sell the flawed [devices] despite knowing of the dangers."
The plaintiffs further allege they have suffered extreme mental anguish from knowing that the defective devices could malfunction at any time.
Legal experts say if plaintiffs can prove that Guidant knew about the problem with the defibrillators and continued to sell the devices, the plaintiffs would be entitled to punitive damages because Guidant has a documented history of knowingly selling defective products and the firm had promised not to do so in the future the last time the company was busted.
In 2003, a former Guidant subsidiary was fined $92 million by the US Department of Justice for concealing serious adverse events, including 12 deaths, related to its abdominal aortic grafts. At that time, as part of its settlement agreement with the DOJ, Guidant pledged to "verify and make sure their reporting procedures were in order, and that they were reporting adverse events for their devices."
On February 23, 2006, the Associated Press reported that the FDA, US Department of Justice, the Securities and Exchange Commission and several state agencies were investigating Guidant over its recalls. In addition the AP advised that, "Guidant's St. Paul facility has been the focus of the federal investigations and inquiries into the company's manufacturing process."
The DOJ jumped into the current controversy on January 28, 2006, and sent out a press release, when the US Attorney in Minneapolis issued a subpoena seeking the records that were disclosed in the Texas lawsuit that showed the company knew that the defibrillators could fail. Some of the specific documents requested evidence that Guidant executives had discussed whether they should warn doctors that some of the devices could short-circuit and decided against it.
More specifically, the DOJ noted, the documents include notes from Fred McCoy, president of Guidant's cardiac rhythm management division, that show a decision was made to sell inventory described by the executives as having sporadic ''life-threatening'' defects. The DOJ merged its investigation with an investigation already underway by the FDA's Office of Criminal Investigation.
Experts say product liability lawsuits such as those Guidant is facing have considerable financial implications for a company and failure to notify the public about device flaws can have a more devastating impact on a firm's financial future than the notification itself.
"Company management should fear the prospect of being accused of deliberately refraining from physician disclosure in order to maintain a high market share that would enhance management's financial interests," says Genese Kay Dopson, special counsel at Sedgwick, Detert, Moran & Arnold LLP, in the May/June 2006, Medical Device Link.
"For example, in Guidant's case," she explains, "the aftermath of physician notification resulted in the decrease in the value of Guidant's stock."
"As a result," she noted, "a company that was in negotiations to acquire Guidant prior to the physician disclosure negotiated a lower bid as a result of the decrease in stock value."
"Shareholders have also initiated suits against Guidant for fraud," she said.
"I think the company is potentially more damned," she states, "if it does not make the physician disclosure."
According to Ms Dopson, in product liability cases companies must be able to put forth a defense that demonstrates a commitment to patient safety. "Failure to adhere to the primacy of patient safety," she says, "coupled with decisions leading to concealment of known defects from the medical community, will fuel lawsuits that lead to jury verdicts that include punitive damages."
In December 2005, the FDA issued a warning letter to Guidant after inspectors found numerous problems with quality control and record-keeping procedures at the St Paul plant where the defibrillators were manufactured which meant that until the issues were resolved, the FDA would not approve any new Guidant products.
On April 17, 2007, the Boston Globe reported that the FDA had finally lifted the warning letter that had been hanging over Guidant, freeing up the company to introduce products that had been blocked by the quality-control problems.
On April 10, 2007, the FDA said a December 2006 inspection of Guidant indicated that the issues appeared to have been adequately addressed.
However, the good news was likely overshadowed by the FDA's April 12, 2007, announcement of a recall of approximately 73,000 more defibrillators because of faulty capacitors. "The capacitors," the FDA said, "may cause accelerated battery depletion and may reduce the time between elective replacement indicator and end of life to less than three months."
The FDA instructed patients implanted with one of the recalled devices to contact their healthcare provider regarding the steps to take.
Aside from inheriting Guidant's woes, Boston has major issues pending with the FDA of its own making. On January 26, 2006, Boston received a corporate warning letter from the FDA, notifying the company of serious regulatory problems at 3 facilities and advising Boston that the corrective action plan relating to 3 site-specific warning letters issued to the firm in 2005 was inadequate, according to Boston's SEC filings.
The FDA warning letter sent on May 18, 2005, about quality-control standards said Boston failed to establish manufacturing controls for the quality of devices and did not properly track quality concerns.
READ MORE LEGAL NEWSOn January 26, 2006, the Associated Press reported that FDA officials said that this was only the third time in the agency's history that it had issued such a broad companywide warning involving a device maker's systems to identify potentially defective and unsafe products
According to the AP, the problems identified during inspections involved the company's headquarters and facilities in Maple Grove, Minn, and Spencer, IN, and also cited continuing problems at sites in Watertown, Mass; Glens Falls, NY, and Quincy, Mass.
On April 17, 2007, the Boston Globe, reported that the companywide warning letter that Boston received in January 2006 is still in effect and applies to Boston's "drug-coated stent business and the rest of the pre-Guidant areas of the company."
Company executives told the Globe that they did not expect the issues to be resolved until the second half of 2007. "Until then," the Globe reports, "the company will be prevented from receiving agency approval of any new models of drug-coated stents."