The recall, last month, by Guidant (Indianapolis) of 50,000 implantable cardioverter defibrillators (ICDs) may jeopardize its pending $25.4 billion merger with Johnson & Johnson (J&J; New Brunswick, New Jersey) or, at the least, put in doubt the $24 billion-plus value of the sought-after union. Besides creating a large dollar loss for Guidant, allegations that the company delayed a general notice to physicians concerning problems with the ICDs' batteries may add large costs in litigation and consumption of management time.

After the disclosure of problems with the defibrillators in June apparently prompted by an expose-type article in the New York Times J&J issued a terse statement saying that it continued to be "confident" in its plans to buy Guidant. But following announcement of the defibrillator recall, J&J issued another short statement with somewhat stronger wording. While saying it continued to work to close the acquisition in the third quarter, it called "the events" disclosed by Guidant "serious matters" and said that it was "engaged in discussions with Guidant to help the company understand the issues."

Guidant failed to issue a general alert to physicians and patients for nearly three years concerning a design flaw that could cause the units to short circuit and malfunction, with the popular Ventak Prizm 2 DR model ICD one of the devices included in the recall. About 17,000 people 13,900 of them in the U.S. are implanted with the affected Ventak Prizm 2 DR devices, made before April 2002, when Guidant said it fixed the problem. Patients with the Contak Renewal and Renewal 2 also are affected. The company committed to replacing all three models at no charge because of the short-circuit problem. More than 20,000 of those models have been implanted in the U.S.

Also being recalled are the Ventak Prizm AVT; Vitality AVT; Renewal 3 AVT; and Renewal 4 AVT ICDs. Guidant said those models can be reprogrammed at a doctor's office without being removed to fix a potential computer memory error. Some 18,000 of those are used by U.S. patients. Overall, the company said about 63,000 of the devices had been implanted, with nearly 50,000 still in use. The devices cost from $20,000 to $35,000 each.

At least two patients with defibrillators made by the company have died, and Guidant said its devices had failed at least 45 times. In its statement on the recall, the FDA advised patients to talk to their doctors but said it would not recommend whether individual patients with one of the recalled devices should have them removed and replaced. The company said people who recently received a defibrillator shock should consult their physicians.

In a statement disclosing the recall, Guidant CEO Ronald Dollens said, "We will work with physicians as they decide how best to treat their patients," he said, adding that the company is committed to establishing industry guidelines and processes to determine when, how and under what circumstances adverse events should be communicated to doctors and patients.

Alexander Arrow of Lazard Capital Markets (New York) issued a research note, estimating that the recall would cost the company as much as $225 million. Lawsuits adding to these payouts seem likely to follow, even from those patients not choosing to receive new devices. Many of these patients will choose against a reimplantation because of the risks associated with repeat surgeries and potential infections and likely experience a high degree of anxiety concerning that difficult choice.

In his report, Arrow downgraded Guidant to "hold" from "sell" and said that "the degree of reputational damage to the company's ICD franchise, the crown jewel of the company and the main asset J&J sought in its decision to acquire Guidant, may be becoming great enough to induce J&J to renegotiate its acquisition price."

Angiotech unveils equity unit

Riding high on its success in supplying paclitaxel drug technology to Boston Scientific (Natick, Massachusetts) for that company's Taxus drug-eluting stent, Angiotech Pharmaceuticals (Vancouver, British Columbia) last month reported launch of a new venture investment and "venture relationship development and management" unit. Dubbed ADDVANCE for Angiotech Drug Device Venture and Capital Enterprises the new venture funding unit represents an effort to attract early stage med-tech companies that would link up well with Angiotech's drug/device efforts, said Todd Young, vice president of investor relations and communications for the company.

"We're sitting on a bit of cash," Young told The BBI Newsletter, his voice emerging via cell phone from the hubbub of a New York hotel where the company was presenting its story to analysts. In a press statement, the company said it looks to put venture funding of up $50 million into emerging med-tech firms over the next three years. Targets for the funding, Young said, will be early stage organizations likely to mesh with Angiotech's drug/device focus as well as drug/biologics combinations while, in return, helping to build the company's already well-developed intellectual property portfolio.

Other than the match-up with Angiotech's portfolio, he said there will be no geographical or technological restrictions for the companies funded, though he pointed to "orthopedics and vascular intervention" as choice opportunities. He emphasized the relative autonomy that ADDVANCE will have. "[W]e're really committed to creating an internal venture group that acts semi-independently, that has its own personnel that runs the venture group," Young said. ADDVANCE also will pursue outside collaborations or joint ventures, or establish, fund and spin off new companies, along with selected outside venture capital investor partners, Angiotech said in its statement.

"These opportunities will pursue selected Angiotech research programs or product opportunities that may benefit by being developed and funded by an entity independent of the parent organization," it said. It said that its completion, nearly a year ago, of a $25 million equity investment and establishment of a distribution relationship with Orthovita (Malvern, Pennsylvania) is a model for this type of opportunity. Orthovita, a developer of orthopedic biomaterials, sold somewhat more than 5.68 million shares of its common stock to Angiotech for gross proceeds of $25 million.

William Hunter, MD, Angiotech president and CEO, said that ADDVANCE would provide "a focused vehicle to reach out to the venture capital community and the exciting development stage companies they fund with both our substantial technology portfolio and capital resources." Angiotech scientists, he said, have discovered "a substantial universe of new uses for existing pharmaceuticals in local applications, including in drug-device combinations. We also have several technologies and products where no exact fit exists with our evolving product development and commercialization efforts, but nonetheless could represent significant value for our shareholders."

Hunter described the venture-funding effort as a way to open Angiotech's "research architecture to development stage companies and the venture capital community and . . . unlock what we believe are latent values in our research and intellectual property portfolio more rapidly."

Angiotech also reported formation of a license agreement with Broncus Technologies (Mountain View, California), a developer of interventional bronchoscopy devices. The license accord allows Broncus to incorporate Angiotech's paclitaxel technology with its own Exhale system used to treat emphysema. The Exhale system, used in airway bypass procedures, is designed to reduce the hyper-inflation in patients with emphysema "by creating extra-anatomic passages that allow air to pass from hyper-inflated areas of the lungs directly into larger airways and, ultimately, out of the body," Broncus said.

Siemens forms new imaging division

Siemens (Munich, Germany) last month established a new division called Siemens Medical Solutions Molecular Imaging, which combines its nuclear medicine operations with the recently acquired CTI Molecular Imaging (CTI; Knoxville, Tennessee), a provider of positron emission technology (PET) imaging equipment and services, and now a wholly owned subsidiary of Siemens Medical Solutions (Malvern, Pennsylvania). The move follows expiration of Siemens tender offer to acquire all of the issued and outstanding shares of CTI stock at $20.50 a share. The transaction, first disclosed in March, was valued at about $1 billion.

With the completed acquisition and the formation of this new division focused on PET and single photon emission computed tomography (SPECT)-based molecular imaging, Siemens said it "continues and strengthens its commitment to molecular imaging development, technological innovation and the creation of dynamic new technologies that will revolutionize the diagnosis and treatment of disease." This includes the development and distribution of molecular biomarkers, preclinical imaging for research and pharmaceuticals and application and post-processing for molecular imaging. "By strengthening our leadership position in identifying disease earlier at the molecular level, we continue to transform the delivery of healthcare by improving patient care while reducing costs," said Erich Reinhardt, PhD, president and CEO of Siemens Medical Solutions.

Leading Siemens Medical Solutions Molecular Imaging is Michael Reitermann, president of the former Siemens Nuclear Medicine division. Ronald Nutt, PhD, founder and former president and CEO of CTI, is the chief scientific advisor of the new division. "Siemens and CTI have had a long-standing partnership through our joint venture, CTI PET Systems, so joining together to form Siemens Medical Solutions Molecular Imaging is a natural progression in our relationship," Nutt said.

The companies said that they believe the emergence of molecular imaging may influence a shift in healthcare from "sickness repair" to a focus on maintaining wellness. To achieve this, they said a comprehensive set of diagnostic tools that includes molecular imaging techniques, such as PET, is required for pre-symptomatic/early disease detection.

HealthSouth to pay $100M in SEC settlement

HealthSouth (Birmingham, Alabama), a major provider of outpatient surgery, diagnostic imaging and rehabilitative healthcare services, in June reported reaching an agreement with the Securities and Exchange Commission (SEC) to resolve claims brought against it in a March 2003 civil action. With the agreement, HealthSouth will pay the SEC $100 million in five installments over two years, beginning in 4Q05. The SEC said it may establish, with the money, "an investor fund" in accordance with the Fair Fund provision of the Sarbanes-Oxley Act. The agreement with the SEC does not address claims brought against any other party in that action, HealthSouth said, a reference to ongoing shareholder lawsuits filed against the company

The agreement addresses the multi-year, multi-billion-dollar inflation of HealthSouth accounting figures for which its founder and former CEO, Richard Scrushy, is being tried under Sarbanes-Oxley, which holds a top executive responsible for a firm's corporate accounting. The jury in that trial had not reached a verdict by mid-June.

Greg Doody, the company's general counsel and secretary, referred to "the massive fraud perpetrated against us," and said that the settlement "in conjunction with our bondholder consent agreement in June of 2004 and our previous settlement with the U.S. Department of Justice (DoJ)-Civil Division, the Office of Inspector General, and the Centers for Medicare & Medicaid Services [Baltimore] in December 2004 puts a substantial portion of our legal issues behind us and allows us to move forward."

Jay Grinney, HealthSouth president and CEO, called the settlement "a major milestone in HealthSouth's recovery and a powerful symbol of the progress we have made as a company over the course of the last two years."

The company said that provisions for the $100 million settlement have been incorporated in its long-term financial projections and that the payments will be made "without compromising the resources necessary to manage its facilities in a quality manner."

HealthSouth also agreed, as part of the settlement, to retain the services of consultants in the areas of governance, internal controls and accounting to review policies and practices implemented under the new management team; provide training and education to appropriate officers; and continue to cooperate with the SEC and DoJ in their "ongoing investigations."

Covance files lawsuit vs. PETA

Covance (Princeton, New Jersey), a drug development services firm, reported that it has filed suit against People for the Ethical Treatment of Animals (PETA) and against Lisa Leitten whom Covance referred to as PETA's "agent" charging fraud, violation of employee contract and conspiracy to harm the company's business by deceitfully infiltrating and videotaping the company's facility in Vienna, Virginia.

Covance alleges that it hired Leitten and that, with that hiring, she lied about her true intentions in that employment and then violated a confidentiality agreement with the company. Covance also charges PETA with engaging in a conspiracy with Leitten to harm the company's business and that PETA interfered with Covance's contract with Leitten.

"This type of malicious activity by PETA, in which it conspires with individuals to lie about their intentions, to videotape and potentially disrupt medical research, and to then launch vile disinformation campaigns against pharmaceutical research companies, has got to stop," said James Lovett, Covance's general counsel. He called this a deceit that will "do nothing to improve the care of research animals and only serve to impede the development of safe and effective new medicines."

Covance is seeking return of all video, audio and other materials taken by PETA and Leitten "in light of their legal obligations, except copies already provided to the regulatory authorities." It said that return of these materials is critical "so that it can be examined for evidence of both what Covance considers PETA's unsubstantiated claims of misconduct and potential distortion by PETA to further its aim to end all animal-related research."

B&L doubles research center size

Bausch & Lomb (B&L; Rochester, New York) Chairman and CEO Ronald Zarrella reported plans for a facility expansion that will nearly double its main research and development center in Rochester. The $35 million project includes $25 million for new construction and $10 million for renovations, equipment and machinery, the company reported.

The two-story 75,000-square-foot, glass-and-brick wing will house laboratories and offices and allow room for a future 25,000-square-foot addition. The company said it would add up to 200 research jobs over the next two years as it continues to increase its R&D investment.

GSI Lumonics becomes GSI Group

GSI Lumonics (Billerica, Massachusetts) reported a company name change to GSI Group. The company also announced a new trading symbol on the Nasdaq stock exchange: GSIG.

GSI Group will be led by the same management team. The new name reflects the "significant change" the company has undergone in its business during the past four years by emphasizing its major brand-name products, it said. The company said the new name also capitalizes on the name recognition of GSI and builds upon the brand name recognition from recent acquisitions.

GSI Group supplies precision motion control components, lasers and laser- based advanced manufacturing systems to the global medical, semiconductor, electronics and industrial markets.

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