Medical Device Daily Associate

With its news late last week that it was recalling nearly 50,000 of its implantable cardioverter defibrillators (ICDs), coupled with the recent admission that it failed to alert customers to the danger of one of the devices for nearly three years after it was aware of a problem, Guidant’s (Indianapolis) credibility with both physicians and patients may be severely damaged.

Additionally, the company may have jeopardized its pending $25.4 billion merger with Johnson & Johnson (J&J; New Brunswick, New Jersey) or, at the least, severely devalued for its shareholders the sought-after union.

After the disclosure of problems with the defibrillators last month, J&J issued a terse one-sentence statement that it continued to be “confident” in its plans to buy Guidant.

But following announcement of the recent recall, J&J issued another short statement with somewhat stronger wording. While saying it continues to work to close the acquisition of Guidant in 3Q05, it added: “Nonetheless, the events reported by Guidant are serious matters, and Johnson & Johnson is engaged in discussions with Guidant to help the company understand the issues.”

J&J will have to decide if the recall could materially hurt Guidant’s business, in which case it could scuttle the deal outright or renegotiate the terms of the merger.

The recall comes less than a month after the New York Times first reported that Guidant failed to alert physicians and patients for nearly three years about a design flaw that could cause the units to short circuit and malfunction with the Ventak Prizm 2 DR model defibrillator, one of the devices included in the recall. The Times also said that Guidant kept selling older versions of the device after developing an improved model of the device not prone to short-circuiting.

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. All three models will be replaced at no charge because of the short-circuit problem, the company has said. More than 20,000 of those models are used by Americans.

Also being recalled are the Ventak Prizm AVT; Vitality AVT; Renewal 3 AVT; and Renewal 4 AVT ICDs. The company 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 between $20,000 and $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.

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.

“FDA’s first priority is patient safety,” said Daniel Schultz, MD, director of the FDA’s Center for Devices and Radiological Health, in a statement. “We want to ensure that all patients who may be affected by this problem are notified and seek appropriate medical advice from their physicians.”

In a statement disclosing the recall, Guidant CEO Ronald Dollens said the company was doing all it could to address the situation. “Patient safety is paramount and our highest priority,” he said, adding, “As a leading manufacturer of lifesaving technology, Guidant takes seriously its responsibility to create the most reliable products and services, enhance patient outcomes and limit adverse events to patients.”

Dollens said the purpose of the company’s recent communications was to share information with physicians and patients about problems in what he termed a “small subset” of Guidant devices.

“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.

“Guidant hopes to work with FDA, other regulatory agencies and physicians to convene a panel to assist the medical device industry in establishing clear guidelines,” Dollens said.

A large unknown for the company is what effect the recall might have on its pending merger with healthcare J&J.

Alexander Arrow of Lazard Capital Markets (New York) issued a research note on Monday downgrading Guidant to “sell” from “hold.” He wrote in a research note: “We believe the degree of reputational damage to Guidant’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.”

Arrow said Guidant initially indicated that implanted defibrillators of more than five years old, which are off warranty but still at risk for short-circuiting, weren’t going to be covered at all.

As of Friday, however, “Guidant apparently changed this stance and began telling doctors it will pay for 100% of the approximately $25,000 per unit that each replacement defibrillator would cost to replace the models that are at risk of failing,” Arrow said.

He estimated the cost of the recall could be as much as $225 million. Lawsuits adding to these payouts seem likely to follow.

“It’s been disappointing and kind of shocking to see that a company of the caliber that you think Guidant is, getting into this kind of problem,” said Larry Haimovitch, president of Haimovitch Medical Technology Consultants (Mill Valley, California), referring to the three-year delay on the company’s part in reporting of the ICD problems associated with the Ventak Prizm. But J&J is unlikely to walk away from the deal, he told MDD, unless serious litigation risk becomes an issue.

“No one wants to buy another company fraught with litigation risk where you could end up having to pay a massive amount of money, well more than you thought,” for acquiring the company.

Additionally, it remains to be seen what, if any, impact the recall and disclosure issues will have on the company’s market share and whether or not it will benefit rivals in the cardiac resynchronization market, including St. Jude Medical (St. Paul, Minnesota) and Medtronic (Minneapolis).

“Guidant ICD market share may slip near-term and the company will incur additional costs due to the recall . . . but we suspect that there will be no long-term impairment to the Guidant CRM franchise,” said Rick Wise, managing director and med-tech industry analyst for Bear Stearns (New York), in a research note. He said that while other companies could benefit from Guidant’s recalls, he doesn’t expect to see a sustained shift in market share.

He said failure rates for Guidant’s ICD products are at or below the guideline levels for notification, and other recall implications seem manageable.

“Given the small number of devices involved and the worst of the matter hopefully in public view, we suspect J&J – understanding that this is a risk for every ICD manufacturer – can feel more comfortable that the worst is over,” Wise said.