N.Y. sues Guidant over its defibrillators
Mike Meyers, Minneapolis Star Tribune
November 4, 2005

 

New York Attorney General Eliot Spitzer filed suit Thursday against Guidant Corp., accusing the company of hiding defects in a heart defibrillator it later recalled.

The suit not only could cost the medical device company millions of dollars to fight or settle but also could make it even more doubtful that Guidant's planned $25.4 billion acquisition by Johnson & Johnson will take place.

Johnson & Johnson is expected to decide today whether to proceed with the acquisition of Indianapolis-based Guidant, which has 3,000 workers in its cardiac rhythm management business in Arden Hills.

The Federal Trade Commission gave approval for the merger Wednesday, triggering a 48-hour period called for under terms of the merger agreement in which J&J has to decide whether to complete the deal or walk away.

Analysts said Spitzer's suit could be the first of many. About 13,900 people have had implants of the defibrillator in question.

Guidant officials had no comment concerning the lawsuit, saying only that the company does not discuss pending litigation.

Guidant's stock price, already under pressure because of the doubt about Johnson & Johnson's decision, slid an additional 4 percent Thursday, closing at $57.57. The shares traded at $75 earlier this year.

Another legal front could open against Guidant if the J&J merger falls through, in the view of experts.

"There probably will be some kind of class-action suit by shareholders against the company," said Walter Birch, a corporate merger expert. "Anytime you dangle $25.4 billion in front of shareholders and that goes away, people are going to be looking for someone to blame."

Others may be in line to sue, as well. "This could be the tip of the iceberg if the allegations are true," said Perry Binder, a professor of legal studies at the Robinson College of Business at Georgia State University. "This could go on in every state and on a federal level also."

On Wednesday, Johnson & Johnson said the Guidant acquisition was in doubt, citing "product recalls at Guidant and the related regulatory investigations, claims and other developments as serious matters affecting both Guidant's short-term results and long-term outlook."

The company has had a series of recalls and product advisories since May involving defibrillators and pacemakers.

Spitzer's lawsuit charges that Guidant knew as early as 2002 that the Ventak Prizm 2 DR Model 1861 defibrillator had electrical faults that could lead to failures. The device is intended to shock a heart that is beating too fast back into a normal rhythm.

"The electrical short has been implicated in at least 28 failures of the Prizm 1861 defibrillator, including one that resulted in the death of a patient," Spitzer's office said.

The lawsuit seeks to require Guidant to fully disclose to doctors all design and performance information and to pay the medical bills for any patient who wants to replace a Prizm defibrillator made before April 2002, when Guidant made changes to correct the problems.

Guidant has offered to reimburse patients as much as $2,500 in direct costs -- and to provide a new Guidant defibrillator -- for those who want to replace their devices.

Spitzer's suit said the $2,500 reimbursement is inadequate.

"We're looking for the ability to replace with any device, including a competitive device, if that's what the doctor and patient chooses," said Joseph Baker, chief of the health care bureau in Spitzer's office.

The cost of replacement, not including the defibrillator, ranges from $8,000 to $12,000 in New York state, Baker said.

Spitzer also is demanding that Guidant reimburse insurance companies, Medicare and Medicaid for the cost of implants of the Prizm 1861 by returning all profits from the sale of the devices.

"If they're found liable, it could unravel into something serious," said Mark Landy, a securities analyst at Susquehanna Financial Group in Bala Cynwyd, Pa. Landy said he's told investors to stay away from Guidant stock. "There's so much going on that it's exceedingly difficult to know" what's ahead for the firm.

Others predicted Guidant will be challenged to manage its legal troubles and cope with a fast-changing medical tech business at the same time.

"The level of complexity for Guidant, in an already complex health care business and regulatory environment, just got exponentially more difficult," said Birch, the merger specialist whose business includes executive recruiting.

But Birch said he believes Guidant will be able to juggle legal and regulatory issues without losing sight of the demands of their core business.

"With the talent on the Guidant management team, they'll be able to do that and keep operations going," he said.

Mike Meyers • 612-673-1746