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Still no word on fate of Boston Scientific's defibrillator recall

By Janet Moore
Published: April 15, 2010

A month ago, Boston Scientific Corp. made the unusual announcement that it was recalling its entire line of heart defibrillators.

The Natick, Mass.-based company said it hadn’t properly alerted the Food and Drug Administration (FDA) on two changes made to the manufacturing process for the heart-rhythm products. At the time, it reportedly filed a 30-day notice with the agency for each manufacturing change.

On Wednesday, an FDA official told Dow Jones that a decision on whether the agency approved the manufacturing changes proposed by the company will be made in a few days. “The world will know pretty soon what we thought of those filings,” said Tim Ulatowski, director of compliance in the FDA’s device branch.

If the FDA determines that the 30-day window is not adequate, then the submission could turn into a 135-day application. News reports have indicated that the Department of Justice and Securities and Exchange Commission are investigating the matter.

For Boston Scientific, time is money. Sales of the $30,000 heart-rhythm devices represent $1.8 billion in annual sales for the company, which employs about 4,000 people in the Twin Cities. According to Leerink Swann analyst Rick Wise, Boston Scientific loses $24 million in sales for every two weeks its implantable cardioverter defibrillators (ICDs) are off the market.

The dearth of news has caused widespread speculation as medical technology companies enter the first-quarter earnings season. Defibrillator rival St. Jude Medical Inc. reports its financial results on Wednesday; Boston Scientific usually follows days after with its report, although no date has been officially announced. The company didn’t respond to a request for comment.

Medtronic, St. Jude to gain

Wells Fargo analyst Larry Biegelsen said in a recent note to investors that Fridley-based Medtronic Inc. will likely pick up two-thirds of Boston Scientific’s lost market share, with St. Jude assuming the remaining third.

Meanwhile, some analysts have speculated that Boston Scientific will have to shed assets—perhaps its neurovascular and neuromodulation units—to help pay down lingering debt from its $27 billion purchase of Guidant Corp. in 2006. (Now part of Boston Scientific’s cardiac rhythm management division, the former Guidant unit is based in Arden Hills.)

“The irony is that five years ago, they bought Guidant to diversify revenue,” said Aaron Vaughn, an analyst with Edward Jones. “And if they sell them off, they’ll become less diverse.” The two units generated $633 million in combined sales last year.

But Wise, of Leerink Swann, said in a recent note to investors that such a move could give Boston Scientific more “strategic flexibility.” Should Boston Scientific choose to refinance all or a portion of its debt and retain any divestiture proceeds, the company might have cash left over to fund acquisitions or make other investments, he said.

“It comes down to how much money they need versus what they’re willing to give up,” Vaughn said. “Of course, now everyone knows they have a problem, so that’s a great positive if you’re interested in buying any of the divisions. The best scenario would be an auction where many people bid on the unit.”

Less quantifiable is the damage to its reputation that Boston Scientific may experience as a result of the pullback. A recent survey by New York-based Majestic Research found that 56 percent of the 70 cardiologists it questioned said the announcement has hurt their perception of the overall quality of Boston Scientific’s ICDs, with 52 percent indicating they’d be less likely to use the company’s devices in the future.

Boston Scientific shares closed Wednesday at $7.16, up 26 cents.