Boston Sci settles implant recall case

Boston Scientific Corp. said Friday it has reached a $296 million agreement with the U.S. Department of Justice related to a series of product recalls in 2005, ending a wrenching chapter in medical technology that has lingered for more than four years.

In an investigation led by the U.S. attorney's office in Minneapolis, the company's Arden Hills-based subsidiary, Guidant, will plead guilty to two misdemeanor charges for "failure to include information" in reports to the Food and Drug Administration (FDA), which regulates medical devices and recalls them if they are found to be faulty.

That was the case in 2005 after two Minneapolis physicians, Robert Hauser and Barry Maron, went public with concerns about the safety of a popular heart defibrillator made by Guidant, which was later purchased by Boston Scientific. Their unusual public outcry came after one of their patients, Joshua Oukrop, 21, of Grand Rapids, Minn., died while biking after his Guidant defibrillator short-circuited and failed to revive him.

The Guidant devices were later recalled by the FDA, but the company was criticized for not warning doctors sooner about the potential defect. The news led to an intense industry review of the way it handles defects and malfunctions.

Part of an $11 billion global industry for cardiac rhythm devices, implantable cardioverter defibrillators shock the heart back into rhythm when they sense an irregular heartbeat. The Twin Cities serves as the epicenter of the once-flourishing industry, with the world's largest makers of the $30,000 devices, Guidant, Medtronic Inc. and St. Jude Medical Inc.

The Justice Department did not release any information regarding the guilty pleas, which are unusual in this type of corporate case. Jeanne Cooney, a spokeswoman for the U.S. attorney's office, said "an agreement has been reached in principle; formal documents will be filed and made public in the next few weeks." Boston Scientific said in a regulatory filing that a definitive agreement will be struck by the end of this year or in early 2010.

Boston Scientific CEO Ray Elliott said in a statement that "Guidant and its employees acted in good faith and believed they complied with applicable laws and regulations." The company opted to resolve the matter in an effort to devote "our full energies and resources to developing our innovative technologies." (The company's Arden Hills cardiac rhythm management division employs about 2,000 people.)

Hauser, of the Minneapolis Heart Institute Foundation, said the agreement "sends a message to the medical device industry that this type of behavior will not be tolerated." He said the controversy has prompted companies to be more transparent about defects and more timely in warning doctors.

At the time of the outcry, Guidant said the failure rate of the defibrillators was too low to justify warning doctors and that surgically replacing the devices would have been more harmful than keeping them in place. The company said it had fixed a manufacturing problem in 2002 that led to the devices short-circuiting, but continued to sell the potentially faulty devices made before the fix. A spokesman said Friday the company still sells the defibrillator models, called Ventak Prizm 2, Contak Renewal and Contak Renewal 2, but since they are older technologies, the sales volume is low.

When it recalled 109,000 defibrillators in 2005, seven deaths were linked to the malfunction. (It's unclear whether the number has increased since then.)

While the furor grew about the company's reaction, a bidding war erupted between Boston Scientific and Johnson & Johnson to buy Guidant. Ultimately, Natick, Mass.-based Boston Scientific bought Guidant for $27 billion but struggled until recently to integrate the troubled operations into its own.

Boston Scientific was later hit with a corporate warning letter from the FDA, a serious violation that hampered the company's ability to introduce products in the U.S. market. In addition, thousands of patients sued the company, prompting a $240 million settlement in 2007.

The company has overhauled its quality systems as a result of the FDA warning and has launched new defibrillator models. It also posts safety data on its website, and many now consider the company a model of transparency. Hauser said some good has come of the controversy. "I think it led to better ethical practices in the industry, and more transparency."

Analysts said the financial impact of the settlement is minimal. "It's a lot of money," said Tim Nelson, an analyst with FAF Advisors in Minneapolis. "It's not going to significantly derail Boston's ability to finance its growth."

The agreement will be recorded in the third quarter -- the company took a charge of $294 million. Boston Scientific said it had a third-quarter net loss of $94 million, or 6 cents a share, compared with net income of $200 million, or 13 cents, reported in October.

Boston Scientific's stock closed Friday at $8.08 a share, up 3 cents.