CDU

In another move designed to deal with big debt and stagnating device sales, Boston Scientific (Natick, Massachusetts) reported its long-anticipated restructuring. The company said it will eliminate about 2,300 positions worldwide, or about 13% of an 18,000-person, non-manufacturing workforce baseline as of June 30. The company said it believes the move will eliminate about 10% of its total expenses.

The reductions were initiated last month and are expected to be substantially completed worldwide by the end of 2008, the company said, and that lay-offs outside the U.S. will be initiated following completion of information sharing and consultations with required bodies.

In addition, the company said it expects another 2,000 employees to leave the company in connection with its previously reported divestitures, including plans reported in August and July to sell off its cardiac surgery and vascular surgery businesses, its fluid management business and the auditory assets of Advanced Bionics (Valencia, California). Collectively, these businesses represent about $550 million in 2007 sales for Boston Scientific.

The company didn't say how the layoffs would be divided among its business units.

The company said it expects the reductions in staff will result in total pre-tax charges of $450 million to $475 million, or 20 cents-22 cents per diluted share. These mostly cash charges will be recorded primarily as restructuring expenses, with a portion recorded through other lines of the income statement. From $275 million to $300 million will be recorded in 4Q07, the remainder expected to be recorded throughout 2008 and 2009.

The company plans to reduce its operating expenses (exclusive of amortization and royalty expenses) against a 2007 baseline of about $4.1 billion by an estimated $475 million to $525 million in 2008, a reduction of 12% to 13%, with a further reduction of an estimated $25 million to $50 million in 2009.

"The expense and head count reductions we are announcing today are intended to bring our expenses back in line with our revenues, while preserving our ability to make investments in quality, R&D, capital and our people that are essential to our long-term success," said Jim Tobin, president/CEO of the company, in a statement on the restructuring. "While difficult, these reductions are in the best interest of the company and will create greater value for our customers and their patients, as well as for our employees and shareholders. These actions will enable us to institute meaningful change that will create lasting benefits."

Boston Sci said that eligible employees affected by the head count reductions will be offered severance packages, outplacement services and other assistance. "We understand the impact these reductions will have on our employees, and we are committed to helping ease the transition," said Tobin. "We will treat everyone with respect and dignity, and we will provide support to affected employees."

Coupled with the head count reductions are plans to restructure several businesses and product franchises, the company said, in order "to leverage resources, strengthen competitive positions, and create a more simplified and efficient business model."

As part of the plan, the peripheral Interventions and interventional cardiology businesses will be combined under a single management structure to create a more integrated business focused on interventional specialists, while enhancing technology and management efficiencies.

In another move the company said the electrophysiology business will be integrated with the cardiac rhythm management business to better serve the needs of electrophysiologists by creating a more efficient organization.

Additionally, the oncology business and its four franchises will be restructured. Three will be integrated into other businesses within Boston Scientific, and the oncology venous access franchise will be combined with the fluid management business, which the company expects to sell.

And finally, the company's international group will be consolidated from three regions to two. The existing three regions are: Europe, Asia Pacific/Japan, and Inter-Continental; the two new regions will be: Europe/Middle East/Africa, and Canada/Latin America/Asia Pacific/Japan.

Bear Stearns med-tech analyst Rick Wise called the restructuring "aggressive," and said the cost-cutting moves should lead to higher EPS, adding at least 15 cents to 20 cents to GAAP EPS in 2008 and $0.20 to 25 cents in 2009-net of the EPS dilution from asset sales and "lost sales and profits." He said while the company's shares should react positively to the restructuring news, "multiple uncertainties related to DES and ICD market growth and market shares," will continue to cloud the company's near-tem financial outlook.

JPMorgan med-tech analyst Michael Weinstein said that the cuts are "unprecedented" in size, but because Boston Scientific has so many shares outstanding, the company will save only 25 cents to 27 cents a share.

That may not be enough to offset falling sales, he said, and it is not clear what effect the cuts will have on Boston Scientific's R&D, sales support, product pipeline and its ability to compete.

Boston Scientific has struggled with its finances since its $27.2 billion acquisition of Guidant (Indianapolis) last year. As a result of that transaction, the company is carrying more than $8 billion in debt.

In 2Q07, Boston Scientific's defibrillator sales were down 20% from two years before, when a series of recalls hurt the company's reputation. Sales of stents — especially the once lucrative drug-eluting type — have been hurt by critical medical studies and were down 27% from a year ago.

Finally, the company in August pulled back on its decision to sell a minority stake (up to 25%) in its endosurgery business that could have generated close to $1 billion. That prompted several creditors to lower the company's debt ratings to junk-bond levels.

Thoratec in IVAD recall, plus warning letter from FDA

Thoratec (Pleasanton, California) reported a double dose of bad news just days after presentation of positive news for its HeartMate II at last month's scientific sessions of the American Heart Association (Dallas) in Orlando: specifically, the implantation and efficacy of the HeartMate II ventricular assist device (VAD) in a larger number of women than usually represented in a clinical trial, and also that the device has been scheduled for an FDA panel assessment later this month.

The company initiated a worldwide recall of all of its implantable ventricular assist devices (IVAD) on Oct. 19, with Catalogue No. 10012-2555-001, serial numbers 488 or higher and manufactured and distributed since October 2004. Thoratec also said it may recall about 5,800 ProTime System anticoagulation monitoring devices made by its subsidiary, International Technidyne (ITC; Edison, New Jersey), which received an FDA warning letter stating concerns about its quality systems. The ProTime System is used to monitor clotting activity in blood in patients on anticoagulant therapy.

Regarding the IVAD recall, Thoratec said these devices may be implanted in the pre-peritoneal (internal) position or placed in the paracorporeal (external) position. It said that in the paracorporeal position "the pneumatic driveline is entirely external to the patient and may be damaged if the driveline is bent at a sharp angle relative to its junction with the pump housing which could cause a reduction or interruption of circulatory support, potentially resulting in serious injury or death."

So far, the company said that five injuries and one death had been reported due to this problem. In the incident that resulted in a death, a damaged driveline severed at its connection to the pump.

The company said it received seven reports of damaged drivelines in paracorporeal IVADs, These seven reports, it said come from about 45 IVADs placed in the paracorporeal position.

The affected IVADs were distributed to 87 hospitals throughout the U.S. and other countries, Thoratec said. They can be identified by the serial number located both on the label of the sterile package and on the connector at the end of the IVAD driveline.

Thoratec said that "until further notice," it is advising that the device not be placed in the external position. It stressed that the action does not affect its implanted IVADs.

The company said the FDA ProTime warning letter relates to manufacturing and quality control issues involving a part from an outside supplier that could cause specific lots of the system to deliver error messages on the display, instead of test results, and/or the remote possibility of incorrect readings of patient blood clotting levels.

Thoratec said that ITC is scheduled to meet with FDA to discuss the warning letter and the company's responses, and believes it will have to voluntarily recall about 5,800 of the ProTime systems.

The company said it is not aware of any patient issues related to this matter, that it believes the issue "has been addressed" and shouldn't affect future ProTime System shipments.

The company estimated the recall will cost $500,000 to $1 million, and therefore won't affect FY07 financial guidance.

Bear Stearns med-tech analyst Rick Wise wrote in a research note that that while Thoratec's shares will likely come under some pressure due to uncertainty surrounding the warning letter and its potential financial impact, the long-term driver of its stock performance will be HeartMate II, its second-generation left VAD. He said he expects that the FDA advisory panel will recommend approval of the HeartMate II.

He said that with a projected 1Q08 approval and launch, commercial uptake of the HeartMate II "will help drive 59% 2009 EPS growth" for Thoratec.

Cardiovascular device firms see more than usual court action

Companies in the cardiovascular device sector saw more than their fair share of action over the past few weeks. Following is a roundup:

J&J vs. ARC; one count dismissed

A U.S. federal judge in early November dismissed a key part of a lawsuit brought by Johnson & Johnson (J&J; New Brunswick, New Jersey) against the American Red Cross (ARC; Washington) seeking to restrict the Red Cross's use of its emblem on first aid, health, safety and emergency preparedness products. The judge's ruling dismissed entirely J&J's claim that the Red Cross promised not to engage in the sale of first aid, health, safety and emergency preparedness products.

"I appreciate the court's decision and hope that Johnson & Johnson will reassess their actions and drop the case altogether," said Mark Everson, president/CEO of the ARC.

Following a hearing on Oct. 29, at the U.S. District Court for the Southern District of New York, Judge Jed Rakoff ruled that the "promissory estoppel" claim, a very significant portion of the pharmaceutical company's lawsuit against the ARC, was "dismissed with prejudice." The judge's ruling also means that J&J cannot refile arguments on this claim.

The judge's order comes nearly three months after J&J filed suit against the Red Cross for the use of its emblem on products ARC sells to the public.

The court set a schedule to hear the remaining claims early next year.

Implantation without IDE

MedCath (Charlotte, North Carolina) reported that Arizona Heart Hospital (AHH, Phoenix) and two groups of doctors associated with that facility have settled with the U.S. Department of Justice (DoJ) and the U.S. Attorneys' Office in Phoenix under the federal Civil False Claims Act in a case that involved implanting devices without an approved investigational device exception (IDE).

The hospital will pay about $5.8 million to settle and obtain a release from any civil or administrative monetary claims related to the DoJ's investigation. Two other entities, Arizona Heart Institute and AHI Cardiovascular Surgeons, paid an additional $900,000 as part of the settlement.

The settlement stems from Medicare claims submitted between June 1998 and October 2002 for physician services involving the implantation of certain endoluminal graft devices to treat aneurysms. The devices had not received final market approval from the FDA and were either implanted without an approved IDE or were implanted outside of the approved IDE protocol.

The hospital is one of 11 in which MedCath owns an interest.

The DoJ's allegations related solely to whether the procedures were properly reimbursable by Medicare. Quality of patient care was not at issue.

AHH denied any wrongdoing or illegal conduct, and the settlement agreement does not contain an admission of liability. The hospital also has entered into a five-year corporate integrity agreement with the Office of the Inspector General of the Department of Health and Human Services under which the hospital will continue to maintain its existing corporate compliance program and which relates to clinical trials conducted at the hospital.

Court rules for NMT

NMT Medical (Boston) reported that the U.S. District Court for the District of Minnesota has issued a ruling that Cardia (Burnsville, Minnesota) has infringed U.S. Patent No. 5.451.235 (235 Patent) and confirms that the patent is valid.

The patent infringement lawsuit was first filed in September 2004, alleging that Cardia's Intrasept device infringes upon the 235 Patent, owned by the Children's Medical Center (Boston) and licensed exclusively by NMT.

"We were confident that our intellectual property had been violated in the Cardia case," said John Ahernf, president/CEO of NMT. "We believe we have more patents than any other company in the patent foramen ovale closure space. Currently, we have 66 issued U.S. patents — with 76 more pending — as well as numerous foreign equivalents."

NMT makes implant technologies that allow interventional cardiologists to treat structural heart disease through minimally invasive, catheter-based procedures.

Boston Scientific to appeal ruling

A jury in U.S. District Court in San Francisco has ruled that Boston Scientific (Natick, Massachusetts) is infringing a patent held by Cordis (Miami Lakes, Florida), a subsidiary of Johnson & Johnson (Brunswick, New Jersey), under the doctrine of equivalents. The patents in the case involve balloon catheter technology.

Boston Scientific said it believes the finding of infringement is in error and that it will request the judge to overturn it.

The company said that damages were determined because the judge found that Cordis failed to submit evidence sufficient to enable a jury to make a damage assessment. The jury also found invalid four Boston Scientific patents that were infringed by Cordis.

ev3 resolves infringement claims

ev3 (Plymouth, Minnesota) said it agreed in principal to resolve patent infringement and other litigation with the Regents of the University of California (Oakland, California) and Boston Scientific (Natick, Massachusetts).

The company said it would make a one-time payment of about $11.7 million to the University of California and a one-time payment of about $3.7 million to Boston Scientific. The payments, along with attorney fees and other litigation expenses, will result in a $20.2 million special charge in 3Q07. All claims against ev3 will be dismissed and the company will not have to stop selling any of its existing products or make any future royalty payments.

Products involved in the litigation include embolic protection devices and certain detachable embolic coils.

The litigation included patent infringement claims by the University of California against ev3; assertions by ev3 of non-infringement, invalidity of the patents and inequitable conduct in the procurement of certain patents; assertions of violations of federal antitrust laws by ev3 against the University of California and Boston Scientific; patent infringement claims by ev3 and Boston Scientific against each other related to embolic protection devices; and a claim by Boston Scientific against ev3 for misappropriation of trade secrets.

Cryocath files vs. CryoCor

CryoCath Technologies (Montreal), a company developing cardiac arrhythmia products to treat cardiovascular disease, has filed a patent infringement lawsuit against Cryocor (San Diego) in the U.S. District Court for the District of Delaware. The complaint charges CryoCor with infringement of several of CryoCath's U.S. patents related to console systems. CryoCath seeks injunctive relief from CryoCor.

In response to the lawsuit, Ed Brennan, PhD, president/CEO of CryoCor, said that, "we are confident in the strength of our own patent portfolio and believe this lawsuit is without merit. We intend to vigorously defend the company against the allegations levied by CryoCath."

CryoCor makes and sells cryosurgical consoles, catheters and related hardware and software, including its Cardiac Cryoablation System.