CDU

Guidant (Indianapolis) found itself on the def-ensive over the past month as it attempted to keep together its proposed $24 billion-plus merger into Johnson & Johnson (J&J; New Brunswick, New Jersey) while fending off continuing accusations that its implantable devices aren’t exactly the gold standard in the category of device safety.

Meanwhile, a report from St. Jude Medical (St. Paul, Minnesota) concerning the effects of atmospheric radiation on some of its devices appears to indicate that companies in the implanted cardiac device sector may be in a heightened self-protection mode.

Clearly the most bothersome event for Guidant came in a mid-month third-quarter earnings conference call by J&J in which Robert Daretta, company CFO, said that J&J was “considering alternatives” under the companies’ merger agreement, those alternatives obviously ranging from scale-back of the deal value or – worst-case – walking away from it altogether.

In the wake of Guidant’s multiple recalls of its implantable devices, follow-on shareholder lawsuits, a potential criminal charge and a continuing series of expose-type articles by The New York Times, J&J has very slowly ratcheted up its wording to indicate it is having second thoughts about consummating the deal.

Shortly after first disclosures of Guidant’s implantable cardioverter defibrillator (ICD) recalls, J&J said it was “confident” that the merger would be accomplished, and it subsequently characterized Guidant’s recalls as “serious matters.” Hence, the wording concerning exploration of “alternatives” serves to indicate that the deal may be on the ropes, and possibly poised for knockout on more than mere technicalities.

Closely following on the heels of J&J’s comments, the The Times continued its series of stories on the company, essentially charging that Guidant has employed inadequate materials and engineering in the design and construction of some of its ICDs. Overall, the newspaper’s stories have led some to wonder about its intense interest in the company, with its articles based on both patient and physician contacts and story leads from Guidant insiders.

In response to J&J’s obviously growing concerns – and a 11% share price dip following that company’s conference call – Guidant President and CEO Ron Dollens responded with a statement saying that the company was expecting Federal Trade Commission approval of the merger “in October” and that it would not specifically comment on the deal until that approval had been received. (as CDU went to press in late October, FTC approval had not yet been issued).

Dollens’ statements obviously were geared to assuring stockholders and analysts that, no matter what the result of its negotiations with J&J, it is still a strong and viable company, Thus, he said in the statement: “While neither company depends on this transaction for its continued future success, Guidant believes that the strategic rationale for combining the two companies is as strong today as when we entered into the merger agreement [in December 2004].”

While some analysts speculated that the deal eventually may implode, a general view was that J&J was imply aiming to negotiate a discounted price, perhaps to about $21 billion instead of $24.5 billion, thereby reflecting the company’s market capitalization loss of more than $2.5 billion since it first began its series of recalls. A typical view came from John Putnam at Stanford Financial Group (Boca Raton, Florida). In a research report, he said: “I don’t think J&J wants to walk away from the deal. I think they want a more equitable price for the company they’re buying,”

Updates offered

Guidant also used its response to J&J’s comments to provide an update on its two major businesses. “Guidant’s third-quarter results will reflect the temporary unavailability of the Contak Renewal 3 and 4 family of heart failure devices during the full month of July and part of August, partially offset by sequential growth of U.S. coronary stent revenue and continuing sales growth of our emerging businesses,” said Dollens, noting that “at the end of the quarter, data suggest our implantable defibrillator implant rate exceeded 80% of the pre-product notification level and is over 100% of the rate one year ago.”

Dollens also noted that the company is launching several recently approved cardiac rhythm management systems during 4Q05, including the Latitude Patient Management system. And he reviewed progress concerning Guidant’s fledgling drug-eluting stent (DES) effort. “Our [DES] development program continues to make important progress toward European launch during the first half of next year,” he said. “We are expanding manufacturing capacity, increasing productivity and recently received FDA approval to expand clinical trial enrollment.”

Dollens emphasized his company’s “down-but-not-out” view of its future prospects indicating that he believes it’s too early to put Guidant on life support just yet. “While recent events and the publicity surrounding them will impact our short-term results, we believe that the fundamentals of our business and the markets that we serve remain strong and our outlook is positive,” he said.

Materials in question

That publicity continued to be very much on the negative side of the coin, with The New York Times publishing a front-page report on Oct. 20 alleging that materials used in some of the company’s ICDs – specifically polyimide insulation – are prone to deterioration when coming in contact with fluids in the body.

Once again, the company felt it necessary to respond, issuing a statement the following day intended to reassure patients that its implantable products are safe. The statement said: “Our concern first and foremost is for patients and their families who may be concerned by reading this article.”

And it recommended that patients with its cardiac devices talk to their doctors “about their specific therapy,” and providing telephone numbers for patients and physicians to get additional information about these concerns.

The statement went on: “Guidant has used polyimide insulation in a variety of applications for more than a decade. As the [Times] article stated, we have had no reports of shorting failures which inhibit therapy as a result of polyimide degradation in devices other than the sub-populations of PRIZM 2 DR, RENEWAL and RENEWAL 2 devices about which we have recently communicated. Our evaluations of product performance and our decisions about physician communications are and have always been based on patient safety. Any suggestion that we have not disclosed safety information because of financial concerns or our merger agreement with Johnson & Johnson is irresponsible and false.”

Radiation worries

Guidant’s troubles obviously are serving to sensitize the other companies that make implantable cardiac devices and are acknowledging product problems in a way that indicates this sensitivity.

Thus, earlier in October, St. Jude Medical (St. Paul, Minnesota) reported its discovery that background levels of atmospheric ionizing cosmic radiation – commonly referred to as cosmic rays – could affect a limited number of its older-generation ICDs. The company said that only 60 out of 36,000 devices have been found to be affected and that about 26,000 of the devices remain in patients.

An incidence of only 0.00167% of the devices at issue had been found to have been affected by background levels of cosmic radiation, St. Jude said, and that the estimated incidence of an anomaly of this type in the affected models is 0.00257% over the five-year projected life of the device. While the company noted no serious patient injuries or deaths attributable to this anomaly, it said it was taking a conservative approach in advising the medical community and regulatory agencies.

While declining to say whether the company would have made this disclosure in the past, given the small numbers of malfunctions, a St. Jude spokesperson told Cardiovascular Device Update: “[I]t’s a sensitive environment, and we believe [this is] information that our physicians would like to know and so we decided to do it.”

The ICDs that may be affected by the radiation problem are certain older generations of the company’s Photon DR, Photon Micro VR/DR and Atlas VR/DR models. The company said it had identified through its investigation, including testing at an independent nuclear laboratory, that a particular vendor-supplied static random access memory (SRAM) chip can be affected, at a low frequency rate, by background levels of atmospheric ionizing cosmic radiation.

The company said the anomaly can trigger a temporary loss of pacing function and permanent loss of defibrillation support. This particular memory chip component was used in certain older models of the company’s ICDs, including the Photon DR (Model V-230HV) (certain serial numbers), Photon Micro VR/DR (Models V-194/V-232) and the Atlas VR/DR (Models V-199/V-240)

“[St. Jude] management claims that this advisory will not be financially material, but ... we would not be surprised if devices were explanted and future reserves taken,” Morgan Stanley (New York) analyst Glenn Reicin wrote in a research report. “Overall, we would expect an explant rate of around 20%, or 5,200 of the devices currently implanted,” he said, adding that this could reduce St. Jude’s pre-tax income by $13 million.

Deutsche Bank (New York) analyst Tao Levy said, “We would classify this ICD recall as in the mid-lower end of ICD problems we have heard over the last several quarters from Medtronic and Guidant, and again reflects all the manufacturers’ heightened sensitivity to informing patients and clinicians of any anomaly, no matter how small.”