Boston Scientific Faces Sales Hit, But Image Another Issue

Physicians at a major heart conference were surprised Monday by news Boston Scientific Corp. (BSX) suspended implantable defibrillators shipments because of paperwork problems, another hit to the company's already fragile reputation.

The news will likely hurt Boston Scientific's sales, but patients shouldn't feel any impact, as long as this remains a clerical problem, doctors said.

Boston Scientific said Monday that it failed to submit some manufacturing process changes for Food and Drug Administration approval. The company declined to describe the process changes that sparked its dramatic move, other than to say they are well-established and validated.

"It strikes me as a very huge response to a minor book-keeping problem," said Douglas Zipes, an electrophysiologist at Indiana University Medical Center, who doesn't have ties to Boston Scientific. These doctors implant devices like defibrillators, which help guard against potentially deadly rhythm problems.

There is little question the recall will hurt business, as evidenced by Boston Scientific's 12.6% stock slide to $6.80, the lowest close in about a year, but doctors at the American College of Cardiology conference didn't see an immediate effect on patients. It isn't hard to substitute other products, in this cases defibrillators from Medtronic Inc. (MDT) and St. Jude Medical Inc. (STJ), they said.

Also, Boston Scientific pegged the matter to a clerical problem, not a clinical one.

"I don't think our patients are going to suffer because we've got alternatives," Zipes said.

Nonetheless, the issue is disruptive, because many hospitals are tied to certain device companies through contracts, said Ralph Brindis, a general cardiologist at Oakland Medical Center and president-elect of ACC. Then again, "you can imagine other companies would want to fill the void," Brindis said.

Many hospitals also contract with multiple companies in an industry with a history of product problems and supply disruptions. Those include major product troubles at Guidant Corp. in 2005, before Boston Scientific bought the company, and Medtronic's recall in 2007 of faulty cables that connect defibrillators to the heart.

Shares of Boston Scientific rivals jumped on expectations for business gains. St. Jude, which depends the most on defibrillator sales, traded up 8.2% to $40.56, while Medtronic, the heavyweight in the roughly $6 billion defibrillator market, gained 4.3% to close at $45.81.

Citigroup analyst Matt Dodds said a five percentage-point market share loss for Boston Scientific seems possible, and that market growth in general could slow. "We can't remember the last time there has been a recall so wide in scope," Dodds said.

The move comes four years after Boston Scientific bought into the defibrillator business by acquiring the damaged Guidant franchise. The Natick, Mass., company has worked ever since to restore a business marred by product recalls and allegations Guidant was slow to disclose problems--and doctors give Boston Scientific credit on that front--but the stoppage represents a big setback.

"I really had hoped they were back," said George Crossley, an electrophysiologist with a hospital system in Tennessee who also doesn't have company ties. "They've put in an enormous amount of effort into really recreating the quality there."

Boston Scientific is scheduled to go before an FDA panel on Thursday to review the company's bid to expand usage of expensive heart-failure defibrillators. This is based on a recently successful major study Boston Scientific funded.

Arthur Moss, a cardiologist at the University of Rochester who headed that study, and will take part in Thursday's presentation, said the sales stoppage news "came as a total surprise."

Boston Scientific resolved three years ago an FDA "warning letter" it inherited with Guidant. That allowed the company to once again get new products on the market, including two defibrillators with very thin cases that have helped it regain some footing.

The company recently redesigned the plastic caps on those devices amid isolated signs they can weaken when placed under chest muscles, which is rare in the U.S., rather than just under the skin. An article published in a medical journal recently cited one case of a problem with an under-the-skin implant, but Boston Scientific has strongly refuted there was an issue specific to its device.

The stoppage to defibrillator shipments affects a wider range of products, however.

-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com

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