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INSIGHT REPORT |
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Insight Report Vol. 1- No.1Boston Scientific Corporation – Market Savvy but Compliance Deficient!There always comes a defining moment in a company’s history where certain events either make or break the company. Boston Scientific Corporation (BSC) is definitely in one such phase. The medical device maker, best known for its industry leading drug eluting stents, is faced with the unenviable task of striking a balance between investing heavily for the future while ensuring that it maintains a tight control over existing operations. Boston Scientific, under the leadership of James Tobin created ripples in the corporate world when on December 5th 2005; it announced a daring counter-bid to acquire Guidant Corporation. At that time, Johnson and Johnson Corporation (J&J), the pre-eminent medical device and pharmaceutical manufacturer of the industry was close to finalizing a deal to acquire Guidant for roughly $21 billion. Most thought that it was only a matter of time before the deal, was inked. After all, J&J was the undisputed king of the jungle and Guidant was a much prized prey. J&J had stalked Guidant for over a year and was now ready to complete the kill. In the highly competitive world of medical devices, Guidant was a major player in the implantable defibrillators and pacemakers market. J&J and Boston Scientific both had products in maturing markets and desperately needed new market segments to enter. What Guidant offered was just the panacea these companies so desperately sought. What ensued after Dec 5th was a gripping and high profile struggle between the two companies that caused many agonizing moments for executives at both companies, but an increasingly sweet parting gift for Guidant board and shareholders. In the end and after many rounds of raises and counter raises by both companies, Boston Scientific prevailed. On January 25 2006, Guidant terminated its agreement with J&J and agreed to be acquired by Boston Scientific. To win Guidant’s hand, BSC agreed to pay approximately $27 billion or $3 billion more than J&J’s best bid. That translated to $80 for each Guidant share which BSC would pay as $42 in cash and $38 in Boston Scientific stock. The successful culmination to the high stake takeover struggle with J&J must have got champagne flowing in BSC corporate headquarters. After all, according to its projections, this success would catapult Boston Scientific to new heights and would literally make it a ‘one-stop shop’ for cardiac devices. However, BSC’s celebrations were destined not to last a long time. For ironically, on the same day that BSC emerged successful in this battle, the Food and Drug Administration (FDA) issued Boston Scientific a very stern warning letter that highlighted many discrepancies with BSC’s current Quality System. In what FDA’s device division has done only twice previously, it issued a corporate wide warning letter to Boston Scientific Corporation. This was after inspections at six BSC facilities over the course of a year revealed significant quality issues. FDA had issued three warning letters to BSC initially in May and August 2005 where it had highlighted various non-compliances that it had encountered. It found BSC’s responses to these warning letters to be inadequate and in combination with the discrepancies found at three different facilities, it felt this non-compliance was no longer an isolated, facility based inconsistency but rather that the entire BSC quality system was defective in these respects and hence needed immediate corporate wide remedial action. In its warning letter dated January 25, 2006 FDA wrote, “The purpose of this letter is to apprise top management of your inadequate corporate-wide corrective action plan as evidenced by the continuing serious deficiencies identified at each of these facilities and to remind you of your responsibility to ensure that all facilities continuously comply with the Act and all pertinent regulations.” Some of the important violations that FDA has cited in its warning letters include:
This is not a complete list of violations that FDA highlighted in
their many warning letters to Boston Scientific. For a complete list,
please view the individual warning letters, the same are listed on the
following FDA website: As the popular idiom goes, “The devil is in the details”. It is one thing to design a quality system, but to follow it religiously to cover all products and over the whole range of activities can be quite a challenging and often an onerous task. And to FDA’s credit, it does a good job in keeping the companies on their toes. A closer look at the BSC objections reveals the extent to which FDA conducts its inspections and the level of compliance it demands from the industry. Some examples include “On at least 3 separate occasions - September 21, 2004, December 14, 2004 and February 15, 2005, your firm distributed 5 units of the Vaxcel Low Profile Infusion Valved Ports to hospitals for later implantation into patients. Prior to these dates, BSC placed all of the Vaxcel Low Profile valved ports on shipping hold on August 25, 2004 because of one complaint of port separation. On the 3 dates noted above, these products were in quarantine and should not have been allowed to be distributed to hospitals.” “For example, we observed the release and actual shipment of _ non-conforming medical devices, specifically _ units of the Taxus Express 2, Monorail, Paclitaxel-Eluting Coronary Stent System to 5 separate hospitals on January 20 and 21, 2005. These devices had failed the kinetic drug release test results and were part of a "shipping hold". Through a failure of your quality system, two employees were able to override your computer system, removing the "S-block" to release these devices electronically. These devices were physically removed from a quarantined area and subsequently shipped to 5 separate hospitals. As part of your review of this serious event, you initiated a Product Inquiry Report, (PIR) 2005-01-01. The medical /clinical assessment of this event your firm indicated that the probability of detecting this event was "high”. Yet the rationale for this detection level stated, "While visual control through the implanting physician will not allow any detection of the occurrence (these stents are visually indistinguishable from the stents within spec), the established KDR controls will continue to provide a high chance to detect outliers before distribution". We note that this assessment went through your review and approval process. You listed a detection level as "high", however, your own rationale states that the actual failed stents are visually indistinguishable from stents within specification. Moreover, you stated that the KDR controls provide a high chance to detect outliers before distribution; however, the _ units actually shipped had failed KDR testing.” A well established company like Boston Scientific is not expected to be lacking in so many areas. Given that it makes critical life-saving medical devices, doctors, patients and regulators expect the highest levels of quality and compliance from the company. From an outside perspective, these issues certainly don’t seem to be a result of a lack of resources. It would be safe to assume that BSC should be in a position to recruit competent and knowledgeable people to formalize and run their quality setup. What seems to be lacking, and which has been repeatedly pointed out by FDA in its warning letters, is a conscious effort on the part of the management to give quality compliance its due share of importance. Top management seems to have become more pre-occupied with business results and with BSC’s expansion plans. While, no body can deny the importance of these issues, adequate cognizance and control of ongoing operations is of paramount importance too. Any negligence or oversight has the potential to derail even the best thought-out future plans. Not being directly involved with this situation and with their internal discussions, we can only surmise the steps they will take to bring this unfortunate corporate incident to a satisfactory conclusion. However, if we were to advice BSC or any other client in a similar situation like this, we would recommend:
It takes a lot of patience and hard work to establish good-will, but it doesn’t take lot of mistakes to cause that good-will to come tumbling down. In addition to the bad publicity, there might be many other serious repercussions for a non-compliant company. Some serious regulatory actions may include: seizure of product inventory, obtaining a court injunction against further marketing of the product, or assessing civil money penalties. In addition, federal agencies are advised of the issuance of all Warning Letters about devices so that they may take this information into account when considering the award of contracts. Additionally, no premarket submissions for Class III devices to which the Quality System/Current Good Manufacturing Practice deficiencies are reasonably related will be cleared or approved until the violations have been corrected. Also, no requests for Certificates to Foreign Governments are approved until the violations related to the subject devices have been corrected. It is safe to assume that unless BSC is able to satisfy FDA with its corrective actions, FDA would take a very hard stance in approving any pending PMA applications for BSC products. In fact, quite likely, it will not approve any BSC experimental devices until the company comes back into compliance, or at least shows to the FDA that it has made some significant progress towards that end. BSC’s next generation drug eluting stent Taxus Liberte could be held up because of this. In today’s high stakes marketplace, any delay in getting a product approved causes millions of dollars of lost revenues, a situation companies can ill afford considering the vast sums of money they invest in getting the product ready and eligible for approval. In fact, for a potential blockbuster product (as BSC hopes Taxus Liberte to be), even a month or two’s delay can cost hundreds of millions of dollars in lost income. In addition to the above, these warning letters might have an adverse impact even on the Guidant deal. Since, a major component of BSC’s package to Guidant relies on BSC’s share price, any adverse movements could cause the deal to appear less attractive. For example, for every 10-cent decline in Boston Scientific’s share price (average closing price of Boston Scientific common stock in the 20 consecutive trading-day period ending three days prior to the closing date of the deal) below $22.62 (referred to as the Collar), the value of Boston Scientific's offer for Guidant decreases by 17 cents per Guidant share. Thus if the price of the stock falls to say $22, the value of the offer to Guidant would get reduced to $79 per share. Any further decrease might make the deal less attractive, either opening a small window for J&J to re-enter or forcing BSC to again sweeten the deal. Thus, lot is riding for BSC to get its quality system in order. While the regulatory scrutiny of companies engaged in the manufacture of Class III products is greater than for Class II and Class I products, manufacturers of the latter types of products cannot take their manufacturing nor their regulatory activities lightly. They have to ensure that in addition to having a comprehensive QSR/cGMP system that encompasses their entire operation, they have enough resources and willingness to monitor their day to day activities to assure that they stay in compliance. For small companies, the same might sound a tedious and often intimidating challenge. However, with adequate training and professional help, these companies can rise to the challenge and ensure that all their activities are within acceptable regulatory requirements. These warning letters, although issued to Boston Scientific, would have sent jitters throughout the medical device manufacturing industry. FDA has effectively served a reminder to all manufacturers, whether big or small, that they should have their quality systems in order and that they cannot afford any leniency when it comes to compliance. We certainly hope that all companies, Boston Scientific included, rise up to this challenge and ensure that all their products are in compliance and hence safe for use on patients. If you have any questions concerning the Boston Scientific warning letter and how it could affect your operations please email us your concerns at info@mdiconsutlants.com. Keep an eye out for the next mdi Insight Report. We’d like to hear from you on how you enjoyed our Insight Report. insight@mdiconsultants.com Next Insight Report - to be announced. If
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