Guidant Corp. pleaded guilty Thursday to 10 felonies, including lying to the Food and Drug Administration, for covering up malfunctions of a device to treat aneurysms that led to 57 emergency procedures and 12 deaths. The company also agreed to pay a record $92.4 million in fines.
The penalty will be the largest paid by a medical device marketer for failing to report malfunctions to the FDA, the government said.
"They intentionally misled the public, doctors and the FDA," said Assistant U.S. Atty. Matthew J. Jacobs in San Francisco. "It was a criminal act, and they are being punished."
Jacobs said that the investigation was continuing and that there could be charges filed against individuals.
Indianapolis-based Guidant said in a statement that it had set aside more than $90 million in reserves to pay the fines. Patients who already have the device, which is still on the market, are not at risk, the government and the company said. A Guidant spokesman couldn't be reached.
The case involves a device called Ancure Endograft that is permanently inserted to strengthen aortic aneurysms, bulges in the main artery carrying blood from the heart. If not treated, an aneurysm can rupture and lead to death. About 45,000 people receive surgery for the condition each year.
The Ancure device was marketed as an alternative to traditional surgery by Guidant's EndoVascular Technologies Inc. unit in Menlo Park, Calif.
The device has two parts. One is a graft made of woven polyester that is implanted at the site of the aneurysm to support the wall of the aorta. The other is a catheter, which is inserted into an artery in the patient's groin and used to maneuver the graft into place.
According to the criminal information filed in the case, the device's malfunction occurred only during implantation. A criminal information is a document filed instead of an indictment.
The catheter had a high failure rate and frequently became stuck in the patient's body, requiring surgery, and Guidant did not report the failures to the FDA as required, the information said.
Fearing that it would lose market share to rival Medtronic Inc., Guidant's sales force schooled doctors in how to free the catheter when it got stuck, according to prosecutors.
But the technique, which involved breaking the handles of the catheter, hadn't been tested or approved by the FDA. After a patient died during a procedure when the so-called breaking-handle technique was used, seven Guidant employees reported problems with the device to the FDA.
The whistle-blowers weren't identified in court documents, and it wasn't known whether any remained employed by Guidant.
Guidant voluntarily withdrew Ancure from the market in March 2001 and reported malfunctions to the FDA. In the 19 months before the product was withdrawn, Guidant had reported 172 malfunctions to the FDA. In fact, prosecutors said Thursday, Guidant knew that 2,628 malfunctions occurred during that time period. Ancure's failure rate was 34%, the government said.
The FDA permitted Guidant to reintroduce Ancure in August 2001 with additional product warnings but no changes to the device, an FDA spokeswoman said.
The $10,000 device was launched in September 1999. Analysts said the product would have sales of $35 million this year, compared with about $160 million for Medtronic's device, Aneuryx.
Analyst Matthew J. Dodds of SG Cowen Securities said Guidant had hinted it might discontinue Ancure. "There is no risk of this product doing worse than it already has. It's pretty much a bust," he said.
Guidant said Thursday that it would provide additional information about the product's future next week.
The company was charged with nine counts of selling a misbranded product and one count of making false statements to the FDA. Guidant disclosed the criminal probe in August.
It couldn't be learned whether any Guidant employees had been dismissed as a result of the coverup. However, in its statement, Guidant said a "former employee" had made false statements to the FDA.
Although Guidant had disclosed that it was under investigation, the severity of the charges surprised analysts and investors Thursday. The company's shares fell more than 6% to close at $40.56 on the New York Stock Exchange.
Analysts were divided on the legal fallout from the government settlement. Glenn M. Reicin of Morgan Stanley said that Guidant faced 11 civil lawsuits stemming from the matter and that more were likely to follow. But he said the federal case wasn't likely to produce a potentially costly class-action suit because the numbers of victims were small.
Nevertheless, the injured patients "have an excellent case against Guidant because Guidant admitted guilt," Dodds said.
Guidant has liability insurance for device failures, but Dodds said he would not be surprised if an insurer balked at covering the Ancure cases.
"It could be argued that the deaths and morbidities could have been prevented," Dodds sad.
Thursday's settlement is the latest setback for Guidant. Last week, Guidant lost a $425-million patent infringement case to rival Johnson & Johnson.
Analysts said Guidant also had fallen behind in the race to launch a drug-coated heart stent, a $6-billion market. Phillip E. Nalbone of RBC Capital Markets said he did not expect Guidant to launch such a stent until late 2005.