Profit Over Safety in a World of Rapid Research and Development: A Few Comments about Guidant and Medtronic

Armand Rossetti

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There is always an ounce of concern among manufacturers about consumer safety, and a pound of worry about the results of statistical risk benefit analyses attached to products. It is also understandable that manufacturers engage in producing innovative and useful medical devices for profit. And certainly, over the years, medical device manufacturers have elevated our health care system to new heights, promoting life-saving therapy and demanding higher standards of care.

Attorney Brenda Fulmer has recently joined Searcy Denney Scarola Barnhart & Shipley of West Palm Beach, Florida. As a result of litigating medical device and pharmaceutical cases Attorney Fulmer has observed that in the past, scientists and inventors discovered something new and then developed companies around the discovery to serve the consumer. Today, MBAs are at the helm of most larger drug companies and medical device manufacturers, and those business types tend to keep both eyes focused on the bottom line.

Executives who do not fully comprehend the science behind a discovery think that the further ahead a company is in front of its competition, at all costs, the greater the bottom line will be. It's simple. Scientists look at profit as a watershed for working miracles, and feel that they must consider safety first. And most non-scientists who manage device manufacturers think of safety as part of a calculated risk versus benefit model. In using the risk benefit model, profit usually boils down to being a numbers game with a dash of safety thrown in for good measure. Safety then becomes a measured commodity that lends itself to minimal adequacy rather than substantial efficacy.

For example, let’s take a look at two highly innovative manufacturers that have revolutionized specific areas of health care, yet have permitted their reputations to become tarnished in a quest for market dominance and profit.

Guidant Corporation:

Guidant (recently acquired by Boston Scientific Corporation) began as a large but economically troubled “medical device and diagnostics division” (MDD) of the giant US pharmaceutical manufacturer, Eli Lilly & Co. Yet, Lilly’s MDD was responsible for 1.25 billion of its yearly 6 billion dollar annual revenues, and the defibrillator was a core product.

In May 1992, MDD was forced to halt shipment of several of its defibrillator models because of manufacturing problems. In fact in the early nineties, parent, Eli Lilly suffered from its sown problems, such as expiring patents for revenue generating drugs, and a general failure to keep pace with its competitors. These problems resulted in Lilly forfeiting 33% of its profit in only 18 months. So, Lilly spun MDD off and the new company became Guidant Corporation. But it was not that easy.

Guidant took hundreds of millions of dollars worth of debt with it. This debt proved to be a heavy burden that left Guidant threading water in a sea of well funded competitors, ready and able to run away with the competition. However, Guidant did have a range of products, such as guide wires, catheters, balloons and other intra-arterial devices that offered surgeons a range of options to avoid intensely invasive open-heart surgery.

However, the majority of Guidant’s newly developed products offered the company only a two year advantage over competitors, and products less than 12 months old accounted for nearly 60 percent of Guidant’s profit. This rapid product cycling demanded an annual research and development budget averaging 160 million dollars to gain an edge on the competition.

In 1995, Guidant generated nearly a billion dollars in sales and about 100 million dollars in net income. In August 1995, Guidant witnessed its first internal defibrillator (the Ventak Mini I) implanted and only seven months later in March 1996; the Ventak Mini II (13% smaller than its predecessor and the smallest in the world) became the new standard, overtaking models that rivals, including Medtronic, were manufacturing.

In 1997, this constant conundrum of competition led Guidant (then a 1 billion dollar company) in the shadow of Medtronic (a 2,4 billion dollar company) to partner with much smaller companies that were able to concentrate on specialized, cutting edge technology; companies like Neuroprofusion (developer of treatment for strokes), Micro Therapeutics, Inc. (a specialized catheter manufacturer), and NeoCardia (a radiation device manufacturer). The aforementioned companies and a few others received 250 million dollars in seed money and stock from Guidant. As the year progressed, Guidant acquired EndoVascular Technologies (a developer of preventive therapy against aortic rupture) for 170 million dollars.

With these alliances and acquisitions, Guidant entered the 21^st century.

By the summer of 2001 and in the aftermath of two product recalls (the Ventak Prism Implantable Defibrillator and the Ancure Endograft System), Guidant’s share price fell from a high of $71 to $28. In addition, patent lawsuits abounded, and the company had fallen behind the competition, failing to bring a drug-coated stent to market.

Furthermore in 2002, licensing litigation between Guidant's partner, Cook Corporation, Angiotech, and Boston Scientific threatened to delay Guidant’s entry into the drug-coated stent market until 2005. This problem threatened a potential 800 million dollar market loss. To circumvent all this, Guidant acquired Cook and its licensing agreements for 3 billion dollars. Here is an excerpt from a report:

“Cook had obtained paclitaxel-coating patent rights from Angiotech (NASDAQ: ANPI). The jointly developed stent has performed well in clinical trials. However, Boston Scientific, which also licensed paclitaxel-coating patent rights from Angiotech, argued that Guidant had infringed on the co-exclusive licensing agreement that Boston Scientific and Cook have with Angiotech. The initial court ruling was in Boston Scientific's favor, putting the long-term future of Guidant's stent business in doubt. By acquiring Cook, Guidant will likely circumvent this legal problem and gain the unfettered right to develop and market a paclitaxel-coated stent.”

However, Guidant’s troubles did not end with Cook's acquisition.

In 2003, the company closed Endovascular Technologies, which resulted in a significant loss. The closure may have been the result of Guidant having to pay a 92 million dollar fine for failure to report problems with the Ancure Endograft device for treating abdominal aneurysms.

Moving ahead to July 2005, Dr. Robert Steinbrook wrote an article in the New England Journal of Medicine about Joshua Oukrop a Minnesota teenager, suffering from hypertrophic cardiomyopathy. That disease exposed Joshua to a high risk of sudden death due to ventricular fibrillation (VF), a condition that causes the heart to tremble rather than to beat properly. VF is a dire medical emergency. If an irregular heartbeat were to cotinue for more than a few seconds, blood circulation would stop and death might take place in only a few minutes.

In October 2004, Joshua Oukrop received a Guidant Ventak Prizm 2 DR Model 1861 implantable cardioverter-defibrillator (ICD). Things were going well and Joshua received periodic three month checkups at the Minneapolis Heart Institute foundation; the last checkup was on January 31, 2005, with no problems discovered. During a Spring break in March 2005, Oukrop was on a bicycling trip with his girlfriend when he collapsed and died in a remote area of Southern Utah. His physicians were stunned by his death and an autopsy revealed nothing more clinically significant than his massive left ventricular hypertrophy. ICDs had always proven effective in prevent the type of occurrence that had happened to a person in Joshua’s condition.

A senior consulting cardiologist then accessed the FDA’s Manufacturer and User Facility Device Experience database (MAUDE), which contains adverse event reports involving medical devices. The consultant found evidence that two Prizm 2 DR model 1861 devices had short circuited exactly the same way as Joshua’s device had done. At the time The Minneapolis Heart Institute had implanted 47 Prizms and was following 10 patients who had hypertrophic cardiomyopathy (Joshua's father was one of the 10).

On May 12, Guidant officials visited the doctor at the Institute and told him that Guidant was not going to spread the word about the Prizm’s failures, because the company felt that it did not need to notify anyone. The reason for the silence was that patients would not be able to understand the medical issues involved in determining whether or not to replace the devices.

Guidant knew all along about the propensity for an electrical short between the DFN wire and the device’s backfill tube, and that the problem was due to deterioration of a wire insulator. Guidant knew this as early as 2002 (the time that Guidant was having so many bottom line related problems with its other devices). However in June 2005, Guidant saw fit to send a dear doctor letter containing safety information and corrective action. Guidant’s tune had changed.

"The health and safety of patients is paramount," stated Ronald W. Dollens, president and CEO, Guidant Corporation. "Our innovative technologies have saved and improved millions of lives. Guidant works diligently to create the most reliable products and services, enhance patient outcomes, and limit adverse events to patients."

In any event the FDA announced a Class I recall for the Prizm on July 1, 2005, and on July 14, 2005, the FDA issued a preliminary Public Health Notification, concerning the Guidant Ventak Prizm 2 DR and Contak Renewal Implantable Cardioverter Defibrillators. The FDA followed that notice in October 2005 with an update, and in December 2005 with a second update. The documents speak for themselves.

Medtronic Corporation

Overview:

In 1949, Medtronic’s founders started operating with a 100-year business plan. The company started by repairing laboratory testing devices that engineers had designed, but could not repair themselves. Earl Bakken, a Medtronic founder, could foresee a time when human beings would have implanted devices in their bodies that would promote healing. However, the company earned only eight dollars during its first year in operation. To generate some revenue, Medtronic operated as a representative for other medical device manufacturers long enough to allow Bakken to engineer his first devices.

The advent of open heart surgery occurred in 1953. Thereafter, new surgical techniques created a demand for devices that would assist surgeons and patients in promoting cardiac function. This development spurred Bakken who designed and then introduced the first battery powered pacemaker in 1957 (here is the electronics schematic). That device was a box worn outside the body with wires that led into the chest and onto the heart where the leads could transmit tiny electrical shocks. But Bakken did not expect the device to generate substantial sales.

In the spirit of the original 100-year plan, Medtronic continuously improved that first device and miniaturized it to become an implantable device the size of a half dollar, having leads measuring only a couple of millimeters in diameter. In fact, sales took off at the rate of 30+% a year, leading to a market capitalization in excess of 60 Billion dollars, and Medtronic realized annual revenues of more than four billion dollars. And here isa reason why companies like Medtronic constantly need to focus on overcoming the competition.

Medtronic chose not to continue to rely on the pacemaker for a majority of its business. Currently, more than 70% of Medtronic's revenue is from products introduced since 1998. The pace has quickened, and the stake has grown. But the pacemaker industry is no longer high growth.

These facts have led Medtronic to develop several new and varied devices, simultaneously. Each device is usually at different stages of development, and this model of rapid, simultaneous development brings with it a quest to integrate the latest technology to keep Medtronic from falling behind its competitors.

However, integrating the latest technology often demands changes to design,on the fly, and constant adjustments to the resulting assembly line and testing procedures. That change means more regulatory record keeping and possible design change notifications.

Medtronic's quest for competition quenching technology has led the manufacturer to seek outside sources of innovation through acquisition and licensing. For example, in the 1960s, Medtronic teamed up with Alcatel (France) to design tined leads and screw in leads. Later in 1979, Medtronic introduced physiological and multi-programmable pacing. These advances reduced the need for surgery for making adjustments.

As its first CEO, Earl Bakken was at Medtronic’s helm until 1976, and that was the same year that Medtronic experienced its first product recall (35 years after its founding). However progrress never stopped and in the 1970s, Medtronic became a full-fledged international concern with headquarters established in Brazil, France, Japan, Puerto Rico, and Canada. By the end of the 1970s, Medtronic’s annual revenue had grown to 200 million dollars.

According to Medtronic’s literature, the 1980’s got off to a good start with the Versatrax pacemaker, a device capable of sensing and pacing in both heart chambers. However the health care landscape was changing and private insurers were following Medicare’s lead in paying a fixed fee for medical devices and surgeries. This insurance development and potential problems with pacemaker lead wires in 1985 led to a first decline in Medtronic's sales in 23 years.

During this period in Medtronic began hiring CEOs from outside the firm, weathered executives with non-scientific backgrounds, such as Dale R. Olseth, a former investment banker (1976), and Winston R. Wallin from Pillsbury Company (1985). Between 1985 and 1988, Wallin doubled research spending from $37 million to $75 million and Medtronic started manufacturing programmable pharmaceutical pumps, and CapSure leads tipped with steroids to diminish heart tissue swelling on insertion. Then a series of acquisitions began.

In a quest to gain entry into new markets, Medtronic acquired nearly a dozen medical technology companies, such as Johnson & Johnson’s Cardiovascular Division (cardiopulmonary devices), Versaflex Delivery Systems, Inc. (catheters), Bio-Medicus, Inc. (centrifugal blood pumps, and Vititron, N.V. (a Dutch pacemaker manufacturer). By 1990, Medtronic had developed or acquired an international stable of products and devices. During the 1990’s, the quest continued with Medtronic acquiring all or portions of numerous medical technology companies, worldwide. This is the way that Medtronic went about maintaining its cutting edge leadership in the medical device industry.

Between 1990 and 2000, the health care landscape changed again. For example, Hospitals were joining buying groups or affiliating with health care systems. As a result, Medtronic introduced the Cardiovascular Alliance. That Alliance banded leading hospitals, physicians and Medtronic together to improve therapy and reduce costs.

During this decade as well, Medtronic partnered with Novartis Pharmaceuticals to produce an intrathecal drug, and with Healthon/WebMD, an Internet health care information website as part of a new eBusiness strategy.

Medtronic's Defibrillator Recalls:

Among the hundreds of recalls that Medtronic has encountered over the years, several sets of cardiac related devices have come to the forefront recently.

Between 2001 and 2003, Medtronic marketed several defibrillators having defective batteries. The concern was that battery failure in two types of devices: 1) implantable cardioverter defibrillators (ICDs); the Maximo ICD); and 2) Cardiac resynchronization therapy defibrillators (CRT-D); certain InSync Marquis and InSync Protect models) could result in sudden death. A leak in the batteries that powered the devices caused power depletion and failure without warning.

On February 11, 2005, Medtronic voluntarily recalled defective ICDs that correct heart arrhythmias and CRTs that coordinate the beating of the left and right ventricles. Those devices impacted 87,000 people, and the batteries that powered them had a propensity to short and deplete within a few hours, leaving the user with no means to correct heart rhythm. As a result patients could become very sick or die. Unfortunately, the devices were continuously being implanted in patients for months, or years, before Medtronic notified doctors about the defects.

In April 2004, about ten months before the above mentioned ICD/CRT recall, Medtronic announced that it was recalling two heart defibrillators, the Micro Jewell II and GEM DR models because there were at least four reported deaths and one injury during use. Those devices failed to charge properly and that failure resulted in a late delivery or no delivery of the therapeutic cardiac shock. The FDA classified this recall as Class I (a category reserved for devices causing adverse consequences or death). Surgeons probably implanted most of the Micro Jewell and GEM DR models in 1997 and 1998, and the company reported that about 1,800 devices were possibly still in use.

Medtronic seems to be experiencing diverse problems with its good manufacturing practices and quality control, For example, Medtronic’s subsidiary, Physio Control, Inc., had an assembly line quality control problem with its LifePak External Defibrillator (please read one of my prior Injuryboard.com blogs on that subject).

It seems as if Medtronic’s rapid expansion into several different device areas, its quest for global presence, its acquisitions, intellectual property battles, its quest to maintain a competitive edge at all costs, and its determination to chase the bottom line have taken the company far from the simple 100-year plan that its founder, Earl Bakken, had conceived when Medtronic was nothing more than a hospital-equipment repair shop.

If you viewed the first video in this blog that featured Brenda Fulmer, she was referring to the following dichotomy in attitude between company founders who were scientists who had safety in mind and the current class of CEOs driven by Wall Street’s hunger for companies with financial prowess. The following excerpt from Fortune (Bethany McClellan, October 25, 1999) says it all:

“With a vast demographic tide flowing in Medtronic's favor, it's easy to think the company has it made. An estimated 65% of the growing number of people over age 65 suffer from some form of cardiovascular disease, and there are no miracle cures for the myriad ailments that afflict the aging heart. For many diseases there may never be a cure--which is why Medtronic exists. "Medtronic doesn't cure anyone. We help them live with their disease," says George.

Yet Medtronic wants--and needs--to do more than tick along with the aging population. Built into its culture is the desire to implant itself into markets far beyond the heart. Medtronic has little choice but to try: It must find new ways to grow in order to sustain its stock price. Pacemakers have been around a long time, and the boom days are over; most analysts estimate 4% annual growth in the coming years. In 1998, Medtronic's revenues grew just 7%, and its profits before charges grew 12%. Since such numbers aren't good enough to support a premium stock price, Medtronic has embarked on a high-risk expansion. ‘This company is growth driven. They'll do it anyway they have to," says analyst Kurt Kruger at Bank of America. CEO George is more blunt: "Either we're totally transformed or we're slipping back.’

George's quest has led Medtronic into a lot of different areas all at once. It is furiously developing new cardiac-care products that go beyond pacemakers. And using its expertise in implanting things that help the body's electrical system, Medtronic is implanting pacemaker-like devices to stimulate other parts of the body, most notably the spine and the brain.”

Perhaps the following story, “Waking Up a Sleeping Company”, carries a more focused message about what separates a scientific manufacturing culture from a profit driven corporate culture. Medtronic’s fourth CEO, Bill George wrote the story and Harvard Business School published it on April 12, 2004.

In the story, Bill George states that when he arrived at Medtronic, it had a soft underbelly and that he had a quest to succeed against “win at any cost” competitors. He said that practicing solid values is to no avail without performance standards. Medtronic‘s culture was “too Minnesota nice,” and that the culture had to change if Medtronic wanted to be the global leader in medical technology.

Here is a quote from Bill George:

“The challenge we faced was changing a successful culture without diminishing its positive attributes. Cultural change is never an easy task, and far more cultural change efforts ultimately fail than succeed. Transforming a healthy culture is even more difficult than changing an unhealthy one. Many people will not understand why change is necessary when the company has been successful. The leader has to be patient, communicative, and diligent in insisting on changes at all levels, or the organization—like the proverbial willow tree—will snap back to its previous mode of operation as soon as the pressure is off.

In Medtronic's case the challenge was especially acute because the company had such a positive culture and strong set of values. As the newcomer leading these changes, I recognized that many people in the organization, especially those who had spent their entire careers at Medtronic, would feel uncomfortable with the changes I was proposing. Many of our leaders seemed quite comfortable with the culture just the way it was.

To link the cultural changes to our mission, I framed them in terms of helping patients and winning in the marketplace. In truth, we had no choice but to make the Medtronic culture more performance-oriented if we were going to fulfill our mission. Otherwise, we would lose out to more aggressive competitors and never earn the right to serve those patients.”

If a company has positive attributes and the culture is successful, then why inject Wall Street’s bottom line fixated pressure into that culture? Why not stimulate it to be a bit more efficient while letting that culture continue to focus on what is important, innovation based in safety and efficacy?

Brenda Fulmer has arrived at Searcy Denney with substantial experience litigating medical device related cases. She has first hand experience with Guidant and Medtronic devices. Attorney Fulmer thoroughly understands the science necessary to successfully litigate ICD cases and has done so many times. However, she also realizes that one must understand the culture behind the manufacturer to truly understand the complete theory of the case.