The Wrong Way to Run a Recall
Boston Scientific's (BSX ) handling of its recent coronary stent recall is a case study in how not to respond to a product failure. Since early July, the company has been forced into not one, but three, separate recalls of its market-leading device. Because of a manufacturing glitch, now apparently fixed, the system for inserting the stent into a patient's artery has been linked to 47 injuries and 3 deaths. With the latest recall on Aug. 5, Boston has yanked a total of 99,200 stents.
Now, Boston Scientific Chief Executive Officer James R. Tobin needs to convince bruised investors, wary cardiologists, and anxious patients that the company's finally in control of the problem. That's critical, since nearly 40% of the company's estimated $5.7 billion in sales this year will come from its popular drug-coated stent, which accounts for the bulk of the recall.
While Boston, based in Natick, Mass., has already lost market share, its main rival, Johnson & Johnson (JNJ ), has been plagued by its own stent-manufacturing problems, which have limited its supplies. That's why Boston has time to recover. Still, with J&J working hard to remedy its supply woes and a new competitor, Medtronic (MDT ), planning to jump into the market, another misstep could jeopardize Boston's lead.
The clumsy recall already has damaged the company and its credibility. It was slow to identify the manufacturing technique that caused the problem, and, as a result, issued an initial recall that was too small. Boston's stock, which traded around $43 a share the day before the first recall on July 2, has slid to a recent $33. And Morgan Stanley analyst Glenn M. Reicin figures Boston has lost 10 points of its 70% market share in drug-coated stents.
Until the recent troubles, Boston was riding high after introducing its drug-coated stent, TAXUS Express2, in the U.S. earlier this year. That device -- which is used to prop arteries open after angioplasty -- is coated with a drug that cuts the risk that the artery will become reclogged. J&J had launched the first drug-coated stent in the U.S., CYPHER, a year earlier. Despite that lead, many cardiologists found TAXUS easier to use.
But TAXUS has been dogged by a dangerous problem. In some cases, the balloon used in the procedure to insert the stent into the artery doesn't deflate. That malfunction has also occurred with Boston's bare metal stents, which aren't coated with drugs and which also are included in the recall. The balloon problem can be dangerous, forcing cardiologists to perform emergency bypass surgery.
The company says a manufacturing change made in May and June in plants in Minnesota and Ireland has fixed the problem. And improvements over the past year in quality controls should ensure the safety of up to 122,000 stents that were made before the manufacturing fix but not recalled. Still, the Food & Drug Administration is reviewing how Boston determined which products to recall and could demand further product withdrawals.
While Boston's executives have been making the rounds to reassure big hospital customers, some cardiologists remain wary. Dr. Richard W. Nesto, chairman of the department of cardiovascular medicine at Lahey Clinic in Burlington, Mass., which uses about 2,900 stents a year, says his group will continue to limit use of TAXUS. Says Nesto: "We want to wait longer and make sure nothing pops up."
It could be a lot worse for Boston. J&J's manufacturing woes have limited how aggressively it can court disgruntled TAXUS customers. The FDA sent J&J a scathing letter in April citing a series of deficiencies in the company's stent plants. What's more, says Merrill Lynch & Co. analyst Daniel Lemaitre, J&J's problems have slowed the company's development of its next-generation drug-coated stent. That could give a boost to Boston, which will soon begin testing of an improved version of TAXUS.
Still, J&J says it's ramping up CYPHER production. And with Medtronic likely to join the fray late next year, that could push down prices for the drug-coated devices, which now sell for about $2,500 apiece. If the competition comes on strong, that will be one more reason Boston can't afford another slipup.
By Amy Barrett in Philadelphia