"Quis custodiet ipsos custodes" Juvenal, Satires (often translated as "Who watches the watchmen?")

Pipeline development has proved frustratingly difficult for cardiology-focused companies like Medtronic, St. Jude Medical (NYSE:STJ), and Boston Scientific (NYSE:BSX) over the last few quarters. St. Jude modified their clinical trial plans for renal denervation and left atrial appendage closure because of enrollment worries against competing devices from Medtronic and Boston Scientific, while Medtronic's renal denervation program failed a pivotal study and its peripheral drug-coated balloon program has likewise disappointed.

When it comes to Boston Scientific, challenging reimbursement has already gotten in the way of the growth of its Alair bronchial thermoplasty system and now it looks like the Watchman LAA device will be coming to market a year later than expected, if the FDA lets it go to market at all.

Third time's the charm?
A week ago Boston Scientific announced, via a sell-side conference presentation, that the FDA is demanding a third advisory panel meeting on its Watchman left atrial appendage (LAA) closure device) prior to making an approval decision. With no panel meeting on the schedule at present, management shifted its guidance for U.S. approval out by a year – to the first half of 2015.

The first Watchman panel (in April of 2009) resulted in a narrow 7-5 vote in favor of the Watchman "with conditions". The FDA issued a "Not Approvable" letter in March of 2010 and cited problems with the PROTECT AF study (this study showed a 91% implantation success rate and a 38% reduction in endpoint events like stroke).

The company launched the PREVAIL trial in response and while the FDA had issues with this study as well (individual components of the primary endpoint favored the control group), the panel voted 13-1 in favor of Watchman approval in December of 2013.

At this point, it is not publicly know why the FDA is calling for a third panel (and the company may not even know yet). I would suspect that the FDA remains concerned about the risk/benefit of the device and wants further panel guidance and comments on labeling – in particular, which patients should get this device. Short of a flat-out rejection or a demand for yet another new study, the FDA may try to limit the label indication for the device only to those atrial fibrillation patients who are contraindicated for anticoagulant therapy.

This is a case where the specifics do matter. LAA closure devices are not likely to be broadly used in patients who are good candidates for anticoagulants anyway. These medications are not risk-free by any means, but there is a general preference to treat with medications before surgery and the closure devices from St. Jude and Boston Scientific have risks of their own.

A reasonable market, if the devices can get there
The left atrial appendage is a pouch-like structure that is connected to the left atrium of the heart. In healthy people it is believed that the LAA works as a "decompression chamber", but in patients with atrial fibrillation or other conditions it can be a place where blood pools and forms clots. These clots can then move into the brain or other organs and cause significant damage (including stroke).

LAA closure or occlusion is simple enough in principle – it uses a mechanical device-based approach to basically close off that pouch and prevent clots from moving into the heart. Boston Scientific's Watchman and St. Jude's Amplatzer are relatively similar catheter-based devices devices that are implanted through accessing the femoral artery (endovascular). AtriCure's (NASDAQ:ATRC) approach, the AtriClip, is quite a bit different in that it is applied to the outside of the heart as part of a surgical procedure.

Generally speaking, the Boston Scientific and St. Jude endovascular approaches have demonstrated closure rates from the mid-80%'s to the low 90%'s, while AtriCure's AtriClip has delivered closure rates in the high 90%'s. While the higher closure rate of the AtriClip makes it a credible option for patients who need LAA occlusion and are already looking at heart surgery for some other reason, I think it is unlikely to gain more than 25% to 30% share of the market.

Assessing the market potential is tricky, as both the Watchman and Amplatazer are imperfect devices and many physicians view anticoagulation therapy has sufficient.

In any case, most estimates of the LAA closure market call for around $500 million in revenue around 2020. That's not a business-changing opportunity for either Boston Scientific or St. Jude, but it is large enough to be worthwhile, particularly when both companies are looking to new products from their pipeline to stimulate revenue and profit growth.

The bottom line
The good news for Boston Scientific is that the 2014 approval of the Watchman wasn't essential to the company's guidance. It seems pretty clear that the FDA has some real reservations about the Watchman, and it may well prove to be a preview for what's in store for St. Jude as well. Losing the Watchman/Amplatzer LAA would be a modest setback for Boston Scientific and/or St. Jude, though both companies very much need to expand their addressable market and revenue opportunities.