The only interaction that medical-device makers want with the FDA is to hear that their device has earned 510(k) marketing clearance. They certainly don't want to hear about recalls of their products, especially if it's a class 1 recall. The FDA issues that level of recall only when it believes a device poses a risk of injury or even death.
These pumps have a checkered past, including an FDA seizure of them from one of Baxter's warehouses in 2005. Baxter resolved those issues with the FDA earlier this year and had begun repairing the existing pumps so that it could sell new ones. Most of the 4,500 pumps affected by the recall were being refurbished to fix the initial problem.
And then last week, the company announced a second class 1 recall -- this one involving 534 Colleague and Flo-Gard infusion pumps. During quality-control inspections, the company found falsified repair, test, and inspection data sheets for pumps that were repaired or upgraded at its service center. Since the pumps weren't actually tested properly, there's a chance that one might malfunction -- hence, the class 1 recall was issued. The three employees involved were canned.
The immediate financial implications of the recalls probably aren't too severe. It will have a slight effect on net margins for the quarter, since the company is doing work that it's not getting paid for. In the long term, its sales force will need to do damage control so that its customers aren't worried about malfunctioning equipment.
The bigger problem for investors is that the recall brings company management into question. As Fools, we want to buy companies with strong leadership that can take our hard-earned money and use it to grow the company.
In both of the recall cases, the leadership screwed up. In the first case, company leaders should have tested the device more thoroughly before release, and in the second case, they hired incompetent workers at best, and they may have been indirectly responsible for the recall at worst, by pressuring the workers to perform faster than was possible. If so, that could have led the subordinates to falsify their paperwork.
The two events may be isolated incidences, and it may just be a coincidence that they occurred so closely together. But with so many medical-device companies to choose from, such as Rule Breakers picks SonoSite
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