Late last week, medical device company Guidant (NYSE:GDT) announced that the company had informed doctors of problems pertaining to as many as 50,000 implanted cardioverter defibrillators, or ICDs.
Nearly 29,000 ICDs have been recalled for a design problem that may lead to a short circuit, while the others in question have a computer memory problem that can be fixed with reprogramming in a doctor's office. Thus far, 45 device failures -- and two deaths -- have been reported.
What makes this story worse is how it relates to events first reported in a New York Times story in early June. Apparently, Guidant knew of the problem and redesigned the device but continued to sell older models out of inventory that had not been corrected. That's the sort of information that leads to class action lawsuits, and it wouldn't surprise this Fool if Guidant does find itself on the defense over this issue in a courtroom someday.
Quite frankly, I'm surprised that this happened at Guidant. During the years I covered the company as an analyst, Guidant was one of the most forthcoming in the health-care space -- often reporting issues that it didn't have to report and that other companies would have dismissed as trivial. So, while the problems tied to this recall may or may not fall beneath the generally accepted threshold for reporting (which is a failure rate of about 0.1%), it seems a little out of character for the company as a whole.
Complicating matters even now is the fact that the risk of failure is so low. While Guidant has committed to replacing the 29,000 units (at a potential cost of as much as $870 million), the risks of explantation may be worse for many patients than simply leaving the device where it is. So doctors and patients are left to choose between the very real risks of explantation and the potential risk(s) of doing nothing -- not a great choice for anybody to have to make.
At this point, it would not appear that this problem would derail Guidant's merger with Johnson & Johnson (NYSE:JNJ). Presumably, J&J is up to speed on this matter and has made its peace with the issue. Of course, until the deal actually closes, it's impossible to guarantee that everything will proceed as planned.
Assuming that there isn't even more bad news waiting to come out, this should not have a major long-term impact on the Guidant ICD business. Recalls and defects happen -- they've happened to both Medtronic (NYSE:MDT) and St. Jude (NYSE:STJ) in the past -- and doctors understand this.
What is important, though, is to be seen as honest and forthcoming about the issue. While Guidant is doing the right thing now, investors, patients, and doctors may well ask whether more should have been done sooner.
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Fool contributor Stephen Simpson owns shares of Johnson & Johnson. The Fool has an ironclad disclosure policy.
