Shares of troubled medical device maker Guidant tumbled for the second day after New York State Attorney General Eliot Spitzer said Thursday he was suing the company for allegedly concealing information about a design flaw in a company-made heart defibrillator.

Guidant

Mr. Spitzer’s suit accuses Guidant of failing to tell doctors about a mechanical problem that could cause the implanted device to malfunction, potentially causing serious health problems or death for patients with the device.

“Concealment of negative facts that might influence a consumer to purchase another manufacturer’s product is the essence of fraud,” said Mr. Spitzer. “We wouldn’t permit this type of conduct in connection with the sale of cars or washing machines. It is simply unconscionable that it occurred with a critical medical device.”

Guidant shares slid $3.87 to $56.53 during recent trading. On Wednesday, Guidant shares fell $2.70 to $60.40, after Johnson & Johnson said it may scrap its $25.4-billion bid to acquire Guidant, citing the seriousness of the company’s recent heart device recalls and related regulatory investigations (see J&J May Leave Guidant at Altar).

Guidant shares fell $2.70 to $60.40, after Johnson & Johnson said it may scrap its $25.4-billion bid to acquire Guidant, citing the seriousness of the company’s recent heart device recalls and related regulatory investigations (see J&J May Leave Guidant at Altar).

Mr. Spitzer filed the lawsuit in New York State Supreme Court in Manhattan. It claims the Indianapolis-based company failed to disclose a flaw that caused one of Guidant’s Ventak Prizm models of implantable heart defibrillators to short out.

Heart defibrillators are medical devices implanted to correct abnormal heart rhythm by delivering a controlled electric shock to restore normal function.

Mr. Spitzer claims that between April and November of 2002, Guidant continued to sell potentially flawed defibrillators. Furthermore, Mr. Spitzer alleges that Guidant failed to notify doctors for more than three years.

The electrical short has been linked to at least 28 defibrillator failures, including one that resulted in the death of a patient, according to the lawsuit. The lawsuit seeks restitution for patients who want to replace the potentially flawed Prism model defibrillators made before a 2002 manufacturing change.

The lawsuit also wants Guidant to give up the profits received from the defibrillators in question.

In June of this year, Guidant voluntarily recalled the possibly flawed Prism defibrillators manufactured before April 2002 (see J&J Sticking to Guidant Deal and Guidant Warns on More Devices).

Merger Price ThreatenedAfter NewBrunswick, New Jersey-basedJ&J announced it was reconsidering the acquisition, Guidant said the company is legally obligated to complete the transaction. 

J&J originally offered $76 per share in cash and stock for Guidant before the device maker was hit with a slew of recalls and regulatory inquires this year (see Recall of Guidant Pacemakers, Guidant Handles Blows, So Far, and Med Device Makers Subpoenaed).

Recall of Guidant Pacemakers

The recent lawsuit adds yet another variable into the equation for Wall Street analysts as they gauge Guidant’s future.

Mark Landy, medical analyst for Susquehanna Financial Group, said he doesn’t know if Mr. Spitzer’s lawsuit will play a role in determining whether the acquisition will go through. He noted the federal government is already investigating Guidant and, if Guidant complied with U.S. Federal Drug Administration reporting guidelines, Mr. Spitzer’s lawsuit probably won’t pull up anything new.

Only time will tell if J&J will acquire Guidant, said Mr. Landy, but it won’t happen at the originally offered $76 per share price.

It’s going to come down to how flexible the parties will be in renegotiating the deal. Currently, “It doesn’t look like either party is being very flexible,” he said.