- The Delaware Court of Chancery ruled Wednesday Boston Scientific's attempt to terminate its $275 million acquisition of women's health device maker Channel Medsystems is inappropriate, writing Channel is entitled to an order requiring Boston Scientific to complete the merger announced in 2017.
- Boston Scientific participated in multiple financing rounds for the Emeryville, California-based startup before setting up a buyout of an endometrial cryoablation device to treat heavy menstrual bleeding, which won premarket approval from FDA in April.
- Boston Scientific failed to prove fraudulent behavior by a Channel executive would reasonably be expected to have a material adverse effect, Chancellor Andre Bouchard wrote. As a result, "Boston Scientific breached its obligation under the Agreement to use commercially reasonable efforts to consummate the merger." Boston Scientific said in an SEC filing Wednesday it is "evaluating its options."
The court decision to compel Boston Scientific to close the merger is the newest chapter in its multi-year relationship with Channel.
Between 2013 and 2015, Boston Scientific invested about $8 million in exchange for approximately 15% of Channel's equity. Initially, the large medtech did not plan to acquire the smaller company, but mulled over doing so after learning other companies were interested in buying it in spring 2017.
In November 2017, Boston Scientific agreed to buy Channel Medsystems for $275 million, contingent on FDA approving its global endometrial ablation device, named Cerene, by Sept. 30, 2019.
The device is intended to be an alternative to drugs, hysterectomy, or dilation and curretage, a method to remove uterine tissue. Each treatment cycle with Channel's device is supposed to last about 2.5 minutes and can be performed in a gynecologist's office without general anesthesia, according to the company.
Channel discovered in December 2017 that Dinesh Shankar, its vice president of quality, had falsified documents in an effort to defraud $2.6 million from the company. Some of the fraudulent documents were filed with FDA as part of the submission for its device.
According to Bouchard's decision, Boston Scientific terminated the merger agreement on May 11, 2018, despite FDA indicating the fraudulent documents would not be the reason the ablation device would fail to win approval.
Channel retained Greenleaf Health, which identified fabricated sterility records and calibration records from Cerene's clinical study as areas of concern. Channel's subsequent investigation into the concerns determined Shankar's fraud did not affect the clinical study, according to the decision.
A DOJ ruling in February sentenced Shankar to 33 months in prison after he pled guilty, and ordered him to pay $2.6 million in restitution on a mail fraud conviction for embezzling from Channel, following a federal grand jury indictment in April 2018. The former executive has since repaid Channel "almost all" of the $2.6 million he stole, according to Bouchard's decision.
Bouchard wrote Boston Scientific's argument that the Shankar fraud would result in liability litigation, competitive harm and future regulatory action are normal business risks and "seemingly after-the-fact rationalizations."
"The record demonstrates, and the court finds, that FDA approval of Cerene, which appeared likely when Boston Scientific terminated the Agreement, undercuts Boston Scientific's assertion that it would need to keep Cerene off the market while it engages in its own remediation efforts and potentially conducts an additional clinical trial," Bouchard wrote.
The Delaware court ordered Boston Scientific and Channel to submit an implementing order consistent with the ruling within five business days.
Maria Rachal contributed reporting.