Channel Medsystems sues Boston Scientific over spiked $275m buyout

Channel Medsystems sued Boston Scientific (NYSE:BSX) this week over a $275 million buyout that Boston allegedly spiked over a former Channel employee’s alleged scheme to embezzle nearly $3 million from the women’s health company.

Emeryville, Calif.-based Channel Medsystems developed Cerene, a cryogen-based endometrial ablation system designed to treat heavy menstrual bleeding that won CE Mark approval in the European Union in June 2017. In the U.S., the treatment phase is complete in a 242-woman pivotal investigational device exemption trial. The company has raised at least $47.6 million in a series of funding rounds that included Boston Scientific, which acquired a 20% stake for $20.6 million spread over two of the rounds.

Last November the companies agreed to a deal that would have seen Boston acquire the remaining 80% for $275 million if it won FDA approval by Sept. 30, 2019, according to the lawsuit, but by May the agreement had foundered in the wake of the alleged embezzlement scheme.

As 2018 approached Channel executives discovered that then-quality assurance VP Dinesh Shankar had faked expense reports, launching an internal probe with outside counsel and forensic accountants and tapping another outside firm to run a quality system audit. The investigations found that, although Shankar had embezzled $2 million via six fake shell companies and another $567,000 using faked expense reports – including some that were submitted to the FDA – the scheme didn’t affect its chances at winning pre-market approval from the FDA. Federal prosecutors indicted Shankar April 20, charging him with six counts of mail fraud. If convicted, he faces up to 20 years in prison and a fine of $250,000 or twice the gross gain for each count.

“The company and its independent consultants completed a thorough risk assessment and determined that the majority of reports Mr. Shankar falsified had no safety-related implications,” according to the lawsuit. “Critically, nothing Mr. Shankar did affected the [IDE] study or any of the data gathered thereunder in any way whatsoever. Mr. Shankar did not have access to the data for the [IDE] study. Therefore, the key clinical data regarding the safety and efficacy of the Cerene device is wholly unaffected by Mr. Shankar’s fraudulent conduct.”

The final PMA filing with the federal safety watchdog was completed August 13, Channel said in the lawsuit.

“As a result of Channel’s transparency and proactive approach to dealing with the problem, Channel has succeeded in working with the FDA to promptly resolve all of the potential problem areas affecting Channel’s PMA submission with the result that there will be no material delay to the overall approval process. The process for FDA approval of the Cerene device PMA remains on track to be completed within the period contemplated under the merger agreement,” the company said.

But in a May 11 letter spiking the merger, Boston Scientific said Channel Medsystems “fraudulently induced [Boston] to enter into the merger agreement” and “breached its representations and warranties under the merger agreement, and that such breaches gave rise to a material adverse effect” stemming from Shankar’s alleged embezzlement, according to the complaint. Negotiations broke down in August and Boston said it would cancel the deal, leading to Channel’s suit seeking to enforce the agreement.

“Channel neither committed fraud on [Boston] nor breached its representations and warranties,” Channel said in the compliant. “On the contrary, the only thing that has changed about Channel since the time of signing the merger agreement is [Boston’s] desire to consummate a transaction on which it has now apparently soured.”

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