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Boston Scientific, Medinol settle row

Natick firm will pay $750m in battle over stent design, contract

Boston Scientific Corp. agreed last night to pay $750 million to settle claims that it broke its contract and stole technology from an Israeli company in the late 1990s, according to a company statement issued last night.

The accord ends a rancorous 10-year relationship between the state's largest life sciences company and Medinol, a small Israeli firm that was once its chief supplier of stents -- tiny devices that doctors use to prop open arteries after clearing them of blockages, one of the most common surgical procedures in America.

Though large, the settlement is a fraction of Boston Scientific's annual revenue from stents, which have become the company's biggest product and one of the fastest-selling medical devices in the world.

Medinol's lawyers asked for more than $4.5 billion in damages, according to court documents obtained by the Globe, claiming that Boston Scientific used its technology to design its current top-selling Taxus Express line of stents.

Boston Scientific says the stent's design is original, and had countersued Medinol for $400 million, saying the company's delays had cost it business.

The settlement reached yesterday in New York ended both suits and formally canceled the contract between the companies. Boston Scientific also gave up a 20 percent ownership share in Medinol that it had taken as part of the original contract, and the companies agreed that future disputes or royalty demands would be resolved through arbitration.

''We're pleased to close this chapter, and put this matter behind us," said Boston Scientific spokesman Paul Donovan. ''We can now direct our full attention to developing our life-saving products and technologies."

Medinol's lead attorney, Rory Millson of the New York firm Cravath, Swaine and Moore, could not be reached for comment last night.

Boston Scientific's stock is unlikely to be strongly affected, analysts said last night, because investors had been estimating a payout in the $750 million range.

''I think it's a clean resolution," said Dhulsini de Zoysa, an analyst with SG Cowen & Co. who follows the medical-device industry.

The two companies signed a deal in 1995 under which Medinol, an Israeli firm founded by husband-and-wife team Judith and Kobi Richter, would develop and manufacture stents for the Natick company. The deal gave Boston Scientific a foothold in the important and fast-growing area of the medical-device market.

In 1997, however, Boston Scientific set up a secret factory, which it called Project Independence, to copy Medinol's technology. Medinol claims the Natick company was trying to produce its own stents and squeeze it out of the contract, but Boston Scientific said later that the scheme was allowed because Medinol had become such an unreliable supplier.

After the business relationship started to break down, Boston Scientific attempted to buy Medinol outright to acquire its technology. In 2000, the US Department of Justice discovered the secret factory while investigating a product recall, and in 2000 Boston Scientific chief executive James Tobin met with the Richters and acknowledged the scheme, writing in a letter to his company's board of directors, ''[R]ather than have the Richters find out about it from the Feds, I told them."

In 2001, Medinol sued Boston Scientific in US District Court in New York, alleging that its former partner stole its technology under the guise of a business contract and still owed it a portion of the money it made on all of the stents it was selling. The contract was to last through October 2005.

Boston Scientific almost immediately countersued, claiming Medinol's owners were abusive and obstructionist, and had cost Boston Scientific hundreds of millions of dollars in business by delaying and threatening to stop stent shipments.

In a December ruling, Judge Alvin K. Hellerstein said Boston Scientific's hiding of its project amounted to ''bad faith," although he threw out several of Medinol's more dramatic allegations, including fraud, conspiracy, and racketeering.

The coronary stent business has changed dramatically in the past two years, since Johnson & Johnson and Boston Scientific each introduced a drug-coated version of the metal device. The drug coating prevents the body's natural healing mechanism from reblocking the arteries while they heal.

The highly profitable drug-coated stents have fueled explosive growth for Boston Scientific, accounting for nearly half of its $6.3 billion in annual sales.

The company's share price, which hit a high of more than $45 last year during optimism over the early success of Taxus, has languished below $30 for most of the summer over analysts' worries that competition will eat away at its lead in the stent market. The stock closed at $23.17 last night, before the news was released.

Boston Scientific did not set aside money to cover the settlement, said Donovan. The $750 million payment disclosed last night would represent a sizable portion of the $883 million the company holds in cash or equivalents, according to its most recent quarterly financial filing.

The company is also embroiled in litigation with rival stent maker Johnson & Johnson, with each company alleging the other infringed its patents.

The two companies had been in and out of court all summer, with a trial whose dates were often abruptly canceled to allow the companies room to negotiate. Observers called it an unusually contentious corporate battle.

''That Boston Scientific and Medinol can come to peaceable resolution . . . suggests that there's hope for peace in the Middle East," said analyst de Zoysa.

Stephen Heuser can be reached at sheuser@globe.com.

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