Thoratec Corporation is a supplier of implantable heart pumps and left ventricular assist devices. The Company manufactures these circulatory support products for use by patients with congestive heart failure, including "end-stage" patients. Traditionally, these products have been used in such patients as a "bridge to transplant," for patients awaiting a heart transplant. In contrast, "Destination Therapy," or permanent support, was the Company's flagship new treatment option for patients with end-stage heart failure.
The original Complaint charges Thoratec and certain of its officers and directors with violations of the Securities Exchange Act of 1934. The Company claims that its HeartMate XVE is an approved ventricular assist device designed to provide permanent support for these patients. The Complaint alleges that during the Class Period, Defendants made a number of false and misleading statements regarding expected sales and the market for the HeartMate as a "Destination Therapy" treatment for end-stage heart failure patients. As a result of these statements, Thoratec's stock traded at artificially inflated levels and Defendants were able to complete a $143.7 million note offering.
Specifically, the Complaint alleges that during the Class Period, Defendants knew but concealed from the investing public the following adverse material facts: (i) even as the Company estimated that as many as 100,000 patients per year in the U.S. could be helped by their new Destination Therapy treatment option, the actual "true" market for the product was far less than claimed, as it was severely constrained by limited reimbursement dollars available under Medicare and Medicaid service guidelines; (ii) although the Defendants claimed that there were approximately 900 hospital centers in the U.S. qualified for the practice of Destination Therapy and implantation of the HeartMate, in fact less than 75 centers have been designated as Medicare-approved for Destination Therapy; (iii) Medicare had rigid preset reimbursement guidelines and schedules for Destination Therapy that could only translate into a serious negative impact on the Company's FY2004 sales projections for the HeartMate; (iv) cardiothorasic surgeons were rejecting and/or not accepting the HeartMate as a viable device for Destination Therapy patients because of issues with the device's reliability in a long-term setting; (v) the demand for the Company's Destination Therapy implants was not growing at the rate claimed; (vi) the Company's Destination Therapy implant estimate for FY2004 of between 300 to 500 pumps was grossly overstated and was internally projected to be a fraction of this estimate; (vii) the Company's FY2004 projections of $190-$200 million were overstated by tens of millions of dollars; (viii) not only were CMS reimbursement charges delaying the number of implants, implantation centers and medical professionals had delayed any significant expansion of the existing implant programs until after October 1, 2004 (the expected date of the availability of a significant increase in the CMS reimbursement rate); and (ix) sales of the HeartMate implants would be depressed until Q4 2004, and as a result, the Company's earnings shortfall experienced in Q1 2004 (versus Q4 2003 and Q1 2003) would not be made up for nearly one year, until Q1 2005, at best.
The Complaint further alleges that on June 29, 2004, after the market closed, Thoratec released its preliminary results for the quarter ended June 30, 2004. These results were much worse than previous forecasts. On this news, the price of Thoratec stock dropped precipitously to $10.74 per share, a drop of more than 25% from the previous day's close, on extraordinarily heavy volume of over 11 million shares.
On May 10, 2006, United States District Judge Ronald M. Whyte signed an Order granting the motion to dismiss the consolidated Complaint. According to the Order, the court finds the Complaint fails to adequately allege the falsity of the challenged statements and Defendants' scienter with the requisite particularity. Therefore, the court granted without prejudice Defendants' motion to dismiss the Complaint for failure to state a claim. Plaintiffs were given 30 days from the date of this order to file an amended Complaint.
On June 15, 2006, the Plaintiffs filed a First Amended Consolidated Complaint.
As disclosed by the Company’s FORM 10-Q for the quarterly period ended July 1, 2006, the parties to both the Federal securities law putative class action and the state shareholder derivative actions have reached a preliminary settlement of all pending actions, and the Company anticipates that the parties will be able to finalize these settlements during the third quarter of this year and expects court approval for both settlements to occur during the third or fourth quarter of this year.
According to the Stipulation of Settlement filed August 23, 2006, the proposed settlement fund is in the amount of $3,375,000.
On November 21, 2006, the Court entered the Final Judgment Order of Dismissal with Prejudice, approving the settlement. That day, the Court also entered the Orders approving the plan of allocation and awarding lead Counsel’s attorneys’ fees and reimbursement of expenses.
