Money Matters - Simplified

Johnson May Abandon Guidant Acquisition

A string of device recalls by Guidant, has forced New Brunswick, N.J. based Johnson and Johnson to consider dropping the $25.4 billion plan to buy the Guidant Corporation. The announcement resulted in Guidant's shares dropping 4.1 % to $60.37, which is also about 20 % lower than their price when they started calling their products back.

The second largest implantable defibrillators manufacturing company recalled 109,000 defibrillators, setting off regulatory probes and giving competitors an advantage. The $20,000 to $30,000 devices, about the size of a stopwatch, are implanted into a patient's chest and connected to the heart with tiny wires. Defibrillators detect an erratic heartbeat and use electrical shocks to correct it. Sales of these devices by Guidant accounted for nearly 50 percent of its revenue last year.

U.S. Food and Drug Administration inspectors criticized Guidant for failing to ensure the quality of its heart implant devices and not warning doctors about software glitches that caused some the failure of some pacemakers, which help regulate heartbeats.

J&J Chief Financial Officer Robert Darretta said Oct. 18 the company was considering “alternatives" in the Guidant agreement. Guidant lost market share after recalling defibrillators because of electrical defects that were linked to at least two deaths and halting sales starting in June.

Earlier Johnson and Johnson said in a statement that they were not sure if the two companies will resume discussions over the deal or if the deal will be finalized with revised terms and conditions. J&J's remarks came on the heels of a Federal Trade Commission announcement that it had cleared the merger, subject to divestitures designed to preserve market competition in three medical-device areas.

The terms and conditions laid down by FTC while approving the proposed acquisition of Guidant, first announced in December 2004 said specifically, that J&J license its lucrative drug-coated stent technology to Abbott Laboratories. Stents are tiny mesh devices that prop open coronary blood vessels to maintain adequate blood flow. The FTC has also asked that J&J divest itself of its endoscopic-vessel harvesting products, used in coronary artery bypass surgery. J&J has agreed to sell the line to Datascope. The FTC also wants J&J to terminate its distribution agreement with Novare Surgical System Inc. for that company's proximal anastomotic assist devices, which are also used in coronary artery by-pass surgery.

Once the F.T.C. gave approval to the deal, which it did early today, Johnson & Johnson has 48 hours to close the agreement or declare that there had been a "material adverse" development. The company quickly put its cards on the table in an apparent bid to force a move by Guidant.

"They are playing chicken, and right now it appears that J.&J. has the upper hand," said Joanne K. Wuensch, an industry analyst with Harris Nesbitt.

As originally announced, the deal was valued at $76 a share for Guidant holders. For Johnson & Johnson, the move was seen by analysts as a major step to gain a stake in the fast-growing market for implantable heart devices like defibrillators and pacemakers.

Prior to today's announcement, Johnson & Johnson had approached Guidant about negotiating a lower acquisition price, but those proposals had been rejected by Guidant.

"Johnson & Johnson believes that these events have had a material adverse effect on Guidant, and, as a result, that it is not required under the terms of the merger agreement to close," the company said. “Johnson & Johnson cannot assure that the companies will resume those discussions," the statement said.

“My take is that J&J would still like to do the deal but that Guidant is unwilling to negotiate the price enough so that J&J is satisfied," said Patrick Kaser, who helps manage $21 billion at Brandywine Asset Management in Wilmington, Delaware, including J&J shares, in a telephone interview today.

"If J&J wanted the price to be, say $68-$70, I'm surprised Guidant wouldn't agree to that given that the market as of yesterday was pricing Guidant at $63," Kaser said. "If J&J wanted to pay $60, maybe it's more understandable why Guidant wouldn't want to come down."