BB&T Associate

As this issue of Biomedical Business & Technology went to press, the issue of who eventually might claim ownership of troubled cardiac rhythm management firm Guidant (Indianapolis) remained unresolved. At that point, Boston Scientific (Natick, Massachusetts) appeared to be in the lead, but rumors were rife on both the investment and operational sides of the med-tech industry that Johnson & Johnson (J&J; New Brunswick, New Jersey) had one more possible deal-clinching bid ready to put into play.

As the bidding war continued to play itself out as the final full week of January began, several new factors were added to an already much-too-complex equation. Guidant, which already has reported a slew of problems with its pacemakers and implantable cardioverter defibrillators last year, reported a new problem with some of its older devices. The company said it had identified a second batch of older-model pacemakers that are at risk of malfunction due to a problem with a sealing component. The company recommended physicians reassess their patients due to the discovery of additional devices with the potential defect.

Guidant, which said there have been 145 incidents of malfunction to date related to the seal problem, estimated 16,000 of the affected devices remain implanted in patients worldwide. The company said this new leak disclosure adds to a previous physician notification made last July. At the time of the first notification, the company said that as of July 11, it had identified 69 devices that may have exhibited this failure, from about 78,000 devices distributed with this component, with about 28,000 devices still implanted worldwide.

It said that no failures were reported for the first 44 months of device use but that “the likelihood of occurrence increases with implant time.” Of the 28,000 devices identified and implanted worldwide, 18,000 of them remain in service in the U.S., with an average implant age of 69 months. As of Jan. 9, a total of five reported incidents out of the second identified patient population of 54,000 represented a rate of occurrence of 0.009%. Guidant said it has confirmed hermetic seal degradation in two of the five reports. It is estimated that 19,300 devices in this second population remain implanted worldwide.

At the time devices in the second population were assembled, the company said hermetic sealing components susceptible to gradual degradation were mistakenly mixed with a much larger group of non-susceptible components. The devices in this latest notification were manufactured between Oct. 19, 1998, and Dec. 5, 2000.

Apparently neither this latest news nor the documents unsealed in a Texas court last week that showed that Guidant executives had debated whether to tell doctors about possible heart device malfunctions six months before the problems were publicly disclosed deterred J&J from a possible new, increased offer for the embattled company. Rumors were circulating that Johnson & Johnson would raise its offer to somewhere in the neighborhood of $77 to $78 a share – still significantly below Boston Scientific’s most recent $80 a share bid, but higher than J&J’s original offer of $76 a share in December 2004.

Fueling this speculation were rumors, some of which allegedly were planted by J&J personnel as part of a campaign to undermine the Boston Scientific offer in the minds of analysts, that two of its patents may be infringed if an unnamed company tries to launch a drug-eluting stent coated with a derivative of rapamycin.

J&J’s Cypher stent is coated with that compound, as are the experimental stents under development by Guidant and Abbott Laboratories (Abbott Park, Illinois), Boston Sci’s potential partner in the bidding war for Guidant. Abbott has agreed to contribute $6.4 billion to the Boston Scientific bid and in exchange would acquire Guidant’s vascular business, including the new cardiac stent.

Larry Biegelsen, an analyst with Prudential (New York), wrote in a research report that “this potential for J&J to prevent Abbott Laboratories and Boston Scientific from marketing [Guidant’s] Xience-V DES, could give Guidant’s board pause approving a Boston Scientific-Guidant merger.”

While Biegelsen said a $78-a-share offer was likely, he noted that J&J, with much larger pockets than Boston Scientific, could go as high as $90 a share for Guidant “before an acquisition of St. Jude Medical (St. Paul, Minnesota) [another significant player in the cardiac rhythm management space] is more attractive.”

“They’re trying to tell all of us that there are patents out there that they have that they feel can stop Boston Scientific,” said Jan Wald, an analyst with A.G. Edwards (Boston), in a telephone interview with Bloomberg News. Wald said he was called by a J&J employee he declined to name.

As part of its recent campaign, J&J also has argued that Boston Scientific’s bid was breaking its bank and that its assumptions on Guidant’s cardiac rhythm management were too aggressive.

Guidant’s suitors disputed the rumors floating around Wall Street. “We believe this issue has no bearing on our proposed acquisition of Guidant. Unfortunately, threats of legal action are commonplace in our industry,” Paul Donovan, a spokesman for Boston Scientific, said in a statement.

Abbott spokesman Jonathon Hamilton said the company was undeterred by the report. “We are confident we have freedom to operate,” Hamilton said of Abbott’s stent. “With respect to Guidant’s product, it would be inappropriate for us to comment.”

Guidant said a week earlier that Boston Scientific’s offer of $80 a share – $42 in cash and $38 in stock – was “superior” to J&J’s current bid of $24.2 billion, or $71 a share, consisting of $40.52 in cash plus 0.493 of a J&J share for each Guidant share held.

Institutional Shareholder Services (ISS; Rockville, Maryland), a prestigious firm specializing in advising shareholders on proxy votes and governance, issued a statement recommending against J&J’s bid, preliminary to the scheduled Guidant shareholders vote set for Jan. 31. On Jan. 17, Guidant’s board dropped its support for J&J’s $24.2 billion bid in favor of Boston Sci’s $27.2 billion counter-offer.

Sarah Cohn, director of communications for ISS, said that ISS recommended against the J&J merger “based upon the fact that the Guidant board [on Jan. 17] deemed an alternative bid from Boston Scientific to be ‘superior’ to the J&J merger and, following Boston Scientific’s most recent $80 offer, the spread between this and J&J’s offer has widened substantially.”

In other Guidant news, The New York Times and two Texas plaintiffs won access in a Texas court to documents which they say demonstrate that Guidant continued to sell models of defective implantable cardioverter defibrillators (ICDs) that they knew could malfunction. The petition requesting release of these documents – handwritten notes by Guidant executives and reproductions of a company slide presentation – was filed as part of a lawsuit by two Corpus Christi residents who charge that the company was selling defective ICD devices after it knew of the problems. State District Judge Jack Hunter granted the motion to release the documents.

Countering allegations by the plaintiffs, Guidant said that the notes indicate “responsible action” by the company while it was investigating the problems.

Meanwhile, the case by the two Texas plaintiffs, Beatrice Honojosa and Louis Motal, is set to go to trial this month. Honojosa has had her defibrillator explanted, while Motal’s ICD remains implanted.

Bob Hilliard, attorney for Hinojosa and Motal, said that handwritten notes from Fred McCoy, president of Guidant’s Cardiac Rhythm Management division, provide evidence that the company made a decision to sell the defective products. He said the notes show that McCoy was “evaluating and considering what should we do” after learning of the problems. “They made a decision to change the design and sell the defective inventory without notifying the public,” Hilliard said.

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