Medical Device Daily Associate

It appears that the saga of who will buy troubled cardiac rhythm management (CRM) firm Guidant (Indianapolis) is finally over, with Johnson & Johnson (J&J; New Brunswick, New Jersey) letting a deadline to best rival suitor Boston Scientific's (Natick, Massachusetts) most recent offer of $80 a share ($27.2 billion) expire at midnight on Jan. 25.

After the deadline expired, Guidant reported that it was terminating its merger agreement with J&J and entering into one with Boston Scientific, which only got into the bidding fray for Guidant last month (Medical Device Daily, Dec. 6, 2005).

J&J, which had been offering to buy Guidant for $71 a share, said in a statement that “it had determined not to increase its last offer for Guidant Corp., because to do so would not have been in the best interest of its shareholders.“

The agreement is the latest and perhaps final turn in J&J's 14-month quest to take control of Guidant, stretching back to December 2004 when it first offered $76 a share to acquire the company, with the crown jewel of the deal at the time being its cardiac rhythm management business.

J&J noted that Guidant was required to pay a break-up fee of $705 million on or before today.

Under Guidant's new agreement with Boston Scientific, that company will reimburse Guidant for the termination fee.

“We believe the transaction and the strategic rationale for this combination are in the best interests of our patients, employees, customers and shareholders – reflecting the full value of our firm,“ Jim Cornelius, Guidant's CEO, said in a statement. “The combination of these two companies provides faster, more consistent revenue growth opportunities to shareholders.“

As part of the deal, Boston Scientific also entered into an agreement with Abbott Laboratories (Abbott Park, Illinois) under which Boston Scientific agreed to divest Guidant's vascular intervention and endovascular businesses, while also agreeing to share rights to Guidant's drug-eluting stent program.

Under its pact with Abbott, Boston Scientific will receive $6.4 billion in cash from that firm on or around the closing date of the Guidant transaction. The amount consists of $4.1 billion in purchase price for the Guidant assets, a loan of $900 million and Abbott's agreement to acquire $1.4 billion of Boston Scientific common stock.

Boston Scientific and Guidant said they believe that Boston Scientific's agreement with Abbott will enable Boston Scientific and Guidant to rapidly secure antitrust approvals for the proposed acquisition.

Abbott Laboratories spokesman Jonathon Hamilton said, “Upon the close of the Boston Scientific acquisition, we will acquire Guidant's vascular business. Guidant's vascular business complements our strategy to further expand our company and medical products by building market-leading positions in high-growth businesses.“

Guidant said the scheduled Jan. 31 special meeting of Guidant shareholders to vote on the merger with J&J has been canceled.

Rumors earlier in the week leading up to J&J's decision not to increase its bid were rife, on both the investment and operational sides of the med-tech industry, that the company had one more possible deal-clinching bid ready to put into play. But the company decided that the price it would have to pay for a company for which it had dickered the price down to $63 a share as late as November, due to concerns about legal and regulatory problems within the CRM business, was just too high.

Indeed, as the bidding war played itself out, 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.

Additionally, 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.

Fueling the speculation of an increased J&J bid were rumors – some allegedly 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, Boston Sci's potential partner in the bidding war for Guidant.

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

Harris Nesbitt (New York) analyst Joanne Wuensch said she believed J&J would not come back with another bid and that Boston Scientific's offer is sound. “I don't think Boston Scientific paid too much. I think the Abbott agreement gave them the financial strength to close this deal.“

She added: “I think this is a company-transforming event. I think investors will like Guidant under Boston Scientific. This is good for Boston Scientific.“

Somewhat more pessimistic about the merger was Prudential (New York) analyst Larry Biegelsen, who wrote in a research report that although the strategic rationale for combining Boston Scientific and Guidant is compelling, “we have lingering concerns regarding the integration risk, the high level of debt Boston Scientific is assuming, the high level of dilution, the good but not great top-line growth through 2010, and the Guidant warning letter.“

He added that in his view, Abbott was the clear winner in this new arrangement, “as it provides Abbott with a second DES option and a strong interventional cardiology platform.“

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 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.

If J&J does not make any sort of increased bid, the rumor mill can now begin speculation about the company's next move on the medical device front, especially since the company has stressed how important medical devices are for the future of the company. The next logical acquisition target would be St. Jude Medical (St. Paul, Minnesota), which also has a stake in the lucrative CRM business, which J&J longs to be a player in.

J&J did get some good news on the acquisition front Wednesday as it learned that the Hart-Scott-Rodino waiting period for its acquisition of insulin infusion pump maker Animas (West Chester, Pennsylvania) had expired. Animas also filed its definitive proxy statement regarding the merger.

The proposed $518 million transaction, first disclosed last month (MDD, Dec. 19, 2005), is expected to close shortly after Animas' special meeting of stockholders, which is scheduled for Feb. 17.

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