Medical Device Daily Associate

In what appears to be a late round in the prizefight for ownership of Guidant (Indianapolis), challenger Boston Scientific (Natick, Massachusetts) last week delivered the latest combination punch to original suitor Johnson & Johnson (New Brunswick, New Jersey). Besides upping its offer to $73 a share, it also pressured Guidant to make a declaration that its offer was the superior one by 4 p.m., EST, Friday or the offer would expire.

That deadline passed without immediate comment from either company. But Boston Scientific said that if the Guidant board declared its amended offer superior, the offer would remain open until the close of business on Jan. 24.

That would give J&J five days to make a counteroffer, a move which many analysts feel is likely.

Boston Scientific's $73-a-share bid is more than a 7.5% premium to J&J's most recent $68.06 a share offer.

The new bid raises Boston Scientific's last offer by about $340 million to $24.8 billion. And the company made other concessions, apparently to appease Guidant's concerns about antitrust scrutiny and the timing of the deal's completion.

The latest offer came one day after Guidant's board of directors voted to accept J&J's increased offer, up from its previous $63.08 a share proposal (Medical Device Daily, Jan. 13, 2006).

Guidant said that it accepted the J&J offer despite its being lower than Boston Scientific's original bid of $72 a share because the deal had already been approved by regulators. Some considered this a ploy to extract more money and concessions from Boston Scientific, which, many analysts say, needs this deal even more than J&J to shore up sagging revenue and profit from its flagship drug-eluting stent products.

In a statement, Boston Scientific's chairman, Peter Nicholas, called on Guidant's board members to accept its new bid, suggesting that they would fail to fulfill their fiduciary duty if they didn't.

“We strongly encourage the Guidant board to act in the best interests of Guidant shareholders by declaring our $73 per share offer superior to the revised $67.92 per share transaction with Johnson & Johnson,“ Nicholas said, noting that the value of J&J's bid of $68.06 a share in cash and stock had dropped to $67.92 because J&J's share price had fallen in reaction to its higher offer.

“Our amended offer addresses all of the outstanding issues raised by Guidant's board,“ added Nicholas.

Under the terms of the amended Boston Scientific offer, each share of Guidant common stock will be exchanged for $36.50 in cash and $36.50 in Boston Scientific common stock. The increased cash component of the offer represents a more than $4 premium to J&J's proposal.

If the average closing price of Boston Scientific common stock during such period is less than $23.62, Guidant shareholders will receive 1.5453 Boston Scientific shares for each share of Guidant common stock, and if the average closing price of Boston Scientific common stock during such period is greater than $28.86, Guidant shareholders will receive 1.2647 Boston Scientific shares for each share of Guidant common stock.

To assuage the fears of Guidant directors who worry that a deal with Boston Scientific could be held up by regulators, Boston Scientific agreed to shed any assets required to complete the deal. Additionally, it dangled another carrot: it promised to pay Guidant's shareholders an additional 1.2 cents a share for each day from April 1 to the closing if there were delays, in essence guaranteeing that the deal will be completed in 1Q06.

Boston Sci's promise to jettison any assets over regulatory concerns could jeopardize its deal to share rights to Guidant's promising DES when it sells that company's vascular intervention and endovascular businesses to Abbott Laboratories (Abbott Park, Illinois) for $4.3 billion as it promised to do in its definitive offer for the company.

“We suspect that the new Boston Scientific offer was developed with input from the Guidant board, so it's likely that the Guidant board will declare it superior to J&J's latest offer,“ Prudential Equity Group (New York) healthcare analyst Larry Biegelsen said in a research report.

“While J&J would still have another opportunity to counter, J&J would have to come close to matching Boston Scientific's $73 [per share] offer and/or significantly raise the cash component of its offer if it hopes to acquire Guidant,“ Biegelsen wrote.

Joanne Wuensch, analyst with Harris Nesbitt (New York), said in a research report that while Boston Sci's new offer was only $1 more per share, the proposal was about much more than that.

“Interestingly, [Boston Scientific] only raised its bid by $1 [per share], signaling that price is but one factor in the negotiation — but includes timeliness of closure,“ said Wuensch. “At this stage in the negotiation process, we believe decisions are being made not only on dollars and cents, but also ego, strategy and a broader view of the competitive landscape.“

Should the bidding war continue, Wuensch said her analysis indicates that Boston Scientific could offer up to $76 to $77 per share, and up to $40 to $41 in cash before hitting a wall with its investment-grade rating.

J&J could still best Boston Sci in this auction. Its original offer for Guidant back in December 2004 was for $76 a share, or about $25.4 billion, and coming prior to Guidant's well-publicized problems with its cardiac rhythm products.

Due to concerns about Guidant's potential litigation and regulatory issues over the long-term, J&J then renegotiated the offer down to the $63 figure but was compelled to raise that figure after Boston Sci belatedly entered the picture with its $72 offer last month (MDD, Dec. 6, 2005).

Randy Katz, an attorney with Bryan Cave (Irvine, California) and an expert in healthcare industry mergers and acquisitions, said he does not believe that J&J will directly match the offer after its tough bargaining to reduce the deal value and its previous declarations that the lower price represented “full and fair market value.“

“I don't know how they can save face by saying 'tell you what, we'll match all of it,'“ Katz told Medical Device Daily.

He added that J&J doesn't need to match the Boston Scientific offer dollar for dollar. “They need to get a little bit more in the neighborhood [of the Boston Sci] deal,“ he said, but also make it clear to Guidant that “we're not going back to where we were a couple of months ago.“

J&J's offer has already cleared all regulatory reviews and could close immediately after the shareholder vote Guidant has scheduled for Jan. 31.