CDU Associate

Johnson & Johnson's (J&J; New Brunswick, New Jersey) blockbuster mid-December offer to purchase Guidant (Indianapolis) for a whopping $24 billion will, if completed as planned, be the biggest-ever deal in the medical device sector, as well as the largest acquisition for healthcare products maker J&J in its 118 years of existence.

Proposed terms of the deal, which had been rumored to be in the works for some time, call for each Guidant share to be exchanged for $30.40 in cash and $45.60 in J&J stock.

Assuming consummation of the deal, J&J said it would create a new medical device and diagnostic unit named Guidant, with that business able to bill itself as the largest medical device business in the world.

Key to the effort will be the process of integration, but the match of J&J a behemoth conglomerate in the healthcare products arena with Guidant a titan in the cardiovascular sector but smaller and much more closely focused remains a large issue.

Michael Dormer, chairman of J&J's medical device unit, in a conference call focused on the proposed deal, clearly attempted to allay the fears that usually come with restructuring, by saying that cutbacks in employees and business lines would not be "significant." The deal, he said, is "not based on cost-cutting and cost-control."

Ron Dollens, Guidant's CEO since its spin-out from Eli Lilly and Co. (also Indianapolis) 10 years ago, said that he will not leave the company as previously planned. Earlier in 2004, he announced his plans to exit at year-end but now said he would stay until the integration of the two firms is complete.

Dollens voiced active confidence in the merger. He said that Guidant's management supported the deal, and that among those "committed" to it are three top Guidant executives: Guido Neels, chief operating officer; R. Frederick McCoy Jr., president of the company's cardiac rhythm management business, based in Minnesota; and Dana Mead Jr., president of the company's stent business, based in California.

In the conference call, no specific date was given for deal closure, but J&J officials suggested it might come no later than July.

Competitors in the cardiovascular field are likely to be concerned by the expanded heft given to Guidant by the hookup with J&J, but officials of the companies downplayed anti-competitive concerns. Robert Darretta, CFO of J&J, said he did not see the imposition of "material divestitures" to complete the deal.

But regulatory concerns were high on the list of questions raised by sector watchers commenting on the deal.

Larry Haimovitch, president of Haimovitch Medical Technology Consultants (Mill Valley, California), who covers the cardiovascular space for CDU and its sister publication, Medical Device Daily, told CDU that there would be inevitable high-profile issues surrounding the combination of the two companies' stent businesses.

The Cordis unit (Miami Lakes, Florida) of J&J developed the Cypher drug-eluting stent (DES), the first commercialized in the U.S., and Guidant also is pursuing the DES path. While it hasn't had significant success in the DES competition, Guidant is the leader in the bare-metal stent sector, and the combination between its stents and J&J's DES capabilities could be seen as crowding other competitors in the DES chase chiefly Boston Scientific (Natick, Massachusetts), with its second FDA-approved DES, and a variety of other firms scrambling to develop next-generation products in the field.

Haimovitch said that, in addition to the stent sector, "overlaps in the minimally invasive surgery space, particularly in the areas of angioplasty balloons and catheters, could lead to regulatory concerns."

He said the "jewel" of the deal for J&J is that it would bring it immediate access to the cardiac defibrillator market, where Guidant claims a 45% share. This market is getting a boost from a plethora of research indicating the value of implantable cardioverter defibrillators (ICDs) in saving lives and the recently proposed increases in reimbursement coverage for the devices by the Centers for Medicare & Medicaid Services (CMS; Baltimore). "There is no way for J&J to become a real player in any reasonable period of time in [the ICD] business," except through a key acquisition, Haimovitch said.

He also described the deal as landscape-changing in the medical device sector, most certainly in the cardio arena, a view that appeared to be validated by Dollens, who said that Guidant had for some time seen the need to get bigger in order to achieve "real success" in the sector.

Short-term, Haimovitch predicted some advantages for two other big cardio players, Boston Scientific and Medtronic (Minneapolis), both because of the uncertainties created by the large size of the deal and the potential problems of integrating J&J and Guidant. And, he noted, cutbacks at executive levels as fallout from the merger will mean "a lot of really good executives are going to be floating around."

Haimovitch said the process of integrating the two firms could be marked by some "chaos," and he had questions about the match-up in cultures. "I wonder if there's a J&J way of doing things that Guidant will balk at," he mused.

The integration question also captured the attention of Tom Rosenwald, a specialist in healthcare management with the executive search firm Ray & Berndston (New York). According to Rosenwald, any time a company is purchased, the marriage of business philosophies becomes a primary issue and, as in any marriage, the partners must work out any differences to succeed.

Even if there are cultural differences, "they'll get over it," he predicted, saying the deal is ultimately good for both firms. "J&J certainly has their own way of doing business," Rosenwald told CDU, noting that that way is fairly conservative.

While he predicted some consolidation of management, he said this could be a much easier transition than with other recent blockbuster combinations. He specifically cited the Pfizer/Pharmacia merger in 2003 in which there were numerous redundancies to be addressed.

J&J already has weathered transitional storms in the past, Rosenwald said. "There were cultural differences before as [acquired] businesses moved from consumer-oriented products to pharmaceutical[s]. All these companies end up figuring it out."

Besides seeing Guidant's product lines "playing right into" J&J's growing focus on cardiovascular devices and surgery, he said that J&J should be "well poised" to leverage Guidant's product offerings. Rosenwald pointed also to J&J's increased emphasis on bundling products to hospitals and group purchasing organizations. "Within the cardiac space, this makes J&J and Guidant very powerful."

He added: "Broadening product line offerings and having more news to talk to doctors about which gives the rep more reason to be seen is always going to be a help. This gives them great leverage when putting together contracts."

While the deal is big and clearly intended to bolster flattened prospects in J&J's pharmaceutical franchise it may not be big enough, according to several analysts, who noted that huge sales are needed for any significant expansion of J&J's $40 billion-a-year revenue numbers.

One organization finding strong value in the proposed acquisition was research firm Prudential Equity Group, calling it "a terrific deal" for J&J, both strategically and financially. Prudential said the deal "should provide sustainability to a hobbled Cordis division and adds a superior long-term growth franchise in CRM [cardiac rhythm management]."

Prudential rates J&J as its top pick in the healthcare/medical devices space.

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