CDU 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, or about $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 entered the bidding for Guidant late in 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 twist in J&J’s 14-month attempt to take control of Guidant, stretching back to December 2004 when it first offered $76 a share for the chance to acquire the company, with the crown jewel of the deal at the time being the latter firm’s CRM business.

J&J noted that Guidant was required to pay a deal break-up fee of $705 million on or before Jan. 26.

Under the new purchase 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, chief executive of Guidant, 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 Sci 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 Abbott on or around the closing date of the Guidant transaction. The amount consists of $4.1 billion for the Guidant assets, a loan of $900 million, and Abbott’s agreement to acquire $1.4 billion worth 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 . . . [which]. 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 had been canceled.

Rumors earlier in the week leading up to J&J’s decision not to make a final upgraded bid for Guidant 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 J&J 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.

As the bidding war played itself out as the final deadline approached, 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.

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.

Fueling the speculation of an increased J&J bid 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.

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.

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.

Hamilton said that Abbott 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.”

Harris Nesbitt (New York) analyst Joanne Wuensch said she believed J&J would not come back with another bid and that Boston Scientific’s deal 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. I think this is a company-transforming event,” she said. “I think investors will like Guidant under Boston Scientific. This is good for Boston Scientific.”

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.

The rumors mill now can begin speculation about J&J’s next move on the medical device front, especially since the company has stressed how important medical devices are for its future. The next logical acquisition target would be St. Jude Medical (St. Paul, Minnesota), which also has a major stake in the lucrative CRM business in which J&J longs to be a player.