Medical Device Daily Associate

If it truly isn't over, as they say, "'til the fat lady sings," then the operatic saga that is Guidant's (Indianapolis) courtship with Johnson & Johnson (J&J; New Brunswick, New Jersey) – and more recent suitor Boston Scientific (Natick, Massachusetts) – is one of longest-winded of all time, stretching back more than 13 months.

It looked as though the proverbial singing grande dame would make her appearance after Boston Scientific formalized its $25 billion offer earlier this week, besting J&J's reduced, second offer of $21.5 billion (Medical Device Daily, Jan. 10, 2006). And Boston Scientific said that the $25 billion bid constituted "full and fair market value," given Guidant's problems in its implantable rhythm device product lines.

But the final act easily could be postponed yet again.

J&J late Wednesday responded with its third offer for Guidant, increasing its bid to $23.2 billion – $37.25 in cash and 0.493 shares of its common stock for each outstanding Guidant share.

Surprisingly perhaps, given J&J's tough bargaining, which knocked the price for Guidant's shares down from $76 to about $64 in November (MDD, Nov. 16, 2005), Guidant reported its board's unanimous endorsement of the new offer, though valued 6% below Boston Scientific's bid. Thus, the Guidant board is recommending shareholder approval of the offer at the company's Jan. 31 special meeting on the proposal.

"This agreement with Johnson & Johnson provides significant financial value and certainty for shareholders," said James Cornelius, Guidant Chairman and CEO, in a statement.

In a quick response, Boston Scientific said it wouldn't withdraw from the auction, and that it will continue to pursue its own $25 billion offer.

"It is clear that our $72 per share offer is superior to the $68.06 per share now being offered by Johnson & Johnson," said Boston Scientific in a statement. "Our discussions with Guidant are ongoing. We intend to vigorously pursue this transaction to its completion."

Lawrence Biegelsen, healthcare analyst with Prudential Equity Group (New York), wrote in a research report that Boston Scientific could raise its offer to $78 a share from the current $72, and still maintain its investment-grade credit rating.

Also expecting Boston Sci to increase its bid was Joanne Wuensch, analyst with Harris Nesbitt (New York).

"We doubt this show is over," she wrote in a research report, "and in the end we expect that Boston Scientific will increase its bid, expanding the gap between the two offers in an effort to win the franchise."

Wuensch added that she expects J&J and Guidant to easily clear additional regulatory requirements triggered with the new bid in time for Guidant's Jan. 31 meeting.

Though J&J's new bid is still substantially below that of Boston Scientific's offer, J&& contends that its larger size – $47 billion in 2004 revenue compared to Boston Scientific's $5.6 billion – gives it greater resources to fix Guidant's problems and sustain long-term growth.

William Weldon, J&J's CEO and chairman, said in a statement: "Together with Guidant, we have spent more than a year planning an integration that will create an extraordinary cardiovascular device business that can deliver better medical treatment sooner to millions of patients. We strongly believe that our union with Guidant is the only one that can deliver on that promise, and create lasting value for shareholders of both companies."

Since June, Guidant has recalled or issued safety warnings for about 88,000 defibrillators and almost 200,000 pacemakers. As fallout, the company faces numerous lawsuits and regulatory scrutiny that will take up significant economic and management resources, over at least the next two to three years.

The recommendation by the Guidant board to accept J&J's offer could be taken at face value, though there is some speculation that it may be a ploy to push Boston Scientific to raise still further its offer in this ongoing auction.

Boston Scientific's acquisition of Guidant with an even higher offer would risk pushing it into junk credit status, some say. But it might take that risk since Boston Scientific needs the merger more than J&J, according to many analysts.

In a New York Times report on the newest J&J proposal, A.G. Edwards & Sons analyst Jan Wald speculated that losing Guidant would leave Boston Scientific under intense pressure to find an alternative deal, given that revenue and profit from its flagship drug-eluting stent product are waning, and will continue to suffer as new DES products come on-line, as early as late 2006 or early 2007.

In a related development, Guidant said in a regulatory filing yesterday that it might have to pay a break-up fee of as much as $675 million if its proposed acquisition by J&J fails to close under certain conditions after that company raised its offer.

The increased J&J bid led to the $50 million increase in the termination fee. J&J's original bid for Guidant was $25.4 billion, accompanied by a $750 million fee. But after Guidant disclosed problems with some of its defibrillators, the company cut its bid to $21.5 billion with a $625 million break-up fee.