Medical Device Daily Associate

It appears that the high-stakes game of “chicken” between Guidant (Indianapolis) and suitor Johnson & Johnson (J&J; New Brunswick, New Jersey) is over, with Guidant flinching first to the tune of roughly $4 billion. The two companies said in mid-November that the merger agreement had been restructured, with J&J now scheduled to pay about $21.5 billion for Guidant, nearly $3.9 billion less than the original $25.4 billion that the companies had agreed upon when the deal was first disclosed late last year.

Under the new terms, which have been approved by the boards of directors of both companies, each share of Guidant common stock will be exchanged for $33.25 cash and 0.493 shares of J&J common stock. The new price of $63.08 per share – $12.92 less than the original $76 per share price – represented a 9% premium over Guidant’s closing share price the day before the revised deal was unveiled. The final cost to J&J will be $19 billion after backing out Guidant’s cash on hand.

The deal faces one more hurdle, as Guidant shareholders still must approve the revised agreement. If that happens, the companies said they expect to close the transaction in 1Q06.

With the agreement on the revised deal, Ron Dollens, Guidant’s president and CEO, announced his immediate retirement from the company and board of directors after more than a decade of leading the organization. The company’s board also said that James Cornelius, previously non-executive chairman of the board, would become chairman and interim CEO.

“The combination with Guidant will help us address more aspects of cardiac disease than ever before, bringing new capabilities in cardiac rhythm management for the treatment of heart failure and arrhythmias and bringing complementary skills in coronary stenting for the treatment of coronary artery disease,” said J&J Chairman and CEO William Weldon during a conference call on the revised merger terms.

Johnson & Johnson CFO Robert Darretta Jr. said the Guidant buy should have an “immediate impact” on J&J’s sales and structure. He said during the conference call that assuming the deal is closed on schedule, the company’s Medical Devices and Diagnostics business segment would represent more than 40% of J&J’s sales, “and in fact, will become the largest of our three business segments,” which also include Consumer and Pharmaceuticals.

The acquisition, he said, will help to promote “greater balance” between the company’s business segments. In contrast, he pointed out that in 4Q01 nearly two-thirds of J&J’s operating profits came from its pharmaceutical business segment.

The deal, which originally was expected to close in 3Q05, appeared to be in jeopardy due to Guidant’s continued problems over this past summer with the recall of thousands of pacemakers and implantable cardioverter defibrillators (ICDs). When J&J showed signs of wanting to back away from the original deal earlier in November, Guidant sued J&J to complete it as originally structured.

J&J had maintained, however, that it did not feel bound by the original terms of the deal because product recalls and related regulatory investigations, claims and other developments have had “a material adverse effect” on Guidant’s value. Since June, Guidant has recalled or issued warnings on about 88,000 ICDs – including its top seller, the Contak Renewal 3 – and almost 200,000 pacemakers because of reported malfunctions. The company has resumed sales of the recalled devices, but it has taken a hit in its market share and reputation, primarily because of reports in the New York Times in May that said the company failed to alert physicians and patients for nearly three years about a design flaw that could cause one of its ICDs, the Ventak Prizm 2 DR model, to short-circuit and malfunction. The newspaper also said that Guidant kept selling older versions of the device after developing an improved model of the device not prone to short-circuiting.

In a federal filing the week prior to the announcement of the revised deal, Guidant said the Securities and Exchange Commission had launched a formal inquiry into product disclosures and trading of its shares. It also said it is now the subject of civil investigations led by the attorneys general of Arizona, Oregon and Illinois on behalf of a total of 34 states and the District of Columbia. New York Attorney General Eliot Spitzer sued Guidant for fraud, accusing it of not telling doctors about a potentially fatal flaw in some of its ICDs. That suit follows close on the heels of similar filings by the attorneys general of Massachusetts and Minnesota. The company also faces numerous lawsuits from patients and shareholders

Guidant said that despite the financial change, the agreement with J&J was as fundamentally strong today as it was back in December. “The fact is that this agreement makes sense for Guidant’s shareholders and employees,” Cornelius said during the conference call, adding: “It appropriately reflects the business challenges we’ve experienced during this period.” He said the company “remain[s] confident about Guidant’s capabilities to rebuild its Cardiac Rhythm Management market share,” though he acknowledged that rebuilding “will require time, resolve and resources. The union with Johnson & Johnson will allow us to address these issues and do more for patients with cardiovascular disease than ever before.”

The Federal Trade Commission (FTC) conditionally approved the proposed acquisition on Nov. 2. Under the terms of the FTC’s conditional approval, if the deal is consummated, J&J will be required to: 1) grant to a third party a fully paid-up, non-exclusive, irrevocable license, enabling that third party to make and sell drug-eluting stents (DES) with its Rapid Exchange (RX) delivery system; 2) divest to a third party its endoscopic vessel harvesting (EVH) product line; and 3) end its agreement to distribute Novare Surgical Systems’ (Cupertina, California) Enclose proximal anastomotic assist device.

J&J already has agreed to license its DES assets to Abbott Laboratories (Abbott Park, Illinois). The company also has reached an agreement to sell its EVH assets to Datascope (Montvale, New Jersey). As for Novare, the FTC said it expects that company would be able to find a new Enclose distribution partner “within the next couple of months.”

Previously, as part of the European Commission’s clearance of the deal on Aug. 25, J&J agreed to divest the European steerable guidewires business of its Cordis (Miami Lakes, Florida) unit and the Guidant Endovascular Solutions (Menlo Park, California) business in Europe. It said it is in the process of identifying purchasers for those businesses.

Dollens has been Guidant’s CEO from its initial public offering in 1994 and subsequent spin-off from Eli Lilly and Co. (also Indianapolis) to the present. He served a combined 32 years with those two companies. “I am confident that it is the proper time to pursue my previously announced retirement,” he said in a company statement. “I’ve been privileged to lead Guidant over the last 11 years and build a solid foundation of organic growth from innovation, global sales distribution capabilities, access to key markets and a dedicated leadership team. These capabilities have been a hallmark of Guidant in the past and will continue into the future under Johnson & Johnson.”

Dollens announced in May 2004 that he planned to retire on Dec. 31 of that year. However, with the disclosure of the merger with J&J in the latter month, he agreed to stay on to shepherd the company through the acquisition process, which turned out to be much more difficult due to the slew of ICD and pacemaker recalls reported earlier this year.