Legal fight looms after J&J threatens to drop plan to buy Guidant

By Barry Meier and
Andrew Ross Sorkin
The New York Times
November 3, 2005

Johnson & Johnson has threatened to abandon its plan to acquire Guidant, a troubled maker of heart devices, setting the stage for a financial and legal confrontation between the two companies over a deal valued at $25.4 billion.

The development, announced on Wednesday, was a stunning reversal for a deal that was applauded when it was announced in December as both a handsome payoff for Guidant shareholders and a way for Johnson & Johnson to enter the growing market for implanted heart devices.

But along the way, Guidant, the second-largest U.S. maker of heart devices, found itself ensnared by safety issues and product recalls that appeared to spin out of control.

Guidant disclosed in late May, for example, that one of its defibrillators had repeatedly failed because of an electrical flaw. That disclosure led to regulatory scrutiny, a string of product recalls and, most recently, a Department of Justice investigation.

In a statement, Johnson & Johnson, based in New Brunswick, New Jersey, said on Wednesday that it believed that the recalls and federal investigations had materially affected Guidant's "short-term results and long-term outlook."

Guidant, based in Indianapolis, responded that any impact from the recalls would be short-term and that Johnson & Johnson was legally obligated to complete the deal by Friday as originally negotiated.

Guidant's legal problems also grew more complex on Wednesday as the New York State attorney general, Eliot Spitzer, filed a lawsuit accusing the company of fraud in connection with sales of a defibrillator model that short-circuited in some cases. The lawsuit seeks to force Guidant to disclose device malfunction data and disgorge its profit from sales of the defibrillator.

The deal's breakdown could present a challenge to Johnson & Johnson's strategy of growth by acquisition.

Guidant and Johnson & Johnson did not rule out continuing talks, but with the original deal valued at $76 a share, any new agreement will depend on whether the two sides can compromise on a lower price. People involved in those talks described the latest moves by both companies as a high-stakes game, with neither particularly interested in walking away just yet.

But these people suggested that a gap remained between the price that Johnson & Johnson is now willing to pay and the price that Guidant is willing to accept. These people said Johnson & Johnson was hoping to pay no more than something in the mid-$60s a share, while Guidant was seeking a price in the low $70s.

While some analysts said Johnson & Johnson appeared to have the negotiating edge, other analysts said Guidant executives might choose to sue Johnson & Johnson because they believe that the company's stand-alone value is close to $60 a share. On Wednesday, Guidant closed at $60.40 a share, down 4.3 percent, or $2.70 a share.

"They are playing chicken, and right now it appears that J&J has the upper hand," said Joanne Wuensch, an industry analyst with Harris Nesbitt.

The centerpiece of any legal fight will revolve around a single but complex issue: whether Guidant's product recalls and related events have had a materially negative impact on its future sales and profit. Not surprisingly, both companies on Wednesday staked out their positions. In its statement, Johnson & Johnson said it believed that developments had clouded Guidant's future prospects. For its part, Guidant characterized those effects as "near-term."

Courts have found that a significant negative impact must extend beyond the near term to qualify as grounds for terminating a contract. In 2001, a Delaware court ruled that Tyson Foods was not justified in terminating its merger deal with IBP, a beef processor. Tyson had argued that undisclosed financial problems at an IBP subsidiary had invalidated the deal.

Guidant's chief executive, Ronald Dollens, said in a statement, "We believe that the fundamentals of our business are strong and our markets and products have attractive prospects for growth."

Spokesmen for both companies declined to comment beyond their public statements or make executives available for interviews. Johnson & Johnson issued its statement immediately after the Federal Trade Commission on Wednesday gave it conditional approval to acquire Guidant.

It was in mid-December that Johnson & Johnson announced its plan to purchase Guidant, with the $25.4 billion deal representing the company's biggest acquisition by far. The move represented a decision by Johnson & Johnson to move into the market for implantable defibrillators and pacemakers, a field that is rapidly growing because of an aging population.

Defibrillators are devices that send out an electrical charge to disrupt a potentially fatal heart rhythm; a pacemaker controls a heart that is beating too fast or too slowly.

Spitzer's lawsuit, filed on Wednesday in New York State Supreme Court in Manhattan, accuses Guidant of fraud in connection with its failure to alert doctors about the electrical flaw in the defibrillator known as the Prizm 2 DR. In a statement, Spitzer said doctors needed safety information about implanted devices to determine which model was most appropriate for a patient.

"We would not permit this type of conduct in connection with the sale of cars or washing machines," said Spitzer, who last year sued drug companies to force them to disclose more clinical trial data. "It is simply unconscionable that it occurred with a critical medical device."

Late Wednesday, a Guidant spokesman, Steven Tragash, said the company had not seen the lawsuit. The company, however, has said repeatedly that it has done nothing wrong.

In a recent filing with the drug regulator, Guidant also said it planned to release more detailed data to doctors to show how many units of a particular model had failed because of severe malfunctions like a short circuit that prevented a unit from delivering therapy. The company has declined to say when it will begin disclosing that data.


NEW YORK Johnson & Johnson has threatened to abandon its plan to acquire Guidant, a troubled maker of heart devices, setting the stage for a financial and legal confrontation between the two companies over a deal valued at $25.4 billion.

The development, announced on Wednesday, was a stunning reversal for a deal that was applauded when it was announced in December as both a handsome payoff for Guidant shareholders and a way for Johnson & Johnson to enter the growing market for implanted heart devices.

But along the way, Guidant, the second-largest U.S. maker of heart devices, found itself ensnared by safety issues and product recalls that appeared to spin out of control.

Guidant disclosed in late May, for example, that one of its defibrillators had repeatedly failed because of an electrical flaw. That disclosure led to regulatory scrutiny, a string of product recalls and, most recently, a Department of Justice investigation.

In a statement, Johnson & Johnson, based in New Brunswick, New Jersey, said on Wednesday that it believed that the recalls and federal investigations had materially affected Guidant's "short-term results and long-term outlook."

Guidant, based in Indianapolis, responded that any impact from the recalls would be short-term and that Johnson & Johnson was legally obligated to complete the deal by Friday as originally negotiated.

Guidant's legal problems also grew more complex on Wednesday as the New York State attorney general, Eliot Spitzer, filed a lawsuit accusing the company of fraud in connection with sales of a defibrillator model that short-circuited in some cases. The lawsuit seeks to force Guidant to disclose device malfunction data and disgorge its profit from sales of the defibrillator.

The deal's breakdown could present a challenge to Johnson & Johnson's strategy of growth by acquisition.

Guidant and Johnson & Johnson did not rule out continuing talks, but with the original deal valued at $76 a share, any new agreement will depend on whether the two sides can compromise on a lower price. People involved in those talks described the latest moves by both companies as a high-stakes game, with neither particularly interested in walking away just yet.

But these people suggested that a gap remained between the price that Johnson & Johnson is now willing to pay and the price that Guidant is willing to accept. These people said Johnson & Johnson was hoping to pay no more than something in the mid-$60s a share, while Guidant was seeking a price in the low $70s.

While some analysts said Johnson & Johnson appeared to have the negotiating edge, other analysts said Guidant executives might choose to sue Johnson & Johnson because they believe that the company's stand-alone value is close to $60 a share. On Wednesday, Guidant closed at $60.40 a share, down 4.3 percent, or $2.70 a share.

"They are playing chicken, and right now it appears that J&J has the upper hand," said Joanne Wuensch, an industry analyst with Harris Nesbitt.

The centerpiece of any legal fight will revolve around a single but complex issue: whether Guidant's product recalls and related events have had a materially negative impact on its future sales and profit. Not surprisingly, both companies on Wednesday staked out their positions. In its statement, Johnson & Johnson said it believed that developments had clouded Guidant's future prospects. For its part, Guidant characterized those effects as "near-term."

Courts have found that a significant negative impact must extend beyond the near term to qualify as grounds for terminating a contract. In 2001, a Delaware court ruled that Tyson Foods was not justified in terminating its merger deal with IBP, a beef processor. Tyson had argued that undisclosed financial problems at an IBP subsidiary had invalidated the deal.

Guidant's chief executive, Ronald Dollens, said in a statement, "We believe that the fundamentals of our business are strong and our markets and products have attractive prospects for growth."

Spokesmen for both companies declined to comment beyond their public statements or make executives available for interviews. Johnson & Johnson issued its statement immediately after the Federal Trade Commission on Wednesday gave it conditional approval to acquire Guidant.

It was in mid-December that Johnson & Johnson announced its plan to purchase Guidant, with the $25.4 billion deal representing the company's biggest acquisition by far. The move represented a decision by Johnson & Johnson to move into the market for implantable defibrillators and pacemakers, a field that is rapidly growing because of an aging population.

Defibrillators are devices that send out an electrical charge to disrupt a potentially fatal heart rhythm; a pacemaker controls a heart that is beating too fast or too slowly.

Spitzer's lawsuit, filed on Wednesday in New York State Supreme Court in Manhattan, accuses Guidant of fraud in connection with its failure to alert doctors about the electrical flaw in the defibrillator known as the Prizm 2 DR. In a statement, Spitzer said doctors needed safety information about implanted devices to determine which model was most appropriate for a patient.

"We would not permit this type of conduct in connection with the sale of cars or washing machines," said Spitzer, who last year sued drug companies to force them to disclose more clinical trial data. "It is simply unconscionable that it occurred with a critical medical device."

Late Wednesday, a Guidant spokesman, Steven Tragash, said the company had not seen the lawsuit. The company, however, has said repeatedly that it has done nothing wrong.

In a recent filing with the drug regulator, Guidant also said it planned to release more detailed data to doctors to show how many units of a particular model had failed because of severe malfunctions like a short circuit that prevented a unit from delivering therapy. The company has declined to say when it will begin disclosing that data.

Labels: Department of Justice, Eliot Spitzer, New York AG