The battle for Guidant that has been raging between Johnson & Johnson (J&J) and Boston Scientific is over. The Guidant board has declared that the hefty $80-per-share bid by Boston, made on January 17th, is “superior” to the $71 offer from J&J, and has accordingly terminated its merger agreement with the healthcare giant. Provided that Guidant shareholders support the bid at a yet-to-be announced special shareholder meeting, the merger should go ahead in the next couple of months and give Boston a strong presence in the implantable heart-rhythm device market.
Boston’s new deal values Guidant at around $27.2 billion and, unlike previous offers, is mainly in cash: $42 per share with the rest of the $38 payable in common stock. Guidant shareholders would hold around 36% of the combined company, which would be the world’s third largest medical device company behind J&J and Medtronic. As a further sweetener, Boston has offered an interest payment of $0.0132 in cash per share for every day past the end of March until the deal is closed. The increase is likely to prove appealing; some shareholders, for example Elliott Associates, had already announced that they favoured Boston’s earlier $73 per share bid against the Guidant board’s support for J&J.
Despite raising its offer (way past the $76 per share that many analysts considered the maximum possible), Boston claims it has not overly increased its debt or damaged its credit profile. This is thanks to an amended deal it has struck with Abbott, which will purchase Guidant’s stent and catheter business from Boston following the merger. Under the terms of the renegotiated deal, Abbott will pay $4.1 billion for the business (up from $3.8 billion), increase its loans to Boston from $700 million to $900 million and buy $1.4 billion worth of shares. This deal with Abbott not only provides Boston with $6.4 billion in cash but also ensures the company avoids any anti-trust issues that would arise from over-lapping parts of the new business.
The deal makers
By making these arrangements up front, Boston is hoping to allay any fears that Guidant shareholders might have about delays in receiving antitrust approval. That was one aspect of the lower-priced J&J bid that made it attractive: J&J – which has been wooing Guidant since December 2004 – secured US and European regulatory approval for its proposed merger in mid-2005. The other major non-price difference between the two bids was the size of the acquiring company. J&J is around ten times the size of Boston, which it claimed made it a safer bet. Yet seeing their company folded into a larger conglomerate may have irked some shareholders; a Guidant-Boston combination would also be expected to have higher growth potential and could grow to rival Medtronic. However, that is dependent on whether Boston can help turn around Guidant’s decline in income – full year sales for 2005 were $3.55 billion, down $215 million (6%) from 2004 and lower than the $3.7 billion expected by Wall Street.
Now that the J&J deal is broken, Guidant owes its former flame a $705 million termination fee, which will be reimbursed by Boston. J&J may also feel its reputation for careful deal-making is damaged – and wounded pride as much as business strategy might bring the company to consider an offer for the other cardiac device maker, St Jude Medical.
Related stent news
It is ironic, given that Guidant’s well-publicised product recalls last year were the reason for J&J to decrease its original Guidant bid from $76 to $63 per share, that it is now Boston Scientific’s turn to come under fire from the FDA. The FDA is putting Boston on notice that its quality management practices are insufficient, with “serious regulatory problems” being found at numerous facilities.
In a recent warning letter the agency says that Boston has failed to properly respond to previous FDA warnings about quality management, including “continuing serious deficiencies” in its practices, having not properly addressed earlier warnings issued last year. The FDA is challenging quality management practices at facilities producing the Vaxcel, Enteryx and Taxus paclitaxel drug-eluting stents. The FDA added that it would not approve any premarket submissions for Class III devices from Boston until these violations are corrected.
However, there is better news (potentially for Abbott) as Guidant has received European approval ahead of schedule for its Xience V drug-eluting stent. Guidant is ramping up manufacturing and building its inventory to supply ongoing clinical trials and support the European launch of the everolimus-eluting stent in the second quarter of 2006.