Guidant sues Johnson & Johnson to complete merger

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Guidant has sensationally sued Johnson & Johnson (J&J) to complete the agreed $25.4 billion merger, the largest in the healthcare industry. J&J agreed to buy Guidant in December 2004, in a move to expand its heart-device business and offset declining pharmaceutical sales, which have been affected by cheaper generic drugs.

However, follow various recalls of Guidant products, J&J has sought to renegotiate the terms of the $76-per-share agreement. Rumours have persisted that J&J were seeking a deal somewhere is the low-$60’s per share, while Guidant had pushed for a price in the high-$60’s per share.

J&J believes Guidant’s recent recalls of heart devices and regulatory probes (following the recalls) have damaged the latter’s value. Therefore, J&J claims that under the terms of its merger agreement, it is not required to complete the acquisition. Guidant has said its recent problems were short-term and its business fundamentals remained strong.

Guidant recently announced that the US Securities and Exchange Commission has launched a formal inquiry into its product disclosures and into the trading activity of its shares. Guidant said it is cooperating with the probe.

It appears as though any J&J/Guidant case would hinge on whether there had been sufficient damage (a “material adverse change”) in Guidant’s business that would legally allow J&J to scrap the deal. However, the court’s interpretation of “material adverse changes” in merger agreements have been mixed, making a legal battle uncertain for both sides. It would seem neither party has an interest in going through a costly court case; however, neither company wants to settle for anything less than the asking price.

The merger has been fraught with problems, not least the possibility of Medtronic is reporting their concerns to the Federal Trade Commission, following its decision requiring J&J to license a key cardiac stent technology to Abbott Laboratories, as a condition of approving its purchase of Guidant and as a way of easing concerns about competition. Obtaining rights to use the patented technology in the US would give an advantage to Abbott as they prepare to compete in the lucrative US market for drug-coated stents, now dominated by J&J and Boston Scientific. Rapid exchange allows the physician to place the stent into the body without need of an assistant to perform the procedure. The majority of stent procedures now use this method. Only J&J, Guidant and Boston Scientific currently have rights to the stent-delivery technology in the US, although Medtronic markets rapid-exchange systems outside the US.

A spokesman for Medtronic said the company had been contacted by the FTC in connection with the merger review, but declined to comment further. Medtronic was forced to stop selling rapid-exchange systems in the US in 2001 after an unfavorable patent ruling.

Abbott hopes to gain approval for its drug-coated stent, called Zomaxx, in Europe in 2006 and have the product on the US market by late 2007 or early 2008. Medtronic recently launched its device, called Endeavor, in Europe and expects to be on the US market in 2007. An Abbott spokeswoman would not confirm whether it is in line to license the stent-delivery technology.

In regard to Europe, the European Commission ruled that as a result the former must divest its Cordis steerable guidewires business in Europe and Guidant its Endovascular Solutions business in Europe.

Under the proposed merger, Guidant and Cordis will become part of a newly created cardiovascular device unit within J&J. The newly created franchise will be named Guidant, while the Cordis name will be retained for select businesses within the franchise. Guidant business units include cardiac rhythm management, vascular intervention, cardiac surgery and endovascular solutions. In the interventional cardiology market, this business combination provides the capability to accelerate development of new technologically advanced products.

J&J believe this new business can utilize Cordis’ expertise, intellectual property and experience in drug development, coating technology and polymers, which together with Guidant’s strength in rapid and innovative development of stent platforms and delivery systems, will bring superior products to the market faster than either company could on its own.

According to JP Morgan, the European ruling will have little, if any, impact on Guidant’s earnings, given that the estimated international sales for Guidant’s Endovascular business were approximately $44 million in 2004 and $54 million in 2005. Indeed, financial analysts believe Guidant will be pleased with the overall ruling as the Endovascular business in Europe makes up less than 2% of total sales. More importantly however, the decision allows Guidant to retain its coronary stent business, which is more strategic in nature. The remainder of Guidant’s European operations is not affected by this ruling.

JP Morgan also commented that in regard to the J&J (Cordis) ruling, it believes that its steerable guidewires business in Europe does not appear to be ‘all that material’, again having little, if any impact, on Cordis’ earnings potential. This mirrors a decision in September by the Canadian Competition Bureau, which highlighted ‘specific concerns’ relating to the market for steerable guidewires in Canada. Previously, the Canadian Competition Bureau decided not to take any action in relation to markets affected by that proposed acquisition, following an extensive review under the provisions of the Canadian Competition Act.

However, the Bureau has advised J&J that it will monitor developments in certain Canadian markets related to the acquisition over the three-year period provided under the Competition Act. In response to the Competition Bureau’s concerns, J&J announced that it will be offering for sale its Cordis coronary steerable guidewires business.

In Europe, Guidant and J&J said that they are examining remedies to address the overlap in the endoscopic vessel harvesting product lines. These planned activities include; restructuring of reporting relationships of the Endovascular Solutions organization to “hold separate” certain affected employees; formulating retention programs to ensure the sustainability of the Endovascular Solutions business; and communicating the new structure and responsibilities to customers.

In a related development, Datascope has confirmed that it has entered into a definitive agreement with Ethicon, a Johnson & Johnson company, to acquire the Clearglide endoscopic vessel harvesting product line of Ethicon’s CardioVations division.

This transaction is contingent on the closing of the acquisition by J&J of Guidant as well as the satisfaction of other typical conditions. Datascope is entitled to a termination fee in the event its acquisition of the endoscopic vessel harvesting business does not close due to the failure of the J&J transaction.

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