Behind Boston Scientific's bid

Were it not for a series of product recalls last summer, Guidant Corp. would probably be part of the Johnson & Johnson empire today

Johnson & Johnson's $25 billion deal to acquire Guidant was expected to close in the third quarter. There was already talk about the cardiac powerhouse that would result from the combination of Johnson & Johnson's stent business and Guidant's dominant position in devices designed to stabilize the heartbeat, such as defibrillators and pacemakers.

But a series of stumbles by Guidant, leading to product withdrawals and recalls, gave Johnson & Johnson cold feet, leading the company to cut its offer to $21.5 billion, and creating an opening for yesterday's $25 billion bid by Boston Scientific.

The outcome of the contest is still uncertain, with some analysts saying Johnson & Johnson will back away from a company that is ''damaged goods" and others saying a bidding war may ensue.

''This is a competitive move by Boston Scientific," said Pam Weagraff, a principal at Quintiles Consulting of Rockville, Md., which helps medical device companies meet regulatory requirements. ''Why should they let Johnson & Johnson get one of the leading cardiovascular device companies out there?"

Johnson & Johnson and Guidant enjoyed a brief honeymoon period after they disclosed the deal last year. But in June, disaster struck: Guidant said its one of its implantable cardiac defibrillators could malfunction, and may have contributed to the death of a patient. Compounding the anxiety for patients who received the suspect devices, doctors warned against replacing the defibrillators because of risks associated with removing one and implanting another.

A week later, the New Jersey company said it was pulling five other cardiac defibrillators from the market because of malfunctions in a few of the 46,000 devices. The move temporarily eliminated Guidant, which is based in Indiana, from the fast-growing market for electrical cardiac defibrillators. The implanted devices sense when a heartbeat becomes abnormal and deliver a powerful shock to stabilize it.

Two competitors -- Medtronic Inc. and St. Jude Medical Inc., both of Minnesota -- stepped in to fill the gap.

Soon after the recall, Guidant determined that a magnetic switch became stuck in four of the devices. It said it could reprogram implanted devices without removing them from patients, and could replace suspect valves in devices in inventory. But faulty devices involved in the second recall were linked to two deaths.

Guidant in late July said it would resume sales of defibrillators that had been pulled from the market. But the damage the recalls inflicted on the impending Johnson & Johnson acquisition was not so easily fixed. Within months, it appeared Johnson & Johnson would back away from the deal.

The recalls also sparked several regulatory probes and New York Attorney General Eliot Spitzer sued Guidant last month, claiming the company failed to tell doctors about a potentially deadly design flaw in one device.

The withdrawal hurt second quarter earnings, which declined 15 percent, further increasing speculation Johnson & Johnson would not go forward with the purchase.

Guidant responded aggressively, suing Johnson & Johnson in federal court and asking a judge to force the company to follow through on its planned acquisition. Ultimately, both sides were able to save face: Johnson & Johnson agreed to move forward, but cut the purchase price by 15 percent, to $21.4 billion.

Boston Scientific's offer yesterday opens the door to a bidding war with an uncertain outcome.

Jan Wald, an analyst with AG Edwards & Sons who worked for years at Guidant, said the company has a culture that was distinct from that of Eli Lilly & Co. In 1994, Lilly combined five of its medical device subsidiaries into one firm that it spun off as Guidant through a stock offering that year.

''It wasn't an insular culture like you find in pharmaceutical firms," said Wald. ''It was a culture based on innovation and accountability."

Wald said Guidant was willing to take big risks because it didn't have the luxury of developing a product to the point where its success was assured. A radiation treatment flopped, and it also had problems bringing a drug-coated stent to the market, losing the lead to Boston Scientific and Johnson & Johnson's Cordis unit.

The most important challenge to a new owner, Wald said, will be retaining Guidant's senior technical talent.

Jennifer Hsui, an analyst with RBC Capital Markets in San Francisco, said she expects Johnson & Johnson to counter with a sweetened bid for Guidant. But she believes the price is already too high.

''We think fair value is less than where it's trading right now, but there's always a premium for acquisitions," Hsui said.

Jeffrey Krasner can be reached at krasner@globe.com.