updated 12/7/2005 8:56:49 PM ET 2005-12-08T01:56:49

Johnson & Johnson, already No. 1 or 2 in markets for most of its medicines, consumer products and medical devices, showed it wants to do the same thing with pacemakers and implantable defibrillators when it made a play a year ago for Guidant Corp.

That's no surprise, given the growing number of elderly people with faulty tickers needing such devices to stimulate the heart to beat at a healthy pace.

But J&J might have to look elsewhere after rival Boston Scientific Corp., which on Monday made a higher bid for Guidant, said it could sign a merger agreement with Guidant by month's end and close a deal in the first quarter of 2006. That statement came shortly after Indianapolis-based Guidant on Wednesday announced its board of directors decided to start talks with Boston Scientific.

"The combination of Guidant and Boston Scientific will create the world's leading cardiovascular device company, accelerating diversification and growth," Boston Scientific said in a statement.

Boston Scientific, which has jumped ahead of J&J as the top maker of drug-coated heart stents, offered Guidant $25 billion in a deal that would quadruple the Natick, Mass.-based company's debt, cut short-term earnings and add to recent legal and regulatory troubles.

That's quite a bit of risk for Boston Scientific, given that Guidant appeared to be damaged goods. It has issued multiple recalls and warnings this year for thousands of its pacemakers and implantable defibrillators — enough that New Brunswick, N.J.-based J&J convinced Guidant last month to accept $21.5 billion, about $4 billion less than its original offer.

"We continue to believe that the existing acquisition agreement between Johnson & Johnson and Guidant ... represents full and fair value," J&J spokesman Marc Monseau said late Wednesday.

He declined to comment on the announcements by Guidant and Boston Scientific or on speculation about what Johnson & Johnson will do if Guidant chooses Boston Scientific.

The latter subject, though, is a hot topic on Wall Street, where analysts expect volatility for some time in the stocks of those three companies and the two U.S. firms that make heart rhythm devices: St. Jude Medical Inc. of St. Paul, Minn., and Medtronic Inc. of Minneapolis.

"If Guidant and Boston Scientific conclude a separate merger agreement, a natural consequence of that for J&J ... would be to make an offer for St. Jude," medical devices analyst David Zimbalist of Natexis Bleichroeder said Wednesday.

"Medtronic would seem to be too big" for J&J to acquire, with a $70 billion market capitalization and $10 billion in revenues, Zimbalist added.

At Deutsche Bank Securities Inc., medical devices analyst Tao Levy said J&J needs a growth engine among its drugs or devices, and heart rhythm devices are "a high-growth, high-profit area." He said J&J would have to buy a device maker because it would take up to a decade to create its own product line, given hurdles such as patents, engineering talent, clinical testing and regulatory approval.

Levy sees a 50-50 chance J&J will raise its offer for Guidant, given that "final" acquisition offers often aren't. If J&J can't acquire Guidant, he said, it is more likely the maker of everything from biotech drugs to baby shampoo would go after St. Jude than Medtronic.

Medtronic spokesman Rob Clark would not discuss any possible industry deals Wednesday, but noted that his company is No. 1 in both pacemakers and implantable defibrillators, with just over 50 percent of the market for each. St. Jude officials did not return a call.

On Tuesday, Jeffries & Company analyst Ryan Rauch wrote in a research report that a Boston Scientific-Guidant deal would be good for St. Jude, with J&J sure to look to acquire St. Jude. That $2 billion-a-year company would be the only U.S. firm left focused on pacemakers and implantable defibrillators.

There are two small European companies in the business, but the U.S. ones have more than 95 percent of the global market, Zimbalist said.

Whatever marriages the companies arrange, the market will continue growing.

Natexis Bleichroeder is forecasting sales of the two devices will hit $9.3 billion this year and $10.4 billion in 2006 — up from $5 billion in 2001.

American Heart Association spokesman Dr. Timothy Gardner cites two reasons: demographics and increased coverage by government and private insurers.

"The increase in longevity in our population means we have an increasing number of very elderly patients, and it is in those patients in particular that we are seeing need for pacemakers and defibrillators," said Gardner, medical director of the Center for Heart and Vascular Health at Christiana Care Health System in Wilmington, Del.

He said there have been major improvements in both types of devices in recent years, making them life savers for patients with a wider array of heart problems and allowing many to resume a normal life. Earlier this year, the Medicare program greatly increased the pool of patients eligible for defibrillators.

Barely 260,000 heart rhythm devices were implanted in 2002, the most recent data from the heart association.

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