updated 11/3/2005 4:18:58 PM ET 2005-11-03T21:18:58

With one day left to seal the deal on Johnson & Johnson’s $25.4 billion acquisition of Guidant Corp., New York Attorney General Eliot Spitzer said on Thursday he was suing the Indianapolis-based medical device maker for concealing information about a design flaw in a heart defibrillator.

Shares of Indianapolis-based Guidant fell 5 percent, or $2.98, to $57.42 in afternoon trading on the New York Stock Exchange. J&J stock declined 20 cents to $61.10.

Even if the deal that the two companies agreed to 10 months ago goes through, J&J likely will pay significantly less than the original price, some experts said. And if J&J scraps it, the companies may find themselves in court.

While the agreement stipulates a $700 million breakup fee, J&J has already suggested that a stream of product recalls in recent months by Guidant, as well as federal investigations into the device maker, may have had the materially negative impact that would allow it to simply walk away.

The companies have until Friday to close the purchase.

“That deal is a goner — it’s D.O.A.,” said Anthony Sabino, a mergers and acquisitions attorney and a professor at St. John’s University after Spitzer’s announcement. “You could knock me over with a feather if they go through with this.”

Spokesmen for J&J and Guidant declined to comment Thursday.

Not everyone was convinced the companies would scrap their plans.

Alex Arrow, an analyst with Lazard Capital Markets, said he believed the deal would still go through, but at a significantly lower cost.

“We believe the main motivation behind (J&J’s) statement may be to gain extra negotiating leverage,” he wrote in a research note released Thursday morning.

Analysts speculated the $76-per-share proposed acquisition price could drop as low as $60 per share.

Glenn Novarro, an analyst with Banc of America Securities, predicted in a research note that the deal would go through at $69 per share.

Since June, Guidant has recalled or issued warnings on about 88,000 heart defibrillators — including its top seller, the Contak Renewal 3 — and almost 200,000 pacemakers because of reported malfunctions. The company faces multiple lawsuits from patients and shareholders, as well as a reported criminal investigation by the U.S. Food and Drug Administration.

Federal prosecutors in Boston and Minneapolis last week issued separate subpoenas seeking documents about Guidant’s devices and its Ventak Prizm R 2 and Contak Renewal R 1 and 2 defibrillators.

Spitzer filed the civil lawsuit Wednesday in state Supreme Court in Manhattan against the maker of medical devices.

“We wouldn’t permit this type of conduct in connection with the sale of cars or washing machines,” Spitzer said. “It is simply unconscionable that it occurred with a critical medical device.”

Spitzer accuses the company of failing to disclose a flaw in its Ventak Prizm 2 DR Model 1861 cardio defibrillator. The device is surgically implanted into a patient who is at high risk of death because of an abnormal heart rhythm and emits an electric shock to restore the heart beat to normal. A heart could stop if the device fails.

The attorney general claims Guidant discovered the flaw in February 2002 in some models that short circuited. Spitzer notes the company made some engineering changes months later, but continued to sell the version of the model that hadn’t been corrected.

The company didn’t acknowledge the problem with the early model until May 2005, just before the flaw was to be revealed in a newspaper article. In June, Guidant recalled about 13,900 of the devices made before April 2002.

Spitzer claims the model has failed 28 times and one patient died as a result. He seeks fuller disclosure of the problem and restitution to patients and their families as well as recovery of the company’s profit from the uncorrected devices.

Larry Chinitz, the director of clinical cardiac electrophysiology at New York University Medical Center, said the impact on Guidant from its recalls and safety warnings may last an unusually long time.

“What Guidant failed on was their ability to communicate appropriately with the medical community,” he said. “That created a confidence problem with patients and physicians.”

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