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Loser in medical bidding war may be a winner

Johnson and Johnson may have lost the bidding battle for Guidant, but the company is apparently the luckiest loser in this year's medical merger mania. By CNBC's Mike Huckman.
/ Source: CNBC

Did Boston Scientific pay $27.5 billion bucks for damaged goods?

After a  fierce, unusual and drawn out bidding war with medical device rival Johnson and Johnson, Boston Scientific was the winning bidder for Guidant. And just two months later, it's issuing a massive recall of Guidant's faulty pacemakers and implantable defibrillators.

"Boston Scientific probably overpaid for Guidant." said Les Funtleyder, an analyst who follows the companies at Miller Tabak & Co. “The higher the price of the deal, the higher the risk the deal was going to fail."

Johnson & Johnson may have lost the bidding battle for Guidant, but the company is apparently the luckiest loser in year's medical merger mania. J&J had made the first bid for Guidant, but then in a surprising move lowered it. And when push came to shove, the company did not go back up high enough to outbid Boston Scientific.

"So, in a sense they are lucky because they don't have to worry about the problems," said Jan Wald, an analyst at A.G. Edwards.

As fate would have it, Boston Scientific pulled the 23,000 devices on the same day Johnson & Johnson announced it had won a very different bidding war. That one was for Pfizer's Listerine, Lubriderm and a laundry list of other household products.

Using a big chunk of the cash it would have burned had it bought Guidant, J&J is paying more than $16.5 billion for the Pfizer consumer unit, a business that did $4 billion in sales last year and J&J thinks still has room to grow.

"Versus the Guidant deal it probably was a wiser use of cash,” said Funtleyder. “Whether or not they can ultimately deliver on the returns in an absolute sense will probably take a couple of years."

With the acquisition of Pfizer's consumer unit J&J is mixing it up. Chairman and CEO Bill Weldon said the company will get 40 percent of its revenue from pharmaceuticals, 35 percent from medical devices and 25 percent from over-the-counter products.

"I think they are a diversified company,” said Wald, “and I think they've shored up a part of their business that will provide them steady growth." 

"Balance is always good,” said Funtleyder. “The consumer business provides a lot of cash which they can use to develop new pharma."

Johnson & Johnson is trying to prove you can win for losing.