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J&J in talks to buy Guidant for $24 billion

Health care and consumer products maker Johnson & Johnson is in negotiations to acquire medical-device maker Guidant Corp., sources familiar with the situation said on Tuesday.
/ Source: Reuters

Health care and consumer products maker Johnson & Johnson is in negotiations to acquire medical-device maker Guidant Corp., sources familiar with the situation said on Tuesday.

The long-rumored deal could be worth more than $24 billion, according to The New York Times. The news pushed shares of Guidant up 6 percent, while J&J’s stock fell 1 percent.

J&J is the No. 2 player in the market for a revolutionary treatment for coronary heart disease, drug-eluting stents, which are medicine-coated tubes that prop open heart arteries that have been cleared of blockages.

Guidant, once the leader in conventional bare-metal stents, has quickly lost share in the market, which has adopted the newer, more effective drug-coated versions of the devices.

Credit Suisse First Boston analyst Adam Galeon said a deal between the two companies could marry the best-in-class bare metal stent -- Guidant’s Vision stent -- with J&J’s proven drug sirolimus. J&J would also grab Guidant’s product line of defibrillators and pacemakers that treat irregular heart beats.

“It would be a nice merger,” said Barry Hyman, chief investment strategist at Ehrenkrantz, King, Nussbaum. “J&J has had a good performance this year. If the deal passes antitrust rules, it’s consolidation within the pharmaceutical industry and makes J&J a stronger company.”

Neither Guidant nor J&J, whose products range from Neutrogena soap to blockbuster pharmaceuticals, would comment.

William Blair analyst Ben Andrew said the real attraction for J&J is not Guidant’s stent offerings, but its devices to treat errant heart rhythms, such as pacemakers and implantable heart defibrillators.

Heart devices are “generating close to $2 in earnings (per share) for the company in our estimation” while Guidant’s vascular business has been declining for the past 18 months, Andrew said.

Guidant has said it expects to earn a total of $2.40 to $2.45 per share in 2004.

“J&J ought to do the deal,” Andrew added. “I think the big sticking point is valuation.”

He said J&J would have to pay $70 to $80 per share just for Guidant’s cardiac rhythm management business, which may be more than J&J is willing to pay. But another Wall Street analyst said a fair price for the entire company would be $76 or $78 a share.

Susquehanna Financial Group analyst Mark Landy said a deal makes sense strategically and would give J&J next-generation stent technology and the chance to bundle and sell hot devices to hospitals.

“My concern is it’s a short-term fix to a long-term problem,” Landy said, citing looming patent expirations in J&J’s pharmaceuticals business.

“Guidant’s business buys them time to figure out what they need to do in pharmaceuticals. It doesn’t buy a growth platform for the future.”

Rumors of a deal have been circulating for years, but have become more frequent in recent months as Guidant has delayed naming a successor to Chief Executive Ronald Dollens, who will retire at year end.

Last week, Guidant issued a news release with its quarterly financial outlook without its traditional conference call. The company said it would make an announcement about its succession plans later this month, fueling takeover speculation.

Harris Nesbitt analyst Joanne Wuensch said if a deal were announced, she foresees significant antitrust issues that may force J&J to divest a large portion of Guidant’s pipeline for drug-eluting stents. That could delay the closure of the deal by many months, traders said.

Analysts said Abbott Laboratories Inc. would be a logical buyer for Guidant’s stent business.

Despite a series of attempts, Guidant has failed to bring the newer drug-coated stents to the market. Analysts say the devices wouldn’t be ready for the U.S. market until 2007.