J&J heading towards law court over Guidant merger

Guidant is suing Johnson & Johnson (J&J) over its refusal to complete a planned $25bn merger with the troubled medical devices maker, a deal that was set to be the biggest in J&Jís 119-year history.

Last week, J&J threatened to pull out of the deal, agreed last December, unless Guidant accepted a lower offer than the original $76 a share ñ a proposal that Guidant refused. J&J believes that a series of product recalls and the consequent regulatory investigations have had enough of an adverse effect on Guidant to justify it walking away.

Since late May, Guidant has issued a string of warnings about malfunctions in its heart defibrillators and pacemakers ñ and even had to pull 109,000 highly lucrative defibrillators off the market for several weeks. As a result, its third-quarter net income fell to $65.4m from $153.6m a year ago, with sales dropping 14 per cent to $795m.

Guidantís civil lawsuit was filed in the US District Court in Manhattan and comes after Fridayís (November 4) deadline passed for completing the deal.

In a statement, J&J said it "will vigorously oppose the lawsuit and take all necessary action to enforce its rights under the merger agreement".

Although Guidant declined to comment, the lawsuit said the product recalls and related problems do not constitute a material adverse event and that J&J was in breach of contract by not closing the deal.

"I donít see where this deal can be salvaged," said Standard & Poorís analyst Robert Gold, who downgraded Guidant stock to 'strong sell' from 'hold'. "I donít think J&J wants to risk its own reputationÖI think Guidant is an impaired asset."

J&J is already contracted to pay a $700m break-up fee to Guidant, although it can escape this if it can prove that the defibrillator recalls have damaged Guidant. Analysts believe Guidantís lawsuit is aimed at retrieving some $2.5bn in damages.

Guidantís third-quarter financial results reveal the impact of having to recall its best-selling defibrillator, the Contak Renewal, from the market for five weeks, from late June to early August.

Because of the recall, Guidant said it lost 55 per cent of its US market share for implantable defibrillators in July, but that it had regained all but 20 per cent of its pre-recall market share by October.

The US Securities and Exchange Commission has started a formal enquiry into the companyís product disclosures and trading in Guidant stock.