Guidant issues new warning on heart devices [agreement to be acquired by Johnson & Johnson]
Friday June 24, 12:49 pm ET
By Julie Steenhuysen and Debra Sherman
CHICAGO (Reuters) - Guidant Corp. (GDT - News) on Friday advised doctors to stop implanting some of its most sophisticated heart defibrillators, saying the devices may be faulty and may have to be recalled.
Analysts said the warning could put Guidant's key product line at risk and heightens worries that the company's agreement to be acquired by Johnson & Johnson (JNJ - News) for $25.4 billion, or $76 per share, could fall through.
Guidant shares tumbled as much as 13 percent to $60, a 10-month low, while shares of rivals Medtronic Inc. (MDT - News) and St. Jude Medical (STJ - News) jumped.
"This is a large chunk of revenues. It could be about 20 percent of corporate revenues (of about $4 billion)," said Susquehanna Financial Group analyst Mark Landy.
Guidant's warning comes one week after the company recalled several earlier versions of its implantable defibrillators -- designed to shock irregular heartbeats back to normal rhythms -- after they were linked to two deaths and 43 reports of malfunctions. No deaths have been linked with the newer versions of the devices.
The latest problem involves pacemaker and defibrillator combination devices used to treat patients with heart failure and guard against dangerous heart rhythms.
"This is a different problem. It's more significant as it affects products they are already selling," said Keay Nakae, an analyst with C.E. Unterberg, Towbin.
Guidant said it is advising doctors about safety problems with its Contak Renewal 3 and 4, Renewal 3 and 4 AVT, and Renewal RF implantable cardioverter defibrillators, or ICDs.
Guidant said it has determined that a magnetic switch in these devices may get stuck in the closed position, which in some cases inhibits their ability to treat ventricular or atrial tachyarrhythmias and can accelerate battery depletion.
Four incidents have been confirmed out of about 46,000 devices; a fifth is suspected but cannot be confirmed, the company said.
In the four occurrences in which the device was implanted, the device sounded a warning that alerted patients or their physicians to the defect, and the devices were replaced.
One other incident occurred in a device before it was implanted.
"Given the attention put on the recall and the negative reaction doctors had from having to learn about it from The New York Times, Guidant has gone on a complete disclosure campaign to the detriment of its stock," said one arbitrageur who asked not to be named. "The more the stock falls, the more risk arbitrators are being forced to sell."
Added another, "This has become a financial story, but it's really a medical story. If Medtronic and other device-makers had to face this level of scrutiny, they would have similar problems. But right now only Guidant is under the microscope."
A trader said, "Whether or not this is a $100 million or $300 million problem that would be inconsequential to the massive, merged J&J-Guidant, it's now become such a huge media and PR issue that that is the reality now. J&J may have a hard time ignoring it and sticking with the deal at this price now."
Thomas Gunderson, an analyst with Piper Jaffray, said he believes the price J&J pays for Guidant will be adjusted downward by about 10 percent.
The value of Guidant shares, excluding the impact of the recall, is somewhere between $53, or 20 times expected 2005 earnings, and $60, or 20 times expected 2006 earnings, Gunderson said.
"I think J&J is participating in the decision-making of these recalls and I think the deal continues to go forward, but I think they lower the overall price," he said.
Options trading was active, reflecting perceptions of significantly more risk associated with the deal closing, said options analyst Paul Foster of theflyonthewall.com.
Guidant shares were down $6.54 to $62.02, just off the day's low of $60, on the New York Stock Exchange. Medtronic shares were up $1.21 to $52.85 and St. Jude shares were up $2.57 to $42.75 after scaling a record at $43.61.
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