CHICAGO/PHILADELPHIA – Health care and consumer products maker Johnson & Johnson (JNJ) is in negotiations to acquire medical-device maker Guidant Corp. (GDT), 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. Neither Guidant nor J&J would comment.
Analysts said a deal would give J&J access to Guidant's fast-growing line of implantable defibrillators (search) and pacemakers and pave the way for a next-generation drug-coated stent (search) that could rival Boston Scientific Corp.'s (BSX) top-selling Taxus heart device.
News of a potential deal, which would be the biggest in medical device history, pushed shares of Guidant up 5 percent, while J&J's stock fell 1.5 percent.
"It would be a nice merger," said Barry Hyman, chief investment strategist at Ehrenkrantz, King, Nussbaum. "If the deal passes antitrust rules ... it makes J&J a stronger company."
Analysts believe a deal could add to J&J's earnings by 2006. That could be a salve to the company's ailing drug portfolio, which has a number of key products set to go off patent, including in 2005 its Duragesic pain patch, which has annual sales of $2 billion.
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. "Guidant's business buys them time to figure out what they need to do in pharmaceuticals. It doesn't buy a growth platform."
J&J is the No. 2 player in drug-eluting stents, which prop open diseased heart arteries and deliver drugs to prevent the buildup of scar tissue.
Guidant, once the leader in the stent market with its conventional bare-metal stents, has quickly lost share to the more effective drug-coated versions and is not expected to have its own drug-coated stent on the U.S. market until 2007.
Credit Suisse First Boston analyst Adam Galeon said a deal could marry the best-in-class bare metal stent -- Guidant's Vision stent -- with J&J's proven drug Sirolimus.
Galeon said a combination would create much stiffer competition for Boston Scientific, which was second to the U.S. market with a drug-coated stent but gained share quickly because of the ease of use of its device and the quality of its sales force.
But William Blair analyst Ben Andrew said the real attraction for J&J is Guidant's devices to treat errant heart rhythms, such as pacemakers and implantable defibrillators, which are "generating close to $2 in earnings (per share) for the company," 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.
Rumors of a deal have been circulating for years, but have become more frequent in recent months as Guidant 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.
Analysts said Abbott Laboratories Inc. would be a logical buyer for Guidant's stent business, but Abbott said on Tuesday it has no interest in buying Guidant or expanding its stent operations through acquisitions.
Shares of Guidant hit a high of $74.05 in early morning trading, but settled to $72.35, up $3.60, on the New York Stock Exchange (search). Shares of J&J shares shed $1.30 to $60.53 in heavy trading on the NYSE.