Medical device maker Guidant Corp. (GDT) on Monday sued to force Johnson & Johnson (JNJ) to complete an agreed $25.4 billion takeover, and also reported a slump in earnings and a widening probe by federal investigators.

J&J replied by saying product recalls and related regulatory investigations have had a "material adverse effect" on Guidant, and said it believes it is not required to complete the acquisition.

Steve Brozak, an analyst with WBB Securities (search), said Guidant's lawsuit against J&J was a logical step that it had telegraphed all along. "What complicates all of this incredibly is new external forces — the SEC. That cannot help Guidant's position," he said.

Its shares fell to their lowest level since August 2004 and were trading down $2.59, or 4.4 percent, at $56.33 early Monday afternoon on the New York Stock Exchange (search).

Guidant, which is also the subject of shareholder lawsuits and other government probes, has faced intense scrutiny in recent months over its failure to inform doctors about potential defects in some of its implantable devices used to manage abnormal heartbeats.

In the latest probe, the SEC launched a formal inquiry into some product disclosures and into the trading of its shares, Guidant said. The company said it was cooperating with the probe.

Hit by a recall of some of its most lucrative implantable heart devices, Guidant reported a slump in third-quarter results and forecast lower fourth-quarter sales and income.

Earnings from continuing operations fell 60 percent to $65 million, or 20 cents per share, from $161 million, or 50 cents per share, a year earlier. The latest results included charges of $43 million, or 12 cents per share.

J&J agreed to buy Guidant in December 2004, in a move to expand its heart-device business and offset shrinking pharmaceutical sales, which have been hurt by competition from cheaper, generic drugs.

It would have been the health care industry's largest-ever merger.

But it now wants to slash the price of its originally proposed $76 per share pact, and its lower offers have been rebuffed, sources familiar with the situation have said.

In its earnings report, Guidant said it made 32 cents per share excluding some items, missing the average estimate of 44 cents of analysts polled by Reuters Estimates.

Guidant said quarterly sales fell 14 percent to $795 million, due to a decrease in unit volume from the impact of the recall.

It forecast that fourth-quarter sales and income from continuing operations before taxes would be lower than in the year-ago quarter.

Guidant said the extent of the impact will depend on the pace at which it regains implantable defibrillator and pacemaker system market share.