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Medical device maker Guidant Corp. sued Johnson & Johnson on Monday in an attempt to force it to complete a $25.4 billion acquisition of Guidant, which has been roiled by a series of recalls. Analysts and lawyers said the suit signals the two sides have failed to renegotiate the acquisition which had been slated to close last week and that the deal will likely dissolve. Shares of Indianapolis-based Guidant tumbled nearly 5 percent in early trading Monday, before recovering slightly. J&J shares rose. Meanwhile, Guidant’s problems mounted as it reported sharply lower third-quarter earnings on Monday and disclosed it was under investigation by the Securities and Exchange Commission. Moody’s Investors Service changed the direction of Guidant’s rating review to possible downgrade from direction uncertain because the transaction didn’t occur as planned. “I don’t see where this deal can be salvaged,” said Robert Gold, an analyst at Standard & Poor’s, who downgraded Guidant stock Monday to a strong sell from a hold. “I don’t think J&J wants to risk its own reputation … I think Guidant is an impaired asset.” The lawsuit, filed in U.S. District Court in Manhattan, comes after Friday’s deadline passed for completing the deal as specified under the arrangement the two companies reached Dec. 15, 2004. It followed days of speculation that J&J would walk away after warning last Wednesday that it was no longer obligated to complete the deal because the recalls have had a material adverse effect on Guidant, triggering an out clause in the contract. J&J said the two companies had discussed restructuring the transaction although no agreement had been reached. The original deal valued Guidant at $76 per share in a combination of stock and cash. Analysts said the speculation on Wall Street was that New Brunswick, N.J.-based J&J was willing to pay in the low $60 per share range for Guidant while Guidant was holding out for a price in the high $60 per share range. “I think if the two sides were close to a deal you wouldn’t see a lawsuit,” said Robert Faulkner, an analyst at JMP Securities. 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.” The company declined further comment. Guidant also declined comment but the lawsuit said the recalls and related problems don’t constitute a material adverse event and that J&J breached the contract by not closing the deal. J&J can escape paying a $700 million breakup fee if it can show that the recalls have hurt Guidant — and analysts said J&J has a major advantage given all of Guidant’s misfortunes since the deal was announced. The Federal Trade Commission last week conditionally approved the acquisition. Guidant shares fell $1.69, or 2.9 percent, to $57.23 in afternoon trading on the New York Stock Exchange, while Johnson & Johnson shares gained 44 cents to $61.32. Starting in June, Guidant has recalled or issued warnings about 88,000 heart defibrillators — including its top seller, the Contak Renewal 3 — and almost 200,000 pacemakers because of reported malfunctions. The company faces multiple lawsuits from patients and shareholders and is also under investigation by the Justice Department. Last week, New York Attorney General Eliot Spitzer sued Guidant for fraud, accusing it of not telling doctors about a potentially fatal flaw in some of its defibrillators. On Monday, Guidant reported its third quarter dropped 57 percent to $65.4 million, or 20 cents per share, from $153.6 million, or 48 cents per share, a year ago. The latest figure includes costs of $28 million, or 6 cents per share, related to regulatory actions on its devices. Excluding items, the company said it would have earned 32 cents per share in the latest quarter. Revenue fell 14 percent to $795 million from $924.5 million. Analysts surveyed by Thomson Financial predicted third-quarter earnings of 49 cents per share on sales of $884.2 million. Also Monday, Guidant said the SEC investigation concerns product disclosures and trading in the company stock. “I think J&J has a claim. I don’t think they are going to have to pay Guidant,” said Joanne Wuensch, a managing director at Harris Nesbitt. Wuensch believes that Guidant can carry on independently thought it may take some time to rebuild its reputation with doctors and patients. “I think it will take a couple of quarters but they (Guidant) will rebound,” Wuensch said. “They may not go back to their original position, however.” She estimates Guidant shares are worth about $67 a share on a stand alone basis. But Gold thinks the stock is worth only $48 a share. “Guidant has lost a lot of market share and they don’t have a big pipeline,” Gold said. He estimated that before its problems, Guidant had about one-third of the $5.5 billion defibrillator market. Now he thinks Guidant only commands in the low 20 percent range of the market as Medtronic Inc. and St. Jude Medical Inc. take advantage of its weakness. Guidant’s defibrillator sales fell 26 percent during the quarter. Gold notes that the defibrillator market is the company’s most attractive because it is growing while overall pace maker sales have been sluggish. Copyright 2005 Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten or redistributed.

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