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Heart Device Maker is Warned on Quality MARKETPLACE By Bloomberg

Posted on: Wednesday, 28 December 2005, 09:00 CST

By Avram Goldstein

Guidant, the medical equipment maker that is the subject of a bidding war, said on Tuesday that it had been barred by U.S. regulators from exporting heart devices from its principal plant because of quality-control failures. Its shares took their biggest decline in more than seven weeks even though Boston Scientific, one of the bidders, said it was standing by the $25 billion takeover offer it made on Dec. 5.

"We continue to move forward on our due diligence with the goal of reaching a definitive agreement with Guidant," a Boston Scientific spokesman, Paul Donovan, said.

The latest action against Guidant resulted from a Sept. 1 inspection report, in which the U.S. Food and Drug Administration examined defibrillator failures linked to at least seven deaths that had forced the recall of 109,000 devices. After the recall, Johnson & Johnson the initial bidder cut $4 billion from its $25.4 billion offer for Guidant, which it first made a year ago. Jeff Leebaw, a spokesman for Johnson & Johnson, declined to comment.

According to Guidant, the drug agency will not permit the export or premarket approval of Guidant's implantable defibrillators and pacemakers until faults in production and quality processes are corrected at the plant in St. Paul, Minnesota. The agency issued a warning letter with the sanctions on Friday, Annette Ruzicka, a spokeswoman for Guidant, said. It was not clear why the agency order apparently applied only to foreign shipments. Ruzicka said she could not supply details. Shares of Guidant were down $2.28, or 3.4 percent, at $64.70 at the close Tuesday in New York. Boston Scientific's current offer is for $72 in cash and stock for each Guidant share. Johnson & Johnson offered $63.08 in cash and shares.

The decline was the stock's biggest since 4.7 percent on Nov. 3 the day the New York State attorney general, Eliot Spitzer, accused the company of misleading doctors about a design flaw in its defibrillators. Defibrillators implanted in cardiac patients' chests use electric shocks to correct a faltering heartbeat.

"Whoever doesn't get this company is going to be the lucky one," said John Putnam, an analyst with the Stanford Group in Boca Raton, Florida. "If I were Boston Scientific, I'd certainly find something wrong in my due diligence to walk away from this."

Boston Scientific was down 72 cents, or 2.8 percent, at $25.12. Johnson & Johnson fell 81 cents to $60.30.

The Guidant warning letter has not been posted on the drug agency's Web site. An agency spokeswoman, Julie Zawisza, said that trade secrets might have to be edited out first.

Ruzicka at Guidant said the company had completed 90 percent of the commitments it made in an initial response in October to the results of the inspection of its St. Paul plant. "The company will promptly respond to the warning letter and believes that it can fully address the concerns of the FDA without a material impact to its business," Guidant said.

Source: International Herald Tribune

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