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Merger to have little impact on Guidant's Minnesota operation
by Bill Catlin, Minnesota Public Radio
December 16, 2004

After more than a week of news reports about a deal being near, Johnson & Johnson has announced it will buy Indianapolis-based Guidant Corp. for 25.4 billion dollars in cash and stock. Guidant employs about 3,000 people in Minnesota, most at its Cardiac Rhythm Management operation based in Arden Hills. That operation lay at the heart of the deal, and observers expect little change under Johnson & Johnson.

St. Paul, Minn. — Guidant's Arden Hills operation makes pacemakers and implantable defibrillators. The devices that correct problems in the heart's pumping rhythm are playing an increasing role in the treatment of heart disease.

Guidant's defibrillator sales grew by nearly 50 percent last year to $1.5 billion. Fred McCoy, president of the cardiac rhythm management business, says last year about 100,000 people received defibrillators, but there are about three million people eligible for them.

"When you take 100,000 implants of a defibrillator against approximately three million people, just here in the United States, you can see that the treatment rate is currently less than 10 percent. And for lifesaving therapy, and for life-enhancing therapy, that leaves us a lot of room to grow," says McCoy.

Johnson & Johnson's products range from baby shampoo to medications and medical devices, but it has no device that treats heart rhythm problems. Guidant CEO Ron Dollens says the $42 billion giant should be able to increase sales of Guidant's cardiac rhythm products, and build market leadership in an an important business for both firms, making stents that prop open clogged arteries.

And even though Guidant is big, $3.7 billion in sales last year, Dollens says Johnson and Johnson's greater size -- and deeper pockets -- matter.

Dr. Spock, back in the '50s, said, 'With kids, you new parents, just love them, feed them, and leave them alone.' I think that's what J&J is going to do with the CRM division (of Guidant). - Analyst Thomas Gunderson

"To be part of an organization where we can integrate different technologies -- whether it's pharmaceutical biologicals, to information systems, communication systems -- it's going to be a more complex world as we look forward," says Dollens. "And we think this kind of a combined entity will cause us the greatest chance of success going forward."

Mergers and acquisitions often result in layoffs designed to cut costs. But executives from both firms went to some lengths on a conference call to say the goal of the merger was growth, not cost-cutting.

"The key here is decentralization, allowing people to continue to function and do their jobs and offer tremendous benefit to patients," said J&J CEO Bill Weldon.

Guidant CEO Ron Dollens said Johnson & Johnson officials had stressed the importance of Guidant's employees during negotiations.

"There is a huge focus on the human capital, being able to retain the people within this organization, because they know obviously that is what the company ends up being," said Dollens.

Still, Guidant officials acknowledge there is some overlap between the two companies, and the future can't be promised to everyone.

Medical Technology analyst Thomas Gunderson with Piper Jaffray in Minneapolis says Guidant's Minnesota employees may actually see greater job security as part of Johnson & Johnson.

Guidant laid off around 200 employees in Arden Hills last summer, in part because of a slowdown in the company's stent sales. Competition from Johnson and Johnson was a major factor. But Gunderson says the mergers likely impact on jobs will be minimal -- if at all.

"Dr. Spock, back in the '50s, came out and said, 'You know, with kids, you new parents, just love them, feed them, and leave them alone.' I think that's what J&J is going to do with the CRM division. I think they're going to take care of them," says Gunderson. "They will have financial security there."

Some observers have said the transaction faces lengthy anti-trust scrutiny, because both Guidant and Johnson & Johnson make stents. But Gunderson says he doubt that spells trouble for the deal, because other firms are likely to add to the competition in that market.

For Fridley-based Medtronic, Guidant's main competitor, Gunderson says the deal is a minor negative over the long term. But he says Johnson & Johnson may help Medtronic by expanding use of defibrillators.

"J&J is absolutely unmatched in their ability to build new markets. So as we go forward, you could say that maybe some of that burden is going to be shared by J&J," says Gunderson.

So far, investors don't appear to be completely sold on that theory. Medtronic's share price has dropped nearly 2 percent since reports of merger talks first surfaced. The deal is not expected to close until the third quarter of next year.

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