Monday, November 24, 2014
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Boston Scientific wins bidding war for Guidant

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Boston Scientific Corp. headquarters in Natick, Massachusetts. The company has reached agreement to purchase Guidant Corp. for more than $27 billion. Both companies have ties to Minnesota. (Photo by Joe Raedle/Getty Images)
The bidding war for medical device maker Guidant looks to be over. Johnson & Johnson refused to raise its offer, clearing the way for rival Boston Scientific. Boston Scientific and Indianapolis-based Guidant say they're moving forward with a deal worth more than $27 billion. While both companies are based outside of Minnesota, their most critical divisions are in the Twin Cities.

St. Paul, Minn. — All this month, Massachusetts-based Boston Scientific and Johnson & Johnson have done battle over one thing in particular -- Guidant's research and production facility in the Twin Cities suburb of Arden Hills. In vast clean rooms, Guidant employees make pacemakers, defibrillators, and other devices that regulate the heart's beating from just under the skin.

The business is complex, highly regulated, and difficult to get into. Analysts also say the profit potential is huge, and the only real way to become a player is to buy your way in.

David Heupel, a portfolio manager with Thrivent Financial for Lutherans, says for $27 billion, Boston Scientific has done just that -- at a whopping price few would have predicted just a month ago.

"That is a huge acquisition in medical technology, or any sector of the economy for that matter. And it's a game-changer for this business," says Heupel. "With only three players in the cardiac rhythm management or implantable device space, to have a change of ownership here is dramatic."

The other players are Medtronic and St. Jude Medical, both based in the Twin Cities.

Some analysts question whether Boston Scientific is paying too much to join the club. The deal will require some financial contortions, including a fair amount of borrowing, and a side-transaction with another medical device company.

The Standard & Poor's rating agency questions whether Guidant's business in the future will be strong enough to make the deal pay for itself.

That is a huge acquisition in medical technology. ... With only three players in the cardiac rhythm management or implantable device space, to have a change of ownership here is dramatic.
- Analyst David Heupel

Piper Jaffray analyst Thom Gunderson says Boston Scientific has used pricey buyouts to become what it is today.

"Again, it looks like it's too expensive. Looks like it's a little too much. It's good for the Guidant shareholders. But we'll see in a couple of years. I think it will play out similar to history, and that is Boston Scientific will look pretty smart here," says Gunderson.

While this is a big move on the industry chessboard, the impact for patients and employees is likely to be minimal. Boston Scientific employs more than 3,000 people in Maple Grove and Plymouth. About 3,000 Guidant workers make heart devices in Arden Hills.

Gunderson says while many mergers do result in job cuts, this is probably not one of them.

"I don't think that's going to happen here, because there is not substantial overlap between what Boston Scientific has been doing, in general and in the Twin Cities, and what the Arden Hills Guidant facility is doing," says Gunderson. "In fact, it's entirely possible there might be jobs added to this company."

Some analysts believe Boston Scientific will actually add workers in Arden Hills, to put an end to Guidant's regulatory and recall troubles. In the past year, Guidant has recalled or issued safety advisories on hundreds of thousands of devices, and been warned by the FDA about quality control in Arden Hills.

Physicians like Dr. Robert Hauser at the Minneapolis Heart Institute view Boston Scientific's victory over Johnson & Johnson cautiously, though Hauser thinks Guidant will remain on track to fix its problems.

"I do think that J&J probably brought more to the table in terms of depth and infrastructure, but there's no reason Boston Scientific can't perform in this regard," says Hauser.

A takeover by Boston Scientific will not add or subtract any heart device makers from the marketplace. So for patients and insurance companies facing the substantial price of, say, a $30,000 defibrillator, the deal seems unlikely to have much effect.

Analysts also say the pace of innovation in implantable devices is already strong, and Guidant's changing hands is unlikely to have much impact.

Thrivent's David Heupel says while the deal seems done, nothing is final until shareholders and the government sign off on the deal.

"Boston has a lot to do. They've got to get regulatory approval, they've got to divest some assets, lot of hurdles. It's not out of the realm of possibility that something trips the deal up," says Heupel.

Even if the horse race for Guidant is essentially over, it could be just the first in a series of industry-shaping events. Medtronic could face more formidable competition from this newly enlarged competitor that, like itself, makes both heart devices and stents.

And the focus of takeover speculation may shift to Little Canada-based St. Jude Medical. It seems unlikely medical products giant Johnson & Johnson has lost its taste for the promising field of implantable devices.

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