J&J; May Break Deal to Acquire Guidant Over Liability Worries

Johnson & Johnson warned Wednesday that it might pull out of a $25.4-billion deal to buy Guidant Corp. because of potential liability arising from the medical device maker’s sweeping product recalls and a regulatory investigation. But Guidant executives said J&J; was legally bound to go through with the deal.

“Recent product and communications issues have certainly had an impact on our business in the near term,” Guidant Chief Executive Ronald W. Dollens said. “However, we believe that the fundamentals of our business are strong and our markets and products have attractive prospects for growth.”

Meanwhile, analysts said J&J;, whose healthcare products include baby lotion and drug-coated heart stents, might be turning its focus to Guidant rival St. Jude Medical Inc. in its quest to diversify.

“J&J; needs something like Guidant to revitalize its growth,” A.G. Edwards & Sons analyst Jan Wald said. “People are now thinking that if J&J; does walk away, St. Jude is in their scopes.”

St. Jude spokeswoman Angela Craig said the St. Paul, Minn.-based company did not comment on speculation.

Indianapolis-based Guidant’s shares sank $2.70 to $60.40. J&J; fell 60 cents to $61.30. St. Jude rose $2.10 to $50.44.

Wednesday’s market speculation and corporate posturing came as the Federal Trade Commission gave conditional approval for New Brunswick, N.J.-based J&J; to acquire Guidant.

J&J; quickly issued a statement saying that recent recalls of Guidant’s implantable devices and regulatory investigations had a “material adverse effect” on Guidant and that it was not required to close the deal.

“Johnson & Johnson cannot assure that the companies will resume those discussions or, if discussions do resume, whether they will be able to reach agreement on revised terms that would allow Johnson & Johnson to proceed with the transaction,” the statement said.

Pulling out could cost J&J; $700 million, according to the merger accord. But if J&J; could prove that the recalls had adversely affected Guidant, it wouldn’t have to pay the fee.

Since June, Guidant has recalled or issued warnings about 88,000 heart defibrillators and almost 200,000 pacemakers because of reported malfunctions. It faces lawsuits from patients and shareholders, as well as a reported criminal Food and Drug Administration probe.