Considering Alternatives?

Johnson & Johnson (JNJ) had a great earnings report today. Sales and profits were up. The company even raised its forecast for next year. But during the conference call, J&J’s CEO dropped a tiny two-word bombshell.

During a conference call to discuss its results, J&J said it is taking another look at its agreement to buy medical device maker Guidant Corp. in light of recent product recalls and a Food and Drug Administration probe of Guidant’s actions.
“We believe these are serious matters, and we’re continuing to closely monitor the situation at Guidant,” said J&J Chief Financial Officer Bob Darretta, during the call. “In light of these matters, we’re continuing to consider alternatives under our merger agreement.”

Consider alternatives? That doesn’t sound good. Guidant’s stock is getting pummeled today on very heavy volume. This deal was announced last December, and Guidant, which makes pacemakers, has done just about everything it could to screw it up. For example, their patients keep dying on them. That’s not good. Guidant has had five recalls this year alone.
Until today, J&J had been silent. There were rumors that J&J might want to lower the $76 price. The worst fear was that J&J would simply walk away. It still might happen. I’m not sure what “consider alternatives” entails but if I owned shares of Guidant I wouldn’t be happy.
This was a lousy move by J&J. As you can tell from the Buy List, I love medical device stocks, but I’ve stayed away from Guidant. Johnson & Johnson rarely makes missteps, but this is clearly one. The odd thing is that J&J had basically shut Guidant out of the lucrative coated stent market. Guidant had been desperately trying to get in for years. What was J&J looking for? For Guidant, the news just goes from bad to worse. There’s also a criminal investigation going on. Ironically, J&J’s medical devices unit showed the strongest growth last quarter.
The medical devices stocks on our Buy List are largely unaffected today. St. Jude Medical (STJ) is up. Zimmer (ZMH) and Medtronic (MDT) are down. Stryker (SYK) will report after the close.

Posted by on October 18th, 2005 at 12:25 pm


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