Device Trouble Trips Guidant

Guidant's (GDT) shares continued to trade lower Monday following a recall of certain implanted defibrillators, and at least one analyst said the medical-devices maker could now be looking at a lower takeover price from Johnson & Johnson (JNJ).

On Monday, Guidant shares were down $1.51, or 2%, to $70.95. The company said Friday that 50,000 of its implantable cardiac defibrillators in service could be subject to defects that have led to 45 malfunctions. The company has warned doctors worldwide about possible problems with some of the devices. Two patients with defibrillators covered by the notification have died.

After Guidant disclosed the problems with the devices, Johnson & Johnson said it "continues to work toward a third quarter 2005 close of the acquisition of Guidant Corporation. Nonetheless, the events reported by Guidant are serious matters, and Johnson & Johnson is engaged in discussions with Guidant to help the company understand the issues."

Alexander Arrow of Lazard Capital Markets downgraded Guidant to sell from hold on Monday. "We believe the degree of reputational damage to Guidant's ICD franchise, the crown jewel of the company and the main asset JNJ sought in its decision to acquire Guidant, may be becoming great enough to induce JNJ to renegotiate its acquisition price," he wrote in a research note.

Arrow said Guidant initially indicated that implanted defibrillators of more than five years old, which are off-warranty but still at risk for short-circuiting, weren't going to be covered at all.

As of Friday, however, "Guidant apparently changed this stance and began telling doctors it will pay for 100% of the approximately $25,000 per unit that each replacement defibrillator would cost to replace the models that are at risk of failing," Arrow said.

He estimated the cost of the recall could be as much as $225 million. Lazard's capital markets business has been transferred to a privately held entity and is no longer associated with Lazard Freres and its investment banking business.