Johnson and Johnson's $25.4 billion proposal to acquire Guidant Corp., Indianapolis, a leader in pacemaker and defibrillator technology, promises to give the healthcare giant, which has long been established in the plumbing side of cardiac care, an almost immediate presence on the electrical side.
The deal, if approved by regulators, would allow J&J, Brunswick, N.J., to capture a sizeable stake in one of the most lucrative service lines a hospital can offer.
"This would strengthen J&J's position in dealing with large providers like us," said Joon Sup Lee, associate chief of cardiology and clinical director of the cardiovascular institute at the University of Pittsburgh (Pa.) Medical Center.
The long-rumored deal, the largest in J&J's 118-year history, was announced last week-part of a recent wave of consolidations in the healthcare industry (Dec. 13, p. 6). Under the terms of the agreement, which requires regulatory approval, each share of Guidant stock will be exchanged for $30.40 in cash and $45.60 in J&J common stock. Guidant and Cordis Corp., the J&J company that was the first company to receive Food and Drug Administration approval to market the game-changing, drug-eluting stent in 2003, will be combined under the Guidant name.
Spun off from Eli Lilly and Co., in 1994, Guidant develops, markets and manufactures a variety of devices used in cardiac surgery and has been a leader in the exploding electrophysiology market, which includes pacemakers and defibrillators. But Guidant hit some bumps in the equally exploding stent market when its plans to partner with the Cook Group to market a drug-eluting stent were derailed by a legal imbroglio with Boston Scientific in 2003. Guidant still manufactures bare-metal stents, which continue to be widely used for procedures other than coronary angioplasty, and it has a range of products in less-prominent markets such as heart failure, off-pump beating heart bypass surgery and abdominal aneurysms.
For hospitals and vendors alike, the heart is one of the most hotly contested pieces of real estate in the human body, and J&J has been a leading player in the land grab. Until earlier this year, J&J was nearly the only supplier hospitals had for coronary angioplasty, thanks to Cordis and its drug-eluting Cypher stent. Cordis enjoyed that exclusivity until March when Boston Scientific entered the market with its Taxus drug-eluting stent (March 15, p. 12). Gearing up for the ensuing market share battle, Cordis subsequently signed a co-marketing agreement with Guidant for the Cypher, beefing up its sales force. Rumors of a merger between the two companies have circulated ever since.
J&J's push for the electrophysiology business of cardiac service lines ensures that hospital heart programs will have to deal with the company at almost every turn.
"This should be an opportunity for us," said Bob Johnson, executive director of the Central Minnesota Health Center at 676-bed St. Cloud (Minn.) Hospital. "J&J is a huge company and by virtue of economies of scale, I would hope that we could do even better if we need Guidant products because J&J is going to have a larger customer base. There might be other products that can be combined in negotiating a contract."
Electrophysiology-the implanting of pacemakers and defibrillators for heart rhythm management-is one of the fastest-growing segments at St. Cloud, Johnson said. Procedural volume jumped 122% to 2,439 procedures in the year ended June 30, from 1,097 procedures in 2003, he said. Nationally, electrophysiology work is projected to climb by about 36%. "The technologies are exploding because of devices being developed by companies like Guidant," Johnson said.
Nevertheless, it's also an expensive enterprise for hospitals, though it "certainly has great benefits for patients," Johnson said. It's a profit-making enterprise at St. Cloud only because of carefully negotiated contracts, higher volumes and expert physicians, he said.
"I think it is an expensive investment, and we've made that investment," putting in a new electrophysiology lab last year at a $2.38 million cost, Johnson said. The average cost for an electrophysiology procedure is about $9,750, he said, but an implantable defibrillator can cost as much as $30,000.
Lee noted that there are other significant players on the field even if J&J receives the regulatory greenlight to acquire Guidant. Medtronic has a presence in both the electrical and plumbing ends of cardiac care, although it is not expected to have a drug-eluting stent available for market before a year, he said. But Boston Scientific may be "at a little bit of a disadvantage," he said. The company, which has grabbed a commanding amount of drug-eluting stent market share from Cordis since March, last week announced plans to acquire Advanced Stent Technologies, Pleasanton, Calif., for undisclosed terms. Advanced develops stent delivery systems.
For hospitals in terms of costs, Lee said the J&J deal with Guidant could go either way. Considering at any given time there are three or four major players, the consolidation of two "doesn't necessarily decrease the number of competitors in the market," he said. "What it does do is give the two companies the ability to link two products in a single package, link services as one large service when dealing with hospitals."
The deal also could spark innovation, Lee said, but it's hard to predict what the impact on pricing will be.