June 29, 2006 - Sometimes the best acquisitions are the ones that don't get made.
Just ask U.S. consumer and health product giant Johnson & Johnson, which earlier this year lost a long and tangled takeover battle for medical-device manufacturer Guidant Corp. to Boston Scientific Corp. J&J walked away with a $705-million (U.S.) break fee, and moved on with a smile to buy Pfizer Inc.'s consumer health products unit for $16.6-billion just this week.
By contrast, Boston Scientific, which laid out $27.5-billion in cash and shares for Guidant, has bought itself what, so far, looks like a massive and costly series of headaches, in the form of product recalls and lawsuits. These have helped drive its stock price to a four-year low of less than $17 on the New York Stock Exchange, down more than $9 from early January. It closed yesterday at $16.95, up 30 cents from Tuesday's finish.
There appear to be few signs of relief in sight.
"I quite frankly don't see a whole lot of positive catalysts," said analyst John Putnam of Stanford Group Co. of Houston, who rates the stock a "hold" and has a 12-month price target of $25. "I think the stock is just going to languish here because there is really no positive news."
In fact, the company is among the stocks identified in a Bloomberg News survey last week as having the largest gaps between their current share price and the average of analysts' price targets, which currently comes out at $28.20.
However, for many analysts, this adds up to making the stock a smart purchase: 20 of 30 surveyed by Bloomberg rate it a "buy," and the remaining 10 all rate it "hold."
The latest blow to the shares came Monday, when Boston Scientific, which is based in Natick, Mass., cautioned more than 27,000 heart patients fitted with Guidant pacemakers and defibrillators that the life-saving devices could shut down without warning because of a defective low-voltage capacitor they contain. It also has asked that approximately 23,000 more of the devices, currently held in customers' inventories, be returned.
Last year, Guidant was forced to recall 109,000 defibrillators, triggering regulatory sanctions, investigations by state medical authorities, a flood of lawsuits, and a decision by J&J, which was still in the game, to slash its bid for the Indianapolis company to $21.5-billion from $24.5-billion.
To rub salt in the wound, Boston Scientific chief executive officer James Tobin said in a conference call with analysts Monday that more recalls are a certainty and that it could take two years to resolve the problems at Guidant.
He reportedly insisted, however, that he has not been surprised by what he and his team have found, and that he is not suffering from buyer's remorse.
"We are right where we expected to be," he said.
Stanford Group's Mr. Putnam has a hard time crediting this. "There are always going to be things that crop up or pop up that you don't know about," he said. "Maybe they should have done more due diligence or paid less."
The latest troubles have clearly exasperated some other analysts, too, among them Tao Levy at Deutsche Bank Securities Inc.
"Clearly BSX shareholders are going to be tested once again, and so are we," he said in a note to clients Monday on the latest recall. "On the outset, this problem could be very significant given the scope of the potential devices affected and leaves us wondering what type of mess Boston Scientific is left to fix."
Boston Scientific also has some quality control problems of its own.
In fact, before it acquired Guidant, both it and its target received corporate warning letters from the U.S. Food and Drug Administration saying that, until they have demonstrably improved their quality control, it will not approve new products for sale in the United States.
Mr. Putnam said this likely means that Boston Scientific will, for example, be unable to get approval for a new drug-coated coronary stent, which keeps clogged arteries clear, until the first quarter of next year, rather than the final period of 2006 as it had hoped.
In acquiring Guidant, Boston Scientific has bought itself what, so far, looks like a massive and costly series of headaches, in the form of product recalls and lawsuits.