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New Jersey Law Journal -GUIDANT

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  • New Jersey Law Journal -GUIDANT

    New Jersey Law Journal

    June 13, 2005

    LENGTH: 1558 words

    HEADLINE: Accepting the Material Adverse Risks; Despite risk of litigation, J&J likely to complete acquisition of beleaguered defibrillator maker

    BYLINE: Lisa Brennan

    BODY:

       In the world of mergers and acquisitions, it takes a lot to break a deal.

       After all, the acquirer generally has thoroughly vetted the move and doesn't want to get a reputation for not going through with its intentions. And any last-minute glitches generally have to spell major legal consequences before an acquirer ditches its plan.

       Johnson & Johnson's $25.4 billion proposed acquisition of Guidant Corp. of Indianapolis is a case in point, New Jersey M&A attorneys say.

       At issue is Guidant's Ventak Prizm 2 Model 1861 defibrillator, implanted in about 24,000 people but now the subject of litigation.

       Guidant was sued on June 1 in federal court in Indiana for not warning patients of a short-circuiting problem in the device. It also faces a wrongful death suit to be filed by the family of a college student whose death in March was allegedly caused by the defect, and the Food and Drug Administration is investigating its handling of the problem.

       Guidant did not publicly acknowledge the defect until late on May 23, when The New York Timestold Guidant officials it was publishing an article about the device, which appeared the next day.

       On May 23, Guidant sent an advisory telling doctors it had fixed the flaw three years before and recommended against replacing the unit. But the Times reported on June 2 that Guidant provided data to a hospital that it continued to sell the old, potentially defective units after it had corrected the problem.

       The device is a beeper-sized titanium box implanted below the clavicle to shock a faltering heart into beating normally. It had been implanted in Joshua Oukrop, the 21-year-old Minnesota college student with the genetic heart disease hypertrophic cardiomyopathy, which leads to increased risk of cardiac arrest.

       Guidant examined the device after Joshua's death and concluded that it had short-circuited. His doctors said they would have replaced his unit had they known about the flaw.

       Still, M&A attorneys don't see the adverse publicity and legal exposure amounting to a material adverse condition or material adverse effect on Guidant 's overall worth, such as would blow the deal.

       "Acquiring companies almost never like to terminate mergers based on material adverse changes of the target," says Michael Rave, of Florham Park's Pitney Hardin.

       J&J, which announced the deal in December, issued a statement on May 24 saying it continues to be confident about the acquisition and expects to close the transaction in the third quarter. But it added that it was trying to "better understand and evaluate information regarding the Prizm 2 defibrillator."

       Aside from outstanding regulatory and court approvals, the deal appears to be nearly done. Through a spokesman, Guidant declined to comment for this story.

       It would be rare, M&A lawyers say, for the deal's terms to change so near its closing date.

       "It's highly unlikely that J&J will go back to Guidant and say, 'We need an adjustment to the purchase price,' because they've already sent out proxy materials and Guidant shareholders have already approved the merger," says Rave.

       "Guidant would have to send out a different set of proxy materials and the shareholders would have to approve it again. ... As long as Guidant made proper disclosures, there shouldn't be any delay," he adds.

       Rave says J&J also is unlikely to pull the plug on the deal because it would haunt the company. "When J&J goes to do another merger, they'll have this track record."

       And some courts have not looked kindly on efforts to walk away from an acquisition.

       In 2001, for example, a Delaware court held that poultry producer Tyson Foods Inc. of Springdale, Ark., was not justified in terminating its merger agreement with IBP Inc. of Sioux Falls, S.D., a beef producer, over accounting irregularities at a subsidiary.

       "The courts hate a forfeiture," says a New Jersey M&A lawyer. "It's the most draconian remedy there can be."

       One of the nation's largest makers of medical devices, Guidant had $3.8 billion in sales last year, nearly half of that from implantable cardiac defibrillators.

       It told doctors in its May 23 advisory that it was aware of 26 cases in which the defibrillator had short-circuited. All the failures occurred in units made before April 2002, when Guidant says it fixed the problem. Guidant said it hadn 't alerted doctors sooner because the device, even with the defect, was highly reliable.

       One deal lawyer in New Jersey, who did not want to be named because his firm does work for J&J, defends Guidant's actions thus far and its argument urging cardiologists not to replace the units because the risks of doing so outweigh dangers the device may pose.

       "A risk that occurs in medical devices doesn't rise to a judge saying it's a MAC [material adverse condition], something that entitles one of the contracting parties to walk away. They can still be held liable for it. They have insurance, " this lawyer he says.

       Says another deal lawyer at a different New Jersey firm that also does work for J&J: "Acquirers like J&J don't walk away easily," he says. "The market is expecting to get it done."

    Plaintiffs' Perspective

       But the lawyer for Lee Oukrop, Joshua's father, has a different view.

       Matthew Curtis, of Southfield, Michigan's Sommers, Schwartz, Silver & Schwartz, says it's not a manufacturer's decision to weigh the risk patients face should they opt for replacement units.

       "Guidant has taken a very risky position," says Curtis. "In our opinion, the risk associated with replacing ICDs [implantable cardiac defibrillators] justifies removal. Who are they to decide? Who are they to play God? They know nothing about the individual patient for whom it's imperative that the ICD must function."

       Curtis sees Guidant's actions as the "typical corporate cover-up" to ensure sales and a good stock price.

       Curtis takes issue with Guidant's position on the potential risk associated with removal. So does Barry Maron, one of Joshua's physicians at Abbott Northwestern Hospital in Minneapolis, and Lisa Salberg of Rockaway, founder of a nonprofit advocacy group for people with hypertrophic cardiomyopathy.

       The three of them say it makes no sense in light of the fact that Guidant, and its two competitors - Medtronic Inc. and St. Jude's - require patients to replace their implantable cardiac defibrillators every five or six years because of battery failure.

       "The only risk they're talking about is the 1 percent risk of infection,"
    says Maron. "In no way does Guidant's reporting of the flawed device in some fashion to the FDA appear to immunize them to criticism over their failure to inform patients at risk and cardiologists in charge of their care."

       One of the lingering questions raised by the Times' coverage is whether Guidant complied with the FDA's reporting requirements, particularly in April 2002, when it fixed the flawed defibrillator. A Guidant official told the Times that it decided that FDA regulations didn't apply to "manufacturing enhancements."

       A New Jersey deal lawyer who handles FDA reporting requirements says on the face of it, Guidant has complied with the agency's reporting requirements.
    "Guidant has already made the changes and there's nothing much else to do. If an adverse event didn't occur three years ago, they don't have to report to the FDA. They're only obliged to report failures."

       "It could have been a design flaw, but an acceptable tolerance for failures is understood," the lawyer continues. "Guidant supposedly has a great reputation. If there's 24,000 out there, 1 percent is 240, and this one-tenth of that."

       Salberg, the patient advocate from Rockaway Township, has the same condition as Oukrop and uses a defibrillator made by Medtronic. She thinks Guidant should have issued a voluntary recall of the flawed device.

       Medtronic notified doctors in February that the battery in one of its defibrillators was draining faster than anticipated. Medtronic issued a voluntary recall, at a cost of about $50,000 a patient.

       Such a recall might cost Guidant $12 million. "That's nothing," says Curtis.
    "It's not a deal breaker. A deal breaker would be if these people started dying, like my client, and they have 24,000 wrongful death suits out there."

       John Brennan, a 74-year-old man from Bucks County, Pa., became the lead plaintiff in a class action filed in U.S. District Court in the Southern District of Indiana. The suit alleges that the flaw has potentially fatal consequences for many patients who rely on the device to regulate their heartbeats and prevent or correct arrhythmia.

       The suit, a breach of warranty claim, seeks a judgment holding Guidant liable to all patients with the flawed implantable cardiac defibrillators. It questions whether Guidant followed FDA manufacturing practices and reporting requirements.
    The suit was filed by Irwin Levin of Indianapolis's Cohen Malad and co-counsel at Lieff, Cabraser, Heimann & Bernstein, a firm with offices in New York and San Francisco.

       David Fried, of Newark's Blume Goldfaden Berkowitz Donnelly Fried & Forte, says a similar class action could be filed in New Jersey. "If the claim is based on the failure to warn, you have two years in New Jersey from the time you find out about the danger to file suit," says Fried. "Say a year from now, another person dies in New Jersey as a result of the defibrillator short-circuiting, New Jersey would be a place where you could file suit."

    LOAD-DATE: June 13, 2005
    Knowledge is power ... Stay informed!
    YOU can make a difference - all you have to do is try!

    Dx age 12 current age 46 and counting!
    lost: 5 family members to HCM (SCD, Stroke, CHF)
    Others diagnosed living with HCM (or gene +) include - daughter, niece, nephew, cousin, sister and many many friends!
    Therapy - ICD (implanted 97, 01, 04 and 11, medication
    Currently not obstructed
    Complications - unnecessary pacemaker and stroke (unrelated to each other)

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