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The little pacemaker company that could
Despite new FDA warning letter, analysts and $25 billion buyer still believe in pacemaker company.
By Aaron Smith, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - Guidant just can't get any relief from regulators, but analysts and a potential corporate buyer refuse to give up on the beleaguered pacemaker company.

Over the last year, Indianapolis-based Guidant Corp. has seen its stock price drop more than 10 percent amid a litany of bad news, including the July recall of tens of thousands of faulty pacemakers that have been connected to seven deaths.

On Tuesday, Guidant (Research) sank about 3 percent after the Food and Drug Administration issued a warning letter stemming from its inspection of a factory in St. Paul, Minn.

Despite the declines, Guidant stock still trades for about $65 a share and Boston Scientific said Tuesday that it still plans on buying the company for about $25 billion.

So just how serious are the problems facing Guidant?

Bernstein analyst Bruce Nudell said that depends on "how close they are to resolving the issues the FDA cited in their document."

"The regulatory freeze is a problem," said Nudell, who rates Guidant "market perform" or "neutral." Nudell said Guidant "can't ask for regulatory approvals on new products until the outstanding questions from the FDA are resolved."

Guidant said it has completed 90 percent of the FDA requests for quality improvement, based on the agency's inspection of a pacemaker factory and research facility that was completed Sept. 1. But analysts were not so quick to dismiss the warning.

"One only gets a warning letter when one hasn't done what the FDA wants," said Robert Faulkner, analyst for JMP Securities who has a "neutral" rating for Guidant. "The company thinks they can take care of all this without material impact, but if the company is wrong there, it's a big deal. Time is of the essence, because if [Guidant] doesn't fix the deficiencies that the FDA points out quickly, it may prevent the company's new products from being released in a timely fashion."

Boston Scientific (Research) said it is still seeking to buy the company, and that company's stock declined more than 2 percent. The company has been locked in a bidding war with Johnson & Johnson (Research), though analysts believe that Boston Scientific will emerge the winner. Boston Scientific's offer is about 16 percent higher than Johnson & Johnson's bid of $21.5 billion.

Other problems

The FDA sent out the warning as Guidant faces a wrongful death suit related to its faulty, recalled pacemakers, which have taken a bite out of corporate projections.

Guidant's stock price took a dive Friday, after the company filed its earnings guidance with the Securities and Exchange Commission. The company expects fourth-quarter earnings per share of 17 cents to 23 cents and sales of $790 million to $820 million. Analysts had been projecting, on average, earnings per share of 47 cents and sales of $928 million, according to Thomson Financial.

In the guidance filed with the SEC, the company blamed "product disclosures and related publicity" for its declining market share of defibrillator implants, which in recent months dropped to 70 percent of its volume from last year.

In July, Guidant recalled specific types of pacemaker because of faulty sealants that allowed moisture to affect the devices' electronic circuitry. Some 78,000 of these pacemakers had been distributed, and 28,000 of those had been implanted, with 18,000 in the U.S., according to the FDA.

At the time, Guidant estimated a failure rate of 0.17 percent to 0.51 percent for the faulty pacemakers. "It is possible that the actual failure rate will be greater than this, in part, because some of the past failures have not been reported to Guidant," said the FDA.

In addition, The New York Times on Saturday reported that Guidant had projected that some of its patients could die from shorted circuits in pacemakers, citing company records filed in connection with the wrongful death suit.

Faulkner, the JMP analyst, said the new warning from the FDA is a serious matter, but that he's willing to trust the optimistic response from Guidant.

"[Guidant] is in a situation where they have to be extremely forthcoming and precise in their communications," said Faulkner. "So I'm inclined to take them at their word."

The analysts interviewed for this story do not own stock in the companies mentioned here, though Bernstein has done business with Guidant and Boston Scientific.

To read about the bidding war for Guidant, click hereTop of page

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