(Adds comment from Boston Scientific spokesman in 16th paragraph.)

By Peter Loftus

Of DOW JONES NEWSWIRES

Johnson & Johnson's (JNJ) plan to acquire small device maker Conor Medsystems Inc. (CONR) would give it access to a cutting-edge heart stent, potentially shaking up the stent market, but J&J faces the risk that Conor's stent won't get approved in the U.S.

J&J, New Brunswick, N.J., agreed to pay $1.4 billion in cash, or $33.50 a share, for Conor Medsystems of Menlo Park, Calif. Conor shares jumped $5.16, or 19%, to $32.68 Friday morning, on volume of 21.6 million, well above the daily average of 740,150. J&J expects the deal to close in the first quarter of 2007, subject to regulatory clearance and approval by Conor shareholders. Shares of J& J gained 71 cents, or 1.1%, to $67.24 on composite volume of 10.9 million shares, compared with average daily volume of 8 million.

J&J said the deal gives it access to a "controlled drug delivery technology," which Conor has used to develop the CoStar stent. CoStar is a drug-eluting stent currently available outside the U.S. The company is now studying its use in American patients in preparation for seeking U.S. regulatory approval, which it hopes to receive in late 2007 or early 2008. J&J believes the underlying drug- delivery technology also can be applied to other products.

"We can do more for patients with cardiovascular diseases together than either of these companies could have done on their own," Nicholas Valeriani, J&J's worldwide chairman of cardiovascular devices and diagnostics, told analysts on a conference call.

CoStar is aimed at the drug-eluting stent market now dominated by J&J's Cordis unit, which makes the Cypher stent, and Boston Scientific Corp. (BSX), maker of the Taxus stent. Drug-coated stents, which prop open clogged arteries in an effort to prevent heart attacks, were designed to avoid arterial scarring associated with bare-metal stents.

But drug-eluting stents have come under fire in recent months amid worries that they increase the risk of blood clots months or years after implantation, a process called late thrombosis. Some cardiologists have suggested that bare- metal stents should be used instead, but others dispute this.

Last month, a study presented at a cardiology conference concluded there were small but statistically significant increases in risk of late blood clots in both Cypher and Taxus, compared with bare-metal stents.

Boston Scientific has said a study showed a small but statistically significant increase in the rate of stent thrombosis for Taxus versus bare-metal stents, but with no corresponding increase in death or heart attack. J&J has said its studies show no statistically significant increase in Cypher's risk for thrombosis, but has pledged to further evaluate the potential risk in studies.

The concern over late stent thrombosis with drug-coated stents has created a market opening for Conor. Although CoStar is a drug-eluting stent, it's different from Cypher and Taxus in that it morphs into a bare-metal stent about six months after implantation. Conor believes this process increases CoStar's safety.

Now, J&J will gain access to Conor's stent technology, giving it a potential alternative in case Cypher's safety profile becomes an issue. Also, J&J will acquire a "next-generation" stent program sooner than if it had pursued a newer stent alone. Prudential analyst Lawrence Biegelsen noted that J&J's second- generation drug-eluting stent hadn't been expected until 2009 in Europe and 2010 in the U.S.

J&J, however, seemed to dismiss the notion that its purchase of Conor was a response to the recent concerns over drug-eluting stents. Asked on a conference call Friday whether recent developments such as increasing competition and the concern over stent thrombosis spurred J&J to act now, a J&J executive said "not at all."

There is some risk in J&J's strategy because results of the study of CoStar in the U.S. are unknown. Also, Boston Scientific has taken legal action against Conor alleging patent infringement, both in the U.S. and abroad.

But J&J executives said the deal is a good one despite the risks. "Of course, we're well aware of the clinical studies underway, and we're aware this is a litigious space in which we're participating," J&J Chief Financial Officer Robert Darretta said. "With the knowledge of all that's going on, we concluded this was an extraordinary opportunity we wanted to move forward with."

Conor Chief Executive Frank Litvack said his company's "shareholders are well served by this transaction. It provides them with an opportunity to realize significant and immediate value."

The deal could spell trouble for J&J's competitors. Prudential's Biegelsen said Boston Scientific stands to lose the most because CoStar may have safety advantages over Taxus, and J&J's vast resources will improve Conor's chances of prevailing in patent litigation with Boston Scientific.

In a prepared statement, a Boston Scientific spokesman said: "It's clear that Conor infringes various aspects of our intellectual property, including our stent, our balloon and our drug. We have filed infringement cases against Conor on each of these aspects, and we believe we will prevail on all of them."

Conor Medsystems has said it intends to vigorously defend itself in the proceedings with Boston Scientific.

Other stent makers include Medtronic Corp. (MDT) and Abbott Laboratories (ABT) , which are planning to introduce drug-eluting stents in the U.S. But J.P. Morgan analyst Michael Weinstein said the J&J-Conor deal might not affect Medtronic and Abbott much because he expects CoStar - if it's approved in the U.S. - to take market share mainly from Taxus.

J&J expects the Conor acquisition to reduce 2007 earnings by about 24 cents a share, Darretta said. The mean 2007 earnings estimate of analysts surveyed by Thomson First Call is $4.06 a share, up from a projected $3.74 a share this year.

The Conor purchase "will essentially be breakeven" for J&J in 2008, Darretta said.

Most of the dilution to 2007 earnings is expected to come from an estimated charge of about $600 million, or 21 cents a share, to write off in-process research and development.

- Peter Loftus; Dow Jones Newswires; 215-656-8289; peter.loftus@dowjones.com

  (END) Dow Jones Newswires
  11-17-06 1631ET
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