Nov. 7 (Bloomberg) -- Guidant Corp. sued to force Johnson & Johnson to complete a $25.4 billion purchase of the troubled medical-devices maker and reported a plunge in quarterly profit.

Guidant filed suit in federal court in New York after J&J balked at closing a transaction arranged in December. Since June, Indianapolis-based Guidant recalled 109,000 faulty cardiac defibrillators, the stock fell 20 percent and rivals took away sales. Johnson & Johnson said today it is no longer obligated to buy Guidant because of a ``material'' change in its outlook.

Johnson & Johnson may be seeking a lower price, said Keay T. Nakae, an analyst with C.E. Unterberg Towbin in San Francisco. Guidant, the second-biggest maker of implantable defibrillators behind Medtronic Inc., refused to renegotiate the terms, New Brunswick, New Jersey-based J&J said last week. The purchase would be the biggest in J&J's 119-year history.

``From J&J's standpoint, they don't want to overpay for an asset they think might be overvalued,'' Nakae said today in an interview. ``You had to expect it was going to come down to a legal fight.'' His firm doesn't hold either stock.

Johnson & Johnson said in a statement today that it isn't required to close the transaction and will ``vigorously oppose'' the lawsuit. In its lawsuit, Guidant called J&J's position ``meritless.''

``The company views the previously announced product recalls at Guidant and the related regulatory investigations, claims and other developments as serious matters affecting both Guidant's short-term results and long-term outlook,'' J&J said. Company spokesman Jeff Leebaw declined further comment.

Sales, Profits Fall

Guidant's shares fell $1.40, or 2.4 percent, to $57.52 at 4:16 p.m. in New York Stock Exchange composite trading. The price was 24 percent below the $76 a share in cash and stock that J&J agreed in December to pay. Shares of Johnson & Johnson rose 55 cents to $61.43.

Third-quarter sales of implantable defibrillators fell 26 percent and pacemakers, 15 percent, Guidant said. Net income plunged 64 percent to $65.4 million, or 20 cents a share, from $153.6 million, or 49 cents, a year earlier, according to today's statement. Revenue dropped 14 percent to $795 million.

Guidant is facing U.S. probes and New York state fraud claims. In an SEC filing today, Guidant said it received subpoenas last month from U.S. attorneys in Boston and Minneapolis for information on marketing practices. The company also disclosed a subpoena in September from the California Attorney General for information on stent and catheter production and performance.

Price Dispute

Guidant spokesman Steven Tragash declined to elaborate on the company's statement.

Several analysts said in notes to clients last week that the dispute is a matter of price and they expect the transaction to be completed.

Alexander K. Arrow, health care analyst at Lazard Capital Markets LLC in New York, said J&J probably wants the price to be reduced to $65 to $68 a share. Guidant executives have held out for something closer to the agreed $76 a share. Arrow upgraded his Guidant recommendation Nov. 4 to ``buy'' from ``hold.''

The acquisition of Guidant would add heart-rhythm products to a lineup that already ranks Johnson & Johnson the world's biggest maker of medical devices. Guidant would give J&J Chief Executive Officer William Weldon a piece of the fastest-growing medical technology: pacemakers and implantable defibrillators.

Guidant Allegation

``In seeking to acquire Guidant, J&J was looking to the future, where it anticipated explosive growth in the cardiac rhythm management market, in which it is not a player, and increased competition in the vascular intervention businesses, in which J&J already participates,'' Guidant said in its lawsuit.

Les Funtleyder, health-care strategist at Miller Tabak and Co. in New York, last week estimated the global market for defibrillators and pacemakers at $10 billion a year.

Doctors implant defibrillators costing $20,000 to $30,000 each into cardiac patients' chests to halt abnormal heart rhythms that can lead to sudden death. When the stopwatch-sized device detects an irregular heartbeat, it shocks hearts back into a normal rhythm.

Breakup Fee

The purchase agreement says Johnson & Johnson ``may be obligated'' to pay Guidant a breakup fee of $700 million, according to a December filing with the Securities and Exchange Commission.

Guidant's suit seeks an order for J&J to complete the deal at $76 a share and the judge won't have discretion to alter the price, said Victor I. Lewkow, senior mergers and acquisitions partner at Cleary, Gottlieb, Steen & Hamilton in New York, in an interview today. The judge may be reluctant to issue such an order if he concludes there is too much antagonism between the companies for the transaction to proceed, he said.

J&J won antitrust approval for the combination from the U.S. Federal Trade Commission last week after agreeing to certain divestitures. J&J would license Guidant's cardiac-stent delivery technology to Abbott Laboratories and sell a blood- vessel harvesting product to Datascope Corp. of Montvale, New Jersey. Datascope said Nov. 2 it is entitled to a termination fee if the transaction fails.

Guidant recalled the defibrillators starting in June because of defects linked to at least two patient deaths. Last month, U.S. Food and Drug Administration inspectors said Guidant failed to ensure the quality of its devices and waited too long to warn doctors of risks.

New York Attorney General Eliot Spitzer sued Guidant Nov. 2, alleging the company misled doctors on faults in one of the devices. Spitzer's complaint contends that Guidant committed fraud by failing to inform doctors until this year that its Ventak Prizm 2 DR Model 1861 defibrillator could malfunction with potentially fatal results.

J&J Subpoena

Separately, Johnson & Johnson said in a filing today that it received a subpoena from the U.S. attorney's office in Massachusetts Sept. 26 for documents related to sales and marketing of eight drugs to Omnicare Inc., a manager of pharmacy benefits for long-term care facilities. J&J said its units are responding to the subpoena.

Massachusetts U.S. attorney spokeswoman Samantha Martin said she couldn't confirm or deny an investigation. A Johnson & Johnson spokesman declined to comment beyond the company's filing.

``To the best of our knowledge, our purchases of pharmaceuticals comply with all applicable laws and regulations,'' Omnicare said in an e-mailed statement.

The Guidant suit was assigned to U.S. District Judge Robert W. Sweet. The case filed today is Guidant Corp. v. Johnson & Johnson, 05cv9404, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Avram Goldstein in Washington at agoldstein1@bloomberg.net

Last Updated: November 7, 2005 20:08 EST