When medical device maker Boston Scientific Corp. won the marathon battle for Guidant Corp. with a $27 billion bid in January 2006, it had reason to celebrate.

Natick, Mass.-based Boston Scientific had outmaneuvered healthcare giant Johnson & Johnson to win Indianapolis-based Guidant, whose flagship products -- implanted pacemakers and defibrillators grouped in a category known as cardiac rhythm management -- represented a large portion of a then-$10 billion market. In many ways, Guidant appeared to be a good fit for Boston Scientific, which had expanded into a $6 billion company by developing or buying a wide range of products for nearly every part of the body, from biopsy needles to urinary catheters to its crown jewel, tiny coronary stents that prop open damaged arteries. Boston Scientific's top stent, the Taxus, is drug-eluting, or coated with a drug that slowly releases and keeps the artery from reclogging.

Boston Scientific quickly won regulatory approval for the Guidant deal with a nifty divestiture spinout to Abbott Laboratories. But to make the deal work longer-term, the company needed many more things to go right. In the three years since, few have.

Product safety worries, executive turnover, heavy debt, downgrades and the recession, which has battered Boston Scientific's stock, have cast doubt on the wisdom behind the deal. "They shot themselves in the foot by completely overpaying for Guidant," Morningstar Inc. analyst Debbie Wang says.

When Boston Scientific first jumped into the mix for Guidant in December 2005, Wang called its $72 per share bid "savvy." Then the price kept rising, with Boston Scientific eventually paying $80 a share to beat back Johnson & Johnson. Wang termed it an over-reach; other analysts were scathing. "They are destroying the value of their company for a damaged asset," Citigroup Inc. analyst Matthew Dodds told The New York Times. "What is their board thinking?"

When the deal was announced, Boston Sci executives, led by CEO Jim Tobin and then-CFO Larry Best, warned it would be dilutive until at least 2010. In 2005, the year before the merger, Boston Sci reported a $628 million profit on $6.3 billion in sales. Adding Guidant, the firm's balance sheet changed dramatically. Sales rose to $8.4 billion in 2007, but charges from the merger and other factors pushed Boston Scientific into the red. After a $3.6 billion net loss in '06, the firm was in the red $495 million in '07. Full-year 2008 numbers weren't ready at press time, but Guidant continues to weigh upon its buyer.

One problem is the $9 billion in debt Boston Scientific loaded up on to make the deal work. In premerger 2005, the company had $850 million in cash and $2 billion in debt. By the end of 2007, those figures had jumped to $1.5 billion and $8.2 billion, respectively. Officials said they would pay it down quickly with revenues from Guidant's products as well as ever-growing proceeds from its flagship coronary stent business. And while Boston Scientific has made early payments a priority, major cost-cutting and selloffs have been necessary.

On Jan. 25, 2006, the day J&J gave up the fight for Guidant, Boston Scientific shares slipped 2.2% to $23.48. It's been downhill ever since, at first slowly, then in the recent economic crisis, sharply. The stock ended Jan. 16 at $7.87 and has been trading at less than $10 since October. Investors reacted badly Oct. 1 when Boston Scientific was ordered to pay $700 million to J&J for patent infringement on a decade-old product. Making matters worse, during the week of Oct. 6, two co-founders sold 31 million shares, which the company attributed to involuntary triggers, not a judgment by the co-founders on the
company's fortunes.

As shares slumped, Boston Sci took pains to emphasize its financial strength. On Oct. 14, the firm assured the public it had access to $3 billion in cash -- $1.7 billion on hand and $1.3 billion through a revolving debt facility. It also said that in the third quarter it prepaid $500 million in debt to reduce its total debt to $6.8 billion, with the next obligation not due until April 2010.

On Boston Scientific's third-quarter conference call in October, Tobin affirmed that stock buybacks were not on the horizon because the cash will be necessary to pay down debt. But he also hinted that cash reserves could help make Boston Scientific a buyer again over the next 12 to 18 months. "We're going to find ourselves in a position to enhance our top-line growth through some targeted, close-to-market or on-the-market, tuck-in acquisitions that would give us a leg up on growth," Tobin told analysts.

Of course, with its market capitalization down to $11.3 billion as of Jan. 20, Boston Scientific could itself be a takeover target. If Eli Lilly and Co. can shell out $6.5 billion for biotech ImClone Systems Inc. -- a company with only one product on which it shares revenues -- it isn't hard to imagine a buyer spending twice that for Boston Scientific's $8 billion in diversified sales.

The success of the Guidant deal was never a sure thing for Boston Scientific. In the run-up to the merger, it was revealed that because of product flaws, several users of Guidant's cardiac rhythm management devices had died, giving rise to widespread product recalls and a raft of legal and regulatory problems. Those troubles were enough to give cold feet to Guidant's original suitor, Johnson & Johnson, which made its initial $25 billion bid in December 2004. Nearly a year later, with safety problems and questions about Guidant's quality control swirling, J&J threatened to walk and suggested a lower price. After legal brinksmanship, the companies settled Nov. 15 on $21.5 billion in cash and stock, or $63 per share. At the time, J&J said the deal would be dilutive to its earnings for two years with a bounce-back in 2008.

By re-opening the negotiating window, J&J let Boston Scientific come crashing through. It unveiled in early December a $72 per share, or $25 billion, bid. J&J countered. Boston Sci countered again.

Boston Scientific prevailed with an $80 per share bid at the end of January. To satisfy antitrust regulators, it then spun out Guidant's vascular product line, including the experimental Xience stents, to Abbott Laboratories for $4.1 billion up front and more down the road. But Boston Sci got to keep partial rights to the first iteration of Xience, which was finally approved this July by the Food and Drug Administration, triggering a $250 million payment to Boston Scientific. Japanese approval would bring Boston Sci another $250 million from Abbott.

It turns out the drug-eluting stent, Boston Scientific's flagship product, would cause more headaches than Guidant's CRM devices, sales of which rebounded once the FDA lifted its ban in April 2007. They accounted for $572 million in sales, or 29% of total sales, in the third quarter of 2008.

In the same period, however, the firm's stent sales as a portion of its total sales fell from 25% to 23%, and further still when compared to the 30% total of its full-year 2006 revenue.

That's because in September 2006, the FDA brought attention to emerging data that drug-eluting stents such as Boston Sci's Taxus might not be as safe and efficacious as once thought. Blood clots in patients with implanted stents began to appear.

At the time, the only rival was Johnson & Johnson's Cypher stent. The worries hit both companies hard. J&J cut 4% of staff in 2007 after Cypher sales fell 41%. A later study from this past summer countered those concerns just as two more competitors hit the market. Between the lingering safety worries and the new competition, Boston Sci's U.S. drug-eluting stent sales fell $31 million, or 13%, in the third quarter.

Boston Scientific officials say the launch of the new Taxus model in July should help regain market share, but a new reality is emerging from the more crowded field and the "whiplashing" of data, Wang says. First, the overall market should stabilize as doctors regain their comfort using drug-eluting stents for a subset of patients. Second, doctors aren't necessarily loyal to one brand. "They're close to interchangeable and switching costs are low, so doctors don't have to learn how to use new brands," Wang says.

The blood-clot risk weighs heavily enough for the FDA to order Boston Scientific, three stent rivals and four major drug companies to fund a $100 million, four-year, 20,000-patient study on stents and blood-thinning medicines. Led by Laura Mauri, a doctor at the Harvard Clinical Research Institute in Boston, the study aims to determine how long a stent patient should also take anti-clotting medicine to minimize the risk. Mauri's team also seeks to answer whether the benefits of the medicine are for all stents or specific to drug-eluting stents such as Boston Sci's Taxus brand.

The need to pay its creditors spurred a round of cost cutting and divestiture in 2007 and led to the ouster in May of that year of Best, one of the engineers of the Guidant takeover. Amid plans to sell five noncore businesses, Best said in March 2007 the firm might take public its endosurgery unit, which sells surgical tools such as catheters, clamps
and lasers.

In July, Best was replaced by Sam Leno, previously CFO at medical device firm Zimmer Holdings Inc. In August the endosurgery initial public offering was off the table. But the divestiture strategy proceeded apace. Also in August, the firm sold its cochlear implant, or "bionic ear," division back to its founder for $150 million, a fraction of what Boston Sci paid in 2004.

In January 2008, the firm completed a $750 million sale of its cardiac surgery and vascular surgery units to Getinge AB of Sweden. In February, the fluid management and venous access units were gone, too, sold to private equity firm Avista Capital Partners
for $425 million.

Some of that cash will disappear, however, in the settlement of a patent lawsuit Boston Sci recently lost to J&J. Boston Scientific is on the hook for $700 million. No surprise, really. It's another instance of whatever can go wrong has gone wrong for Boston Sci since it jumped into the mix for Guidant. Shareholders could be forgiven for wondering if the company is trying to drive them toward its own cardiac-care products. The last few years have not been for the faint of heart.