Synthes deal would boost J&J finances, future

AP News
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Posted: Apr 18, 2011 2:53 PM
Synthes deal would boost J&J finances, future

Health giant Johnson & Johnson could boost its revenue and profit in the short term by buying Switzerland's Synthes Inc., while quickly gaining a dominant position in the growing market for orthopedic surgery products.

The Swiss maker of implants and instruments for bone and tissue repair confirmed Monday that it's in talks about a possible purchase by Johnson & Johnson, one of the world's biggest manufacturers of medical devices, drugs and consumer health products.

The sale of Synthes could make multibillionaire chairman Dr. Hansjorg Wyss the richest man in Switzerland. He owns 40 percent of the company, and his family's trust owns an additional 8 percent, according to Synthes' 2010 annual report.

For Johnson and Johnson, based in New Brunswick, N.J., buying Synthes would make sense on multiple fronts.

"From many different angles, it looks like this deal would be a good deal for Johnson & Johnson, if it's at the right price," said analyst Linda Bannister of Edward Jones. "$20 billion seems reasonable."

That is the rumored purchase price, as reported last Friday by the Wall Street Journal, an amount far bigger than a typical J&J acquisition.

Buying Synthes would double J&J's market position in spine repair products, Bannister said.

"It would move (J&J) to a dominant position in orthopedics, particularly in trauma," she said.

Medical devices became the largest of J&J's three businesses in 2009. Their appeal? They don't see sales suddenly plunge when generic competition arrives, as drugs do. And they're far more profitable than commodity over-the-counter drugs such as Motrin and Tylenol.

In addition, those pain relievers are among the dozens of nonprescription J&J products hit by an astounding series of recalls over the past 19 months. The recalls cut 2010 revenue by about $900 million and have severely hurt J&J's image.

With an aging population around the world and emerging markets spending more on advanced health care, devices and implants to repair fractures in the spine and other bones are in increasing demand. Synthes revenue rose almost 9 percent in 2010 to $3.87 billion, and its net income increased 10 percent, at $908 million.

Shares of Synthes jumped 5.6 percent to 146.50 Swiss franc Monday on the Swiss Stock Exchange in Zurich. Shares of Johnson & Johnson were up 7 cents at $60.63 in midday trading in New York.

Synthes is the top player in devices for repairing traumatic injuries and No. 2 in spine repair products, and is highly profitable, UBS Securities noted.

A purchase would add roughly 5 percent to Johnson & Johnson's 2012 earnings per share, wrote UBS analyst Rajeev Jashnani.

In addition, Johnson & Johnson has roughly $21 billion in cash outside the U.S., avaoiding U.S. income taxes, according to an estimate by Citigroup Global Markets Inc. That makes a big purchase overseas look more valuable, Citigroup analyst Matthew Dodds wrote Monday.

The deal would add to J&J's $61.5 billion in annual revenue, which has seen an unprecedented two-year decline. Slashing overlapping jobs in areas such as administration and sales, the inevitable result of a sizable acquisition, would enable J&J to boost net income quickly, said analyst Steve Brozak of WBB Securities.

"I can set my watch for the layoffs," Brozak said.

So far, the two companies are saying little.

On Monday, Synthes said in a terse statement it was talking with Johnson & Johnson about "a potential business combination transaction" and did not intend to make any further public statements until a definitive agreement is reached or talks are halted. J&J has repeatedly declined to comment.

Synthes is based in West Chester, Pa., but has its global headquarters in Solothurn, Switzerland.

Last year, Synthes pleaded guilty to a felony and dozens of misdemeanor crimes, and agreed to pay $23 million in fines, over unauthorized testing of its bone cement on spinal surgery patients, even though the cement was approved only for use in the arm. Three patients died on the operating table.

Johnson & Johnson's repeated product recalls have resulted in the year-long closure of a nonprescription medicine factory in Fort Washington, Pa., and the company is under close Food and Drug Administration scrutiny.

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Associated Press Writer John Heilprin in Geneva contributed to this report.