Biotech Values

[DewDiligence]

JNJ Acquires Synthes for $21.5B in Cash+Stock

[The total consideration, 35% cash and 65% stock, is a 22% premium to Synthes’ “unaffected” share price on 4/14/11. This is JNJ’s largest-ever acquisition by a wide margin.

JNJ’s own PR is at http://finance.yahoo.com/news/Johnson-amp-Johnson-and-prnews-539016889.html?x=0&.v=1 . CC today at 8:30am ET.]

http://online.wsj.com/article/SB10001424052748704729304576287622474502438.html

›APRIL 28, 2011
By ANUPREETA DAS, GINA CHON and JONATHAN D. ROCKOFF

Johnson & Johnson will acquire medical-device maker Synthes Inc. for $21.3 billion, giving the U.S. health-products giant a commanding lead in the global market for surgical devices used to treat fractures and traumatic injuries.

The two companies said & Johnson will purchase Synthes for 159 Swiss francs a share, which represents a premium of about 22% to where Synthes stock traded the day before The Wall Street Journal originally reported the talks on April 15.

Under the terms of the deal, each share of Synthes common stock will be exchanged for 55.65 Swiss francs ($63.5) in cash and 103.35 francs in Johnson & Johnson common stock.

The boards of the two companies have backed the merger, which will create, together with the DePuy units of Johnson & Johnson, the largest business within its Medical Devices and Diagnostics segment.

"DePuy and Synthes together will create the most innovative and comprehensive orthopaedics business in the world and enable us to better serve clinicians and patients worldwide," said Bill Weldon, Chairman and Chief Executive of Johnson & Johnson.

Synthes shares closed down 1.4% at 146.50 francs in trading Tuesday on the Swiss exchange.

It's unclear whether Synthes's public shareholders, many of whom now are aggressive hedge-fund traders who move in once a company is in play, will be satisfied with the price J&J is offering for market growth. Many have argued privately in recent days that Synthes is worth at least 165 francs a share.

If completed, the Synthes purchase would be J&J's largest acquisition to date. In 2006, it bought Pfizer Inc.'s consumer health-care business for $16.6 billion. Since then, the company, which has nearly $28 billion in cash and securities, has typically eschewed large deals in favor of a "string of pearls" approach, shelling out as much as a few billion dollars for companies. At the same time, J&J aims for dominant positions in its main markets of consumer products, pharmaceuticals and medical devices and diagnostics.

Synthes, based both in Switzerland and in West Chester, Pa., confirmed last week it was in talks with J&J but declined to give further details. Its search for a buyer was propelled in recent months by 76-year-old Synthes Chairman Hansjörg Wyss, according to people familiar with the matter. Mr. Wyss, a Swiss citizen who lives in the U.S., is ranked No. 154 in the Forbes billionaires list. He and his family own about 48% of Synthes.

Synthes holds a significant portion of one of the medical-device industry's biggest markets—the repair of broken and diseased bones. Often, the plates, screws and other orthopedic implants that Synthes makes are used in emergency and mandatory surgeries rather than elective ones.

As populations age and incomes rise in emerging economies, demand for these devices is expected to grow substantially, analysts say. Last year, Synthes's net sales rose 8.6% to nearly $4 billion. North American sales rose 4.6% to $2.1 billion, while Asia-Pacific sales increased 19% to $424 million.

A combination with Synthes would give J&J a nearly 28% share in the orthopedic-devices market, double that of second place Stryker Corp. [ZMH and Biomet are other large players], according to Wells Fargo Securities. J&J executives consider this $30 billion market among the industry's most attractive, and told investors last year that it is growing 6.4% annually, more than a percentage point faster than medical-equipment sales overall.

J&J, which makes everything from Listerine mouthwash to prescription drugs for cancer and heart ailments, had been looking to expand its narrow lead in the devices market. Last year, it studied the possibility of buying U.K. medical-device maker Smith & Nephew PLC, but those explorations didn't go very far, people familiar with the matter said.

Analysts had been expecting J&J to use its cash pile, most of which is overseas, to fund the Synthes acquisition. But under the proposed deal structure, J&J would use more stock than cash, which could dilute its earnings in the short term, given that J&J shares trade at a lower price-to-earnings multiple than Synthes shares.

The people described the negotiations between Synthes and J&J, which lasted a few months, as cordial, with the independent directors of the medical-device company playing an active role.

Goldman Sachs Group Inc. and law firm Cravath, Swaine & Moore LLP are advising J&J. Credit Suisse Group AG and law firm Shearman & Sterling LLP are advising Synthes, these people said.‹