Johnson & Johnson (JNJ) may buy Synthes Inc. (SYST), the biggest maker of devices to treat bone fractures and trauma, as it seeks to boost flagging sales at its orthopedic division, according to a person briefed on the discussions.
A deal is far from certain and may be days or weeks away, said the person, who spoke on condition of anonymity because the talks are private. With Synthes’s current market capitalization of $18.4 billion, an acquisition would be the biggest deal in Johnson & Johnson’s 125-year history.
Synthes would give New Brunswick, New Jersey-based J&J hip screws, surgical power tools and instruments to treat spinal and soft-tissue injuries that generated $3.69 billion in sales last year. J&J, the world’s biggest maker of artificial hips, saw joint-implant revenue fall in last year’s fourth quarter, hurt by a decline in medical procedures and a recall of 93,000 hips.
The deal would be “probably one of the smarter ones J&J could do,” giving it access to a trauma market growing faster than its traditional orthopedic business, said Jeff Jonas, a Gabelli & Co. analyst in New York, in a telephone interview. “Historically, it’s been more of a specialized niche that hasn’t attracted many players, and Synthes is the dominant presence in that market.”
The acquisition would be J&J’s biggest since the $16.6 billion purchase of New York-based Pfizer Inc. (PFE)’s consumer health unit in June 2006. Johnson & Johnson has announced 52 pending or completed deals in the past five years, with an average size of $669 million and a typical premium of 40 percent, according to data compiled by Bloomberg.
Synthes, based in West Chester, Pennsylvania, and traded in Switzerland, rose 8.1 Swiss francs, or 6.2 percent, to 138.7 Swiss francs yesterday in Zurich trading. The company has gained 17 percent since March 17, its low point for the year.
J&J rose 54 cents to $60.56 in New York Stock Exchange trading yesterday and has lost 7.6 percent in the past 12 months.
William Price, a J&J spokesman, declined to comment in an e-mail. Calls to the Synthes’s West Chester office were referred to the company’s investor-relations office in Zurich. A telephone message left there after normal business hours wasn’t immediately returned. The talks were first reported yesterday by the Wall Street Journal.
Johnson & Johnson has voluntarily recalled more than 50 products since the beginning of 2010, led by 40 brands of Tylenol, Motrin and other over-the-counter children’s products as well as artificial hips whose failures have sparked lawsuits by more than 1,000 patients. The consumer recalls cost the company $900 million in lost sales last year and have sparked a federal criminal probe of possible manufacturing violations.
The company may seek purchases of $10 billion or more to bolster its stock as its cash reserves near record highs, said David Lewis, a Morgan Stanley analyst in San Francisco, in a note to clients April 6. J&J had cash and short-term investments of $27.7 billion at the end of 2010. Its revenue was little changed last year at $61.6 billion.
Synthes has a “great trauma franchise” that would be “synergistic with ortho,” at J&J, Lewis said in his note. The acquisition of Synthes may raise antitrust concerns over the shared spinal-care business with J&J’s existing DePuy unit, he said. DePuy generated $5.59 billion last year, 9 percent of the company’s revenue.
The U.S. trauma market is growing by 6 percent to 7 percent a year, said Adam Feinstein, a Barclays Capital analyst in New York, in a Feb. 17 note. Synthes’ spinal-care business sold about $982 million in 2010, second only to Minneapolis-based Medtronic Inc. (MDT) in a $7.1 billion global market, Feinstein said.
Synthes would help J&J fill the revenue gap left by the loss of patent protection to top-selling drugs, among them the antipsychotic Risperdal and migraine pill Topamax, said Jonas, of Gabelli & Co.
“It seems like they’ve been building cash to do a big deal,” he said. “They’ve been struggling with sales growth for the last couple of years and by doing a bigger deal, you do jump-start the sales expectations.”
Synthes makes instruments, implants and biologic materials to fix wounds to the human skeleton and its soft tissues, according to its website. The company traces its roots to 1958, to a venture by four Swiss surgeons, the website says.
Billionaire Hansjoerg Wyss, Synthes’ chairman and former chief executive officer, controls 48 percent of the company’s shares along with the Wyss Family Trusts, according to Bloomberg data.
There have been 420 acquisitions in the U.S. medical products industry in the past five years with an average disclosed deal size of $258.5 million and an average announced premium of 60 percent.
Medical devices generated 40 percent of J&J’s $61.6 billion in sales last year. The company has looked at buying Smith & Nephew Plc, Europe’s biggest marker of artificial hips and knees, Bloomberg News reported on Feb. 2, citing people familiar with the potential deal. Sky News reported Jan. 10 that Smith & Nephew was the target of an $11.2 billion takeover offer from J&J.
Smith & Nephew, which has a market capitalization of $10.1 billion, said Jan. 14 that it wasn’t engaged in any talks that could lead to a takeover.