What's J&J's Next Target?

The pharmaceutical giant lost the bidding battle for Guidant, meaning it has plenty of cash for acquisitions. There are quite a few possibilities

Johnson & Johnson (JNJ) finally blinked. After weeks of a bidding war, J&J walked away from its $71-a-share deal to acquire device maker Guidant (GDT). Guidant will now be bought by J&J rival Boston Scientific (BSX), which has agreed to pay $80 a share, or $27 billion, for the company. J&J's consolation prize: a breakup fee of $705 million.

So what now for J&J? The company will almost certainly be on the hunt for other deals. J&J's most recent quarterly results, announced Jan. 24, were tepid. While earnings for the fourth quarter were up 9.1% to $2.2 billion, excluding one-time charges, sales fell 1.1%, to $12.6 billion. That disappointed Wall Street and made analysts wonder how J&J will generate growth in the next few years.


  Analysts now expect J&J to take its powerful balance sheet, with $13.5 billion in cash and a bullet-proof credit rating, and make more acquisitions. "That cash is going somewhere," says Citigroup analyst Matthew Dodds. "It ain't going to buy back shares."

The most talked-about potential target is St. Jude Medical (STJ). St. Jude is a big player in the market for implantable cardiac defibrillators, a market J&J was hoping to crack with its Guidant purchase. And St. Jude's shares took a hit Jan. 25, falling 6% on weaker-than-expected sales.

Still, St. Jude remains pricey, with shares trading at more than 30 times trailing 12 months earnings. At the same time, St. Jude's sales disappointment was due to lower-than-expected sales in those implantable cardiac defibrillators. So J&J may not want to pay a rich price for a business that doesn't appear to be as exciting as it looked a few years ago.


  Also, St. Jude is not a player in the market for stents, devices used to prop open arteries after angioplasty. J&J was hoping to nab Guidant in part to get its hands on Guidant's stent franchise. Of course, if St. Jude's stock continues to slide, J&J could take another look.

So where else might J&J go hunting? The company has made no bones about wanting to bulk up its medical device business, and there are plenty of smaller companies out there. Among them: Edwards Life Sciences (EW), the No. 1 heart valve company in the world.

But J&J also needs to bulk up its pharmaceutical business, which is flagging due to patent expirations and a weak pipeline. Among the potential candidates: Gilead Sciences (GILD) which makes anti-viral treatments including some for HIV. And J&J has also been trying to expand its reach in the cardiovascular market. Analysts say that is why the company may look at the likes of CV Therapeutics, which is expected to get approval soon for a new drug for angina.


  There's always the chance J&J could stalk Guidant again at some point. For one thing, Citigroup's Dodds says the company could team up with device maker Medtronic and come back with a higher bid. Linking up with Medtronic could allow J&J to up its offer for Guidant without increasing earnings dilution.

Sure, it's a long-shot move, but there's another possibility: If Boston Scientific's stock falls significantly in the next few weeks, the value of its offer for Guidant will decline. In that case, J&J could jump back in with another bid.

All this may seem unlikely. But then again, seeing giant J&J lose in a takeover battle to upstart Boston Scientific wasn't a widely anticipated outcome either.

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