One for the history books

In its largest acquisition to date, Johnson & Johnson acquires medical device maker Synthes for $21.3 billion, creating the world’s largest orthopedics business

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NEW BRUNSWICK, N.J.—On April 27, Johnson & Johnson(J&J) announced its acquisition of Synthes Inc., a leading global medicaldevice company, for $179 per share, or about $21.3 billion—a landmark deal inthat it is J&J's largest acquisition in the company's 125-year history andbecause it creates the world's largest orthopedics business.
J&J began sowing the seeds for this powerful businesssegment in 1998, when it acquired DePuy, a family of companies that develop healthcaresolutions in orthopedics, spinal care, sports medicine and neuroscience. Now a$5.6 billion global enterprise employing 6,500 people and headquartered inRaynham, Mass., DePuy, with the addition of West Chester, Pa.-based Synthes,will comprise the largest business within J&J's Medical Devices andDiagnostics segment.
According to Debbie Williams, director of communications forDePuy, the orthopedics market is a large and growing one, with more than $37billion in sales last year.
"Market dynamics, including an aging population, patientdesire to remain active, the effects of obesity on joint disease, expansion inemerging markets, and a trend toward earlier intervention will drive continuedworldwide market growth," Williams tells ddn."We are always looking for growth opportunities in health care. Our approach togrowth encompasses investing in organic growth in the business, exploringlicensing opportunities with industry partners, and making select acquisitionsthat can bring value to our business."
J&J has "respected Synthes for quite some time,"Williams adds. Recognized for its innovations in trauma, spine,cranio-maxillofacial (CMF) and power tools, Synthes in 2009 held more than a 40percent share in the trauma fixation devices market, a nearly 35 percent sharein the CMF market and a nearly 12 percent share of the spinal surgery devicesmarket—assets which will help J&J to further diversify its portfolio andglobal reach, Williams says.
"Synthes offers a broad, high quality product portfoliosupported by industry-leading professional education and customer service and atalented, well-trained sales organization," says Williams. "The companies sharesimilar cultures that work to meet the needs of health care professionals,share a passion for the wellbeing of patients and deliver on a commitment todelivering high quality, innovative products."
At this time, J&J has no plans to make changes to theorganization or systems that Synthes has in place, Williams says, but she adds,"As we go through the integration planning process, a cross-functionaltransition team will be put in place to evaluate the needs of the combinedorganization. We are very excited about the potential growth opportunitiesahead."
In a statement announcing the deal, Synthes Founder andChairman Dr. Hansjoerg Wyss said the combination of the two organizations will"ensure that physicians and hospitals will receive the utmost possible supportin cooperation with the AO Foundation to help
their patients."
"The Synthes family will find a great home and support fromJohnson & Johnson and will continue operating with its distinct culture andexcellence in product development and physician education together with the AOFoundation. I am very pleased and excited that my life's work will continue aspart of Johnson & Johnson."
Under the terms of the agreement, each share of Synthescommon stock, subject to certain conditions, will be exchanged for $63.15 incash and $117.29 in J&J common stock. The final price will be fixed 10 daysbefore the closing of the deal and is subject to share price of J&J anddollar exchange rate at that time. The deal has an estimated net acquisitioncost of $19.3 billion since Synthes has approximately $2 billion in cash onhand.
The deal is expected to close by the first half of 2012pending clearance under the Hart-Scott-Rodino Antitrust Improvements Act,approval by the European Commission and regulatory approval in certain otherjurisdictions, as well as other customary closing conditions. The merger willrequire the approval of Synthes' stockholders, and will be effected by way of astatutory merger under Delaware law. Since Synthes is incorporated outside ofSwitzerland, Swiss takeover regulations do not apply to the merger.
J&J says the transaction is expected to have no impacton its previously issued guidance for adjusted earnings per share (EPS) thisyear, and only a modestly dilutive impact on adjusted EPS in 2012.
According to Bloomberg, the purchase values Synthes at about11.2 times this year's forecast earnings before interest, tax, depreciation andamortization. Lisa Bedell Clive, an analyst with Sanford C. Bernstein & London, told the news service that J&J might have to shed somebusinesses to win antitrust approval.
"It's a fair price," Clive told Bloomberg. "I didn't expectmuch more than that given the potential for divestments, particularly on thespine side." 
Following the news, J&J's rose 62 cents, or 1 percent,to $65.57, while Synthes' stock Synthes rose 10 centimes, or less than 1percent, to 146.6 Swiss francs. The modest increases may be attributed tomarket uncertainty following J&J's recall of more than 50 drugs and deviceslast year, a move that cost the company $900 million in sales. J&J's McNeilconsumer healthcare unit and the hip replacement implants business were theprimary businesses impacted by the product recalls.
"J&J had a severe challenge to its premier reputationgiven all the recalls," says Michael Holland, chairman of Holland & Co. inNew York. "This relatively bold step to buy a premier company is a significantmove to regain their luster."

Synthes' Q1 salesgrowth sees 8 percent uptick
WEST CHESTER, Pa.—Synthes Inc. reported last month that itsTrauma, Cranio-Maxillofacial(CMF) and Power Tools businesses grew by 8 percent in the first quarter ascompared to the same quarter in 2010, a period impacted by severe winterweather and the Haiti earthquake.
U.S.Trauma continued its two-pronged growth strategy of focused competitiveconversions and new product launches, with new products for the foot, tibia andhumerus accounting for 60 percent of Trauma's growth, Synthes reported. CMFcontinued to generate rapid growth in the Thoracic segment. In addition,Synthes reported that the U.S. spine market continues to face reimbursementchallenges, as some payors have increased pressure on coverage for lumbarfusions for degenerative disc disease indications. The launch of Matrix, apedicle screw system for lumbar spine surgery, and T-Pal, a minimally invasivecage, have offset some of these market challenges, Synthes reported.
"Synthes is off to a solid start in 2011, especiallyconsidering the strong 2010 sales base and the challenging market environment,"said company President and CEO Michel Orsinger in a statement. "We havesuccessfully launched new products and are committed to gaining market share byfocusing on strong execution of further product launches, particularly theForefoot/Midfoot System in Trauma and Matrix in Spine, as well as on continuousinvestments in emerging markets."

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