Medical Device Daily Staff Writer

It's official. Johnson and Johnson (J&J; New Brunswick, New Jersey) is making a move to acquire Synthes (Solothurn, Switzerland) for $21.3 billion, making it one of the largest med-tech deals in history. After heavy speculation and Synthes coming out last week and releasing a brief statement that J&J had been in talks with the firm regarding a possible merger, the med-tech giant broke its silence today and said it was initiating acquisition plans (Medical Device Daily, April 19, 2011).

Upon completion of this transaction, Synthes and the DePuy companies of J&J together will comprise the largest business within the Medical Devices and Diagnostics segment of J&J.

The transaction has an estimated net acquisition cost of $19.3 billion as of the close of business on April 26, based on Synthes' nearly 119.5 million fully diluted shares outstanding and nearly $2 billion in cash on hand as of signing.

The boards of J&J along with Synthes have each approved the transaction. Hansjoerg Wyss, Synthes founder and chairman, and related parties have agreed to vote shares representing not less than 33% of Synthes common stock in support of the transaction.

"DePuy and Synthes together will create the most innovative and comprehensive orthopedics business in the world and enable us to better serve clinicians and patients worldwide," said Bill Weldon, chairman/CEO of J&J. "Orthopedics is a large and growing $37 billion global market and represents an important growth driver for J&J. Synthes is widely respected for its innovative high-quality products, world-class R&D capabilities, its commitment to education, the highest standards of service, and extensive global footprint."

William Plovanic, a research analyst with Canaccord Genuity (Toronto), spoke with Medical Device Daily yesterday regarding the deal. Plovanic, who was attending the International Spine Intervention Society (San Rafael, California) meeting in Las Vegas when the news broke, said he had spoken with several other spine companies at the conference about the acquisition and the consensus was, that this provides an opportunity for some of the smaller players in the space to grab up share.

"We all concur it's going to create a lot of opportunities for these small and midsize players," Plovanic told MDD. "If you look back at the last five acquisitions in Spine, I don't think they've been successful by anyone's measures. In fact if you look at the most recent acquisition of Zimmer [Warsaw, Indiana] by Abbott Spine [Austin, Texas] – a significant portion of the revenues went away. So one plus one did not equal two, it probably equaled 1.6."

Abbott Spine acquired Zimmer for $360 million (MDD, Oct. 20, 2008).

Plovanic added "I would expect that as J&J and Synthes put together their spine operations, you could see some share shift around. Not massively – but it does create opportunity for the smaller players to pick up share. Large companies regaining share has not been the trend."

But according to Wells Fargo (New York) analyst Larry Biegelsen, the acquisition could spur larger med-tech companies to look toward acquiring mid-size med-tech firms.

"We continue to believe that this deal will trigger more consolidation in orthopedics," Biegelsen writes. "J&J's scale in the orthopedics market will likely force larger players such Stryker [Kalamazoo, Michigan] and Zimmer to acquire mid-size players."

He added the "deal is not as accretive as anticipated for J&J because J&J is using 65% stock and 35% cash for the transaction. We had estimated that an all-cash deal would have been 4%-5% accretive to cash EPS in 2012. J&J has almost $28 billion in cash and marketable securities on its balance sheet so it could have used more cash for the deal."

News of transaction comes at a time when J&J is grappling with quality lapses that have prompted more than a dozen recalls of popular over-the-counter medicines, contact lenses and hip-repair implants. According to an article from the Wall Street Journal, the recalls cost the company $900 million in sales last year, resulting in a sales decline and adding to pressure to find new sources of revenue and earnings growth.

It was reported that federal cases involving defective hip implant parts manufactured by DePuy would be consolidated in federal court (MDD, Dec. 8, 2010). The hip implant parts were recalled August 26 after research indicated patients who received the parts required a much higher than usual rate of revision surgeries (MDD, Aug. 27, 2010). The recall affects 93,000 people and it is expected that thousands of lawsuits will be filed on behalf of people injured by the defective parts.

During an investors call earlier Wednesday morning, Weldon spoke to some of these issues – not specifically – but rather in a blanket comment.

"I think we've made extraordinary progress," Weldon said during the call. "I don't think there will be any conflict here to bring these two companies together and stay focused with the commitments we have with the government to improve our facilities."

In other dealmaking activity; Alexian Brothers Health System (Arlington Heights, Illinois) and Ascension Health (St. Louis) reported the signing of a non-binding letter of intent, which makes plans for Alexian Brothers Health System to become part of Ascension Health, the largest Catholic health system in the nation. Terms of the deal weren't disclosed.

"This proposed partnership is a significant step forward in the evolution of the Alexian Brothers Health System," said Mark Frey, Executive VP of Alexian Brothers Health System. "This partnership is a sign of Alexian Brothers Health System's commitment to ensure that everyone in the communities we serve will continue to receive the highest level of care for the long term and strengthen Catholic healthcare in the Chicago metropolitan region."

Omar Ford, 404-262-5546;

omar.ford@ahcmedia.com

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