Medical Device Daily Staff Writer

If Johnson and Johnson (J&J, New Brunswick, New Jersey) acquires Synthes (Solothurn, Switzerland) for $20 billion, it would be one of the largest med-tech deals in history. The Wall Street Journal first shed light about the possible merger between the two companies late Friday afternoon.

If the transaction comes into fruition, it would be J&J's largest ever acquisition and help rejuvenate the firm's device business, one that has taken a pummeling since the economic downturn and pricing pressures began to affect sales.

Synthes would give J&J immediate presence in trauma, one of the fastest-growing segments of the $28.3 billion market for orthopedic devices. Synthes, which also makes spine and bone-replacement products, would expand J&J's presence in emerging markets. Last year, Synthes had $424.4 million in sales in the Asia Pacific region, up some 19%.

On Monday Synthes confirmed reports that the two companies were discussing a merger.

"In response to market speculation, Synthes, confirms that it is engaged in discussions with Johnson & Johnson about a potential business combination transaction," the company said in a statement issued through its website. "No assurance can be given as to whether, when or on what terms any possible transaction might occur. Synthes does not intend to make any further public statements unless and until a definitive agreement has been reached, or until discussions between the parties have terminated."

J&J told Medical Device Daily via e-mail that the firm declined to comment.

Shares of Synthes surged as much as 12% in trading in Zurich. The deal has the potential to up the ante and set the tone for deals this year, according to analysts of the space. It also has the ability to place J&J in a position where it is the clear market leader in the orthopedic market, according to Wells Fargo (New York, New York) analyst Larry Biegelsen.

In research notes he wrote, "Acquiring Synthes would boost J&J's share of the trauma market from 5% to 54% and nearly double its share of the spine market to 22%. The deal would make J&J the clear number one player in trauma and number two player in spine, as well as enhance its number one position in the overall orthopedic market.

He added that strategically, this deal would make J&J the clear market leader in the fast-growing trauma market, build critical mass in the spine segment and further enhance its leading position in the overall orthopedic market. J&J's share of the overall orthopedic market would increase to almost 28% which would be twice as large as its next largest competitors, Stryker (Kalamazoo, Michigan) and Zimmer (Warsaw, Indiana). We think this deal could trigger further consolidation in the orthopedic market with mid-tier players the likely targets, especially in spine. On the regulatory front, we expect such a deal to receive close review by the FTC and its European counterpart given the relatively concentrated top market shares in the trauma and spine segments. Financially, we estimate a deal could be 4-5% earnings accretive to J&J in 2012 to 14 (1% to 2% accretion including deal amortization)."

Analysts at Citigroup noted that there was a tax advantage to using that cash to acquire a foreign company — albeit one with a huge business in the U.S. — rather than repatriating it back home. Nearly 75% of J.&J.'s cash resides outside the U.S., Citigroup estimates.

News of the proposed 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 WSJ, 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 Orthopedics (Warsaw, Indiana), a J&J company would be consolidated in federal court (Medical Device Daily, 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.

In addition the company has lost ground on products that once dominated the market.

A prime example is J&J's Cypher drug eluting stent, which has been eclipsed by Abbott's (Abbott Park, Illinois) Xience.

J&J reported that it will host a conference call for financial analysts at 8:30 a.m. today to review first-quarter results. Dominic Caruso, Vice President, Finance and CFO, along with Louise Mehrotra, Vice President, Investor Relations, will host the call. The company did not say if it would discuss the possible Synthes acquisition.

Omar Ford, 404-262-5546;
omar.ford@ahcmedia.com

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