Johnson & Johnson to Buy Medical Device Company Synthes

The Swiss medical device manufacturer is in talks with J&J

The rumors began over the weekend and are growing stronger. Johnson & Johnson (J&J) is in discussion to acquire Synthes, a Swiss medical device manufacturer. If the deal crystallizes, J&J could boost its revenue and profit in the short term and gain a strong foothold in the growing market for orthopedic surgery products. It will also be the biggest healthcare takeover in recent years.

Wall Street Journal reporters Dana Cimilluca, Anupreeta Das and Gina Chon got the scoop but J&J and Synthes refused to confirm the rumors at the time.

Synthes confirmed on Monday that it’s in talks with J&J. As reported in an article by the Associated Press, which The Washington Post ran, J&J stands to gain a lot from this deal. As populations age globally and some developing countries start spending more on healthcare, medical devices and implants for bone repair are facing growing demand. (Some of Synthes products involve polymers. For instance, the SynPOR Porous Polyethylene Implants are products based on a flexible polymer for facial restructuring.)

In 2010, Synthes’s revenue went up almost 9 percent to $3.87 billion; its net income shot up 10 percent to $908 million. As Hester Plumridge writes in The Wall Street Journal:

Government health-care cuts and cash-strapped patients canceling surgery are taking a toll on medical-devices firms. Industry revenue is forecast to grow at 8% a year until 2014, almost half the level of some recent years. Prices in orthopedics, one of the hardest-hit areas, could fall 1%-2% in coming years. J&J’s devices-and-diagnostic division increased sales just 4% last year. Synthes — specializing in parts for emergency surgery — is more protected from health-care cuts and grew twice as fast, helped by a large emerging-market presence.

J&J’s offer values Synthes’s equity at $20 billion, say sources close to the discussions, roughly a 20% premium to its undisturbed share price. Removing $1.2 billion net cash values it at 11.9 times 2010 earnings before interest, taxes, depreciation and amortization. Previous deals in the sector have been completed at 13 to 14 times.

J&J has lately received a lot of harsh attention over medical device and other product recalls, so this purchase may be a balm to soothe wounds.

Source: J&J, in talks with device maker Synthes, could see short-term boost, bigger market position, The Washington Post, 04/18/11
Source:  J&J May Break Bones in Orthopedics, The Wall Street Journal, 04/19/11
Source:  J&J’s $20 Billion Deal: What is Synthes?, The Wall Street Journal, 04/15/11
Source: J&J in Talks to Buy Device Maker Synthes, The Wall Street Journal, 04/16/11
Synthes logo used under Fair Use: Reporting.