Johnson & Johnson’s newfound dominance of the orthopedic-device market, cemented by its $21.3 billion acquisition of Synthes Inc. (SYST), may drive rivals Zimmer Holdings Inc. (ZMH) and Stryker Corp. (SYK) to seek purchases of their own.
The deal announced yesterday boosts New Brunswick, New Jersey-based J&J’s share of the $5.5 billion market for tools to treat bone fractures and traumatic injuries to 55 percent, from 5 percent, and doubles its slice of the $9 billion spinal-care segment to 22 percent, said Larry Biegelsen, a Wells Fargo & Co. analyst in New York.
That may pressure Zimmer and Stryker, which mostly build devices for knee and hip replacements, to bulk up by acquiring smaller orthopedic companies in faster-growing parts of the industry, said David Turkaly, a Susquehanna Financial Group analyst in New York. Likely targets include ArthroCare Corp. (ARTC), BioMimetic Therapeutics Inc. (BMTI), Wright Medical Group Inc. (WMGI) and Mako Surgical Group Inc., he said.
“What clearly happens is J&J becomes No. 1 in all of ortho,” Turkaly said in a telephone interview. “The Strykers and Zimmers of the world are probably now a good distance behind the animal that J&J is in those markets.”
J&J, the world’s second biggest seller of medical products after New York-based Pfizer Inc. (PFE), rose 62 cents to $65.57 in New York Stock Exchange composite trading yesterday. The stock has climbed 8.5 percent since April 18, when Synthes disclosed the deal talks. Synthes, based in West Chester, Pennsylvania, and traded in Switzerland, rose 10 centimes to 146.6 Swiss francs at the close of trading in Zurich.
J&J will buy Synthes, the biggest maker of trauma devices, for a mix of cash and stock, in an acquisition that may close in the first half of 2012, pending regulatory reviews, the two companies said.
Orthopedics “is probably the largest opportunity in the whole medical device area,” J&J Chief Executive Officer William C. Weldon told analysts on a conference call yesterday.
The market will likely grow as developing countries expand their health-care spending while the global population ages and deals with growing obesity, said Alex Gorsky, vice-chairman of J&J’s executive committee, in a telephone interview.
There have been 420 announced or completed deals in the U.S. medical-products industry in the past five years, with an averaged disclosed size of $258.8 million and an average premium of 60 percent, according to data compiled by Bloomberg. The Synthes acquisition would be the biggest since Biomet Inc. was bought in 2007 for $11.4 billion by a private-equity group of Blackstone Group LP, Goldman Sachs Group Inc., KKR & Co and TPG Inc. It would also be the biggest in J&J’s 125-year history
J&J is generally considered a smart acquirer, said Matt Miksic, an analyst with Piper Jaffray in New York, in a telephone interview.
“They do good deals, and the idea they’re ready to step up and pay for an asset and begin consolidating around trauma and spine may” lead others to follow, Miksic said. “It’s the first of a number of steps in consolidation we’ll see.”
Johnson & Johnson (JNJ), which holds its annual shareholders’ meeting tomorrow, has announced or completed 54 acquisitions in the past year, including the Synthes purchase, with an average deal size of $1.15 billion and an average premium of 37 percent, according to Bloomberg data.
The company expects global sales of hip screws, bone grafts and other trauma tools to grow at about 7 percent a year going forward, Michael Mahoney, J&J’s worldwide chairman for medical devices, said on yesterday’s analyst callHips and Knees
That compares with revenue for hip and knee implants — the main business for Stryker, Zimmer and J&J’s orthopedics unit — that’s likely to grow about 1 percent a year going forward, said Rick Wise, a Leerink Swann & Co. analyst based in New York.
Combined, J&J and Synthes accounted for $9.28 billion in orthopedic sales last year, compared with $4.22 billion for Warsaw, Indiana-based Zimmer and $7.32 billion for Stryker, based in Kalamazoo, Michigan.
The Synthes purchase would use only about a quarter of the $27 billion in cash and short-term investments J&J held as of March 31. Much of that reserve can’t be spent in the U.S. without paying corporate income taxes, which may give Johnson & Johnson incentive for more deals outside the country, Wise said.
Weldon, on yesterday’s call, said he’d be willing to consider other acquisitions.
“If there’s a great opportunity, we would continue to assess it,” the CEO said. “We look at everything, and if it would bring value to our shareholders, we’d definitely consider it and move forward.”
J&J was involved in unsuccessful takeover talks with London-based Smith & Nephew Plc (SN/), Europe’s biggest maker of artificial hips and knees, said a person familiar with the plan who declined to be identified because the negotiations were private. A spokesman for Smith & Nephew didn’t immediately return a phone call seeking comment after normal business hours.
Zimmer probably faces more pressure to do a deal than Stryker, which has a more diversified product line and growing hip sales, Wise said. Russell Weigandt, a Stryker spokesman, declined to comment in an e-mail.
Zimmer has “a comprehensive portfolio in trauma with a number of differentiated and innovative products,” said Garry Clark, a company spokesman, in an e-mail. “Irrespective of competitor activities, we expect to remain competitive.”
Stryker rose 6 cents to $58.39 in New York Stock Exchange composite trading yesterday and has gained 1.5 percent in the 12 months before today. Zimmer climbed 12 cents to $62.9 and has gained 3.4 percent in the past 12 months.
BioMimetic uses bone-growing proteins to repair skeletal damage, a market that Turkaly estimated at $2 billion in annual sales. The Franklin, Tennessee-based company would consider an acquisition offer if it was in the interest of the company’s shareholders, said Kearstin Patterson, a spokeswoman, in an e- mailed response to questions.
“Currently, we are highly focused on product approval and the potential launch of our lead orthopedic product, Augment Bone Graft,” she said. “However, we are always looking out for the best interest of our shareholders and, as such, are required to consider viable opportunities.”
Nick Lamplough, a spokesman for Arlington, Tennessee-based Wright Medical, and Yvette Cuello, a spokesman for Fort Lauderdale, Florida-based Mako, said their companies would have no comment. A telephone message left for ArthroCare spokeswoman Corrine Ervin wasn’t returned.
Synthes has an operating margin of 35 percent, the highest among medical-products makers with market values of more than $5 billion, according to data compiled by Bloomberg. It would be folded into J&J’s DePuy Orthopaedics unit, already the biggest seller of artificial hips.
The industry has tended to grow through acquisitions, said Turkaly, the Susquehanna analyst.
“With all the larger players in the space seeking new avenues for growth, along with swelling cash hordes on their respective balance sheets, we continue to believe the ortho market is ripe for further consolidation,” he said.