The all-cash $4.32 billion deal expected to close by April 2017
Drug major Abbott Laboratories Inc. (NYSE: ABT) has agreed to sell its eye-surgery equipment business to Johnson & Johnson Inc. (NYSE: JNJ), the world’s biggest maker of healthcare products, for $4.32 billion in an all-cash deal, as reported by The Wall Street Journal on September 16th, 2016. The deal would enable J&J to emerge as the second largest company in cataract surgeries, an $8 billion global market that is growing at a rate of about 5% annually. Abbott had bought the eye business, then known as Advanced Medical Optics, for $2.8 billion, including debt, in 2009. Abbott is selling the business, renamed as Abbott Medical Optics (AMO), amidst its efforts to strategically reshape its products portfolio.
The strategic deal includes AMO’s consumer eye health products, cataract surgery business and advanced laser vision (LASIK) technology and corneal care products. Abbott’s medical-optics business makes equipment used in cataract and LASIK vision-correction surgeries, as well as contact lenses. In 2015, AMO’s sales fell 6.9% to $1.1 billion, largely because of a strengthening dollar. The deal, expected to close by April 2017, will not have any impact on Abbott’s earnings guidance for FY17, and is subject to customary closing conditions, including regulatory and shareholders’ approvals.
The Abbott-Johnson & Johnson deal comes amidst a wave of mergers among medical device companies, which are facing intense competition and pricing pressure from networks of hospitals that have themselves been consolidating.
Abbott’s focus on devices and diagnostics
As part of its renewed focus on its cardiovascular devices and diagnostics business, Abbott has stepped up the pace of acquisitions in 2016. On April 28th, 2016, Abbott entered into a definitive agreement to acquire medical devices manufacturer St. Jude Medical Inc. (NYSE: STJ) for about $25 billion. The merged entity would create a medical device leader with a top position in the high-growth cardiovascular market and the neuromodulation market. The deal would give Abbott access to St. Jude Medical’s new medical device products including the EnSite Precision next-generation cardiac mapping system and annual pretax synergies of $500 million by 2020.
Abbott also announced on February 1st, 2016, that is has signed a definitive agreement to acquire Alere Inc. (NYSE: ALR) for $5.8 billion, significantly boosting its global diagnostics presence. With this acquisition, Abbott will become the leading diagnostics provider of point of care testing. Abbott’s total diagnostics sales will exceed $7 billion after the acquisition and the combined entity is expected to garner annual pre-tax synergies of $500 million by 2019.
Abbott achieved a major breakthrough on its cardiovascular devices business after the U.S. Food and Drug Administration (FDA) approved on July 5th, 2016, its first-of-its-kind bioresorbable heart stent called Absorb, used for the treatment of people with coronary artery disease (CAD).
Given these developments, Abbott’s eye care business would be less of a strategic fit and the company would need to reduce its debt after the two acquisitions. Abbott had long-term debt of about $6 billion as of June 30th, 2016.
J&J’s focus on vision care
For Johnson & Johnson, the recent deal assumes significance since it has also been acquiring medical technology assets as part of efforts to accelerate growth of its Medical Devices segment, which includes its vision care business. In 2012, it acquired Synthes Inc., a maker of devices used to treat fractures and traumatic injuries, for roughly $20 billion. AMO, especially its cataract-replacement lenses, is seen to complement well with Johnson & Johnson’s eye-care unit, which sells ACUVUE contact lenses, and help the Company diversify into the surgical suite of products. J&J’s portfolio of contact lenses and solutions is part of a $7 billion segment of the $68 billion global eye-health market. In Q2 FY16, J&J notched $6.4 billion in worldwide medical device sales, while its vision care unit generated revenue of $685 million.
J&J’s recent acquisitions
During Q2 FY16, J&J acquired NeoStrata, a leader in dermocosmetics, and the HIPOGLÓS diaper rash cream brand in Brazil. Subsequent to the quarter, the Company acquired Vogue International LLC, a privately held company focused on the marketing, development and distribution of salon-influenced hair care and other personal care products, for $3.3 billion.
The drug major also completed the acquisition of privately-held BioMedical Enterprises Inc., a leading manufacturer of Nitinol orthopaedic implants for small bone fixation, during Q2 FY16.
Abbott’s stock ended the day at $41.58, slipping 0.24%, at the close on Tuesday, September 20th, 2016, having vacillated between an intraday high of $42.00 and a low of $41.58 during the session. The stock’s trading volume was at 4,867,018 for the day. The Company’s market cap was at $61.31 billion as of Tuesday’s close.
J&J’s stock ended the day at $177.95, gaining 0.25%, at the close on Tuesday, September 20th, 2016, having vacillated between an intraday high of $118.24 and a low of $117.69 during the session. The stock’s trading volume was at 5,181,473 for the day. The Company’s market cap was at $323.73 billion as of Tuesday’s close.
Promise for the Future?
The World Health Organization estimates that about 20 million people are blind from age-related cataracts and that there are at least 100 million eyes with compromised visual acuity caused by cataracts. While the eye care business is seen to be less of a strategic fit for Abbott, it remains to be seen how well J&J integrates AMO into its vision care operations to add to its earnings after the deal closes.