It's not surprising that Johnson & Johnson (JNJ -0.21%) has a deal in the works to buy Abiomed (ABMD), the maker of the Impella heart pump. The only surprising thing is that it took this long for it to happen.
More than 11 years ago, then-Johnson & Johnson CFO Dominic Caruso said the company was looking to get into the business of heart pumps and heart valves -- if the right company could be bought at the right price.
"Both [technologies] are interesting. We are interested in looking at them," Caruso told investors at a Morgan Stanley Global Health Conference in September of 2011. "Unfortunately, they are overvalued today."
At the time, Abiomed was trading at $12 a share. On Monday, the stock closed at $252 and when Johnson & Johnson reported the $16.6 billion deal on Tuesday to buy Abiomed, the stock jumped to as high as $381.99 a share in early trading.
Why the deal makes sense for Johnson & Johnson
As it plans to spin off its Consumer Health segment next year, Johnson & Johnson is focusing instead on its more profitable MedTech (medical technology) and Pharmaceutical segments. The purchase of Abiomed, expected to be completed in the first quarter of 2023, bolsters the company's MedTech offerings; the Impella is considered an industry standard because of its small size and because surgery isn't needed to install it. It is designed to keep the heart working during percutaneous coronary interventions and cardiogenic shock when the heart can't pump enough blood to support the body's needs.
The price for the deal isn't cheap. Johnson & Johnson agreed to pay $380 a share to buy Abiomed, $128 more a share than what it was selling for on Monday. However, Abiomed is profitable, so the purchase will be eventually accretive to Johnson & Johnson. The company said that the financing needed to make the deal work would be slightly dilutive to neutral to earnings per share (EPS) in the first year of the deal but would add $0.05 to Johnson & Johnson's EPS by 2024 and would be "increasingly accretive" after that.
Abiomed also gives Johnson & Johnson the revenue growth that it is looking for. In the second quarter, Abiomed reported revenue of $266 million, up 7% and up 11% in constant currency year over year, the seventh consecutive quarter the company posted double-digit revenue growth in constant currency. Abiomed also had EPS of $2.32 in the quarter, up 87% over the same period last year.
In the short term, Johnson & Johnson investors may feel a little pain. For example, on Tuesday, the company's stock was trading about $3 less a share than it had been selling for on Monday. But now is a good time for such a move because the company is coming off a surprisingly healthy third-quarter report that showed it seems to be thriving despite supply chain and inflationary pressures.
Last week, Johnson & Johnson said quarterly revenue was $23.8 billion, up 1.9% year over year with net income of $4.5 billion and EPS of $1.68, up 21.6% and 22.6%, respectively, over the third quarter in 2021. The company's lowest-performing segment, Consumer Health, reported revenue of $3.8 billion, down 0.4% year over year. Pharmaceutical had revenue of $13.2 billion, up 2.6%, and MedTech had revenue of $6.8 billion, up 2.1%.
Interestingly, it was thought that Johnson & Johnson would focus on acquisitions of smaller to mid-sized companies because they would be less disruptive and easier to make work financially and operationally. However, with Johnson & Johnson's MedTech segment already selling leading Biosense Webster electrophysiology products to treat patients with irregular heartbeats, the addition of a heart pump maker with a $17 billion market cap dovetails with the company's operations, especially since Abiomed has the edge of being a market leader in heart pumps.
Why the deal makes sense for Abiomed
Abiomed investors, at least initially, make out great from the healthcare mega-deal. Their shares immediately became worth $128 more. One concern, though, is what this means for the company in the long term. Will being a subsidiary of Johnson & Johnson be a good fit?
Abiomed will still function as a separate company, just under Johnson & Johnson's umbrella. However, it gains access to Johnson & Johnson's big worldwide sales reach. In the second quarter, 82.3% of Abiomed's revenue came from the U.S. By contrast, only 52.3% of Johnson & Johnson's third-quarter revenue was domestic, with the rest coming from outside the U.S.
It's hard to account for how the cultures of the two companies will mix, however. The move could help Abiomed keep ahead of competitors because it gains access to more research and development funding. Despite Johnson & Johnson's reputation as a relatively conservative company, its MedTech segment has been innovative, using artificial intelligence in surgery with its C-SATS platform and 3-D technology to help surgeons with the company's Visible Patient Planning Solution software.
One advantage for Abiomed investors, at least the ones who don't cash in, is they will get shares in a Dividend King that has raised its dividend for 60 consecutive years.