Is a J&J-Synthes Merger in the Works?

Synthes Inc. is considering merging with Johnson & Johnson in a deal that could be worth up to $20 billion and would boost both the image and the coffers of Johnson & Johnson, the New Brunswick, N.J.-based consumer healthcare giant beset with recalls and quality control issues over the last 12 months.

Rumors of merger talks between the two firms surfaced over the weekend and intensified on April 18. Synthes executives responded to the speculation with a brief statement on April 19 that confirmed the negotiations but gave few other details:

“In response to market speculation, Synthes, Inc., confirms that it is engaged in discussions with Johnson & Johnson about a potential business combination transaction,” the company said in a statement. “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.”

The Wall Street Journal broke the story in its April 16 edition but provided few details other than calling the negotiation process “fragile” and claiming the deal still could fall through. Such an agreement—if approved—would rank as one of the largest healthcare takeovers in recent years.

Shares of Synthes stock rose 6.2 percent on April 15 as speculation mounted about a possible merger. Sources familiar with the discussions, however, told the Journal that fluctuations in Synthes’ stock value ultimately could kill the deal.

Should negotiations reach such an untimely and untoward end, J&J would have to reboot its search for a partner that could help the company regain public trust and lift sagging sales. Pharmaceuticals historically have been J&J’s bread and butter, the means to which the company achieved brand-name recognition (thanks to the 1959 acquisition of McNeil Laboratories) for such products as Tylenol, Motrin, Sudafed and Immodium. Last year though, medical devices eclipsed the company’s pharmaceutical sales, with items such as stents, catheters, guidewires, blood glucose test strips and hip implants comprising 40 percent of J&J’s $61.6 billion in 2010 sales.

As growth in these markets slows, however, J&J has had to diversify its offerings. Last year, the firm ventured outside its traditional comfort zone and purchased Micrus Endovascular Corp., a San Jose, Calif.-based manufacturer of neurovascular brain stents that can help prevent stroke. J&J shelled out $480 million for Micrus Endovascular.

Analysts say the Synthes deal would give J&J access to a market that is growing considerably faster than the hip and knee implant sector. Synthes manufactures hip screws, plates, surgical power tools and instruments to treat spinal and soft-tissue injuries—a sector that is more resistant to the ebbs and flows of economic forces and elective procedures. Based in West Chester, Pa., Synthes reported $3.69 billion in sales and $908 million in profit last year, up 8.6 percent and 10 percent respectively, compared with 2009. Most of the company’s business comes from North America but it also has operations in Europe and Asia.

Jeff Jonas, an analyst at Gabelli & Co. in New York, N.Y., said a J&J-Synthes marriage would give J&J access to the more specialized spinal trauma niche market. “Synthes is the most dominant presence in that market,” he told the news organization.
Analyst Lisa Bedell Clive agreed. “If I were J&J, I would rather buy Synthes,” Clive, an analyst with Sanford C. Bernstein Ltd. in London, England, told Bloomberg News. “It’s the chance to become the market leader in trauma.”