By William Dinsdale and Bilal Rashid (LSE), Priyanshu Srivastava, Amarthya Chandrappa, and Deepankumar Sakthive (Warwick)
Photo: Jesse Orrico (Unsplash)
Overview of the deal
Acquirer: Johnson & Johnson
Target: Abiomed
Implied Equity Value: $17.0bn (as of 18/11/2022)
Total Transaction Size: $16.6bn
Announcement date: 01/11/2022
Target advisor: Goldman Sachs & Co. LLC
Acquirer advisor: J.P. Morgan
Pharmaceutical company Johnson & Johnson (NYSE: JNJ) has announced an agreement to acquire all outstanding shares of Abiomed (NASDAQ: ABMD), a manufacturer of heart, lung and kidney support devices. The deal involves payment of $380 per share in cash, amounting to $16.6bn enterprise value.
The transaction was unanimously approved by the board of directors of both companies and will have a range of both short-term and long-term benefits. The acquisition will expand and diversify Johnson & Johnson’s portfolio of offerings in heart failure and recovery, whilst further supporting Johnson & Johnson’s position as a world-leading pharmaceutical by providing a robust pipeline of technologies and clinical studies.
Whilst the transaction is expected to be slightly dilutive to adjusted earnings per share in the first year, the deal will accelerate pro-forma MedTech and J&J’s enterprise revenue growth and become accretive by $0.05 per share in 2024 and increasingly thereafter.
Company Details (Acquirer - Johnson & Johnson)
Johnson & Johnson (J&J) is an American multinational healthcare conglomerate, holding operations in 60 countries and selling products in over 175 countries. They currently operate in four key sectors: Consumer Health, Medical Devices, Vision and Pharmaceuticals (through their subsidiary, Janssen). In late 2021, J&J announced that they would spin off their Consumer Health operations, in a similar fashion to that of GSK and Haleon.
Founded in 1886, headquartered in: New Brunswick, New Jersey, USA
CEO: Joaquin Duato
Number of employees: 141,700 (as of 2021)
Market Cap: $449.5bn (as of 18/11/2022)
EV: $447.4bn
LTM Revenue: $96.0bn
LTM EBITDA: $32.0bn
LTM EV/Revenue: 4.9x
LTM EV/EBITDA: 14.5x
Company Details (Target - Abiomed)
Abiomed is a medical-device technology company that produces temporary external and implantable mechanical circulatory support devices, including heart pumps and oxygen breathing systems. Abiomed aims to provide cost-effective solutions to recover the hearts of impacted patients.
Founded in 1981, headquartered in Danvers, Massachusetts, USA
CEO: Michael R. Minogue
Number of employees: 2003 (as of 2022)
Market Cap: $17.0bn (as of 18/11/2022)
EV: $16.2bn
LTM Revenue: $1,074.1mn
LTM EBITDA: $274.2mn
LTM EV/Revenue: 11.9x
LTM EV/EBITDA: 45.8x
Projections and Assumptions
Short-term consequences
The transaction is expected to be completed prior to the end of Q1 2023 and is conditional on the tender of a majority of the outstanding shares of Abiomed’s common stock, as well as regulatory approvals, such as those regarding antitrust issues given the nature of this particular transaction.
Once the transaction is completed, Abiomed will become a standalone business within J&J MedTech, becoming one of 12 JJMT priority platforms (defined by having annual sales of at least $1bn each). The integration of the business will be facilitated by the succession plan developed by Michael Minogue, Abiomed’s Chairman, President & CEO. A smooth integration will be vital given the changing leadership and desire to maximise the realisation of synergies between the two businesses.
The proposed acquisition is expected to be slightly dilutive or neutral to adjusted earnings per share in the first year, considering the impact of financing. However, the acceleration of pro forma MedTech and J&J enterprise revenue growth will have an accretive impact of roughly $0.05 per share in 2024, which will increase further thereafter.
Current Abiomed shareholders will be incentivised to support the transaction given the $1.6bn earnout provisions. This comes from the receipt of non-tradable contingent value rights (CVR) entitling shareholders to additional cash (up to $35 per share) based on the achievement of various clinical and commercial milestones ranging from net sales targets to FDA approvals.
Long-term Upsides
The transaction sets up Johnson & Johnson MedTech (JJMT) to potentially fulfil one of healthcare’s largest unmet needs: heart failure management and recovery. This acquisition is testament to JJMT’s changing strategic priorities towards Pharmaceutical and MedTech. Johnson & Johnson is in a stage of diversification, and entering the MedTech market offers a great opportunity to capture any whitespace in the high-growth segment. Abiomed’s capabilities will further accelerate the mass adoption of lifesaving technologies - a foundational vision of Johnson & Johnson. The acquisition also provides Johnson & Johnson with a robust R&D program, exclusive FDA approvals, and a portfolio of ongoing randomised controlled trials.
On the financial side of things, the acquisition will not only boost short-term enterprise revenue but also improve profitability as Johnson & Johnson deepens its position as a cardiovascular innovator. The earnings growth will also be accelerated by extending Abiomed’s reach outside the US by leveraging on Johnson & Johnson’s existing infrastructure. Despite using a combination of cash and short-term financing, Johnson & Johnson expects to maintain a strong balance sheet. The business will continue to support its stated capital allocation priorities of R&D investment, competitive dividends, value-creating acquisitions, and strategic share repurchases.
Risks and Uncertainties
While it is hoped that the fast-growing business of Abiomed will allow J&J MedTech to grow revenues quickly, J&J has also been looking into new uses for Abiomed’s flagship product: Impella - the world’s smallest heart pump, as advertised on their website. The aim is to realise new revenue streams, although there is no guarantee of success. In addition, regulators may not approve any new uses. Given that the Food and Drug Administration (FDA) takes one week to eight months to approve new drugs, it would be hard for J&J to project revenue growth accurately.
Ultimately, this deal is crucial in expanding the medical devices segment of J&J. It is, however, worthy to note that the deal puts a lot of pressure on one product, Impella heart pumps. If the product fails to gain traction, the whole business division takes a step back. In 2019, the Impella heart pumps were linked to serious complications in certain critically ill patients (Kent, 2019). This caused a 10.9% decline in Abiomed stock at the time. Although Impella heart pumps are now FDA-approved, it highlights the impact of any negative news on the product.
J&J plans to allow Abiomed to operate as a stand-alone business within the device unit of the company. Therefore, it is unlikely that Abiomed will realise much cost or revenue synergies that are typical of a merger or acquisition. Abiomed also runs the risk of losing its identity within J&J if integration falls through.
“The addition of Abiomed provides a strategic platform to advance breakthrough treatments in cardiovascular disease and help more patients around the world while driving value for our shareholders” - (Joaquin Duato, CEO of Johnson & Johnson)