Marking its biggest deal in nearly six years, Johnson & Johnson (JNJ, Financial) announced on Tuesday it is buying Abiomed Inc. (ABMD, Financial) for $16.6 billion in a bid to boost its cardiovascular business even as its spins off its consumer health division.
According to the terms of the agreement, the New Brunswick, New Jersey-based health care conglomerate, which is shifting its focus to its pharmaceutical and medical devices operations, will pay $380 per share for Abiomed, which represents a 50.7% premium to the stock’s closing price on Monday.
In addition, shareholders of the Danvers, Massachusetts-based manufacturer of heart pumps and other mechanical circulatory and respiratory support devices will get rights to receive up to $35 per share in cash if certain commercial and clinical milestones are reached.
Johnson & Johnson disclosed that it plans to fund the transaction through a combination of cash on hand and short-term financing.
Following the announcement, shares of Abiomed popped more than 50%, while Johnson & Johnson’s stock declined about 2%.
Year to date, the two companies have recorded positive returns even as the broader health care sector has languished, tumbling almost 50%.
Upon the close of the deal, which is expected to occur before the end of the first quarter of 2023, Abiomed will operate as a standalone business within Johnson & Johnson’s medical technology division.
Benefits of the transaction
The company also highlighted several benefits of the combination. In addition to expanding its presence in the cardiovascular space with Abiomed’s portfolio of heart recovery technologies, including the Impella heart pumps, it is expected to accelerate Johnson & Johnson’s near and long-term sales and earnings growth.
In a statement, Johnson & Johnson CEO Joaquin Duato noted the addition of Abiomed is “an important step in the execution of our strategic priorities” and vision for its future.
“We have committed to enhancing our position in MedTech by entering high-growth segments,” he said. “The addition of Abiomed provides a strategic platform to advance breakthrough treatments in cardiovascular disease and helps more patients around the world while driving value for our shareholders.”
Abiomed Chairman, President and CEO Michael R. Minogue also expressed his excitement for the deal, noting it “reflects the remarkable value” the company created with its heart pump platform and pipeline.
“This transaction partners us with an organization that shares our patients-first mindset and creates immediate value for our patients, customers, employees and shareholders,” he said. “It will enable us to leverage Johnson & Johnson’s global scale, commercial strength and clinical expertise to accelerate our mission of making heart recovery the global standard of care.”
Most recent company financials
Johnson & Johnson reported its third-quarter 2022 results on Oct. 18.
For the three months ended Sept. 30, the health care conglomerate saw its revenue grow 1.9% to $23.8 billion. Similarly, it said net income of $4.45 billion, or earnings of $1.68 per share, increased 21.6% from the prior-year quarter.
The company recorded slight sales increases in its Pharmaceutical, MedTech and Worldwide segments, but saw a 0.4% decline in its Consumer Health division, which will be spun off by November 2023.
As for Abiomed, it reported its second-quarter 2023 financial results on Nov. 1.
The company recorded an 11% increase in revenue to $266 million for the three months ended Sept. 30. The net income of $106.13 million, or earnings of $2.32 per share, also improved from the year-ago quarter.
Valuation
Johnson & Johnson has a $446.10 billion market cap; its shares were trading around $170.63 on Tuesday with a price-earnings ratio of 23.76, a price-book ratio of 5.98 and a price-sales ratio of 4.74.
The GF Value Line suggests the stock is fairly valued currently based on its historical ratios, past financial performance and analysts’ future earnings projections.
Further, the GF Score of 90 out of 100 indicates the company has high outperformance potential based on backtesting results. It received high ratings for profitability, growth, financial strength and momentum, but a middling mark for GF Value.
Abiomed has a market cap of $17.21 billion; its shares were trading around $378.47 on Tuesday with a price-earnings ratio of 79.85, a price-book ratio of 11.23 and a price-sales ratio of 16.45.
According to the GF Value Line, the stock is modestly overvalued currently.
The company has high outperformance potential based on its GF Score of 100, which was driven by high ratings across the board.
Guru ownership
A number of gurus are set to benefit from the pending deal.
Among the 34 gurus who are invested in Johnson & Johnson, Ken Fisher (Trades, Portfolio) has the largest stake with 0.22% of its outstanding shares. Other major guru shareholders include Ray Dalio (Trades, Portfolio)’s Bridgewater Associates, Jeremy Grantham (Trades, Portfolio), Yacktman Asset Management (Trades, Portfolio), the T Rowe Price Equity Income Fund (Trades, Portfolio), Tweedy Browne (Trades, Portfolio) and Mairs and Power (Trades, Portfolio).
With a 7.97% stake, Baillie Gifford (Trades, Portfolio) is Abiomed’s largest guru shareholder. PRIMECAP Management (Trades, Portfolio), Simons’ firm, Al Gore (Trades, Portfolio)’s Generation Investment, Dalio’s firm, Steven Cohen (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) also have positions in the stock.
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