Introduction:
As of 1st November 2022, Johnson & Johnson announced that it will be acquiring Abiomed, for an enterprise value of approximately $16.6 billion, with $380.00 per share in cash. Existing Abiomed shareholders will also receive up to $35.00 per share in cash under a non-tradeable contingent value right (CVR).
As per Joaquin Duato, the Chief Executive Officer of Johnson and Johnson, “The addition of Abiomed is an important step in the execution of our strategic priorities and our vision for the new Johnson & Johnson focused on Pharmaceutical and MedTech.”
Ashley McEvoy, the Executive Vice President and Worldwide Chairman of MedTech at Johnson & Johnson, added that “Abiomed’s skilled workforce and strong relationships with clinicians, along with its innovative cardiovascular portfolio and robust pipeline, complement our MedTech portfolio, global footprint, and robust clinical expertise. Together, we have the incredible opportunity to bring lifesaving innovations to more patients around the world.”
Companies’ Overview:
Johnson & Johnson
Johnson & Johnson is the world’s largest health company with a revenue of $93,78b last year. The company manufactures healthcare products and provides related services for the consumer, pharmaceutical, medical devices, and diagnostics markets. Products that are sold are for example skin and hair care products, acetaminophen products, pharmaceuticals, diagnostic equipment, and surgical equipment in countries located around the world.
The company has three business segments. The biggest is the Pharmaceutical division which brought in $45.6 billion last year (top revenue-producing drugs are Stelara, Tremfya, and Erleada). The second segment is medical devices which brought in 23 billion (top revenue devices including hip implants, spine implants, and contact lenses). Lastly, the consumer health department brought in 14.1 billion dollars (top revenue-producing products are Listerine, Band-Aid, and Aveeno).
Regarding strategy, the Johnson & Johnson CEO told that “One of my priorities for the new Johnson & Johnson is to drive Medtech to become a best-in-class performer. This acquisition is consistent with that strategy, expanding J&J Medtech into high-growth markets and accelerating revenue growth while advancing the standard of care,”. Abiomed will operate as a standalone business within the conglomerate’s medical technology division. The company does not expect to make significant job cuts at Abiomed after the deal closes, noting that expected synergies from the deal would be “quite modest”.
J&J is focused on its pharmaceuticals and medical devices operations with the consumer health spinoff expected by November 2023. Chief Executive Joaquin Duato has said he will prioritize building up the medical devices unit through acquisition.
Abiomed
Abiomed was founded in 1981 and generated revenue of $1.03 billion in its most recent fiscal year which ended in March 2022. The company develops medical technology that provides circulatory and oxygenation support. Analysts expect its revenue to climb to $1.5 billion annually by 2025, according to Refinitiv data.
The company’s Impella heart pumps are the smallest in the world and have been used in the United States since 2008. They are by far Abiomed’s most important and brought in a worldwide revenue totaling $985 million in the fiscal year 2022.
Heart disease is one of the leading causes of death in the United States, accounting for nearly 700,000 deaths in 2020, government data showed. Besides that. J&J executives have said that beyond the new products Abiomed is developing, they believe they can use J&J’s existing infrastructure to expand Abiomed’s reach outside the U.S.
Industry Overview:
In contrast to the previous year, during which the healthcare industry rebounded from the consequences of the COVID-19 pandemic, 2022 has seen a significant decline in M&A deal volumes. Although the healthcare industry is generally considered a recession haven, as a result of the long-term effects of the COVID-19 pandemic, smaller companies, many specializing in healthcare services, are economically and financially burdened. Additionally, Private equity investors in the healthcare industry are faced with rising interest rates, general economic uncertainty, and a diminishing supply of assets they can invest in. Furthermore, with Russia’s invasion of Ukraine, disruptions in the global supply chain are raising prices and causing enormous shortages in the industry. Consequently, as of the 3rd quarter of 2022, the healthcare industry accounts for 11.4% of global deal value and 9.3% of deal count—the lowest values since 2016. Larger healthcare companies, despite their reliable financial foundation and ability to access liquid cash, are reluctant to enter or further deals given the current growing macroeconomic uncertainty.
However, specialty drugs, with extremely inelastic demand, continue to perform well, bringing in over half the revenue of pharmaceutical companies. As a result, Big Pharma is well-placed even in the case of a recession. Pfizer, for example, through vaccine sales has almost doubled its revenue between 2020 and 2021, facilitating notable recent acquisitions. Just in 2022, the company has executed four acquisitions, three of which were “$5 billion-plus all-cash deals”.
The biggest deals of 2022 concentrate on acquisitions to facilitate the adoption of digital technology to realize customer and industry needs. Cloud-based platforms and digital care, for example, are piquing investor attention. Hospital and health systems, however, are less attractive to private equity funds and investors, who are deterred by rising labor costs and interest rates. Looking towards the future, this trend is expected to continue as the healthcare industry becomes increasingly dependent on healthcare technology.
Deal Rationale:
On the one hand, the transaction expands Johnson & Johnson MedTech’s position as a cardiovascular innovator, advancing the standard of care in heart failure and recovery, one of healthcare’s largest unmet needs. Cardiovascular disease is indeed the number one cause of death globally and brings high associated costs. De facto, all forms of cardiovascular disease lead to heart failure, which is a significant cost to health systems due to hospitalizations and extended lengths of stay.
The acquisition of Abiomed is of pivotal importance for Johnson&Johnson to execute strategic priorities of focusing on Pharmaceutical and MedTech. More specifically, the deal allows Johnson&Johnson to diversify and expand its portfolio with a leading platform in heart failure and recovery – Impella® heart pumps, currently the smallest heart pumps in the world. Moreover, Abiomed’s skilled workforce and strong relationships with clinicians, along with its robust pipeline, complement Johnson&Johnson’s MedTech portfolio, global footprint, and robust clinical expertise.
On the other hand, Johnson & Johnson’s leading capabilities in physician education and commercial excellence will complement Abiomed’s capabilities, accelerating access and adoption of these lifesaving technologies to more patients around the world.
This transaction benefits Abiomed in terms of immediate value creation for the various stakeholders and perfectly fits the company’s “patients-first” mindset. Abiomed can leverage Johnson & Johnson’s global scale, commercial strength, and clinical expertise to accelerate its mission of making heart recovery the global standard of care.
Deal Structure:
Johnson & Johnson will acquire through a tender offer all outstanding shares of Abiomed, for an enterprise value of approximately $16.6 billion which includes cash acquired. The agreed price per share of $380 (per Abiomed share), is at a 50.7% premium over its closing price of $252.08 on Monday. The price per share is just shy of Abiomed’s 52-week high of $381.99 per share. Shares of Abiomed surged about 50%, while J&J shares slipped 0.5%. Abiomed shareholders will also receive a non-tradeable contingent value right (CVR) entitling the holder to receive up to $35.00 per share in cash if certain commercial and clinical milestones are achieved.
The milestones consist of:
- $17.50 per share, payable if net sales for Abiomed products exceeds $3.7 billion during Johnson & Johnson’s fiscal second quarter of 2027 through the fiscal first quarter of 2028, or if this threshold is not met during this period and is subsequently met during any rolling four-quarter period up to the end of Johnson & Johnson’s fiscal first quarter of 2029, $8.75 per share;
- $7.50 per share payable upon FDA premarket application approval of the use of Impella® products in STEMI patients without cardiogenic shock by January 1, 2028; and
- $10.00 per share payable upon the first publication of a Class I recommendation for the use of Impella® products in high-risk PCI or STEMI with or without cardiogenic shock within four years from their respective clinical endpoint publication dates, but in all cases no later than December 31, 2029.
Johnson & Johnson expects to fund the transaction through a combination of cash on hand and short-term financing. Johnson & Johnson expects to maintain a strong balance sheet and to continue to support its stated capital allocation priorities of R&D investment, competitive dividends, value-creating acquisitions, and strategic share repurchases.
Following the completion of the transaction, Abiomed will operate as a standalone business within Johnson & Johnson MedTech, becoming one of 12 JJMT priority platforms as defined by annual sales of at least $1 billion each.
The transaction is expected to be completed before the end of the first quarter of 2023 and is conditioned on the tender of a majority of the outstanding shares of Abiomed’s common stock, as well as the receipt of applicable regulatory approvals and other customary closing conditions. Assuming the closing of the tender offer, Johnson & Johnson will acquire any shares of Abiomed not tendered into the tender offer through a merger of Merger Sub with and into Abiomed for the same per share consideration as will be payable in the tender offer. The merger will be effected as soon as practicable after the closing of the tender offer.
Authors:
Ilaria(Yi) Ding, Raf Giesbers, Valentina Piersensini, Aahana Mishra, Zhenming Zhang
Sources:
Johnson&Johnson, CNBC, Bloomberg, Abided, MassDevice, Pitchbook, Reuters
Bocconi Students M&A Circle 