Johnson & Johnson’s (JNJ) $16.6 billion deal to buy heart pump maker Abiomed (ABMD) will boost its pharmaceutical and medical device businesses before J&J plans to spin off its consumer division into a separate company. The acquisition of Abiomed is expected to be completed by the end of the first quarter of 2023. The spin-off of J&J’s consumer business, including brands like Band-Aid and Tylenol, is expected in November next year. Conclusion J & J ‘s new standalone consumer company will be called Kenvue . The split will allow the remaining company, which will retain the Johnson & Johnson name, to focus more on its biopharmaceutical and medical device innovation and technology businesses. The Abiomed transaction is consistent with this initiative and will strengthen Johnson & Johnson’s ability to address unmet need for innovation in heart failure and recovery while accelerating long-term top-line and earnings growth. We like the transaction as it reinforces the core of our investment thesis – an increased focus on JNJ’s fastest-growing segments, specifically MedTech in this case. As a reminder, J&J’s medtech unit reported global operating growth of 8.1% in the third quarter. That’s certainly a respectable growth rate, but not quite the 10% to 14% revenue growth (up 13% to 17% on a constant currency basis) that Abiomed forecast for fiscal 2023 when the company released its first-quarter 2023 numbers published in early August. Simply put, the addition of Abiomed will serve to accelerate the growth rate of J&J’s medtech unit and should, in theory, result in a higher valuation as investors tend to reward growth with multiple expansions. The Abiomed transaction, funded with J&J’s cash and short-term financing, is expected to post negative to neutral results over the next year. In 2024, J&J expects the acquisition to add about 5 cents to earnings per share and what the company describes as “increasingly profitable thereafter.” Valuation While the valuation to be paid isn’t cheap at roughly 16 times Abiomed’s fiscal 2023 sales estimates, Johnson & Johnson has the financial capacity to get there without incurring too much debt. The amount paid represents just over half of J&J’s expected earnings before interest, taxes, depreciation and amortization (EBITDA) for fiscal 2022. Over the long term, we believe the transaction will prove to be a better investment than just sitting on cash. It will generate higher returns than any interest accrued on the debt, as Abiomed’s offerings address a more than $35 billion market opportunity in the U.S. alone. Heart failure, which is the end result of all untreated cardiovascular disease, is the leading cause of hospitalizations in the United States for people over the age of 65 and is the #1 cause of death in America. Speaking to investors after the announcement, J&J’s management also reiterated that despite the acquisition, the company “has the flexibility to continue to pursue multiple priorities by simultaneously investing in research and development, pursuing value-added acquisitions such as this, and capital.” returns to shareholders through our dividend and, where appropriate, share buybacks.” Use of Cash Acquisitions are generally made through the exchange of cash, stock, or a combination of both. The risk-reward nature of a deal can change depending on the form of payment. For example, a All-stock offer gives both parties the opportunity to participate in the upside potential, but also to share in the risk if the integration does not have the desired effect of creating a stronger company and creating additional value.A cash offer, on the other hand, means that the buyer – in this Case Johnson & Johnson – the ge takes on all the risk but keeps 100% of the value added. Therefore, a decision like this to commit nearly $17 billion, or $380 per Abiomed share, upfront can demonstrate management’s confidence in the prospects of this acquisition. Sure, J&J assumes all of the integration risk — but if successful, its shareholders will realize 100% of the reward without the stock dilution that would otherwise result from a stock payment. Fortunately, Johnson & Johnson has one of the best balance sheets in the world. Following Tuesday’s pre-bell announcement, shares of J&J fell less than 1%, while shares of Abiomed rose more than 50%, equivalent to per-share premium. Contingent Value Part of the transaction also allows Abiomed shareholders to earn additional cash per share if certain commercial and clinical milestones are met. That’s thanks to a non-tradable contingent value right (CVR) they receive as part of the deal. The breakdown on the CVR is as follows. According to the press release, $17.50 per share would be awarded “if net sales for Johnson & Johnson’s Abiomed products exceed $3.7 billion for the second quarter of 2027 through the first quarter of 2028.” However, if that target is not met, but is “later met during a rolling four-quarter period through the end of Johnson & Johnson’s first fiscal quarter in 2029,” an award of $8.50 per share will be made. Additionally, $7.50 per share was awarded “upon approval of the FDA pre-market submission” for the use of Abiomed’s Impella products in patients with segment elevation myocardial infarction (STEMI) “without cardiogenic shock through January 1, 2028.” And $10 per share, payable “on the first issuance of a Class I recommendation for the use of high-risk Impella products [percutaneous coronary intervention] PCI or STEMI with or without cardiogenic shock within four years from the publication date of their respective clinical endpoints, but in all cases no later than 31 is far in the future and would be worth it if the milestones required are met to unlock the payments (Jim Cramer’s Charitable Trust is Long JNJ. For a full list of stocks click here.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling any stock in his charity’s portfolio. 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Johnson & Johnson headquarters in New Brunswick, NJ
Mel Evans | AP
Johnson&Johnson‘s (JNJ) $16.6 billion deal to buy a heart pump manufacturer Abiomed (ABMD) will strengthen its pharmaceutical and medical device business in advance of J&J’s plans to spin its consumer division into a separate company. The acquisition of Abiomed is expected to be completed by the end of the first quarter of 2023. The spin-off of J&J’s consumer business, including brands like Band-Aid and Tylenol, is expected in November next year.