Heart disease kills more Americans than any other. It costs the US $219bn a year in healthcare services and lost productivity. Johnson & Johnson thinks there is money to be made in the cardiovascular field.
The healthcare giant is plunking down more than $16bn to buy Abiomed, which makes a heart pump used by patients with severe coronary artery disease. Bulking up is one way to fight slower growth when top-selling immunology drug Stelara loses patent protection next year. The premium on offer is enough to send J&J investors’ hearts racing healthily.
J&J’s $380 a share cash offer values Abiomed’s equity at around $17.3bn. The offer represents a 51 per cent premium to Abiomed’s closing price on Monday and nears the level the stock last traded at four years ago.
Abiomed does have some cash on its books. Strip that away and that would give the deal an enterprise value of about $16.6bn. That still puts the company on an EV/ebitda multiple of over 58 times. That is rich, given J&J’s comments that any potential cost savings would be “very modest”.
Boston Scientific and Edwards Lifesciences, both of which have large cardiovascular businesses, command an average multiple of around 22.
One has to wonder why J&J, which is in the midst of spinning off its consumer products division, felt the need to do a deal now. Sure, it is sitting on $34bn of cash and equivalent. But its pharmaceutical and medical device units — which pulled in $79bn in sales last year — continues to grow at a decent clip despite the hit from the stronger dollar.
Abiomed, which generated just over $1bn in sales last year, is expected to pull in $1.3bn next year, according to consensus forecasts. Given that J&J generates over 70 times those revenues, this is a small deal for the buyer.
Nevertheless, the $35 a share in additional cash, worth $1.6bn, that Abiomed shareholders will receive if certain targets are met suggests that J&J investors will wait a few more beats for a return on this investment.
Our popular newsletter for premium subscribers is published twice weekly. On Wednesday we analyse a hot topic from a world financial centre. On Friday we dissect the week’s big themes. Please sign up here.