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Hearts are key to J&J strategy

Buyout targets make cardiovascular items

Johnson & Johnson’s pursuit of growth through acquisitions could put companies from Edwards Lifesciences to St. Jude Medical on its wish list.

A year after J&J announced the biggest acquisition in its 126-year history, newly appointed Chief Executive Officer Alex Gorsky is now looking to takeovers to bolster the medical-device unit with products such as heart valves, according to an interview in late April. J&J’s own cardiovascular sales have fallen for five straight years, the only business in its medical device division to shrink.

Gorsky, who started as CEO less than two weeks ago after overseeing J&J’s medical devices, takes over a company beset since 2010 by more than 50 recalls on products from Children’s Tylenol to artificial hips. The world’s second-biggest seller of health-care products could command half the global market for heart valves by buying Edwards, which analysts say will boost earnings more than any cardiovascular device-maker in the next three years, data compiled by Bloomberg show. With St. Jude, J&J would get a company with the industry’s highest operating margins.

“If J&J is interested in remaining relevant in cardiology, it’s important for them to create another beachhead,” said Jeff McCormack, a senior equity analyst for Fairport, N.Y.-based Manning & Napier, which oversees about $40 billion. In the cardiology market, “size is going to matter. So it might be a good time for a company like J&J to begin to identify who they envision to be winners.”

He said Edwards and St. Jude are among the cardiovascular device makers that make the most sense for J&J to acquire.

“We do not comment on rumors or speculation,” Michael Mussallem, CEO of Irvine, Calif.-based Edwards, said about a possible sale. Amy Jo Meyer, a spokeswoman for St. Paul, Minn.-based St. Jude, and Bill Price, a spokesman for New Brunswick, N.J.-based J&J, also declined to comment.

“When there are large opportunities that we think can give us more strategic advantage, we will obviously take a look,” Gorsky said on April 25. “We remain committed to cardiovascular” even after sales decreased 44 percent since 2006.

His comments came a year after J&J announced its takeover of Synthes Inc., the world’s biggest maker of devices to treat bone fractures and trauma, for $21.3 billion in cash and stock.

Accounting for the cash and debt Synthes holds, the transaction will be the largest for a medical-products company and exceed J&J’s $16.6 billion deal for Pfizer’s consumer health care business in 2006, data compiled by Bloomberg show. The Synthes deal is expected to close by June, the data show.

Gorsky is focused on acquisitions as product recalls and quality control issues caused J&J’s shares to underperform its competitors. Shares of J&J rose 24 percent in the past three years through April 30, half the average gain for health-care companies in the Standard & Poor’s 500 Index, the benchmark gauge for American common equity.

J&J has recalled millions of packets of Tylenol, Motrin, Benadryl and other over-the-counter medicines because of foul odors, adulterated ingredients and bad labeling, which undermined its reputation for quality and safety.

The $179 billion health-care company, the parent of Warsaw-based DePuy Orthopaedics, was knocked from one of the top two spots in Harris Interactive’s annual consumer poll of corporate images this year for the first time in 13 years, falling to seventh.

J&J also faces more than 6,000 lawsuits from patients who received faulty artificial hips that were recalled in 2010, as well as more than 550 lawsuits by women who blame vaginal mesh implants made by J&J’s Ethicon unit for internal injuries.

J&J, which last year exited the market for the drug-coated heart stents that it pioneered after competition pushed down prices, could now look to acquire Edwards to expand its share of faster-growing and more profitable cardiovascular devices to stem its revenue decline, according to Joanne Wuensch, an analyst in New York for BMO Capital Markets.

Edwards, the largest maker of artificial heart valves worldwide, has increased sales for 10 straight years and controlled about 47 percent of the $2.2 billion market for the devices last year, data compiled by Bloomberg show.

Analysts project the company’s earnings before interest, taxes, depreciation and amortization will climb 66 percent to $812 million by 2015 from an estimated $490 million this year, the data show. That’s more than any maker of cardiovascular devices with at least $1 billion in revenue in the past 12 months and three times faster than J&J itself.

Edwards, valued at $9.5 billion, won FDA approval in November for its Sapien transcatheter heart valve, the first less-invasive heart valve to treat patients who are too sick for chest-opening surgery. Edwards said the device will bring in as much as $600 million in sales this year, almost a third of its revenue that analysts project will approach $2 billion.

J&J’s cardiovascular unit had $2.3 billion in sales last year, according to data compiled by Bloomberg.

“J&J has been quite public for some time about wanting to get into heart valves, particularly transcatheter heart valves,” said BMO’s Wuensch. “To get there, they could buy Edwards. Edwards has the only transcatheter heart valve on the U.S. market at this stage. It’s one of the more interesting medical technologies around right now.”

St. Jude, which makes defibrillators, pacemakers and heart valves, could also attract J&J by giving it a broader range of heart-related products, according to Jay Singhania, a money manager at Dallas-based Westwood Holdings, which oversees $13.9 billion and owns shares of J&J and St. Jude.

Founded in 1976, St. Jude earned 26 cents in operating income for every dollar of its $5.6 billion in sales in the last 12 months, the highest operating margin among cardiovascular device makers with Ebitda growth that exceeds J&J’s and more than double the industry median, the data show.

St. Jude has about 17 percent of the heart valve market.

“J&J’s notably absent from heart valves and they got out of the stent business, so they definitely have a hole there,” Westwood’s Singhania said.

“St. Jude would give them some optionality on some of these needle-moving pipeline opportunities. St. Jude does look cheap.”

St. Jude, with a market value of $12.4 billion, has had to grapple with its own safety issues in some of its older products, which could deter J&J, according to Glenn Novarro, a New York-based analyst for RBC Capital Markets.

The journal HeartRhythm released a study in March showing St. Jude’s Riata wires, used to connect life-saving defibrillators to the heart, may fatally short-circuit and could have led to 22 deaths.

They were recalled last year. The company will also stop selling the QuickSite and QuickFlex left-ventricular wires after 39 reports of the wires protruding from their insulation, the company said April 4.

While RBC Capital’s Novarro anticipates no problems with St. Jude’s newer Durata-brand wires, it could take at least a year before J&J considers a cardiovascular device deal because of the time needed to integrate Synthes.