J&J’s Heart Deal Pumps Up Post-Breakup Prospects

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Johnson & Johnson is betting that devices designed to keep patients’ hearts pumping will do something similar to its revenue growth. The U.S. healthcare firm is paying $16.6 billion to buy cardiac-device maker Abiomed, a transaction that will create a measly return in the near term but will help boost J&J’s top-line appeal after an impending breakup.

The price, at $380 a share, is hefty. It works out at roughly 50% above where Abiomed’s stock was trading at Monday’s close, and that’s not including an extra payout due if the company hits certain financial and regulatory milestones. With Abiomed set to make about $360 million in operating profit after tax two years from now, based on Refinitiv estimates, that’s a return on investment of just 2%. J&J says there won’t be much room for cost cuts, so any improvement on that return will have to come from extra growth in Abiomed’s revenue.

That’s not a bad bet to make. Abiomed has grown its top line by more than 20% annually for over a decade on average, and J&J has three reasons to suspect this pace should continue for several years. The company’s small heart pumps should continue to capture more of the market for heart failure. The number of patients who experience that condition is rising as the population grows older and more obese. And since J&J is a big global firm, it should be able to expand sales overseas. If the business reaches $4 billion of revenue in five years, akin to a 24% growth rate, then all else being equal, J&J’s return would be a more palatable 5%.

Buying Abiomed would also give J&J’s revenue a more regular rhythm. After it spins off its consumer business next year, what remains will be more exposed to the patent cycles of the larger drugs business, and Abiomed ought to provide a more steady kind of cash flow. And as a $450 billion company with virtually no debt, J&J will still have room to do more such deals without giving its investors palpitations.


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