Ethicon, a segment of the diagnostics division of Johnson & Johnson (NYSE:JNJ), recently decided to purchase certain Quill intellectual property from Angiotech Pharmaceuticals for an initial cash outlay of $20 million, which may go up to $42 million in potential contingent consideration. Ethicon offers hernia repair, women’s health & urology solutions, etc.
Separately, JNJ has also been facing a shortage of Doxil, a treatment for ovarian and other cancers, because its contract manufacturer, Boehringer Ingelheim GmbH’s Ben Venue Laboratories, halted Doxil production in November to meet regulatory concerns relating to contamination.
Johnson & Johnson is a $179 billion company with operations in the research & development and manufacturing of pharmaceuticals; and diagnostics and consumer healthcare, which includes women health, skin care and baby care. Key competitors of Johnson & Johnson are Pfizer (NYSE:PFE), Merck (NYSE:MRK) and Abbott Labs (NYSE:ABT).
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Quill Technology IPR Acquisition from Angiotech
With this acquisition, JNJ would be able to better regulate the costs for its Ethicon segment. Under the agreement, Angiotech Pharmaceuticals will also manufacture knotless wound closure products using the Quill technology, exclusively, for Ethicon for an undisclosed term. This agreement will benefit both JNJ and Angiotech as Angiotech will be granted royalty free license to all Quill intellectual property sold to Ethicon. This will allow Angiotech to continue to manufacture, market and sell Quill. Ethicon contributes nearly 10% to the company value. You can see by modifying the chart below how this development will impact Ethicon’s EBITDA margin.
JNJ is not going to produce any new batches of Doxil but has some unused supply to be provided to patients under the allocation program started last year. It is now conducting a rationing program for cancer patients already enrolled under the allocation program, so that they can receive additional treatment.
Doxil is reported under Procrit, Eprex & Valcade segment of JNJ’s Pharmaceuticals division, which accounts for nearly 15% to our $72 price estimate for JNJ.
The share price may be impacted negatively because of the cessation of Doxil supply. However, JNJ may find other manufacturers to fill in for the supply shortage, thereby offsetting any potential negative impact to its value.