J&J Is Demanding Too Much From Boston Scientific
Johnson & Johnson (NYSE:JNJ) is demanding $7.2 billion in damages from Boston Scientific in relation to the breach of contract by Guidant. The claim arises from the controversial auction nine years ago in which Guidant sold itself to the highest. [1] The trial has begun and could have severe repercussions for Boston Scientific if J&J’s action succeeds. J&J claims that Guidant through misrepresentation breached the contract the due diligence process, allowing Boston Science to outbid J&J, presenting it from acquiring the company for a much cheaper price. In fact, Guidant’s acquisition hasn’t turned out to be a winner for Boston Scientific. A huge penalty could meaningfully erode the company’s market value and marginally increase J&J’s. Although the case is technically against Guidant, the liability is Boston Scientific’s as it acquired Guidant and assumed its potential liabilities.
Our price estimate for Johnson & Johnson stands at $101, implying a discount of about 5% to the market price.
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See our complete analysis for Johnson & Johnson
Let’s consider the worst case scenario for Boston Scientific. The company’s current market value is a little over $17 billion. Yet it has just $246 million in cash and over $4 billion in debt. It annual EBITDA is roughly $5 billion and a judgement in the amount of $7 billion would deeply cut into its financing capacity. However, this result is highly unlikely. Some of the most plausible scenarios of damage payment of $1 billion – $2 billion could lead to a downside of more than 5% to 10%. What does J&J gain out of this? For one thing, the company can increase its cash pool slightly which could lead to an upside of little over 2% even in the its best case scenario (J&J gets $7 billion). In other words, the financial upside is minimal and the battle seems to be mostly about payback and establishing legal superiority. Court cases are a very common occurrence in the pharmaceutical industry and the companies tend to spend a significant amount on legal fees to protect their assets and intellectual property.
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2009 |
2010 |
2011 |
2012 |
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Streaming Content Costs as % of Revenue |
3% |
7% |
22% |
44% |
Total Content Costs as % of Revenue |
13% |
14% |
25% |
46% |
Streaming Content Obligations as % of Revenue |
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60% |
122% |
156% |
Total Streaming Content Obligations ($ Million) |
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1,299 |
3,907 |
5,634 |
- J&J demands $7.2 billion from Boston Scientific as trial begins, Reuters, Nov 20 2014 [↩]