J&J Is Demanding Too Much From Boston Scientific

+13.79%
Upside
158
Market
180
Trefis
JNJ: Johnson & Johnson logo
JNJ
Johnson & Johnson

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.

Relevant Articles
  1. Will Johnson & Johnson Stock Rebound To Its Pre-Inflation Shock Highs of $185?
  2. Should You Pick Johnson & Johnson Stock At $160?
  3. Should You Pick Johnson & Johnson Stock After A 6% Fall In A Month Despite Upbeat Q3?
  4. What’s Happening With Johnson & Johnson Stock?
  5. Johnson & Johnson Poised For A Muted Q2?
  6. Cross-Sector Comparison: Is Caterpillar Stock A Better Pick Over J&J?

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.

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

2009

2010

2011

2012

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

60%

122%

156%

Total Streaming Content Obligations ($ Million)

1,299

3,907

5,634

Notes:
  1. J&J demands $7.2 billion from Boston Scientific as trial begins, Reuters, Nov 20 2014 []