We Are Not Surprised That J&J May Be Selling Cordis

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Johnson & Johnson

Johnson & Johnson (NYSE:JNJ) is reportedly in talks to sell Cordis and Cardinal Health is leading the bidding, apparently. [1] This is not quite surprising. J&J has historically focused on building its medical devices and diagnostics business, which paid off as the company became global leader in many of the critical medical devices markets. However, the situation has been a little different for the past few years. The segment’s growth has slowed down significantly and the company is looking at ways to downsize this segment and focus more on growing pharmaceutical business. Strong pricing pressure and competition from lesser known names appears to be the primary factor behind the stunted growth. Last year, J&J sold its diagnostics unit, Ortho-Clinical Diagnostics, to the Carlyle group for around $4 billion. The divestitures may continue and this year it could be Cordis that is to go. In fact, the wheel was set in motion last year when The Wall Street Journal reported that Cordis’ sale process is at an early stage.

It must be noted that despite J&J’s gradual exit from drug-eluting stents business, its cardiovascular medical devices segment recovered in 2014. Biosense Webster has been gaining market share and J&J’s endovascular products are seeing good growth, driven by the re-launch of the S.M.A.R.T. vascular stent system and the EXOSEAL Vascular Closure Device. This makes Cordis a relatively more attractive acquisition prospect for some companies than it was a couple of years ago.

Our current price estimate for Johnson & Johnson stands at $101, which is at par with the market price.

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See our complete analysis for Johnson & Johnson

The reports claim that Cordis could sell for as much as $2 billion. That’s not a very attractive price considering that J&J’s cardiovascular medical devices sales stand at more than $2 billion annually. The growth prospects have dried up, except for some support from Biosense Webster, and perhaps that has weighed on the negotiation of consideration. We estimate that the medical devices business still accounts for more than half of J&J’s value, which implies a valuation of close to $145 billion. Cordis selling for a mere $2 billion is definitely not a good sign for this segment.

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Notes:
  1. J&J Said to Be in Talks on Sale of Cordis, With Cardinal Leading, Bloomberg, Feb 20 2015 []