J&J’s Recent Move: A Visionary Acquisition Or An Optical Illusion?

+14.83%
Upside
157
Market
180
Trefis
JNJ: Johnson & Johnson logo
JNJ
Johnson & Johnson

Johnson & Johnson (NYSE:JNJ) has agreed to acquire Abbott’s Medical Optics (AMO) business in an all cash deal valued at $4.3 billion. We previously looked at what this divestiture means for Abbott (NYSE: ABT) (Read: Making Sense Of Abbott’s Sale). As far as J&J is concerned we consider the transaction to be good strategic move for its existing Vision Care division. We believe that there is enough potential in this segment which the company can tap into with a larger product portfolio.

Our price estimate for Johnson & Johnson is $118, which is roughly where it now trades.

The Deal Makes Strategic Sense

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?

After the restructuring and certain divestitures in its medical device segment, it was widely speculated that the J&J may be planning to exit this segment completely. But the management has made it clear in conference calls over the last few quarters that it continues to focus on this business. The company plans small tuck-in acquisitions and is re-assessing its go-to-market strategy. The acquisition of Abbott’s Optice business is a step in this direction.

The total world wide vision-care market is estimated at $68 billion and is expected to grow at roughly 5% per year. Furthermore, the market penetration of products in the eye health business very low.  For instance, the penetration in the contact lens segment is estimated at around 18%. The ageing population in the developed markets and rising income in the emerging countries will further fuel the growth of eye-care segment globally. Given the size and low market penetration, there exists sizable market opportunity for future growth.

J&J’s main product in the eye care segment is the Acuve brand of contact lenses. With this acquisition, the company will be able to broaden its portfolio in the vision-care by adding products in cataract surgery, laser refractive surgery (LASIK) and consumer eye health products such as over-the-counter drops. Furthermore, overall J&J has been aligning its medical-devices portfolio towards surgical devices. Abbott Medical Optical’s significant presence in cataract and LASIK surgery  reinforces this. The consumer eye health products that the acquisition will bring in fits well with J&J’s existing consumer oriented product in vision-care.

The company would be able to use its own expansive and Abbott’s acquired business’ supply chain to faster increase penetration.

The Acquisition Would Not Have Much Financial Impact

J&J will pay $4.3 billion to Abbott in cash. Given the company’s solid cash position, with nearly $40 billion in cash and equivalents, the transaction should not be a cause of worry. Furthermore, cash is low yield asset and it appears to be a good move by the company to invest in businesses which have growth potential.

J&J’s vision-care business generated $2.6 billion in FY’15 while Abbott Medical Optical generated $1.1 billion in the same period. On pro-forma basis the the division will make up for about 5% of the total revenue. The management expects only incremental accretion to EPS once the deal is closed. But, with such a large untapped market the division would add significant value in long-term.

Have more questions about Johnson & Johnson? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Johnson & Johnson

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)

Get Trefis Technology