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Johnson and Johnson’s $3.4bn acquisition of Auris Health

By Niclas Hallberg and Ikjyot Anand (LSE), Jack Briody and Lorraine Jiang (Columbia University) | 02/03/2019

Overview of the deal

  • Acquirer: Johnson and Johnson

  • Target: Auris Health, Inc.

  • Estimated value: $3.4bn

  • Announcement date: 13th February 2019

  • Acquirer Advisor: JP Morgan Chase & Co

  • Target Advisor: Centerview Partners

Amidst a buying spree by Big Pharma to replenish portfolios before losing blockbuster drug patent protections, Johnson and Johnson have announced it will acquire Auris Health for $3.4 billion in cash, with additional payments of up to $2.35 billion upon hitting undisclosed milestones. This acquisition follows on from the divestiture of LifeScan, J&J’s diabetes care unit, and represents a strategic shift to focus on and improve sales in better-performing businesses like cancer treatments.

The deal will complement J&J’s previous acquisition of Orthotaxy, a privately held developer of software-enabled robotic technology for surgery. Additionally, J&J’s Ethicon unit, which will absorb Auris, also has a joint venture with Alphabet’s Verily Life Sciences in the form of Verb Surgical, a digital surgery platform combining robotics, data visualization and data analytics. Through the ownership of such companies, J&J hopes to win the race between medical companies to develop technologies to make surgery safer and less invasive.

Following the deal, Frederic Moll is to join J&J to rapidly accelerate product innovation in digital surgery, although his exact role is unclear.

“We are encouraged to see J&J moving more aggressively in the robotics field, which has been a gap for its medical device business” - Larry Biegelsen, Wells Fargo Analyst

Company Details (Johnson and Johnson)

Johnson and Johnson (J&J) is an American multinational operating in 60 countries and products sold in over 175 countries. Their products relate to human health and well-being, with operations spanning the consumer, pharmaceutical and medical devices segments.

- Founded in 1886, headquarters: New Jersey, United States

- President and CEO: Alex Gorsky

- Number of employees: 135,000

- Market Cap: $364 bn EV: $378 bn

- LTM Revenue: $81.6 bn LTM EBITDA: $28.2 bn

- LTM EV/Revenue: 4.63 LTM EV/EBITDA: 13.39

Company Details (Auris Health)

Auris Health is a robotic medical device company aiming to transform medical intervention through the integration of robotics, micro-instrumentation, and data science. Their Monarch Platform is intended for use in diagnostic and therapeutic bronchoscopic procedures.

- Founded in 2007, headquarters: California, United States

- President and CEO: Frederic Moll

- Number of employees: 90

- Market Cap: - EV: -

- LTM Revenue: - LTM EBITDA: -

- LTM EV/Revenue: - LTM EV/EBITDA: -

Projections and Assumptions

Short term consequences

The deal marks the official entrance of Johnson & Johnson into the healthcare robotics market, expected to reach $16.76 billion by 2023. After selling some of its divisions such as diabetes care, the company is currently divided into three main business units: pharmaceuticals, medical devices, and consumer products. Out of these three, the medical devices unit has been underperforming, with sales falling 4 percent to $6.67 billion near the end of 2018 and direct turnaround efforts starting in 2016.

This sets the context for J&J’s strategic rationale, as Auris is expected to bring new turnaround opportunities by helping to unlock more cost synergies, as well as improving patient outcomes and surgery efficiency. The acquisition complements J&J’s previous repositioning towards a greater focus on robotics technology, done mostly in an attempt to boost sales in the medical devices unit. Their previous moves include investing in the robotic surgery startup Verb Surgical, and last years purchase of Orthothaxy. With this strengthened, more robotics focused portfolio, the company sees short-term upsides in the medical devices unit and expects to achieve above-market growth in the next year.

The announcement pushed down rival Intuitive Surgical Inc.’s shares as much as 2.5 percent, As one of the main players in the robotics surgery field and owner of the more widely known Da Vinci Surgical Robot, Intuitive experienced a 34 percent growth in the past year compared to J&J’s lackluster growth of only 4 percent. In the long-term, J&J will face competition as it tries to pivot towards this new area of healthcare.

Long term upsides

The acquisition indicates J&J’s steps to create a “connected digital system” that will help the company create a more integrated and effective process for surgeons and patients. With Auris’s focus on lung cancer and its Monarch Platform robotic technology, J&J will be well positioned to further the development of its Lung Cancer Initiative by incorporating more digitized solutions. The Monarch Platform, with its flexible catheter design, poses a credible threat to Intuitive’s Da Vinci which, with its multi-limb design, is limited to minimally invasive procedures.

The acquisition represents J&J’s aim to become a new-era leader in healthcare by capitalising on the robotics market’s rapid expansion and investor appeal. As of now, Intuitive Surgical Inc. controls the robotics surgery space with $3.3 billion in annual sales, worth almost $52 billion today. But J&J, with Auris’s Monarch Platform, may eventually pose a threat to Intuitive’s market dominance. However, this edge may be fleeting as analysts expect Intuitive to seek approval for its own flexible catheter system this year. With the rapid progress of technology, J&J’s next move in this market will be of great strategic importance. Their joint venture with Alphabet on Verb maybe this next step, as analysts expect the company to release an undisclosed product on the market in 2020.

However, J&J also faces the threat of increasing liabilities from thousands of lawsuits involving the company’s baby powder products. Its drug business is also experiencing pressure from ongoing debates about prescription prices and generic competition with some of its products losing patent protection.

Risks and Uncertainties

Fears of having overpaid for Auris are present: the company has only one approved product which could take appreciable time to penetrate the market. Indeed, Auris’ most recent funding round only valued the company at around $2.2 billion. The recent buying spree by Big Pharma fueled by access to billions of dollars of cash, flowing back from overseas after President Trump’s tax plan, helped average premiums paid for healthcare companies increase from 42% in 2017 to 81% in 2018. Currently, it is unknown if there are any further products in the pipeline for Auris which would justify the high valuation and long term returns.

As the Monarch Platform develops further from diagnosis to treatment in the future, J&J will require new treatments which target nodes at the periphery of the lungs, as small studies have shown these being more effective than traditional methods. However, at a time where investment into research and development have been reduced dramatically, J&J will likely be forced to buy these treatments from other companies, which would be considerably more expensive and put large strains on the company’s finances.

J&J will face significant competition from surgical robotics sector-leader Intuitive Surgical, whose aggressive portfolio of patents has made it more difficult for would-be competitors to gain footing in the industry. Although, Auris’ acquisition of Hansen Medical, including their trove of valuable patents relevant to robotic surgery, gives J&J some extra ground to compete for market share against a firm with more experience in healthcare robotics than them.

“Auris will now become a more formidable competitor given the advantage of JNJ’s commercial scale” - Vijay Kumar, Evercore ISI Analyst

© The MergerSight Group. 2018. All rights reserved.


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