Devices & Diagnostics

Should J&J buy Edwards Lifesciences?

Johnson & Johnson’s chief executive is on the hunt for a structural heart company to add to its medical devices business. Does it make sense to buy a company that is the big name in the market?

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Last week, in an earnings call with analysts, Dominic Caruso, chairman and CEO of Johnson & Johnson, indicated that the diversified conglomerate is interested in the structural heart space.

Here’s what Caruso said in response to an analysts’ question, according to a transcript of the call from Seeking Alpha:

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In the Medical Devices, as you know we have a very strong presence in orthopaedics and in general surgery. We keep looking for additional bolt-on acquisitions there and we have a very strong electrophysiology business in cardiovascular but there are other areas within cardiovascular that seem attractive in structural heart and other areas, but the valuation would be something we’d always consider. So we’d also be very disciplined about doing a transaction where the valuation seem pretty high, which is what they are today.

If structural heart is of interest, the first company that comes to mind is Irvine, California-based Edwards Lifesciences. That company has repeatedly defied expectations, its own and that of analysts, when it comes to sales of its Sapien transcatheter heart valves. Earlier this week Michael Mussallem, CEO of Edwards, said, “2016 has been a remarkable year for our company with year-to-date sales growth rate of 20%, about double our original expected growth rate” in the third-quarter earnings call with analysts. The Seeking Alpha transcript shows that Mussallem went on to add that customers globally have flocked to the company’s Sapien 3 heart valve that “remains on track to generate over $300 million more in sales than we originally expected for the year.”

So given Caruso’s interest in structural heart companies, should Johnson & Johnson buy Edwards? His comment on the valuation of some companies being pretty high in medtech these days seems to indicate that J&J is going to be cautious. But wouldn’t it make sense to buy the company that got the first FDA approval for a transcatheter aortic valve replacement (TAVR) and maintains its lead?

One analyst thinks so.

“For a company like J&J, I think historically one of the strategy pitfalls Cordis made in the coronary stent business, was that they acquired companies like Conor Medsystems who had technologies that sounded promising but were not fully vetted,” said Venkat Rajan, industry manager for medical devices at Frost & Sullivan, in an email. “As such, if you are going to take the risk to enter that market, why not go straight to the top (via Edwards Lifesciecnes)  in the same way they did with Synthes for the trauma market.”

[Cordis was a J&J business that pioneered drug-eluting coronary stents only to bow out of it and the unit was sold to Cardinal Health last year.]

If valuation is a concern, then J&J could look at left atrial appendage (LAA) occlusion devices or those that mitigate congestive heart failure, Rajan said, but noted that neither of these segments has the same market opportunity as that of TAVR. In fact, the New Brunswick, New Jersey, company has already bought an LAA closure firm — Coherex Medical — without disclosing the price. And J&J’s venture arm – Johnson & Johnson Innovation – JJDC – has invested in CVRx, a company using neuromodulation to treat heart failure.

In a phone interview Friday, J&J’s medical devices chief indicated that the company has cash on hand and will put it to work if the acquisition fulfills the business’ overall strategy, is a good fit and creates shareholder value – the three boxes that need to be checked for any purchase.

“We are one of two AAA-rated companies in the world. We are not afraid to leverage our balance sheet to bring in accretive opportunities for the business,” said Gary Pruden, who manages the $25 billion medical devices business that has been underperforming. In 2015, sales were off nearly 9%.

But when pressed about Edwards Lifesciences, here’s how Pruden responded:

When you look at the third criteria regarding shareholder value, that sometimes makes [acquisitions] challenging and, by the way, there are a lot of targets in the structural heart space. The named company is one of them but there are others. We are looking at bolt-on acquisitions or tuck-in acquisitions… TAVR is pretty well developed. There’s four or five players and mitral is a pretty much, flat out crap shoot at this point but the burden of disease may be as high there if not higher. So we are carefully monitoring all the spaces and we look for the opportunities and we are not afraid to deploy capital. It just has to be on strategy, be a good strategic fit and create shareholder value.

Transcatheter mitral valve replacement (TMVR) is a complicated matter and Pruden is correct to imply that a winning product there has yet to reveal itself. Some believe the answer there is a mix of repair and replacement products. Despite that, there hasn’t been a dearth of acquisitions in TMVR, even as J&J has stayed on the sidelines.

Edwards suspended an internal TMVR program to buy CardiAQ for up to $400 million last year. Soon after Abbott, which has the first FDA-approved MitraClip repair device disclosed that it bought Tendyne Holdings for $250 million and Cephea Valve for an undisclosed amount. The world’s largest pure-play device maker, Medtronic, agreed to shell out $458 million to gobble up another startup in the mitral world – Twelve.

Photo: Hong Li, Getty Images