The well acclaimed pharmaceutical and healthcare giant, Johnson & Johnson (JNJ, Financial), has been in the news ever since August of last year when it expressed its interest to divest the medical devices unit from its core business stream. In fact, the medical devices unit has not seen much of a profit in the past few quarters and has dragged the top and bottom line of Johnson & Johnson in the past fiscal year. The management has already initiated the cost-cutting strategies and this divestiture is something which could fit in the same category. In a spree to shed its slower growth businesses and to concentrate on those which are innovative and promising in the long run, J&J decided to sell off the Bridgewater-based medical devices unit, Cordis. A recent Bloomberg report gives an indication that there are potential bidders already suiting to acquire the Cordis unit of J&J. Let’s catch up quickly with some of the shared details.
Once a market leader, but no more
The Cordis medical devices unit of the company makes vascular medical devices and caters to the market requiring drug-coated heart stents for treatment of cardiovascular blocks. While the market for cardiac stents currently stands at $5 billion, the Cordis unit is struggling to make patients buy from it instead of purchasing similar products being offered by its closest rivals who are ruling such markets.
For the fiscal year 2014, the medical devices unit performed worse than expected and contributed $27.52 billion in sales, a sequential 3.5% decline when compared on a year-over-year basis. Such a dismal performance of Cordis did speak volumes on the challenge J&J is facing in its stents business with insurers and hospitals presently negotiating higher discounts for such devices, leading to intense price competition with the peers. Also with the introduction of rival products which are more effective for cardiovascular blocks and easier to implant, this unit which once pioneered the market for its drug-coated stents failed to hold its stand. Thus, J&J has rightfully decided to get rid of this devices unit which is registering low to flat growth almost every quarter.
The leading bidder is here
A recent Bloomberg report has given clear indications that J&J is in talks with Ohio based Cardinal Health Inc. (CAH, Financial) that happens to be the leading suitor for acquiring Cordis.
If the latter is successful in acquiring Cordis it will offer a boost to its product pipeline, since it also manufactures medical equipment which includes surgical supplies besides distributing drugs. As Cordis is the pioneer in the drug-coated stents manufacturing, it will add to the sales of Cardinal Health Inc. which reported total sales of $91.1 billion in the previous fiscal year.
But spokespersons from J&J and Cardinal Health declined to comment further on this matter. However, news sources have confirmed that there could be other private equity firms and healthcare companies trying to bid for J&J’s medical devices unit. The deal is expected to close at around $1.5-2 billion as per published reports. Therefore, it can be concluded that if Cardinal Health is eager to acquire Cordis, the management has to take a brisk decision on the same else it might just lose the opportunity of being the “leading bidder” for the medical devices unit of J&J.
Moving ahead
Though there’s still no definitive deal on the table, the Cordis sale falls in line with the company’s plan to cut costs to the tune of $1 billion each year by focusing on key areas such as divesting its smaller business units from the major contributing business lines to remain profitable in the coming future. While speculations on the latest divestiture is ripe at this juncture, investors’ ought to stay tuned and closely monitor whether this deal actually goes through with Cardinal Health or if it takes a different twist at the end.
