Johnson & Johnson Buys Mentor

Drug giant Johnson & Johnson recently bought out cosmetic drug company, Mentor, for $US1.07B bucks.  How is this relevant to Botox?

Mentor is currently awaiting FDA approval for its Botox alternative drug.  Mentor is also the only rival to Allergan’s silicone breast implant product.  Expect the two to go head to head, or shot to shot (pun intended), in both markets, all of which comprise what is known as the “asthetics” space.

Asthetics involve all drugs and related stuff that aids in fighting age-related cosmetic changes.  By 2012, the asthetic market may grow into a $US7B industry due to baby boomers rocketing off into old age and their vanity-consciousness guiding their wallets.

From Bloomberg:

Dec. 1 (Bloomberg) — Johnson & Johnson announced its second acquisition in a week, drawing on stockpiled cash to buy the breast-implant maker Mentor Corp. for $1.07 billion.

Holders of Mentor will get $31 a share, almost double last week’s close, in a deal that pushed the stock within cents of the offer price. Allergan Inc., a maker of implants and the wrinkle treatment Botox, dropped 11 percent on the prospect of competing with J&J, the world’s largest health-care company.

J&J said last week it would buy Omrix Biopharmaceuticals Inc., a maker of surgical equipment to stanch bleeding, for $438 million. The deals suggest J&J, with more than $14 billion in cash on its balance sheet at the end of September, may be on a shopping spree for undervalued companies, said John Farrall, a health-care analyst with National City Private Client Group in Cleveland, which manages $125 million in J&J stock.

“This is right down J&J’s alley of a smaller player with decent products that they can just move right through their distribution network,” Farrall said today in a telephone interview.

Mentor, based in Santa Barbara, California, is the world’s leading seller of breast implants and also sells equipment used in liposuction and facelifts, all offerings new to New Brunswick, New Jersey-based Johnson & Johnson. The acquisition would be a “keystone” of the J&J’s efforts to enter the $4.6 billion market for cosmetic medical products, said Gary Pruden, president of Ethicon, the unit that will oversee Mentor.

Good Aesthetics

Worldwide sales for the “aesthetic” market are expected to grow to as much as $7 billion by 2012, he said. With the global population growing older, and obesity on the rise, J&J sees promise even if breast surgeries have slowed recently in the weak economy, Pruden said by phone.

“The short-term economic view is not one that we think undermines our long-term strategy,” he said.

J&J offers Mentor the sales, marketing and doctor-training force that will help expand business outside the U.S., Josh Levine, Mentor’s chief executive officer, said today in a telephone interview.

Mentor shares rose 89 percent to $30.58 at 4:02 p.m. J&J dropped $3.25, or 5.6 percent, to $55.33. Allergan slid $4.27, or 11 percent, to $33.41. All three trade on the New York Stock Exchange.

Allergan, of Irvine, California, and Mentor are the only companies offering silicone breast implants in the U.S. The Food and Drug Administration approved their use for cosmetic surgery in 2006, after 14 years of allowing them only for breast reconstruction due to safety concerns.

Botox Rival

Mentor also is seeking FDA approval for a wrinkle-filling injection expected to compete against Botox, Allergan’s market- leading cosmetic product.

Breast-implant sales fell in the last quarter and are likely to continue to slide next year because of the U.S. recession, Farrall said.

Still, at about three times expected earnings, the price is “not that much” for Johnson & Johnson relative to other recent acquisitions in the drug and medical device industry, he said. Mentor traded as high as $40.82 on Jan. 4.

“The move into breast implants may surprise some, given the history of litigation and liability risk in the space,” said Michael Weinstein, a JPMorgan Chase & Co. analyst in New York, in a note to clients today.

“J&J, however, appears comfortable enough with the risk profile after months, if not years, of due diligence on the opportunity,” said Weinstein, whose note saw “little to no chance” of a competing bid emerging.

Revenue Decline

Mentor generated $373.2 million in sales in the fiscal year ended in March, 88 percent from breast implants. Implant revenue dropped to $74.4 million in this year’s fiscal second quarter, which ended Sept. 27, from $93.9 million in the previous three months.

The acquisition is expected to close in the first quarter of 2009 and will hurt J&J’s earnings by 3 cents to 5 cents a share for the year, according to the statement. When net debt is included, the deal is valued at $1.12 billion.

Mentor is getting advice on the transaction from Citigroup Inc. and Morrison & Foerster LLP. Johnson & Johnson is using Cravath, Swaine & Moore LLP.

Unfortunately, J&J didn’t do their dilligence with the long term Botox side effects…