The value of Orange County’s largest publicly-traded company, Edwards Lifesciences Corp. (NYSE: EW), reached an all-time high last week, its shares jumping nearly 15% to give the medical device maker a market capitalization of about $36 billion.
How long Edwards retains its position as OC’s top public company, though, is now increasingly a source of speculation.
Its shares surged on the back of a new report by Wells Fargo analyst Larry Biegelsen that suggested Edwards is a potential acquisition candidate of new Brunswick, N.J.-based healthcare giant Johnson & Johnson (NYSE: JNJ).
The report, first covered by Barrons, said it would make sense for J&J to beef up its flagging medical device segment, either through the acquisition of Edwards or its Marlborough, Mass.-based potential competitor, Boston Scientific Corp. (NYSE: BSX).
Boston Scientific’s market value is about $54 billion; its shares rose about 4% after news of the report broke.
J&J is valued at more than $370 billion. Its shares dropped about 2% after the report.
The latest M&A rumor isn’t the first time Edwards has been named a potential takeover target of J&J—which has a sizeable Orange County presence in the medical device and eyecare sectors—though the sharp stock movement suggests Wall Street is paying more attention to the rumors this time.
Last week Edwards declined to comment on the market speculation, which added nearly $4 billion to its market value over the week.
Only nine publicly traded OC companies have market values exceeding $4 billion.
In addition to Edwards’ role as OC’s most valuable public company—aided in recent years by acquisitions and headquarters moves of longtime area heavyweights like Allergan, Broadcom and Western Digital—it’s Orange County’s 15th-biggest employer, with about 4,300 employees at its Irvine campus and other area locations.
Dominant Devices
The addition of either Boston Scientific or Edwards would give J&J an entry into the growing transcatheter heart valves market—artificial heart valves inserted via a catheter through a blood vessel to avoid open-heart surgery.
Edwards, a pioneer in transcatheter heart valves, has a dominant presence in the market; news reports estimate it has about two-thirds of the aortic valves market, in addition to a leading position in transcatheter mitral valve technologies.
Boston Scientific pulled its Lotus transcatheter aortic heart valve from the market last year, delaying the company’s entry into the segment. The device should return to European and U.S. markets next year, the company said in February.
The addition of either company would help J&J boost its medical device segment, whose sales have fallen over the past six years. In 2012, devices accounted for 41% of J&J’s total sales, but those numbers are projected to drop to 32% by next year, Biegelsen said in his report.
The Wells Fargo analyst suggested Boston Scientific would be a better buy for J&J.
Either company would be a positive addition to the company, whose chief executive, Alex Gorsky, has called more and more attention to “the increasing innovation and friendlier regulation of devices, compared with some other products,” the Wells Fargo report said.
Gorsky has indicated his firm isn’t shy about making big-dollar purchases; he said in recent public statements that J&J is “agnostic about where we are sourcing our innovation from.”
Last year, it spent $10.6 billion on research and development and $35.2 billion on acquisitions, according to Securities and Exchange Commission filings.
Edwards, by comparison, spent $552.6 million on R&D last year, up 16% year-over-year.
J&J spent about 2.8% of its market value on R&D last year, while Edwards was not far behind in its spending—about 2% prior to the recent stock uptick—despite being only about a tenth the value of J&J.
Edwards said the increase resulted from mitral, aortic and tricuspid transcatheter heart valve treatment product development.
Medtronic PLC is a competitor.
Local Presence
J&J’s business is comprised of pharmaceutical, medical devices and consumer segments, the pharmaceutical business the largest at $36.3 billion in sales last year. The consumer and medical devices businesses reported $13.6 billion and $26.6 billion in sales, respectively.
J&J has been vocal about its plan to add more innovative products to the medical devices segment. Its surgical platform is strong in orthopedics and other surgery products, and it also has an emerging cardiovascular business. The latter would greatly benefit from the addition of a player like Edwards or Boston Scientific, Biegelsen said.
In Orange County, J&J’s operations include a large employment base in the medical device sector. Its devices campus in the Irvine Spectrum has 1,100 employees—a quarter of Edwards’ local employment—spread across six buildings, according to a J&J spokesperson.
The companies are run under a host of names, including Acclarent, Biosense Webster Inc., Cerenovus, Advanced Sterilization Products Services Inc. and Mentor Worldwide LLC.
One of those is on the way out; J&J announced in June that it will sell Advanced Sterilization to Everett, Wash.-based Fortive Corp. (NYSE: FTV) for $2.8 billion in a deal projected to close early next year.
The remaining device companies aren’t focused on cardiovascular treatment, with the exception of Biosense Webster, which develops products used for diagnosing and treating cardiac arrhythmias.
Acclarent develops balloon dilation systems used to treat sinus infection, as well as chronic ear pressure and pain; surgical aesthetics product maker Mentor Worldwide develops breast implants.
Cerenovus focuses on stroke care, and is developing products used to treat intracranial aneurysm.
AMO Blueprint
J&J has recent experience taking over local medical firms. Early last year, it bought Santa Ana-based Advanced Medical Optics, a former unit of Abbott Laboratories, for $4.3 billion.
Advanced Medical now operates within the surgical division of J&J Vision, which in turns falls under the parent company’s medical device unit.
Advanced Medical largely kept its executive team intact following the 2017 sale, and continues to operate from Santa Ana. J&J’s disposable contact lens division is based in Jacksonville, Fla., with its own separate leadership.
J&J reported its Vision Care franchise generated sales of $4.1 billion last year, an increase of nearly 46% over 2016.
“Growth was driven by sales for the acquisition of AMO, with the majority of AMO sales in the surgical category,” according to regulatory filings.
“Keep in mind that J&J is buying AMO as an intact business, [an area] that they did not have a position in before,” Tom Frinzi, worldwide president of J&J Vision’s surgical platform, told the Business Journal in an earlier interview.
A similar game plan would appear possible if J&J makes a move for Edwards, whose 26-acre Irvine campus is about 660,000 square feet and in the early stages of a major expansion (see real estate column, page 17).
