Two big medical tech firms in talks for possible combination

(Bloomberg) -- Synthes Inc. said it's in talks about a possible takeover by Johnson & Johnson, potentially the biggest deal in J&J's 125-year history as it seeks to recover from pulling more than 50 products off the market since the start of 2010.

Synthes doesn't intend to provide more information until a definitive agreement has been reached or talks have been terminated, the West Chester, Pennsylvania-based company said today in a statement.

Buying Synthes, the biggest maker of devices to treat bone fractures and trauma, would end months of speculation about talks between J&J and U.K. device maker Smith & Nephew Plc. Synthes would give New Brunswick, New Jersey-based J&J a line of hip screws, surgical power tools and instruments to treat spinal and soft-tissue injuries that had $3.69 billion in 2010 sales, boosting the U.S. company's share of the market for trauma care.

"If I were J&J, I would rather buy Synthes," said Lisa Bedell Clive, an analyst with Sanford C. Bernstein Ltd. in London, in a phone interview today. "It's the chance to become the market leader in trauma," which has more long-term growth and profit margin potential than replacement hips and knees.

DEAL PREMIUMS

A deal for 140 francs to 160 francs a share, representing a premium of 8 percent to 23 percent, would be "reasonable" based on previous medical technology deals, Clive said. A purchase by J&J would be "challenging" given antitrust concerns and would limit the chance of a large acquisition premium, she said.

A takeover would burden J&J, the world's second-biggest maker of health-care products after Pfizer Inc., with another business grappling with recalls and charges of pushing dangerous products. Chief Executive Officer William C. Weldon is already managing recalls, a U.S. probe of J&J's consumer manufacturing and more than 600 lawsuits tied to faulty artificial hips.

'FAIR ARGUMENT'

"You could make a fair argument it's not the right time to expand," said Mark Bussard, an analyst at Baltimore-based T. Rowe Price Group Inc., which held 21 million J&J shares in December, before the talks were announced today. "If I were on their board, I might be asking, 'Why don't we spend the next year getting our house in order, and then talk about a $20 billion acquisition?'"

William Price, a J&J spokesman, declined to comment in an e-mail today.

J&J, the world's biggest maker of artificial hips, reported a drop in joint-implant revenue in last year's fourth quarter, hurt by a decline in medical procedures and a recall of 93,000 artificial hips.

The U.S. company's recalls include almost 200 million packages of Tylenol, Motrin and other over-the-counter medications. Its DePuy unit has also withdrawn 93,000 hip implants that failed at higher-than-expected rates, forcing repeat surgeries.

CONSENT DECREE

The company's McNeil Consumer Healthcare unit signed a consent decree on March 10 giving the U.S. Food & Drug Administration expanded oversight of three manufacturing plants for five years, following recalls of over-the-counter drugs with musty odors or incorrect ingredients. The settlement doesn't preclude future criminal charges, the agency said at the time.

That makes timing difficult for pursuing a big deal, said Erik Gordon, a business professor at the University of Michigan in Ann Arbor who studies the biomedical industry.

Synthes recalled spinal implants in 2009 after reports that the Synex II Central Body components had failed in six people, leading to pain and loss of height for some, the company said in a Nov. 4, 2009, statement. The FDA said the devices could pose an "imminent hazard" to patients' health.

To be sure, J&J and Synthes aren't the only device makers to pull products and face lawsuits. Joint-implant makers Stryker Corp. and Zimmer Holdings Inc. and Medtronic Inc., the biggest maker of defibrillators and pacemakers, also faced recalls in recent years.

SYNEX IMPLANTS

The company had produced "thousands" of Synex implants that caused no problems, Gilgian Eisner, a spokesman for Synthes in Solothurn, Switzerland, said in a phone interview yesterday. No deaths were reported and the recall didn't require the removal of devices that were already implanted if they didn't prompt complaints, he said. The company is developing a replacement for the device.

Synthes is also in talks to sell its Norian unit, which pleaded guilty in November to one felony and 110 misdemeanor counts for conducting an unauthorized trial of its bone-mending cement products, Norian XR and Norian SRS.

MARKET SHARE

An acquisition of Synthes would allow J&J to double its market share in spinal care to 30 percent, making it the second- biggest behind Medtronic, Carla Baenziger, an analyst with Bank Vontobel AG in Zurich, wrote in a note. J&J would also become the market leader in trauma with market share of about 57 percent, up from 5 percent now, she said.

Synthes traces its roots to a 1958 venture by four Swiss surgeons, according to its website. Synthes Chairman Hansjoerg Wyss founded the company in the U.S., where he still resides.

In February 1999, the company, then closely held, merged with Swiss medical equipment maker Stratec Holding AG to become the market leader in bone-trauma devices. The combined company became known as Synthes-Stratec Inc. At the time, Synthes had headquarters in Pennsylvania and Canada, while Stratec had been publicly traded on the Swiss stock exchange since 1996.