By Linda A. Johnson
Tuesday, June 27, 2006
TRENTON, N.J., June 26 -- Johnson & Johnson said Monday it is buying Pfizer Inc.'s consumer health-care unit for $16.6 billion in a nearly all-cash deal that would strongly boost the health and personal care products company's smallest division.
The purchase would give New Brunswick, N.J.-based Johnson & Johnson products including Listerine, Visine, Neosporin and Lubriderm to add to its stable of name brands such as Reach toothbrushes, Acuvue contact lenses, Band-Aid plastic first-aid strips and Neutrogena skin care products. It also would see nonprescription Pfizer drugs such as Sudafed, Zantac and Nicorette join its Tylenol, Motrin and Monistat brands, nearly doubling current over-the-counter drug revenues.
Pfizer plans to buy back up to $17 billion in shares, including up to $7 billion this year and $10 billion in 2007.
Pfizer had been reviewing its strategic options for the division, which reported sales of $3.9 billion in 2005, since February so it could focus on its prescription drug business.
Johnson & Johnson chief executive William C. Weldon said such strong products rarely come on the market. He said the deal helps the company stick to its strategy of keeping a balanced portfolio among its three segments. With the acquisition, prescription drugs and the medical devices and diagnostics business will account for 40 percent and 35 percent of revenues, respectively, and consumer products will jump from 18 percent last year to 25 percent.
The deal comes after Johnson & Johnson lost an intense bidding war to rival Boston Scientific, which acquired heart-device maker Guidant Corp. for $27 billion in April. Weldon said his company "had the discipline to step out" when the price got too high, but that the loss of Guidant was unrelated to the Pfizer deal.
Independent pharmaceuticals analyst Hemant Shah said Johnson & Johnson paid a "scarcity premium" for the rare assets to beat out competitors, doling out more than four times the annual revenues of the Pfizer unit. It was "the highest I've ever seen for consumer products," he said.
"This will make them by far the largest" consumer health company, Shah said, with a very stable new business with steady mid-single-digit growth likely as long as J&J invests enough in advertising and product updates and spinoffs.
Johnson & Johnson, which had $50.51 billion in 2005 revenue, will also acquire the U.S. over-the-counter switch rights to the prescription non-sedating antihistamine Zyrtec upon patent expiration.
Weldon said that Johnson & Johnson will cover the purchase mainly with approximately $17 billion of cash on hand and some short-term borrowing.
The deal, which was approved by the boards of both companies, is subject to shareholder and U.S., European and Canadian regulatory approval. It is expected to close by year-end and boost Johnson & Johnson's earnings in 2009. The company's executives said that by 2009, they expect to see $500 million to $600 million in annual savings from eliminating overlap.
Pfizer, meanwhile, should see about $13.5 billion of the $16.6 billion purchase price after taxes, and expects about $34 billion in cash flow over the next 30 months. Vice Chairman David L. Shedlarz said in an interview that the company's primary goal is to reinvest at least half of that on developing and acquiring new therapies.
"It's a deal of contradiction because one company [Pfizer] thinks that the way to go is away from diversification," Shah said. "The other company [Johnson & Johnson] is diversifying away from pharmaceuticals."
Weldon said the deal won't affect Johnson & Johnson's $5 billion share repurchase plan, announced earlier this year and already more than 40 percent complete.
Pfizer shares closed 37 cents, or 1.6 percent, higher at $23.13 each, while Johnson & Johnson stock fell $1.11, or 1.8 percent, to $60.21 a share.