News

Johnson & Johnson Buying Pfizer Unit

Monday, June 26, 2006

TRENTON, N.J. (AP) - June 26, 2006 -- 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 strongly boosts J&J'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-Aids and Neutrogena. J&J also would see nonprescription Pfizer drugs such as Sudafed, Zantac and Nicorette join its Tylenol, Motrin and Monistat, nearly doubling current over-the-counter drug revenues.

Pfizer had been reviewing its 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 Chairman and Chief Executive William C. Weldon said such strong products rarely come on the market.

"These are extraordinary assets that will bring sustainable long-term value to the shareholders of Johnson & Johnson," Weldon said.

He said the deal helps the company with its strategy of balancing its three business segments. With the acquisition, prescription drugs and the medical devices and diagnostics unit will account for 40 percent and 35 percent of revenues, respectively, and consumer products will jump from 18 percent last year to 25 percent.

"This allowed us to solidify the position we have in the consumer area," Weldon told The Associated Press.

"We continue to look in the medical devices and diagnostics area for opportunities," as well as in pharmaceuticals, he said.

The deal comes after J&J lost an intense bidding war to rival Boston Scientific, which acquired heart-device maker Guidant Corp. for $27 billion in April. Weldon said J&J "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 J&J paid a "scarcity premium" to beat out competitors for the assets, doling out more than four times the Pfizer unit's annual revenues. 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 $50.5 billion in 2005 revenues, will also acquire the U.S. over-the-counter switch rights to the prescription nonsedating antihistamine Zyrtec upon patent expiration.

Weldon said that with approximately $17 billion in cash on hand, J&J will cover the purchase mainly with cash, plus some "complementary short-term borrowing."

The deal will dilute earnings per share by 22 cents over 2007. That year, J&J will take a 3-cent charge for acquiring inventory of Pfizer products, and it will take a 7-cent annual charge for the next 15 years to write down the products' brand-name value.

The deal, approved by both companies' boards, 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. By then, J&J executives expect $500 million to $600 million in annual savings from cutting overlap.

Weldon told analysts on a conference call that not only will the new consumer products drive growth, but the consumer business is the lowest risk of the company's segments.

Shah said that's because they don't face generic competition that slashes revenues quickly. Still, he said, J&J needs other sources of growth, with its pharmaceutical business slowing down dramatically.

Pfizer, meanwhile, should see about $13.5 billion of the $16.6 billion sale price after taxes, and expects about $34 billion in cash flow over the next 30 months. Pfizer Vice Chairman David Shedlarz said in an interview 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 (J&J) is diversifying" away from pharmaceuticals.

Pharmaceuticals analyst Steve Brozak of WBB Securities sees a similar pattern across the drug industry. As companies scramble to cover huge losses from blockbusters losing patent protection, he said, Pfizer is focusing more on developing new drugs and Johnson & Johnson on growing overall revenues.

Pfizer plans to buy back up to $17 billion in shares, including up to $7 billion this year and $10 billion in 2007.

Weldon said the deal won't affect J&J's $5 billion share repurchase plan, announced earlier this year and already more than 40 percent complete.

Pfizer shares rose 37 cents, or 1.6 percent, to close at $23.01, while J&J shares fell $1.11, or 1.8 percent, to end at $60.21 on the New York Stock Exchange.

Get more News »