JNJ-Inverness

J&J to buy Inverness unit for $1.3 billion

(UPDATE: Updates with closing stock prices)

By Debra Sherman

CHICAGO, May 23 (Reuters) - Health care giant Johnson & Johnson (NYSE:JNJ) said on Wednesday it plans to acquire most of Inverness Medical Technology Inc. (AMEX:IMA- news) for $1.3 billion, in a move to regain market leadership in blood-sugar monitors.

New Brunswick, New Jersey-based J&J said the deal would be a stock-for-stock transaction that would give Inverness shareholders about $35 per share, plus a common stock interest in the new company. The deal would exclude certain units of Inverness and only includes the diabetes care products business, it said.

The 114-year-old J&J, known for its Band-Aid adhesive bandages, Johnson's Baby Powder, and many other products, said on May 9 it was in advanced talks to make the deal with Waltham, Massachusetts-based Inverness.

As part of the deal, Inverness would split off its non-diabetes businesses -- women's health, nutritional supplements, and clinical diagnostics -- to form a new, publicly traded company owned by Inverness shareholders.

Inverness shares settled $1.16 higher at $36.11, a rise of 3.3 percent, on the American Stock Exchange. J&J shares, which have a 12-month range of $80.50 to $104.94, closed $1.27 lower at $97.73 on the New York Stock Exchange.

Gruntal analyst Daniel Owczarski said he expects the deal to help J&J, now the second-largest player in the glucose-monitoring market after Roche Holding Ltd. , to reclaim the lead soon.

``We've always thought that Inverness' technology was the best in the market,'' Owczarski said, adding that it may take just six to 12 months before J&J starts to recapture market share.

J&J said it would take a one-time charge in 2001 of about $100 million or 7 cents per share, primarily associated with the write-off of in-process research and development. Based on proposed accounting rules regarding the treatment of goodwill scheduled to be implemented next quarter, the company estimated dilution per share of 2 cents in 2001 and 2 cents in 2002 and said the transaction should add to profits after that.

Excluding the one-time charges, J&J said it expects to fund the impact on 2001 and 2002 earnings per share and therefore remains comfortable with its previous earnings guidance in the middle of analysts' estimates for 2001, which range between $3.85 and $3.90, and the consensus of $4.35 for 2002.

``What we don't know yet is how much synergy there is,'' said Prudential Securities analyst Sandra Hollenhorst.

Still, the market for testing and treating diabetes is expected to grow sharply.

J&J executives forecast the market for self-testing and blood glucose products, which totaled $3.5 billion in 2000, will more than double in the next 10 years.

According to the American Diabetes Association, some 15.7 million Americans, or 5.9 percent of the U.S. population, have diabetes. While an estimated 10.3 million have been diagnosed, 5.4 million are unaware that they have the disease. Each day, about 2,200 people are diagnosed with diabetes.

The Inverness deal, which is expected to close in the fourth quarter, comes two months after J&J agreed to acquire the drug maker Alza Corp. (NYSE:AZA) for $10.2 billion, its biggest deal ever.

For the past three years, J&J's LifeScan unit has been marketing Inverness's glucose-monitoring systems, including the One Touch FastTake and One Touch Ultra meters and strips monitoring systems.

Source: http://biz.yahoo.com/rf/010523/n23424775_4.html

 

 

Why J&J Jumped to Purchase Accounting

Proposed $1.3 billion deal with Inverness highlights new merger accounting.

Suddenly, the purchase accounting method is not all that terrifying to pharmaceutical and health-care giants.

At least that’s the message Johnson & Johnson sent on Wednesday when it announced that it is in “advanced discussions” to acquire Inverness Medical Technology’s diabetes care products business for $1.3 billion.

J&J said in a statement that it would account for the transaction under the purchase method. This is surprising for several reasons.

For one thing, acquisitive drug companies have historically preferred the pooling-of-interests method of accounting, because it allows pharmaceutical firms to avoid hefty amortization of goodwill and earnings dilution.

What's more, J&J's $10.5 billion pending acquisition of Alza Corp. uses the pooling method.

Thirdly, given that the Financial Accounting Standards Board (FASB) is scheduled to end pooling for mergers on June 30, one might have thought that the drugmaker would want to get in another pooling deal in under the wire, right?

Not according to Robert Willens, Lehman Brothers’ tax and accounting analyst. This is because FASB’s proposal for the non- amortization of goodwill puts J&J “in a better position” from an earnings perspective, he says. “I’m sure that had some effect on their decision,” he adds.

Indeed, in the past J&J has accounted for its deals using both the pooling and purchase methods.

Granted, there are technical reasons why the J&J-Inverness deal would be accounted for as a purchase pact. Inverness is doing a spin-off of its non-diabetes business into a new publicly traded company before the merger. “That in and of itself blows [away the possibility of using] pooling,” Willens says. Why? One of the stipulations for pooling is that there can’t be an unusual distribution before the treatment.

“In the past, they would have held onto the assets that were being spun off,” Willens adds. “That was more to their liking.”

In a CFO.com interview in March, J&J CFO Robert Darretta indicated that he has mixed feelings about the anticipated new rules.

“Some people would argue that pooling shows transactions in too positive a light while the purchase method shows them in too negative a light,” Darretta said. “These new regulations are more favorable for where we use purchase accounting but unfavorable compared to pooling.”

Certainly, the new M&A rules are not perfect for the company. “The impact [to J&J] will be initially positive because of the goodwill aspect,” he said. “But over time it will be adverse compared to an environment where you could have had pooling.”

Based on the proposed rules, which are expected to be implemented next quarter, J&J estimates the Inverness deal would dilute earnings by 2 cents per share in both 2001 and 2002.

There are also strategic reasons for J&J not to fret over the purchase accounting and simply allow the spin-off. “Part of it is that they didn’t want the other assets,” says Michael N. Weinstein, a J.P. Morgan analyst. “They’re keeping the technology part they wanted, which is the profitable part of the business.”

However, Willens believes that in other deals such as PepsiCo and Quaker Oats, companies have actually been willing to hold onto assets for the sake of pooling. “In the Pepsi case,” he says, “they’re taking on all the assets, even though some people say they are not that interested in the food assets, and they're doing that to make sure they get pooling treatment.”

Source: http://www.cfo.com/printarticle/1,4580,2|9|AD|3104,00.html