Johnson & Johnson (NYSE:JNJ) is buying medical device company Shockwave Medical (NASDAQ:SWAV) for $13.1 billion.
Shockwave makes devices that perform Intravascular Lithotripsy. They break up calcium deposits in arteries with sound waves, in the same way kidney stones have been treated for 30 years.
The announcement had limited impact on the stock, however. SWAV stock was set to open this morning at about $325 per share, up just 1.6% from its April 4 close. JNJ stock was nearly unchanged at $153.
Why No Big Shock?
The overnight reaction was limited because Shockwave jumped $30/share in late March. This came after The Wall Street Journal reported the two companies were talking about a deal.
In February, Shockwave projected 2024 revenue of $910-$930 million, up 27% from 2023. JNJ’s last big deal came in November 2022, when it bought Abiomed for $16.6 billion. Abiomed makes a heart pump. JNJ is building a suite of heart treatment devices.
While most drug companies have been shedding extraneous operations and focusing on new drugs, JNJ has turned its attention to medical devices. But the idea is the same, to obtain patented therapies before those patents expire.
This has made some medical device stocks move based on their takeover value. Shockwave has jumped 58% in 2024 as its technology was proven in the market. Investors were paying 80 times earnings and 12 times expected revenue for it before JNJ came calling.
Unfortunately, there’s a patent cliff for medical devices, too. Once patents expire, competitors can make competing devices and sell them for less. But medical device companies hope to fight this with vertical integration, continuing to profit after patents expire.
JNJ & SWAV Stock: What Happens Next?
The Shockwave Medical deal is expected to close around June or July.
Johnson & Johnson’s strategy will now be tested in the market. Its dividend has jumped 20% in the last five years and yields 3.12%, while JNJ’s stock price has barely moved.
On the date of publication, Dana Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
