Who Will Buy This Medical Giant's Diagnostics Business?

Diversified medical giant Johnson & Johnson is usually identified by its three core businesses -- consumer health, pharmaceuticals, and medical equipment.

Its consumer health segment has continually grown despite years of recalls, its pharmaceutical segment is fueled by strong sales of top selling drugs like Remicade, and its medical equipment segment is bolstered by its dominant position in orthopedics, which it built on the acquisitions of Depuy and Synthes.

However, there's one business that J&J would like to part with soon -- its fading Ortho Clinical Diagnostics unit, a lagging business in its medical devices segment.


An aging, fading business
J&J's Ortho Clinical Diagnostics unit is the company's in vitro (tissue and bodily fluids) diagnostic testing division. The unit was formed from J&J's acquisition of Eastman Kodak's clinical diagnostics division in 1994, which was merged with J&J's Ortho Diagnostics Systems unit in 1997. Ortho Diagnostics performs two major services -- human blood screening and chemical testing -- and employs more than 4,000 people worldwide.

In recent years, however, companies such as Roche and Abbott Laboratories have made greater progress in molecular diagnostics, which have become a higher growth field than J&J's blood and chemical screening technologies.

At the end of 2012, Roche was the clear market leader in the in vitro diagnostics market, with a 20% global market share -- followed by Abbott at 11%, Siemens at 10%, and J&J at 9%.

As a result, J&J's diagnostics division has been waning in importance over the past year, as seen in the following chart.

Quarter

Diagnostics Revenue

Growth (YOY)

Percentage of Medical Device Revenue

Q4 2012

$530 million

(4.3%)

7.2%

Q1 2013

$477 million

(6.8%)

6.8%

Q2 2013

$483 million

(6%)

6.7%

Q3 2013

$459 million

(10.5%)

6.6%

Source: J&J quarterly reports.

The writing's on the wall -- J&J's diagnostics division is fading fast, and is becoming more of a liability than an asset to the medical device segment. Therefore, the logical thing to do is to sell the business -- which CEO Alex Gorsky has been considering since the fourth quarter of 2012.

Let the bidding begin!
Analysts initially believed that J&J's diagnostic business could be worth up to $5 billion -- which could provide J&J with a healthy injection of cash for investing in other higher growth businesses.

In September, J&J made it official and hired JPMorgan Chase to run the sale of the diagnostics unit, which immediately attracted some major bidders, including Bain Capital, Carlyle Group , BC Partners, and a partnership between CVC Capital Partners and Leonard Green & Partners. J&J followed that up by seeking a second round of bids.

Last week, health care conglomerate Danaher Corporation partnered up with private capital manager Blackstone Group to make an offer as well.

The deal would be an ideal fit for Danaher, which owns a widely diversified business of professional, medical, industrial, and commercial products. Danaher's Life Sciences and Diagnostics segment, which accounts for 36% of its total revenue, reported 10.3% year-over-year sales growth to $1.7 billion last quarter.

Could other buyers be interested as well?
As bidding heats up over J&J's diagnostics unit, other companies that have been frequently considered potential buyers could be worth watching as well.

Abbott Labs is often considered a possible suitor. In my opinion, however, an acquisition by Abbott wouldn't make much sense since the company is more invested in higher growth molecular diagnostics technologies, instead of older blood and chemical screening services. Moreover, Abbott's diagnostics segment is doing fine on its own -- it reported 5.5% year-over-year growth last quarter, fueled by a healthy 15% jump in U.S. sales.

General Electric could be another potential buyer. GE came close to purchasing Abbott's diagnostic business in 2007, and later acquired a cancer diagnostics company, Clarient, back in 2010. Those moves indicate that GE is looking to add even more businesses to its hugely diversified health care portfolio, which already includes imaging devices, diagnostics equipment, surgical systems, health care IT services, and a pharmaceutical tech business. Last quarter, GE Healthcare, which accounts for 12% of the company's revenue, reported flat year-over-year growth -- indicating that growing its top line through acquisitions could be a feasible strategy.

The Foolish takeaway
In closing, the eventual sale of the Ortho Clinical Diagnostics unit will be good news for J&J shareholders.

The company will be able to dump a fading business before it becomes irrelevant, get a big infusion of capital to reinvest in R&D or marketing, and cut costs in the medical devices segment, which reported a disappointing 2% year-over-year decline in sales last quarter. In other words, the deal should make J&J a slightly leaner, richer, and more streamlined medical giant.

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The article Who Will Buy This Medical Giant's Diagnostics Business? originally appeared on Fool.com.

Fool contributor Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of General Electric Company and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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