J&J perks up

The resilience of demand for luxury goods is another boomtime idea starting to show its age. Even the market for cosmetic surgery has softened, with nip, tuck and plump volumes declining this year after half a decade of solid growth. Yet Johnson & Johnson is betting that room for expansion remains in the market for aesthetic medicine. On Monday the consumer goods and pharmaceuticals group announced an agreed takeover of Mentor – manufacturer of breast implants – for $1.1bn in cash.

The reasoning is necessarily strategic. Perhaps wary of the unusual marketing proposition that selling breast augmentation and baby lotion under the same roof could create, Mentor will remain a largely standalone unit within J&J’s “Ethicon” division. A return to growth (Mentor’s sales are forecast to shrink by 3 per cent this year) requires confidence that rising social acceptance of body modification, not just fatter disposable incomes, has driven demand in recent years.

Yet while the price J&J is paying is full – 15 times this year’s earnings before interest, tax, depreciation and amortisation – there is logic behind it. First, the timing is opportunistic. The $31 per share offered represents a 92 per cent premium to Friday’s closing price, but Mentor has been beaten down in the market rout. Its shares traded at this level as recently as June.

Second, Mentor operates in an effective duopoly. The long and difficult process of securing regulatory approval for implants provides a solid cushion for margins, while legal pitfalls have largely been addressed. It also has a small pipeline of products, including an alternative to Allergan’s wrinkle remedy Botox, in late stage development. J&J already has the sales force required to market such a drug. Like other pharmaceuticals groups facing expiration of precious patents in the years ahead, it needs to find new sources of growth. Enhancing its profile while valuations are sagging seems entirely sensible.

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