JnJ's Shockwave buyout jolts the medtech sector, defying GLP-1 concerns

What happened

J&J announces a $13.1bn deal to acquire Shockwave

A week after the Wall Street Journal ("WSJ") echoed rumors of takeover interest, Johnson & Johnson, the world's largest diversified medical device company, officially announced on Friday 5 April 2024 the deal to buy out Shockwave for $335 per share.

J&J said it will fund the deal with cash on hand and debt. It is expected to dilute its adjusted earnings per share by 10 cents this year shares and by 17 cents next year due to financing costs. The deal includes a termination fee of $448 million.

Impact on our Investment Case

Sending shock waves to the cardiovascular market

Shockwave Medical is developing a mini-invasive device called intravascular lithotripsy (IVL) based on proprietary technology that uses shockwaves to crack the calcium that blocks peripheral and coronary arteries. IVL is a simpler, minimally invasive procedure and a safer approach than traditional methods, such as angioplasty (where a balloon is inserted into the artery and inflated at the site of the blockage, widening the artery and restoring blood flow).

The company has been generating strong clinical evidence around the technology's efficacy, safety, and cost-effectiveness and, most importantly, continues to face no direct competition in this approach.

With a total addressable market of approx. $9.5bn, no direct competition, and a booming patient-treated population, Shockwave has been at the top of the Bionics portfolio since early 2021.

From the start, Shockwave was a solid M&A target

In early 2022, we wrote that "Shockwave Medical’s ILV shows strong synergies with other cardiovascular technologies. ILV facilitates the transfemoral delivery of transcatheter heart valves (TAVR, TMVR, etc.) and Abiomed's Impella. The company is a good candidate for M&A in the cardiovascular market."

Unsurprisingly but quicker than expected, J&J bought the two of them. Abiomed in late 2022 for $16.6 billion and now Shockwave for $13.1bn. As a point of comparison Abiomed was the biggest medtech M&A of 2022, and Shockwave is in the lead to be this year's biggest M&A.

J&J seems to be leveraging medtech to hedge biotech risk

Johnson & Johnson is enhancing its medical devices sector in anticipation of new U.S. competition next year for its leading Crohn's disease medication, Stelara.

In 2022, the acquisition of Abiomed was done at a ~50% premium. For Shockwave, if we consider the price before the WSJ's article, the premium is ~17%, reflecting the growth already factored into Shockwave's stock price. Abiomed's revenues were growing at 20% annually, while Shockwave's have surged over 40% without compromising profit margins: Abiomed's gross margin stood at 82%, compared to 88% for Shockwave.

The significant investment in Shockwave acquisitions, exceeding 50% of J&J's available cash ($23 billion), underscores the company's commitment to the deal and diversification of revenue.

A rerating incoming for high growth Medtech after the "GLP-1" crash

Johnson & Johnson acquired Shockwave for approximately 14x its projected 2024 revenues, with expected revenue growth of around 25% CAGR in the coming years. This should particularly favor high-growth medtech firms recovering from a challenging nine-month period following the GLP-1 market shake-up.

We are convinced that medtech companies with over 20% revenue CAGR, the sweet spot of our strategy, could see significant stock price appreciation due to multiples expanding back to more normal levels after being squeezed to almost half of the 10-year historical average.

Our Takeaway

High growth medtech stocks have been very volatile lately, but a big M&A, at a high valuation, in a GLP-1 hit sector, is a clear catalyst for investors to start looking at this segment again.

At atonra, we believe this will spread beyond cardiology and to other GLP-1 hit sectors (diabetes, sleep apnea, transplant, just to name a few) that maintain strong revenue growth and margins.