J&J Buys Mentor, Gets into Aesthetics

The depressed economy has hit all medtech stocks, but some harder than others, in particular, those that rely on nervous consumers to pay out of pocket for elective procedures, namely, medical aesthetics, and refractive surgery. J&J was thus able to acquired breast-implant manufacturer Mentor for much less than it would have had to pay a year ago, when it was first rumored to be looking to get into the aesthetics market.

An old saw suggests dog food and funeral services are recession-proof, but now it’s clear from recent stock prices that aesthetic procedures are not.

No segment within the medical device industry is better positioned to capitalize on the positive feelings that come with good economic times. Conversely, when the economic going gets tough, customers willing to spend out of pocket for aesthetic treatments get going. The recent economic nosedive has aesthetics companies scrambling to trim their own waistlines in case customers willing and able to pay for procedures that aren’t medically necessary stay away for too long.

But it became clear last month that there is one notable buyer in this troubled aesthetics space—Johnson & Johnson, which snapped up Mentor Corp. for a very reasonable price. [See Deal]

Several months ago, even before the effects of the subprime mortgage crisis were fully felt, aesthetic (and other elective, out-of-pocket) medical procedure volumes had begun to drop, a decline that has accelerated since September. Mentor saw its share price drop from $28 in September to $16.15 the day before the acquisition was announced. J&J has offered $31 per share or $1.07 billion, a sum that represents a 92% premium over the stock’s most recent price. Rumors were circulating a year ago that J&J was considering a bid for the aesthetics company when its stock was trading above $40 per share, and Mentor has traded above the $31 threshold most of the time over the past five years, according to analysts.

The union makes a lot of sense, given that 90% of Mentor’s revenues come from breast implants, a surgical segment of the aesthetics industry, and the current plan is to incorporate Mentor firmly within J&J’s Ethicon Inc. surgery division.

The next two years likely would have been tough for Mentor and other aesthetic companies, in a depressed economy in which patients have already begun to stay away from cash-pay medical procedures. Now Mentor’s large, diversified parent cushions it from the downturn, giving support to Mentor’s growing portfolio of office-based products for plastic surgeons and dermatologists—dermal fillers, skin care products, and lipoplasty products. The deal gets J&J into a business that’s adjacent to other core skill-sets found in its surgery and wound care businesses, and which has good long-term growth prospects, now that consumers have demonstrated their acceptance of cosmetic procedures.

Amit Hazan, an analyst at Oppenheimer & Co. Inc., still believes that long-term, aesthetics is a good place to be. "As a society, we have accepted aesthetic procedures and that’s not going to change." He adds that because J&J is a master at consumer marketing, "this is going to be a much better set of products in J&J’s hands than it ever would have been in Mentor’s."

Hazan says that the breast implant market has been expanding beyond the traditional younger customers. One particular target is women in their 40s looking more for support than size. "Mentor is one of only two companies allowed to sell breast implants in this country. It is nearly impossible for anyone else to get into this market, and it’s a good market. I think J&J saw that," he says. J&J also has a lot of upside from PurTox (botulinum Type A neurotoxin), now in Phase III clinical trials, Mentor’s alternative to Allergan Inc.’s Botox. Botox sales were north of $1.2 billion in 2007.

Consolidation among medical aesthetics companies had already begun in early summer when the industry saw the takeout of Medicis Technologies Corp. by Medicis Pharmaceutical Corp., and the pending merger of Solta Medical Inc. and Reliant Technologies Inc. [See Deal] (See "Thermage/Reliant, Evidence of Tightening in the Aesthetics Market," IN VIVO, July 2008 (Also see "Thermage/Reliant: Evidence of Tightening in the Aesthetics Market " - In Vivo, 1 Jul, 2008.).) Mentor’s defenses have likewise been shored up. But now that a mid-sized consolidator has been taken out of the aesthetics industry, what will become of the numerous small aesthetic companies that have been founded in the past five years?

Hazan believes that J&J isn’t done yet. "Dermatologists do the majority of these kinds of procedures, and J&J still doesn’t have a dedicated dermatologist sales force. My guess is that they might go after a small company with a dermatology sales force. They clearly are building up their aesthetics franchise." With good reason. Aesthetics competitor Allergan followed the same strategy successfully. In 2002, Allergan, once focused on ophthalmology, began building an aesthetics franchise around Botox as it neared approval for cosmetic indications. It acquired Inamed for $3.1 billion in 2005, gaining a duopoly in breast implants, an entry into bariatric surgery, and a line of dermal fillers. [See Deal] Allergan’s sales have grown from $1.38 billion in 2002 to $3.88 billion in 2007.

Mary Stuart