Johnson & Johnson’s (JNJ) surgical care company Ethicon decided to acquire a privately-held medical devices company, Acclarent, for approximately $785 million. The transaction, expected to close in the first quarter of 2010, is likely to have a dilutive impact of approximately 3– 4 cents on Johnson & Johnson’s 2010 adjusted earnings per share.

Acclarent develops devices to treat abnormalities associated with ear, nose and throat (ENT) with specialization in products used for sinus surgery. We believe there is huge potential for Acclarent’s business, as its balloon sinuplasty technology and other related products offer ENT patients a better alternative compared to currently available treatment options including conventional surgical approaches.

Johnson & Johnson has been in an acquisitive mode during the year, the Acclarent buyout being the latest. Earlier this year, in May 2009, Johnson & Johnson decided to acquire Cougar Biotechnology, Inc. for about $893 million. Though Cougar had no marketed products, it became an attractive target for its promising pipeline.

Thereafter, in another agreement, Johnson & Johnson acquired a 18.4% stake in Elan Corporation (ELN) for $885 million in addition to $500 million for Elan’s Alzheimer’s disease pipeline. Johnson & Johnson then acquired an 18% stake in a Netherlands based biotech company Crucell NV for $440 million to primarily focus on developing a universal vaccine for treating influenza using Crucell’s genetically engineered antibody technology.

Last month, Johnson & Johnson announced a 7% reduction in workforce to save costs to meet future challenges in addition to eliminating 900 positions from its Ortho-McNeil-Janssen Pharmaceutical unit earlier this year. We believe these cost-saving strategies have enabled Johnson & Johnson to make the acquisitions.

We believe Johnson & Johnson’s diversified business model, lack of cyclicality and strong financial position has helped it pave its way through tough situations. While third quarter revenues were impacted by foreign currency movement and generic competition, management has raised 2009 EPS guidance.

Johnson & Johnson has been trying to offset the declining sales of some of its important products by bringing in new products through in-licensing deals and acquisitions. We believe the diversity and strength of the company’s underlying businesses should continue to provide strong growth in future. We have a Neutral recommendation on the stock.

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