Analysts on Monday played down the possibility of Johnson & Johnson will benefit from any strategic alliance with Smith & Nephew advantage.
Buying the UK company would bolster J&J’s share of the market for artificial joints, where is it is already a significant force, but could draw the attention of competition authorities, they said.
It emerged at the weekend that the US healthcare group had approached Smith & Nephew late last year with a takeover offer that was knocked back as too low by its target’s board.
J&J refused to comment on Monday on reports that it had offered almost $11bn (£7.1bn) to buy the UK-based maker of orthopaedic devices.
One analyst told investors on Monday that an acquisition of Smith & Nephew would be less of a strategic fit for J&J than an opportunity for the New Jersey-based pharmaceutical group to cut costs.
“The acquisition of a duplicate business could provide a means to realise key reductions in selling expenses without directly cutting service levels to physicians,” wrote Derrick Sung of Sanford Bernstein in a research note.
“J&J could potentially eliminate any salesforce duplication in the orthopaedics businesses (hips, knees, and trauma) for which the two companies overlap.”
The combination of the two businesses could result in savings of sales, administrative and general expenses at J&J, he said, since selling costs make up a significant portion of such expenditure at big pharmaceutical companies.
“With sales growth in the major med-tech market slowing, investors have been looking for ways that the companies might cut down on their sales expenses.”
Other analysts suggested that if J&J were to succeed in acquiring Smith & Nephew, its market share would attract the attention of federal regulators. Mr Sung said it could bolster J&J’s market share in the general orthopaedics category from 24 per cent to 35 per cent.
At the same time, the combination of the two companies would make J&J overexposed in the area of metal-on-metal hip replacements, which has been a declining category.
Mr Sung suggested that a driving force behind any bid for Smith & Nephew would be the need for J&J to find suitable overseas investments for the substantial revenues the company generates outside the US. “J&J, like its large cap med-tech peers, realises a substantial portion of its free cash flow from [overseas] operations”, he wrote.
"This cash is still trapped in domestic and overseas can not be used unless it is at a higher rate of return for U.S. companies. Therefore, the acquisition of foreign companies to provide the [overseas] cash use, improve the favorable economic benefits of any acquisition."

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