January 14, 2016
By Mark Terry, BioSpace.com Breaking News Staff
With the last several years marking a frenzy activity marked by giant deals like the Pfizer -Allergan merger, Johnson & Johnson ’s chief executive officer Alex Gorsky recently said the company was skeptical of larger transactions.
There has been a lot of speculation that J&J was going to buy something big based primarily on the company’s cash stockpile. Last quarter, the company’s cash and short-term investments totaled $37.3 billion. In October, J&J initiated a $10 billion share buyback program.
“History would show that value creation in large deals is much more challenging,” Gorsky said yesterday at the J.P. Morgan Healthcare Conference in San Francisco. “Because we’re more of an innovation-focused company, the ideal deal for us is early, great innovation, great science, then we scale it, versus going in and simply ripping out costs and trying to find other synergies.”
It’s not exactly as if Gorsky’s previous deals are all that small. J&J acquired Synthes Inc. for $18 billion. However, Bloomberg points out that device sales have lagged since the acquisition. Drugs, on the other hand, have increased.
Recently, J&J acquired five companies, including Coherex Inc. and Novira Therapeutics. J&J subsidiary Janssen acquired XO1 Ltd. in March, J&J bought Alios BioPharma in September 2014, and its affiliate Cilag GmbH International acquired Covagen in August 2014.
J&J will present fourth-quarter financial data in two weeks, so at the J.P. Morgan conference the company is keeping quiet about sales and revenue, but Gorsky did talk about the company’s focus on internal development.
“If you look, and we’ve done this analysis over the last 20 years, over the last 10 years, our investment in terms of research and development internally and exogenously has been pretty balanced: about 55-45, 55 percent internal, 45 percent external … and we think that’s a good balance,” Gorsky said, as reported by The Motley Fool. “We’ve tended to focus more on smaller opportunities. We would prefer to find … the next Imbruvica, we’d like to find the next Darzalex, we’d like to find the next minimally invasive surgery platform with a contact lens.”
Sean Williams, writing for The Motley Fool, essentially had three take-aways from Gorsky’s talk. Number one, Gorsky believes that acquisition-based growth is important, particularly with collaboration agreements. “J&J believes it can bring 10 novel therapies to market,” Williams wrote, “by the end of the decade that could eventually become blockbusters. Multiple myeloma drug Darzalex, which was approved in November, is the first of those 10.”
The second point is that J&J would prefer to find products and potential products that can be better developed internally, instead of just buying products. “One diamond in the rough,” Williams wrote, “that it added to its arsenal in late 2014 was imetelstat, an experimental cancer drug being developed by Geron (GERN). J&J wound up giving Geron $35 million upfront and pledged an additional $900 million in development, regulatory, and sales-based milestones depending on the success of the drug in treating myelofibrosis and myelodysplastic syndrome.”
And finally, J&J and Gorsky don’t appear to be in a hurry to make any deals, large or small. Some of this is that the company’s share prices are pretty stable and it has plenty of cash. “Between its solid long-term growth prospects,” Williams wrote, “and 53-year streak of increasing its annual dividend, income and value, investors should seriously consider taking a closer look at Johnson & Johnson.”
Not all investors and analysts agree, however. In July 2015, CNBC Mad Money’s Jim Cramer called for J&J to split into three separate companies. The argument is that the three company divisions, pharmaceuticals, consumer healthcare products and medical devices are too big and confusing to manage or understand. “To me,” Cramer said, “JNJ is a textbook example of the parts being worth more than the whole.”
That being said, J&J has been pretty successful as a single company, and under Gorsky’s reign, shares have grown 51 percent, better than the S&P’s 500 Index increase of 36 percent over the same period. It has, however, lagged against other healthcare stocks. The S&P 500 Health-Care Sector Index rose 76 percent in that period.
