J&J's New Acquisition Strategy Makes Sense

Johnson & Johnson's (JNJ) CEO has given an interview to the Financial Times explaining his company's strategy with acquisitions. And right now, that strategy is...not to make acquisitions. They see partnerships as making a lot more sense:

“The cost of developing compounds has become so high and become so risky that we are looking to share the risks and opportunities and find more and more partnerships.”

J&J has been putting this into practice recently, taking equity stakes in several different companies. In the case of Elan (ELN) and Crucell (CRXL), interestingly, the company has agreed to standstill provisions, in order to make it clear that they're not just on the first step to an outright acquisition any time soon. It's interesting that this would be coming from Johnson & Johnson, since in many cases they've been one of the less destructive acquirers in the business already. (Well, with some exceptions, like when they took over Scios).

The temptation to compare this policy with Pfizer's (PFE) is almost overwhelming, but the two companies are in very different positions. For one thing, J&J has their medical devices and diagnostics businesses, which are both profitable and run on different rhythms than their pharma side. Even more importantly, they also aren't locked into a grow-or-die situation, needing larger and larger infusions of revenue to meet the expenses which get larger every time they go out and buy those revenue streams, which means that they need to go buy some more and then...

The article says that J&J has no deals under consideration right now, but that this style of deal-making is definitely how the company plans to operate. There's definitely enough risk to be spread around - I just hope that there's enough reward for everyone, too.

Comments

[davidbdc:]

The J&J CEO has been in his position for about 8 years now. The stock price is basically the same. Perhaps the other Pharma acquisitions have failed due to his poor leadership?

This is not a strategy. They are just taking a scattershot approach. Throw enough money around and something will have to be successful. They need a Pharma veteran running that division, not the consumer woman they have there now.

The only thing J&J has done in his tenure that is successful was the Phizer OTC acquisition.....the rest of it has been a disaster. Its time for a clean sweep of the executive suite. This has the look and feel of a "yes" culture that needs to be changed back to a business first culture.

Oct 30 05:21 AM

[H.J. Huneycutt:]

The stock price is the same, but they've been paying out a 3% - 4% annual dividend for most of that time. It has actually outperformed a great deal of the market over the past 10 years.

JNJ is what it is --- a consistent, low-growth, dividend stock. If you want that steady stream of income, it's fantastic for that. If you want high-growth or deep value - then buy into something else.


On Oct 30 05:21 AM davidbdc wrote:

> The J&J CEO has been in his position for about 8 years now.
> The stock price is basically the same. Perhaps the other Pharma
> acquisitions have failed due to his poor leadership?
>
> This is not a strategy. They are just taking a scattershot approach.
> Throw enough money around and something will have to be successful.
> They need a Pharma veteran running that division, not the consumer
> woman they have there now.
>
> The only thing J&J has done in his tenure that is successful
> was the Phizer OTC acquisition.....the rest of it has been a disaster.
> Its time for a clean sweep of the executive suite. This has the
> look and feel of a "yes" culture that needs to be changed back to
> a business first culture.

Oct 30 07:40 AM

[E Nuff Sed:]

I agree with davidbdc.

Topline growth at JNJ has been meagre and they are maintaining earnings and dividends by deep cost cutting. Both the pharma business and the medical devices businesses are in trouble and the only healthy business they have now is the OTC/Consumer business, which they are milking to compensate for the declining profits in the other 2 sectors. I fear the consumer business will turn sick in a year or two because of lack of investment and over milking.

On balance over the next 5 years my money is better invested in Merck, Pfizer, Glaxo. While they all have problems - overall they have dealt with patent expiries via acquisitions, pay better dividends and are undervalued.

Oct 30 09:35 AM

[BioGuy:]

I would add that the Crucell aquisition is a good one. They are one of the companies developing a *universal* flu vaccine. Many companies are on this path (I don't know how many exactly) but I like Crucells approach. Oddly published 2 days after Dana-Farber Cancer Institute published almost identical antibody targets. Anyway, I like that they are using an antibody (FDA friendly) and their particular target. (See below if you like)
www.crucell.com/R_and_...
www.crucell.com/R_and_...

Nov 19 06:21 PM