Healthcare conglomerate Johnson & Johnson (JNJ +0.72%) is what you might call a stalwart in the portfolios of risk-averse, income-seeking long-term investors. It's about as rock-solid as they come in the healthcare sector, with geographic and operational diversity, a AAA credit rating from Standard & Poor's, and a superior dividend yield that's been raised for 55 consecutive years. You can count on two hands how many publicly traded companies have a longer ongoing streak of raising their annual payout, and you'll need just two fingers to tally the number of public companies with a AAA credit rating from Standard & Poor's.
A rare bad decision by Johnson & Johnson: Overpaying for Actelion
Nevertheless, Johnson & Johnson isn't perfect. Then again, no company is. Its lead drug Remicade is facing biosimilar competition that's hampered its pricing power, leading SGLT-2 inhibitor Invokana has lost its luster in type 2 diabetes, and J&J's operational diversity is more swayed now than in recent years toward pharmaceuticals, which comes with the added risk of losing exclusivity of brand-name drugs.
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Perhaps the worst decision J&J has made in recent years was its acquisition of Actelion. J&J acquired the Swiss-based specialty drugmaker focused on developing drugs to treat pulmonary arterial hypertension (PAH) for an eye-popping $30 billion.
Though it did get Opsumit and Uptravi in the deal, which are each anticipated to peak around $2 billion in annual sales, and PAH therapies should boast strong pricing power, it only received a 9.9% stake in Actelion's spun-off pipeline known as Idorsia (but could add an additional 22.1% through a convertible note). In effect, it could take years, a decade, or even longer before Johnson & Johnson recoups the $30 billion in cash it spent to acquire Actelion's core portfolio. Even with the added 1.5% to 2% annual growth rate post-acquisition, this Fool was simply not impressed.
The smartest move J&J has made all year
However, Johnson & Johnson totally redeemed itself earlier this week. That redemption came on Monday when J&J wised up and stopped chasing ghosts in the hepatitis C industry by ending its partnership with Achillion Pharmaceuticals (ACHN +0.00%). Johnson & Johnson, understanding that there were a number of established players already on pharmacy shelves, and that the sickest patients in the most lucrative market (U.S.) had already been treated, decided to cut its losses and discontinue its efforts in developing a hepatitis C virus (HCV) therapy.
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This isn't to say that the drug the duo was developing wasn't promising. Following six weeks of once-daily treatment, Achillion reported in April that JNJ-4178 achieved a 100% sustained virologic response rate in treatment-naive genotype 1 patients (the most common, but hardest to treat, form of HCV). Existing therapies are approved as an effective cure for genotype 1 patients for no less than eight weeks. Still, it would probably have been another year or two before JNJ-4178 had a shot at approval, leading to an even narrower market in the most lucrative countries.
While the news came as a clear disappointment to Achillion, which has been largely left in the dust by its HCV peers, it'll save J&J some serious cash and time. When the deal was announced in 2015, J&J could have been on the hook for up to $1.1 billion in development, regulatory, and sales milestone payments, along with royalties.
Instead, Johnson & Johnson has announced that it'll turn its attention to hepatitis B, which actually affects more people worldwide than hepatitis C. "Going forward, our hepatitis R&D efforts will focus on chronic hepatitis B, where a high unmet medical need still exists," said Lawrence Blatt, Ph.D., global therapeutic area head of infectious disease therapeutics at Janssen, a subsidiary of J&J.
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J&J's dividend hike tells a tale, too
Investors will also note that J&J's dividend increase this year of 5% ($0.80 per share each quarter to $0.84) was its lowest percentage increase this decade. While J&J does want to keep income investors happy, the company also needs to replenish its coffers following the Actelion acquisition, prepare for ongoing research and development expenses, and ready itself for additional acquisitions. J&J traditionally makes small and medium-sized purchases, meaning a smaller dividend increase should leave it with more cash on hand to make deals happen.
At this point it's difficult to say what's squarely on the company's acquisition radar other than Geron (GERN +0.71%), which it currently has a licensing deal with. The small-cap drug developer and J&J have partnered to develop imetelstat for the possible treatment of myelofibrosis (MF) and myelodysplastic syndromes. Though J&J has narrowed the scope of these studies, the promise of imetelstat ties to an early stage trial where the drug generated partial and complete responses in MF patients. No clinical trial had previously ever observed an objective response in MF patients. If Geron's imetelstat dazzles in late-stage trials, it's not out of the question that J&J gobbles up it (and Geron).
The key takeaway here is that J&J is still shopping, and it's looking to tackle indications in which there isn't a lot of competition. With a growing reliance on pharmaceuticals, this could prove to be a lucrative -- but volatile -- strategy for the healthcare stalwart.
