Whether or not you realize it, this week marks the kickoff of the Super Bowl of all healthcare conference, the J.P. Morgan Healthcare Conference. This four-day event typically features in excess of 400 healthcare companies discussing where they've been and where they're headed next.
Healthcare conglomerate Johnson & Johnson (NYSE:JNJ) was one of the presenters in yesterday's session, with CEO Alex Gorsky answering questions and broadly discussing what's made his company so successful.
Unlike typical presentation sessions for most biotech and medical device companies, Gorsky isn't the type to deliver groundbreaking new presentation material. One reason for that is J&J is currently in the midst of its quiet period, with its earnings report for the fourth-quarter due out in two weeks. Because it reports before many of its peers, J&J is often in the quiet period when the J.P. Morgan Healthcare Conference begins. Not being able to discuss the performance of its pharmaceutical products, medical devices, or consumer health products, made for a presentation that was pretty vague at times.
Alex Gorsky just tipped his cap on M&A
However, Gorsky did hit on one topic where he went into some specifics -- and if you paid close attention, he tipped his cap as to what J&J's merger and acquisition strategy is likely to consist of moving forward.
Forgive the fact that I'm splicing together a few comments from Gorksy's 24-minute presentation, but here were some of his critical comments concerning internal versus external research and development, as well as M&A.
"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% internal, 45% external... and we think that's a good balance.
We've been very outspoken about the need to make sure we're agnostic about where we're sourcing our innovation from... We've invested, I think, about 30% of free cash flow into those activities [internal and exogenous R&D] over the past 10 or 20 years, and we'll keep that going.
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. Then how do we bring our clinical development, our regulatory skills, our global skills to bear on those kind of opportunities, globalize them, turn those into billion dollar platforms."
Why is the above mish-mosh of quotes important? Three reasons as I see it.
1. Acquisition-based growth is vital
First, we now know, based on Gorsky's commentary, just how important both internal and acquisition-based growth is for J&J. No one will question J&J's internal growth engine, especially as it relates to its pharmaceutical pipeline. J&J believes it can bring 10 novel therapies to market 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.
But, now that we have a number (roughly 45% based on Gorsky's comments), we also understand just how critical collaborative growth and acquisitions are for J&J's future. It's almost safe to assume that J&J's hunt for acquisitions never stops. J&J ended the previous quarter with $17 billion in net cash, and it's had no trouble generating $11.4 billion or more in free cash flow since 2006, so it's just a matter of time before J&J's pulls the trigger.
2. J&J prefers diamonds in the rough
Secondly, it's interesting to note Gorsky's comments about going after smaller opportunities. Gorsky was clear that larger acquisitions aren't overlooked, but they do come with their own set of integration challenges. If J&J has its way, it would much prefer to find smaller diamonds in the rough, which will then allow the company to use its size to turn these diamonds into long-term gems.
One diamond in the rough that it added to its arsenal in late 2014 was imetelstat, an experimental cancer drug being developed by Geron (NASDAQ: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. What's most notable about imetelstat is that it generated the first-ever partial and complete responses for myelofibrosis patients in early clinical trials. Current standard of care MF treatments merely focus on reducing symptom severity. A success for imetelstat would put another feather in J&J's cap and, it'd be a big win for the clinical-stage Geron.
3. It's not on a timetable
Lastly, Gorsky's comments, and previous comments from meetings with analysts, have suggested that J&J is in no hurry to rush into an M&A deal if the price isn't right.
If you think about it, J&J is sitting pretty as the stock market declines from its recent highs. As the valuations of some biotech companies deflate, it could bring down what had been high expectations for many drug and device makers. This creates a potential buyer's market for the cash-rich J&J.
All told, after listening to Gorsky's presentation my faith in J&J over the long-term remains as strong as ever. The company's three franchises -- pharmaceuticals, medical devices, and consumer health products -- each offer a piece of the puzzle to make J&J whole. Consumer health delivers slow growth but predictable cash flow and strong pricing power; medical devices offer to potential for long-tail growth with an aging global population; and pharmaceuticals is the high-margin machine for J&J. Between its solid long-term growth prospects and 53-year streak of increasing its annual dividend, income and value investors should seriously consider taking a closer look at Johnson & Johnson.