The stock market may have been exceptionally volatile to begin 2016, but it's been business as usual for healthcare conglomerate Johnson & Johnson (NYSE:JNJ). In spite of a more than 10% drop in all three major U.S. indexes at one point, Johnson & Johnson hardly flinched. In fact, it went into the extended holiday weekend sporting a gain of 5.4% year-to-date.
Johnson & Johnson's highly diversified and recession-resistant business model, its pharmaceutical innovation, and its massive cash flow are all reasons why it was able to skirt the concerns that paralyzed investors earlier this year. Specifically, it's J&J's superior balance sheet, complete with $38.5 billion in cash on hand ($18.5 billion in net cash), that really packs on the support during turbulent times.
However, this same cash that supports J&J during rocky trading environments is also expected to be one of its primary growth catalysts.
Two drug developers J&J might consider gobbling up
During J&J CEO Alex Gorsky's presentation in mid-January at the J.P. Morgan Healthcare Conference, Gorsky essentially pulled the sheets off when discussing his company's M&A strategy. To quickly summarize Gorsky's main point, J&J isn't going to chase any company that it believes isn't a good value; it's mainly focused on acquiring small- and medium-sized drug developers that it believes could expand its product portfolio or complement existing therapies in its pharmaceutical areas of focus.
Who might Johnson & Johnson be interested in scooping up that fits this small- or mid-cap definition? While this remains nothing more than pure speculation at this point, these two drug developers would make a whole lot of sense.
Probably the most logical tie-up would involve acquiring Geron (NASDAQ:GERN), namely because the duo is already collaborating on Geron's only clinical-stage compound, imetelstat.
Imetelstat is an experimental drug being targeted at myelofibrosis (MF), a rare type of bone marrow cancer that leads to scarring and myelodysplastic syndromes. Where imetelstat has shown the most promise, and why J&J agreed to collaborate on the development of imetelstat in November 2014, is in treating MF.
The only Food and Drug Administration-approved product to treat MF right now is Incyte's (NASDAQ:INCY) Jakafi, a JAK-inhibitor. In clinical studies Jakafi reduced many of the severe symptoms associated with MF, such as anemia and enlarged spleen, but it did nothing to slow the progression of the cancer itself. Geron's imetelstat did yield both partial and complete responses in early stage MF trials, which was a medical first. Thus, if Geron's imetelstat can continue to deliver strong MF responses in later-stage studies it could, in theory, be expected to eat Incyte's MF revenue for lunch!
The deal J&J struck paid Geron $35 million upfront and dangled $900 million in additional development, regulatory, and sales-based milestones. While it may not be cheap for J&J to acquire Geron if imetelstat breezes through its ongoing clinical studies, scooping up Geron would internalize these payments and allow J&J to reap what should be very high margins if approved. With few other MF treatments on the horizon, J&J would have a very likely blockbuster on its hands.
If there were a second most logical acquisition, it would likely be clinical-stage hepatitis C drug developer Achillion Pharmaceuticals (NASDAQ:ACHN), for which J&J also has a worldwide collaboration in place.
Hepatitis C is a bit of a sore spot for Johnson & Johnson since its at-one-time innovative pill Olysio exploded in use and then vanished without a trace in almost the blink of an eye. In fiscal 2014, J&J's Olysio generated $2.3 billion in worldwide sales, although the drug needed to be taken in combination with interferon and a ribavirin, which were known to cause a host of unpleasant side effects such as flu-like symptoms, anemia, and rash. By 2015, given the introduction of interferon- and ribavirin-free HCV drugs by Gilead Sciences (NASDAQ:GILD), Olysio was practically obsolete. Sales of the drug slowed to just $621 million worldwide last year, and they were completely discontinued in the U.S. as of the fourth quarter.
Collaborating with Achillion gives J&J a way to remain on the cutting edge of HCV drug development. Although Gilead appears to have locked up the lion's share of the HCV market at present due to its convenience and efficacy, Gilead could still find itself susceptible if a new HCV therapy emerged that could effectively treat the disease in a shorter timeframe. Previous Achillion drug trials, though small, have demonstrated 100% effectiveness in detectable disease elimination for select genotypes after just four weeks. By comparison, Harvoni (Gilead's kingpin genotype 1 drug) treats patients in eight-, 12-, and 24-week intervals.
J&J's deal with Achillion involved a $225 million equity stake in the company, as well as up to $1.1 billion in development, regulatory, and sales-based milestones. Thus, buying Achillion, assuming its pipeline performs as expected, would in effect put money right back into J&J's pockets as a sizable shareholder if it purchased the company for a premium. Plus, it would give J&J access to a market that holds around 180 million infected people worldwide. There's plenty of room here for multiple HCV players, and it appears clear that J&J wants to be one.
Again, I want to emphasize that this is merely speculative at this point. However, the writing is on the wall, and the red carpet appears to be laid out for J&J to scoop up both drug developers if their leading compounds perform well in later-stage clinical studies.