J&J CEO Prefers Smaller Acquisitions Even as Cash Pile Grows

  • Getting value from large deals `much more challenging': Gorsky
  • Health-care company's cash balance swells to $37.3 billion

Johnson & Johnson’s expanding cash hoard is fueling speculation of a major acquisition, but Chief Executive Officer Alex Gorsky isn’t talking like someone with a big deal in the offing.

In an interview, Gorsky said he’s more partial to small deals for treatments in the early stage of development, not the kind of cost-saving megamergers some of his competitors are pursuing. So while Pfizer Inc. takes over Allergan Plc and Medtronic Plc reaps savings from its Covidien Plc deal, Gorsky is skeptical that a large transaction would work for J&J.

"History would show that value creation in large deals is much more challenging," Gorsky said in San Francisco, where he was attending the J.P. Morgan Healthcare Conference. "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."

Gorsky didn’t rule out a large deal, and his comments reflect the balancing act J&J has maintained in managing investors’ expectations for how the company will use its cash. The balance swelled last quarter to $37.3 billion, including short-term investments.

Buyback Plan

In October, the maker of drugs, medical devices and consumer health products announced a $10 billion share buyback. That led to questions from analysts about whether the plan made a large deal less likely, an idea Chief Financial Officer Dominic Caruso disputed. And J&J did bid to acquire Pharmacyclics Inc. last year, people familiar with the matter said at the time. AbbVie Inc. eventually won that competition with a $21 billion offer.

Gorsky has overseen some large deals since taking over as CEO in 2012, including the completion of the company’s biggest acquisition in history -- the $18 billion takeover of device maker Synthes Inc. Device sales, however, have suffered since the acquisition, with drugs taking over as J&J’s biggest category in 2014.

The company’s shares have climbed 51 percent under Gorsky’s tenure, outpacing the 36 percent increase of the Standard & Poor’s 500 Index. But they’ve trailed other health-care stocks. The S&P 500 Health-Care Sector Index is up 76 percent in that span. J&J fell 1.2 percent to $97.02 at the close in New York Wednesday.

J&J agreed to at least five acquisitions last year, according to Bloomberg data. Those included the acquisition of Coherex Inc., to gain devices to help heart patients avoid strokes, and Novira Therapeutics Inc., to get experimental treatments for hepatitis B. Financial terms of those acquisitions weren’t disclosed.

It’s difficult to pull off larger transactions to gain more scale in an industry and cut costs, Gorsky said.

"We’ve tried that approach -- we’ve had some successes, we’ve had others that haven’t been so successful," he said. "We’d much rather spend our time creating the next platform than downsizing, reorganizing and taking the next track."

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