J&J CFO ‘Agnostic’ on Size of M&A, Looks at Deals in All Areas

  • CFO says licensing deals preferred for pharma division
  • ‘Very hard to do something transformational for J&J,’ he says

Johnson & Johnson will consider deals of any size and for any of its three main businesses, chief financial officer Dominic Caruso said, though when it comes to pharmaceuticals the company is more interested in less-risky licensing agreements.

“We’re equally interested in all three of our businesses,” Caruso said in an interview with Bloomberg News. “We’re agnostic whether it’s big or small.” That excludes a mega-merger with another drugmaker, he said.

J&J is focused on finding value, he said, which means different things for each line of business. In the consumer unit, for example, there is relatively lower risk from a regulatory or market perspective than in other lines of business, making it potentially easier to make a purchase that can generate a worthwhile return.

One challenge is finding assets big or differentiated enough to move the needle at the health-care products giant, which had sales of $70.1 billion last year. Its consumer, drugs and medical technology units would each be large stand-alone companies on their own.

“It would be very hard to do something transformational for J&J,” he said. “We do look at areas where we might not be in the market today, where we might add a whole other therapeutic focus.”

Earnings Report

Caruso’s comments came after the company reported second-quarter earnings on Tuesday. The health care company increased its 2016 profit and sales forecasts after second-quarter profit topped analysts’ estimates, driven by growth in the pharmaceutical division. In the second quarter, earnings were $1.74 a share, excluding some items, compared with the $1.68 average of 20 predictions compiled by Bloomberg. Drug sales increased 8.9 percent during the period, helping offset a decline in consumer products, while revenue from medical devices were little changed.

The shares were up 1.3 percent to $124.79, and are up 24 percent in the last 12 months, as of Monday’s close.

While valuations have started to come down in the biotechnology industry, Caruso said that doesn’t mean the drugmaker is pursuing large-scale M&A in that sector.

“Our strategy in pharma is licensing and collaborations and not major acquisitions,” he said. “That doesn’t mean we’re not going to do one.” 

Deal Frenzy

Caruso’s comments come during an ongoing flood of health-care transactions. In 2014 and 2015, there were $872.6 billion worth of proposed or completed deals, compared with $235.5 billion so far in 2016, according to data compiled by Bloomberg.

In medical devices, Caruso said heart valves and cardiology devices are “some of the most exciting areas,” but that valuations aren’t at an attractive level right now. On a call with analysts, Chief Executive Officer Alex Gorsky said J&J is also interested in vision care, orthopedics and surgical deals.

Unlike some of its competitors, J&J hasn’t done any mega-deals in the past two years. Its last large acquisition, the $19 billion purchase of Synthes Inc., was in 2012. The company also reportedly lost a bidding war for Pharmacyclics Inc. when AbbVie Inc. won with a $21 billion offer last year. J&J did its biggest acquisition in four years with the $3.3 billion agreement to purchase closely held hair-care company Vogue International, which it completed this week.

J&J had almost $40 billion in cash, equivalents and short-term items on its balance sheet at the end of last year, according to data compiled by Bloomberg.

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