JPM: Don't expect any splashy device acquisitions from J&J

Alex Gorsky

Johnson & Johnson ($JNJ) CEO Alex Gorsky struck a skeptical tone when it comes to large M&A deals at the J.P. Morgan Healthcare Conference in San Francisco, stressing the company's desire to return money to shareholders, including about 50% in the form of dividends.

Even then, J&J has $37.3 billion in cash on hand, according to Bloomberg.

"History would show that value creation in large deals is much more challenging," Gorsky told Bloomberg, "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."

The company last year attempted a large deal to beef up its larger and faster-growing pharmaceuticals unit, but lost out to AbbVie ($ABBV), which paid $21 billion for the target (Pharmacyclics).

But the biggest takeover in the company's history was the $18 billion purchase of orthopedics company Synthes in 2012. J&J could expand that unit even further by buying out competitor Smith & Nephew ($SNN), which is the only mid-sized orthopedics player left. But there have been no indications of any interest in such a move by J&J, even though fellow orthopedics bigwig Stryker ($SYK) is rumored to considering a deal.

The company's slow-growing device unit, with $6.1 billion in quarterly sales (or about a third of overall sales), has made some incremental investments and acquisitions of late.

This year it invested in two Israeli startups: V-Wake, maker of an implantable device for heart failure, and CartiHeal, the maker of a CE-marked bone regeneration implant. It co-led the latter round, which was worth $15 million.

Last year, the company's Biosense Webster added to its antistroke offerings with the acquisition of Salt Lake City's Coherex Medical, maker of the CE-marked Coherex WaveCrest Left Atrial Appendage Occlusion System, for an undisclosed sum. It's unlikely the company paid a great sum for the device, given the moderate size of the market for devices to reduce the risk of stroke via mechanical means (as opposed to blood thinners like warfarin), a market that is led by Boston Scientific's ($BSX) Watchman.

During a previous interview with FierceMedicalDevices, the med tech arm's chief medical officer Dr. Bruce Rosengard acknowledged that incrementalism is predominant in med tech, making a big med tech acquisition less likely. He drew a distinction with the pharma world, where drugs are being invented for diseases that have no cure or existing treatment.

J&J's ambitious joint venture with Verily (formerly Google Life Sciences) to develop a new robotic surgery system is the most prominent example of Rosengard's attempt to implement the company's successful, outward-looking pharma innovation model to med tech in the hopes of emulating that faster-growing unit's success.

At J.P. Morgan, Gorsky emphasized the importance of consummation in med tech, saying patients increasingly want to participate in discussions about what kind of implant or procedure they will receive. To that end, J&J recently launch a suite of offerings to promote outpatient joint replacement, which is more convenient and less time-consuming than the traditional in placement-based approach. And this year the company launched a consumer health and wellness tech accelerator in Sunnyvale, CA.

Wall Street isn't pleased with the device unit's slow growth, which stands in contrast to the high-performing pharmaceutical business. "We believe in that business, but we realized that there are definitely areas that we haven't been satisfied with over the last few years. We've taken a lot of actions internally and externally to address that, but we remain very confident in this future," Gorsky said.

After all, its steady revenues helped the pharmaceutical business during its downturn, Gorsky said: "When we went through our pharmaceutical challenge in 2008-2009, we realized $8 billion (in lost revenue) to patent expiry. If we didn't have a strong device and a strong consumer business, we wouldn't have been able to reinvest. Now we've launched 14, 15 (pharmaceutical) products since then, 7 of which are already $1 billion or on their way to $1 billion."

- here's Bloomberg's take