I've been a Johnson & Johnson shareholder for some time ... but more and more I'm wondering why.
Today JNJ announced that it's paying a little more than $1B for Mentor -- a company known mostly for breast implants and wrinkle treatments. This follows other phenomenally successful JNJ buys like Conor in recent years (tongue firmly in cheek for those who don't know my sarcasm).
Now, is there real growth potential in the aesthetic and reconstructive segments of health care? Sure. Elective cosmetic procedures are going to slow to a trickle during this recession, but I don't care so much about that ... they'll be back eventually and whether that's 2010, 2011, or 2012 isn't all that important to me. What's more, JNJ does have some exposure to that market already and could (arguably) use more products to leverage it existing salesforce there.
But more and more I wonder if JNJ management really has a plan and, if so, whether that plan is worth hanging around for as a shareholder. I'm not universally opposed to growth-by-acquistion in the med-tech space, and companies like Medtronic have shown that it can be a successful strategy. But I am opposed to serial acquirers who add little to the businesses they buy.
There's plenty of interesting cardiology, neurology, and radiology technologies out there, to say nothing of life sciences and diagnostics. These are technologies that serve real diseases, have solid reimbursement, and can be cornerstone growth platforms for a health care company. Instead, JNJ goes the way of fake ta-ta's.
I hope I'm wrong about this and it turns out that JNJ isn't overpaying for a non-strategic asset, but I'm increasingly feeling that it may be time to sell my JNJ shares and move on to the next big idea.
6 comments:
Speaking of elective procedures, I've been following LCAV for the past few months. Trades close to net cash. LCAV runs about 40 Lasik facilities around the country and prior (founding) mgmt recently acquired 11% to try to force changes.
LCAV could find itself in a little more trouble. The clinical data that is accumulating on these procedures hasn't been great ... and it seems that sentiment is turning against it.
Still... net cash is net cash. That said, I've found a few med-tech stocks selling at negative enterprise values (all aesthetic companies, not surprisingly).
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Actually I think this is a good move for JNJ. Allergan is making a lot of money from botox and implants--close to $2 billion per year. Mentor is competing favorably with them on the implants maintaining its market share at almost $400 million per annum.
Mentor will have Botox in 2010 or 2011 and be the third company approved. Botox is a couple of $$billion market annually.
The facial fillers line is also a growth opportunity although there is a fair amount of competition in this product
JNJ moving into cosmetic products should make some money for them when things recover
They got the company at a fair price by my calculations .
The ability of Mentor to make money isn't in question, and wasn't my objection.
My objection is that it's a deal that makes a lot less sense to JNJ than many of its other options.
What are its other options and how does Mentor detract?
JNJ generates enough cash to make more than one acquistion
Mentor takes away resources that can be used for other buys and it requires investment in sales and marketing infrastructure.
I'm not going to list other companies that would make sense as acquisition targets, as this gets too close to my "day job" and I'm not mixing that into my personal blog.
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