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Does Johnson & Johnson Have a Plan for Huge Cash Reserve?

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Apr. 24 2015, Published 1:47 p.m. ET

Cash deployment  

Johnson & Johnson (JNJ) has a huge cash reserve amounting to ~$15 billion in 4Q14. The company might use the cash for merger and acquisition (or M&A). There are rumors the company is interested in the acquisition of Pharmacyclics, Inc. (PCYC). However, the company refused to comment on this in its latest earnings release. It pointed out that dividends remain the first use of the company’s capital.

 

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Over the last two years, Johnson & Johnson lost exclusivity on three drugs: Aciphex, Concerta, and Velcade. Remicade, the company’s key drug for autoimmune diseases, also lost exclusivity in Europe in 2014 and will lose exclusivity in the United States in 2018. The drug generated revenues of ~$7 billion in 2014.

The company’s other key products, Olsyio and Zytiga, are experiencing sales declines. It’s imperative that the company deploy its cash to enhance long-term growth. It can do this either through new drug development or acquisition of a company with a high potential product pipeline.

Acceleration in medical devices

Johnson & Johnson is reviving growth in its medical devices segment. The segment has been witnessing a slowdown for the last few years. The company has taken the following two steps to accelerate the segment’s growth:

  • Shred its slow growth business.
  • Launch new products.

In June 2014, the company divested the Ortho-Clinical Diagnostics business to The Carlyle Group for $4.2 billion. Next is the divestiture of its Cordis heart-products business, excluding Biosense Webster to Cardinal Health (CAH) for ~$2 billion. The deal is expected to close toward the end of the year.

The company plans to launch 30 new products by 2016. It has already launched a few of them in 2015, including Animas Vibe in the diabetes area in the United States. The company is also developing surgical robotics in strategic collaboration with Google (GOOG).

As an alternative to investing directly in Johnson & Johnson, you might consider pharmaceutical funds such as the iShares U.S. Healthcare ETF (IYH) and the Health Care Select Sector SPDR ETF (XLV).

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