Does Johnson & Johnson’s Latest Acquisition Make It a No-Brainer Buy?

new google-game April 10, 2024 5:15 pm 21views 0comments

The company is hoping to expand, but is there enough here to attract growth investors?


Johnson & Johnson (JNJ 0.46%) has focused more on growth initiatives since spinning off its consumer healthcare business into what is now Kenvue. In 2022, it made a big move with the acquisition of heart pump maker Abiomed for a whopping $16.6 billion. And recently, J&J announced yet another major deal: It is acquiring Shockwave Medical (SWAV 0.54%) for $13.1 billion.


What does this mean for the company, and does this move make Johnson & Johnson an attractive option for growth investors?


The acquisition will strengthen its medtech business

Johnson & Johnson’s two key segments are medtech and innovative medicines. While the company invests in research and development to build out its pharma business, one way it has been bolstering its medtech division has been through acquisitions.


On April 5, the healthcare giant announced plans to acquire Shockwave Medical. The company produces a device that uses sonic pressure waves to help break up calcium deposits. In 2021, the Food and Drug Administration approved its intravascular lithotripsy therapy to treat advanced heart disease. Johnson & Johnson sees this as an opportunity to focus on a promising area, pointing out that “[c]ardiovascular intervention is one of the fastest-growing global medtech markets, with significant unmet patient need.”


In 2023, Shockwave Medical reported revenue of $730.2 million, which increased by 49% from the previous year. For 2024, it expects between 25% and 27% revenue growth, with its top line reaching at least $910 million. Shockwave has also posted a profit in each of the past two years.


Johnson & Johnson faces some challenges ahead

The acquisition of Shockwave Medical is a good way for Johnson & Johnson to strengthen its medtech business, but it’s still a fairly modest purchase for a company of J&J’s size and stature.


Last year, J&J reported $85.2 billion in sales. Its medtech business brought in $30.4 billion, and its innovative medicines segment contributed the bulk of revenue at $54.8 billion. The additional revenue from Shockwave will give the medtech division another way to diversify and grow, but it won’t be transformative, nor will it alleviate some of the risks and concerns investors have about Johnson & Johnson today.


For one, the company faces an impending loss of revenue, with its top-selling immunology drug Stelara losing patent protection in the U.S. next year. Stelara generated $10.9 billion in revenue for Johnson & Johnson in 2023, and a dent in sales could have a major effect on a business that normally doesn’t generate significant growth to begin with. The company is targeting an operational growth rate between 5% and 7% between 2025 and 2030. But how big an impact competition has on Stelara’s sales will undoubtedly play a role in how strong its top line will turn out to be.


Second, there’s also the risk related to talc lawsuits that simply isn’t going away for Johnson & Johnson. The company may end up spending tens of billions of dollars to resolve the issue, and in the meantime, it has been using resources to fund acquisitions. This latest deal involving Shockwave is going to rely on a combination of cash and debt. For investors, particularly those who love Johnson & Johnson’s stock for its dividend, that could be a bit concerning; spending too much cash on acquisitions coupled with some lofty legal bills could make the dividend less safe than it otherwise would be. At the very least, it could lead to smaller dividend increases in the future.


Is Johnson & Johnson’s stock a good buy today?

Johnson & Johnson’s acquisition of Shockwave does improve the growth prospects for its medtech business but it doesn’t fundamentally make the healthcare stock any better of a buy. Acquisitions are likely to continue for Johnson & Johnson now that it’s focused on medtech and innovative medicines. But with the patent loss of Stelara and the talc lawsuits remaining unresolved, there’s still more risk around the stock than there is potential upside right now.


In the past 12 months, Johnson & Johnson’s shares have fallen by 8%, and I wouldn’t be optimistic that things will get a whole lot better for the company in the foreseeable future.


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