Johnson & Johnson executives said the pharmaceutical company is eager to add to its business through M&A, but sticky high valuations are proving a hurdle to striking deals.
The drugmaker, which on Tuesday reported third quarter revenue and profit that beat expectations, holds $34 billion in cash and marketable securities, while generating $13 billion in free cash flow so far this year. Those finances position it to make strategic acquisitions, chief financial officer Joseph Wolk said on a third quarter earnings call Monday.
“Maybe we're even a little bit more bullish and eager to do something. But as folks come to know us, we're not going to do anything haphazardly,” Wolk said. “We don’t have to do anything out of desperation. We’re going to find those assets that have a great strategic fit.”
While a sector-wide downturn cut biotech valuations this year, the memory of higher market levels may still be fresh in the mind of smaller companies, affecting deal discussions. “The market’s a little bit funny. The volatility actually doesn't help for a conducive M&A environment right now because you have potential sellers holding on to 52-week highs or all-time highs, which, quite frankly, aren't too distant in the rearview mirror,” Wolk added.
J&J executives said earlier this year that they’re interested in smaller or mid-sized acquisitions, although they’ve noted their cash position means they don’t have an “artificial ceiling” on the deals they could pursue.
Acquisitions could aid J&J in its goal to grow pharmaceutical sales to $60 billion by 2025, from $52.1 billion in 2021. The company is currently working to spin off its consumer health division into a separate company, a split that’s set to occur in the middle or latter end of next year.
During the third quarter, J&J pharma sales grew by 2.6% to $13.2 billion, bringing year-to-date sales up by 5.2% to $39.4 billion. A surging dollar compressed reported international sales. Excluding the negative 6.4% effect of currency fluctuations, primarily from the stronger U.S. dollar, sales grew by 9.2% on an adjusted operational basis.
Pharma sales growth beat Wall Street’s expectations by 2%, driven by sales of cardiovascular and infectious disease medicines, SVB Securities analyst David Risinger wrote in a note to clients. That beat came despite COVID-19 vaccine sales coming in below forecasts.
Sales of J&J’s topseller, the autoimmune disease treatment Stelara, rose by 3% year over year to total $2.45 billion, although that was also below consensus expectations. The company’s cancer drug Darzalex performed strongly, however, with sales from July to September up nearly 30% from the year previous.
Overall, quarterly sales were up by 1.9% to $23.8 billion across J&J’s pharma, medical device and consumer health divisions. The company tightened its guidance for full-year operational sales and lowered its forecasted pre-tax operating margin due to inflation in the U.S.