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J&J Finally Returning to Its Roots in Diversity?

- By Sangara Narayanan

Johnson & Johnson (JNJ) is the only health care company that has stayed above the $300 billion market capitalization barrier. It is so far ahead that the second-largest company, Novartis, is more than a $100 billion away from J&J's valuation.

For a long time J&J has been a well-diversified company with revenue distributed more or less equally between pharmaceuticals, medical devices and consumer health care.


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But in the last few years, the company has steamed ahead in the pharma segment while the other two divisions have been getting smaller and smaller. Though J&J has long flouted the diverse nature of its business, that's a hard pill to swallow when you see nearly 45% of revenue coming from one segment.

But the company's recent acquisition of Abbott Laboratories' (ABT) eye-surgery equipment unit for $4.33 billion goes a long way in justifying that boast. J&J expects the transaction, which should close during the first quarter of 2017, to be modestly accretive to adjusted earnings per share.


"Given that 'eye health is one of the largest, fastest-growing and most underserved segments in health care today,' the acquisition will help J&J 'become a more broad-based leader in vision care,' Ashley McEvoy, company group chairman, said in a statement." - CNBC



The World Health Organization estimates that approximately 20 million people are blind from age-related cataracts and that there are at least 100 million eyes with compromised visual acuity caused by cataracts. The world population is aging fast, and vision care is one area that is expected to grow stronger in the next 10 years.

In fact, Technavio's market research estimates the global vision care market will grow steadily at a CAGR of nearly 4% between 2016 and 2020. That's a fair growth rate for such a mature market.

Abbott Medical Optics specializes in lasers and equipment used for cataract surgeries and laser vision technologies designed to enhance surgeon productivity and correct nearsightedness, farsightedness and astigmatism. The entire world will have constant needs for such treatments, especially in countries with growing aging populations. It may not be a high growth segment, judging from the 4% CAGR, but it can be a highly stable business line for the company.

One of the biggest issues I've had with J&J for the last few quarters has been its increasing reliance on the pharma segment, which has become an extremely unpredictable market due to increased competition, high levels of research and development expenditure and litigation costs. Even pure-play pharma companies are struggling to hold their ground, and every time their blockbuster drugs go off the patent cliff they are forced to pay a huge premium to buy companies with promising drugs, just to fill the gap.

J&J has been traveling down that road, increasing its dependence on the pharma segment with every quarter. The addition of vision care to its portfolio is definitely great news for investors who would rather own a diversified J&J than a J&J that is a "pharma-heavy, with other segments, too" kind of company.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

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This article first appeared on GuruFocus.


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