TECHNOLOGY: J&J continues winning diversification strategy

Unfortunately this stock picker wasn’t paying much attention, but there were some signs that this would happen. Last week a Prudential analyst thought that Guidant was the top pick in medical devices, while the NY Times had a story late last week that Guidant had no clear succession plan. (Hint, hint–if no internal successor, perhaps an external one would impose itself!) And now comes today’s news that J&J is going to buy Guidant (or at least is in talks to buy it). The price mentioned in the article is $24 billion, or about $3 billion more than Guidant’ closing stock price of $68. So if it goes through as is we can expect a price of about $75, or exactly where the Prudential analyst forecast. Perhaps we should pay them more attention in the future.

Where does that leave the device business? Guidant is big in bare-metal stents and has a new drug eluting stent coming out in 2007. It is better know for its defribillators in which its a strong second to Medtronic. J&J is strong in stents but needs to get stronger to combat Boston Scientific, and the defribillator business helps it broaden its dependence on some pharma products that will be coming under competition (like is anit-anemia drug Procit).

J&J has always managed to keep its diversified portfolio of companies more or less happily under one corporate organization. mMost other big pharma have basically relied on their dominant therapeutic areas and have treated their other units like the poor relations. For instance SKB’s role in consumer products was never as successful or as central as J&Js, while Pfizer and BMS have in recent memory sold medical devices business because they weren’t core to their business. Guidant itself was a spin-off from Eli Lilly about a decade ago.

Being a diversified health care conglomerate is challenging because some product lines make so much more money than others. Dealing with Procrit, stents, diabetes test strips and Splenda (not to mention baby powder) under one corporate roof certainly requires different management skills than big pharma usually exhibits, and it lowers the overall margins in the boom times. But when times are tough, it’s clear though that J&J’s diversification strategy has its advantages, given that it’s the only pharma stock to have actually gone up this year–up 20% compared to Pfizer for example which is down 20%. From that perspective Guidant looks to be a good, if somewhat pricey, addition to the J&J steamroller.

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