Intuitive Surgical, Inc. (ISRG): Should Johnson & Johnson (JNJ) Be Looking for a Cougar in Devices?

Several years ago, Johnson & Johnson (NYSE:JNJ) realized it had a problem with its drug business. This wasn’t a particularly poignant revelation, as the struggles of the business from around 2004 to 2010 were pretty easy to see, but the company went and did something about it. Licensing agreements with Bayer and Mitsubishi Tanabe brought in drugs like Xarelto and Invokana, while the billion-dollar acquisition of Cougar Biotechnology ultimately turned into the blockbuster prostate cancer drug Zytiga.

I mention this because other parts of Johnson & Johnson (NYSE:JNJ) could use some TLC. Not only is the consumer/over-the-counter business still on a slow path to recovery from repeated product quality and recall issues, but the device business has turned into a perpetual disappointment with low organic sales growth. While the large acquisition of Synthes (announced in 2011, completed in 2012) has spiffed up the orthopedics business, I think it’s worth asking whether Johnson & Johnson (NYSE:JNJ) should think about going Cougar-hunting in the device space.

First, a word (or a hundred) against…
Let me start off by saying that, although the growth hasn’t been great lately, Johnson & Johnson (NYSE:JNJ) still has a pretty good device business. There aren’t many large med-tech companies showing all that much growth today, so it’s not as though Johnson & Johnson (NYSE:JNJ) is alone in reporting weak organic growth. What’s more, between areas like orthopedics and minimally invasive surgery, the company does have some areas of real strength.

It’s also worth noting that the device business isn’t like the drug business. You just don’t see multibillion-dollar “blockbuster” devices very often; even much-ballyhooed Intuitive Surgical, Inc. (NASDAQ:ISRG) generates about half the revenue that Boehringer Ingelheim‘s Spiriva generated in 2012, and that was the No. 15 drug in 2012. Likewise, Medtronic‘s entire market-leading cardiac rhythm management franchise generates only about 6% more in revenue than Spiriva did in 2012.

Even so, where could Johnson & Johnson (NYSE:JNJ) look for acquired growth in the med-tech world?

Surgical
With Johnson & Johnson’s strong Ethicon Endo-Surgery business, acquisitions here could be highly leverageable. Intuitive Surgical, Inc. (NASDAQ:ISRG) has always been a popular rumored target, as its da Vinci surgical robot is seen as both a competitor to the minimally invasive surgery businesses of J&J and Covidien , but also an avenue to converting more open surgeries to a minimally invasive approach. Unfortunately, while the growth is appealing, the price tag would be quite steep.

A smaller name, though, could make sense. Novadaq Technologies Inc. (NASDAQ:NVDQ) has developed some innovative imaging platforms that allow surgeons to better assess perfusion (blood flow) while they’re performing surgeries, leading to fewer complications.