As we noted on our members-only call earlier today, we want to provide members with some updates regarding our position in Johnson & Johnson (JNJ) .
Esketamine Recommended for Approval by FDA Advisory Committee
On Tuesday, Johnson & Johnson announced that an FDA Advisory Committee recommended the approval (14 yes, 2 no, 1 abstain) of the company's esketamine-based nasal spray, SPRAVATO, for adults living with treatment-resistant depression. While the development is relatively immaterial for 2019 earnings, the positive outcome represents the removal of an overhang and opens the door to what analysts at Morgan Stanley believe could be a $1 billion product by 2022.
Outside of what this development means for shareholders, we are thrilled to see progress being made on this front as we could be on the verge of a significant breakthrough in the treatment of depression, with Bloomberg reporting that "if approved, it would be the first major therapeutic advance for depression since the introduction of Prozac in 1987."
While the esketamine treatment is by no means an end-all be-all "cure," we believe the availability of a substance that can be at the ready and delivered via a nasal spray, when someone is in the moment of contemplating suicide, which is really the aim of this drug, and to address treatment-resistant depression but even more so to put off the impulse of suicide and give the affected person a fighting chance at getting help, to be invaluable. With suicide rates in the U.S. on the rise, and the CDC reporting (see here) that "in 2016, suicide became the second leading cause of death for ages 10-34 and the fourth leading cause for ages 35-54," we believe the recommendation for approval to be a significant win in combating the ongoing epidemic. Put simply, the increased volume of suicides, which is estimated to be at a 50-year high (and in 2016 was estimated to be at a rate of 123 per day in the U.S., with a higher percentage per capita being seen in veteran population versus the civilian demographic), along with the impacts of the opioid epidemic is actually resulting in a decline in life expectancy in the U.S., a trend that started back in 2016.
Bottom line, we believe this recommendation for approval is a win for shareholders and an even bigger win for society as a whole.
Auris Health Acquisition
Another update we want to bring to members' attention is that this morning, we learned that Johnson & Johnson had entered an agreement to purchase Auris Health, Inc. (see here) for about $3.4 billion in cash with an additional $2.35 billion contingent on reaching predetermined milestones. For those unfamiliar with the company, Auris' core product is the Monarch Platform, which, per the company's website here "integrates the latest advancements in robotics, micro-instrumentation, endoscope design, sensing, and data science into one platform to improve outcomes and reduce cost." The first disease the company is looking to address with its robotic surgery approach is long cancer.
We view the acquisition positively as it serves to further build out the company's medical device business, a segment that has struggled in recent quarters but that has also been target for improvement by management. Recall, improvement in the medical devices business has been a key factor in our investment thesis as we believe progress in this segment will allow for improved earnings and a higher valuation.
Imerys Talc America Files for Chapter 11 Bankruptcy Protection
Lastly, during our call, Jim mentioned that we had just learned of an update regarding the ongoing talc debate that has seen multiple lawsuits come Johnson & Johnson's way. What Jim was referring to was a decision by Johnson & Johnson supplier Imerys Talc America Inc. to file for Chapter 11 bankruptcy protection.
Speaking on the release (click here), Giorgio La Motta, President, Imerys Talc America, Imerys Talc Vermont, and Imerys Talc Canada stated: "This is an important, meaningful, strategic step for our business. After carefully evaluating all possible options, we determined that pursuing Chapter 11 protection is the best course of action to address our historic talc-related liabilities and position the filing companies for continued growth. The safety of talc has been confirmed by dozens of peer-reviewed studies, as well as regulatory and scientific bodies, and the litigation is entirely without merit. However, it is simply not in the best interests of our stakeholders to litigate these claims in perpetuity and incur millions of dollars in projected legal costs to defend these cases. By deciding to file for Chapter 11 protection, we have laid the groundwork to efficiently resolve our historic talc-related liabilities and focus on our continued success in the industry."
We believe there are two important considerations for members. First, the decision by Imerys to file for protection is being made as a result of management weighing historic talc liabilities and acting in the best interest of their stakeholders (as should be expected of any management team), not because of expectations of a ramp-up in lawsuits or something or news of new claims coming to light. Second, and even more important in our view, despite Imerys' management's decision to file for protection, they clearly state that they do not believe there to be any merit to these claims, a view supportive of Johnson & Johnson's own stance and one backed by, as noted in the release, "dozens of peer-reviewed studies, as well as regulatory and scientific bodies."
As this relates to Johnson & Johnson, we view this update as a non-event. While the Imerys team chose to settle these claims via Chapter 11 protection, rather than fight them in court, we believe the underlying facts of the case are unchanged and in no way does the choice by Imerys serve to substantiate the claims made by plaintiffs in the case against Johnson & Johnson.
As a result, of the esketamine recommended approval and the Auris Health acquisition agreement, we are incrementally more positive on shares of JNJ, despite the Imerys news, which we reiterate is immaterial in terms of its impact on the strength of Johnson & Johnson's legal case. Therefore, in line with our commentary from the members-only call, we continue to view JNJ as one of the top-five stocks we find attractive at current levels.
The other four are Goldman Sachs (GS) , which we believe to be highly attractive at a stock price that represents a discount to the company's tangible book value; CVS Health (CVS) , which we remind member will provide 2019 guidance on the Feb. 20 conference call, where we will be looking for EPS guidance of at least $7 per share; Alphabet (GOOGL) , which thanks to its AI dominance and valuation we continue to view as one of, if not the most attractive tech company around; and Honeywell (HON) , which in addition to being attractive at ~15x forward earnings estimates, we believe is a strong business in its own right and stands to see a nice pop should we break a deal with China, tariffs being a key overhang on the industrial sector in general.