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Investment Overview for Johnson & Johnson (NYSE:JNJ)
Below are key drivers of J&J's value that present opportunities for upside or downside to the current Trefis price estimate for J&J:
Medical Devices & Diagnostics
- J&J Market Share in Spinal & Orthopedic devices:In July 2012, J&J completed acquisition of Synthes a in cash and stock deal, which has further expanded its orthopedics franchise (DePuy) and mark the largest deal for J&J. Synthes is a global manufacturer of orthopedic spine and trauma products.
Synthes product portfolio consists of five primary product groups in trauma, spine, knee, bio-materials and power tools. After the deal, DePuy has become a global leader in the Spinal & Orthopedic Devices market.
We expect Synthes to contribute nearly more than $3 billion in revenues post merger and another $1 billion in profits. However, the company recovers from recent setbacks relating to Depuy Hip recall, overall sales may exceed our expectations. This could lead to market share within the segment increasing to 12%, which represents a potential upside of more than 3% to the Trefis price estimate.
- J&J's Other Pharma Sales:Given the patent/market exclusivity expirations and pressure across some franchises, J&J’s pipeline is critical to future growth in the pharmaceutical segment. Our forecast of Other Pharma Sales includes some of the company's pipeline. Drugs in J&J's pipeline include:
- Zytiga - for the treatment of metastatic prostate cancer with peak sales potential of more than $1 billion.
- Xarelto - for Venous Thrombo-Embolism prevention following hip/knee replacement. J&J is also pursuing an
indication for use in stroke prevention in Atrial Fibrillation.
If these drugs do achieve more than their peak sales potential, it represents potential upside of more than 3% to the Trefis price estimate.
Johnson & Johnson (NYSE:JNJ) is an American multinational pharmaceutical, medical devices and consumer packaged goods manufacturer founded in 1886. The company (also called "J&J") and its subsidiaries are engaged in the research and development, manufacture and sale of a range of products in the health care field. It has more than 250 operating companies conducting business worldwide.
J&J is an industry bellwether and therefore its shares generally reflect the overall performance in healthcare products at any given point in time. It also reflects investor appeal for “defensive” securities, as during periods of economic or market uncertainty investors have generally sought haven in J&J shares as its earnings are less cyclical.
Some of its iconic brands include Band-Aid, Listerine, Neutrogena, Tylenol, Zyrtec, Remicade, Rieperdal and Topamax among many others.
The biggest contribution to the value of the stock comes from the Pharmaceutical and Medical Devices & Diagnostics (MD&D) businesses, which we estimate contribute 45% and 41% of the company's value, respectively.
Synthes acquisition to help boost growth
In April 2011, J&J announced its intent to acquire Synthes for $21.3 billion which would be the largest transaction
consummated to date. We believe J&J is paying fair value for a company that has peak margins and whose end markets might continue to see pressure. J&J expects the trauma and knee markets to grow 7% and believes spine could rebound to a 5% rate of growth. If completed, the combined J&J/Synthes
orthopedic division would have the broadest orthopedic portfolio globally.
MD&D margins growing at healthy pace
MD&D operating margins have significantly improved driven by the product mix, favorable pricing in certain years, and restructuring efforts. Of all the divisions, MD&D margins have seen the greatest expansion over the past decade from 7% in 2000 to nearly 30% in 2010.
J&J has also pruned a number of businesses in MD&D such as the Advanced Wound Care and Biopsy businesses and more notably its recent decision to exit out of coronary stents,
driven by the market environment and company-specific issues.
Launch of new drugs
J&J has several new drug launches in its pipeline which are expected in the next few years. Over the 2012-2015 period, J&J plans to file 11 new products and over 30 line extensions. J&J recently received approval for Zytiga and Xarelto and is awaiting regulatory action for Telaprevir (E.U.), TMC 278 (U.S.), and Yondelis (U.S.). Other Phase III compounds that have been filed or are expected to be filed this year include Canagliflozin (second half 2012)
Licensing and co-development arrangements
J&J has entered into licensing/co-development/marketing
agreements with Bayer for Xarelto (Rivaroxaban), Elan for Bapineuzumab, Vertex for Telaprevir, and Millennium Pharmaceuticals for Velcade. J&J has also acquired Cougar Biotech and Crucell to build out its oncology and vaccines businesses.
Loss of patents impacting sales
By the end of 2013 over 10 blockbuster drugs are expected to lose patent exclusivity which includes J&J's blockbuster drugs like Levaquin, Concerta, Invega & Aciphex. These, among other branded drugs are set to lose over $100 billion in revenues in the next few years and thus companies such as J&J will need to develop new drugs to offset these losses.
Growing threat of generic products
The fast growing pharma market in emerging economies or referred to as the 'Pharmerging' economies have the capability and technical prowess to manufacture generic versions of blockbuster drugs. These generic drugs are often sold at prices that substantially cheaper then their branded counterparts, thereby severely affecting big pharma's ability to generate profits in the long run.
Globalization of healthcare reforms
Governments around the world are trying to rein in fiscal spending in order to manage their budget deficits
Since healthcare costs are one of the biggest components of any national budget, increased healthcare legislation and reforms around the world will hurt revenues for the entire pharmaceutical sector.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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