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Investment Overview for Johnson & Johnson (NYSE:JNJ)
Below are key factors that present opportunities for upside or downside to the current Trefis price estimate for J&J:
Immunology and Oncology pipeline firing
- J&J's Revenue from Remicade and Immunology Drugs and J&J's Other Pharmaceuticals Revenue: Despite the fall of J&J's hepatitis C drug Olysio, there still exists some potential in its pharma business that can be unlocked. Its immunology and oncology drugs can do well assuming Remicade holds on to its position in the U.S. where it still has some protection from biosimilar competition. Other immunology drugs such as Simponi and Stelara are growing fast. J&J’s oncology division is likely to do very well. The addition of Imbruvica will be a big boost. We have factored in these expectations in our price estimate. However, positive data pipeline drug trials could lead to our forecasts being conservative. For instance, there are additional clinical data that could potentially strengthen Imbruvica's sales going forward. Also, the company is likely to file multiple immunology and oncology drugs for FDA review in the next two to three years. More than expected success could add additional $5-$6 billion in annual revenues by 2021. This could lead to an upswing of about 10% in J&J's stock price.
Medical devices business crumbles under competitive pressure
- J&J's Share in Spinal and Orthopedics Devices Market and J&J's Surgical Devices Revenue: The revenues from J&J's medical devices & diagnostics segment declined slightly in 2015, which can be attributed to divestiture, adverse currency movements and competitive pressure, which resulted in lower prices. J&J is a world leader in medical devices and diagnostics, and its acquisition of Synthes has strengthened its orthopaedics portfolio. Despite its strong market position, the segment's growth has flattened out, which has led to trimming of the business through divestitures such as Ortho-Clinical Diagnostics and Cordis. Competition from lesser known names has led to pricing pressure, which has brought down incremental growth despite increased shipments. We currently expect low growth in medical devices and diagnostics business. However, if the competition intensifies and J&J fails to find new growth drivers, its revenues can dip further by $5-$6 billion leading to approximately 10% downside.
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.
We believe that both pharmaceuticals and medical devices business are almost equally important to J&J's value.
Pharmaceuticals business has grown significantly in the past few years
J&J's pharmaceutical business accounted for nearly 45% of its revenues in 2015 and more than 55% of EBITDA (earnings before interest, taxes, depreciation and amortization). These percentages have increased over the last few years, thanks to the growth in immunology, anti-infective and oncology drugs. Besides, the division has significantly higher EBITDA margin (~ 59%) as compared to consumer business, and slightly higher than that of medical devices segment.
Strong market position in medical devices industry
J&J has leading market position in several sub-segments of the medical devices market due to its diversified product offerings, established brand, R&D focus, and strong sales and marketing capabilities. Medical devices business constituted roughly 35% of total revenues in 2015 and nearly 30% of EBITDA. Furthermore, J&J acquired Synthes in 2012, which is a global manufacturer of medical devices for orthopedics market including trauma and spine. The combined DePuy/Synthes orthopedic division has the broadest orthopedic portfolio globally and will help J&J expand its leadership.
Pharmaceutical business becoming increasingly important
J&J has made some great strides in the pharmaceutical sector in the last few years. The company, traditionally known for medical devices and diagnostics, is now becoming more centered around pharmaceutical business. The segment is witnessing strong growth driven by increasing sales of Remicade, Zytiga, Simponi and Stelara. Future growth is likely to come from oncology drugs such as Imbruvica and Darzalex, as well as cardiovascular/metabolism drugs such as Xarelto and Invokana. In addition to this, J&J's pipeline will contribute meaningfully in the next 5 years.
Loss of patents impacting sales
Over the last few years, several of J&J's drugs including Levaquin, Concerta, Invega & Aciphex lost their patent protection. Over the next few years, about 3-4 drugs are expected to lose their patent and 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. Remicade faces potential threat from biosimilars, which are generic versions of biologics. The drug is already witnessing significant sales decline in Europe where its biosimilar versions have been approved. However, J&J holds marketing rights for Americas, Japan and other regions. If a biosimilar version of Remicade is approved in the U.S., Remicade's sales, attributable to J&J, will suffer.
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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