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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 strengthen J&J's market position significantly. If this leads to market share within the segment increasing to 20%, it can lead to a potential upside of more than 5% to our 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 company has sold ortho-clinical diagnostics to Carlyle group.
Medical devices & diagnostics business is the most valuable segment for J&J, constituting roughly 60% of its value.
Synthes acquisition to help boost growth
J&J acquired Synthes in 2012 for $21.3 billion. Synthes 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. The company has a strong market position which can be attributed to its diversified product offerings, established brand, R&D focus, and strong sales and marketing capabilities.
EBITDA margins rebounding
Medical devices & diagnostics EBITDA Margin was 45% in 2007, which increased to around 53% in 2010 due to gain from net litigation settlements, favorable product mix, manufacturing efficiencies and cost containment initiatives related to selling, marketing and administrative expenses. The figure, however, dropped to 44% in 2011 mainly due to product liability, litigation expenses and recall of DePuy Hip. By 2013, margins rebounded 56.5% primarily due to higher profits from Synthes' sales, lower litigation expenses and product liability.
Pharmaceutical business becoming increasingly important
The results from the last couple of years suggest that J&J has made some great strides in the pharmaceutical sector. 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, Olysio and Zytiga. Recently, J&J announced the acquisition of biotech firm Alios BioPharma to leverage its potent drug pipeline catering to treatment of viral diseases. Also, given the recent Ebola outbreak in West Africa, the company has accelerated the development of vaccine which may be available for human trials by early 2015.
Licensing and co-development arrangements
J&J has 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
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 6 major 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.
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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