Johnson & Johnson New Coverage: $72.50 Trefis Price Estimate

Johnson & Johnson (NYSE:JNJ) was founded by three brothers in 1886 to produce first aid kits. Today, it has grown into one of the largest health care products companies in the world. The company and its subsidiaries are engaged in the R&D, manufacture and sale of a range of products in the health care field. The company’s operating companies are organized into three business segments: Pharmaceutical, Consumer Health care and Medical Devices & Diagnostics.

The company has a broadly diversified product line that has enabled it manage economic headwinds. It has leadership positions in a large number of its markets with approximately 70% of revenues coming from products that are either #1 or #2 in global market share.

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J&J’s worldwide sales for the full-year 2011 were $65 billion, an increase of 5.6% versus 2010. Net earnings and diluted earnings per share for the full-year 2011 were $9.7 billion and $3.49, respectively.

Full-year 2011 net earnings reflect after-tax charges of $4.2 billion, which include product liability expenses, the net impact of  litigation settlements, a previously announced restructuring charge by Cordis Corporation, costs associated with the DePuy ASR Hip recall program, and an adjustment to the value of a currency option and costs related to the planned acquisition of Synthes, Inc. Excluding these special items in both periods, net earnings for the full-year 2011 were $13.9 billion and diluted earnings per share were $5, representing increases of 4.4% and 5.0%, respectively, as compared with the full year of 2010

We recently launched coverage on J&J with a near $72.50 price estimate for the company’s stock which is 10% higher than the market price.

Launch of Coverage on Johnson & Johnson; $72 Price Estimate

We have broken down our analysis of J&J into 3 major divisions, which are further sub-divided to highlight biggest contributors to stock value.

1. Medical Devices & Diagnostics (50%)

2. Pharmaceuticals (35%)

3. Consumer Healthcare (12.5%)

Medical Devices & Diagnostics

MD&D has seen faster growth compared to the other divisions and operating margins have grown more quickly. J&J’s decision to acquire Synthes for $21.3 billion will give a boost to revenues for DePuy division and improve market share in the spinal and orthopedic devices market. This deal was announced in the second quarter of 2011 and should close in the first half of 2012. As a headwind, we expect J&J’s decision to move out of coronary stents as a potential headwind.

Pharmaceuticals

J&J like any other major pharmaceutical giant has been battling revenue losses due to patent headaches in recent years. It lost its patent on Concerta & Levaquin in 2011, putting at risk nearly $2.5 billion in revenues. Invega & Aciphex will lose patent exclusivity in 2012. Remicade, its biggest blockbuster biologic with sales of more than $5 billion in 2011, will also lose patent protection in 2014, affecting its market share in Immunology drugs segment.

Given the aforementioned loss of patent/market exclusivity and pressure across some franchises, J&J’s pipeline is critical to future growth in this segment. Over the past two years, J&J has launched a number of new molecular entities and significant line extensions that we expect to drive revenue growth. Over the 2011-2015 period, J&J plans to file 11 new products and over 30 line extensions. Some of the most exciting drugs awaiting tests and regulatory approvals include Zytiga, Xarelto, Bapineuzumab & Telaprevir.

Consumer Health Care

J&J’s consumer health care division boasts some of the most iconic brands in the country including Johnson’s, Tylenol, Listerine, and Band-Aid brands among many others.

The company’s consumer performance has been challenged by a number of product recalls within the McNeil OTC (Over-The-Counter) unit related to products manufactured at the Fort Washington and Las Piedras facilities. Brands affected by the recall include Tylenol, Motrin, Benadryl, St. Joseph’s aspirin, and Rolaids.

Another major issues affecting J&J’s consumer health unit is increased competition from private labels. Private label brands, which are generally less expensive for consumers than branded products, have increased in market share over the past 10 years. Retailers such as Wal-Mart and CVS look to market their own products to not only benefit consumers in the form of lower prices but boost their own margins as well.

Understand How a Company’s Products Impact its Stock Price at Trefis