Johnson & Johnson (NYSE:JNJ) recently released its Q1 2013 financial results. Based on the continued strength in its pharmaceuticals business and an improvement in the consumer healthcare segment, we have raised our price estimate. The company is doing well with its immunology and oncology drugs and has showed resilience against the competition from generic drugs in central nervous system therapeutic area. In addition to this, its consumer healthcare business saw substantial growth in the U.S driven by the sales of analgesics and upper respiratory products due to a reliable supply chain and a strong flu season.  However, consumer healthcare continues to hold little value for J&J due to its low margins and slow expected future growth.
As expected, the medical devices & diagnostics segment saw a significant jump in revenues due to Synthes acquisition. However, it was noteworthy to see growth in cardiovascular sales which have suffered a decline in the past due to the company’s exit from drug-eluting stents business. Overall, we believe that Johnson & Johnson is poised for good near term growth.
Strong Performance From Pharmaceutical Business
Excluding the impact of currency movements, J&J’s worldwide pharmaceutical sales increased by 10.7%.  This can be attributed to strong performance of its immunology and oncology drugs, which together account for about 25% of J&J’s value as per our estimates.
Oncology and immunology are growth areas for the company and for the pharmaceutical industry in general.  Primary care areas such as cardiovascular and allergy are already flooded with products, and therefore the focus on oncology and immunology could help the company command a better pricing.
J&J’s immunology drug sales surged by 16.3% globally.  While its biggest immunology drug Remicade showed moderate growth of 5.2%, the sales for Simponi and Stelara grew substantially. It appears that the overall immunology drug market is increasing and international markets present a large growth opportunity. Simponi and Stelara did well internationally, especially in Japan. 
Oncology is a smaller segment for J&J and presents substantial growth opportunity as evident from the recent quarterly results. J&J’s global oncology drug sales grew by 33.2% during Q1 2013.  While Velcade was flat, Zytiga’s sales increased by more than 70%.  Zytiga and Velcade have been approved for additional indications, and it is likely that we’ll continue to see healthy growth in their sales in the near term. Velcade’s sales stood at $1.5 billion in 2012, and we expect the figure to continue to grow till 2014, when the drug loses its patent.
Diabetes Drug Could Play Important Role In Future Growth
J&J received a major boost recently as its blockbuster potential type 2 diabetes drug, Invokana (commonly known as Canagliflozin), was granted FDA approval. With obesity on the rise, diabetes is affecting more people globally. In the U.S. alone, roughly 26 million people suffer from the condition.  Owing to these factors, the global diabetes drug market has seen rapid growth rate in the last couple of years. According to GBI Research, a leading business intelligence provider, the type 2 diabetes drug market, which constitutes a significant chunk of the total diabetes drug market is expected to grow from $26 billion in 2011 to $50 billion in 2021, in developed markets including the U.S., Japan and Europe. 
Medical Devices & Diagnostics – Cardiovascular Doing Well But Pricing Pressure Exists
As expected, J&J’s medical devices & diagnostics division showed revenue jump due to its acquisition of Synthes last year, which is the world’s largest maker of implants to cure bone fracture as well as produces surgical power tools and biomaterials. Excluding the impact of this acquisition, revenues were down due to certain inventory issues, pricing pressure and lower number of selling days.  The growing competition in the market can not be ignored and there is hardly any evidence that the next quarter will see any recovery (excluding Synthes).
However, the silver lining is that the combined J&J/Synthes orthopedic division has the broadest orthopedic portfolio globally, and therefore, the company can leverage the growth in the market better than its competitors. The global trauma fixation devices market is expected to reach $6.7 billion by 2017, growing at a compounded annual growth rate of 6%.  This growth will be driven by the aging population in countries such as the U.S., Europe, Japan and China.
Another positive development was J&J’s growth in cardiovascular medical devices segment. Excluding the currency impact, the sales were up 8.5% globally. This growth comes despite the impact of J&J’s gradual exit from drug-eluting stents business. Biosense Webster continued to gain market share and J&J’s endovascular products saw good growth driven by the re-launch of the S.M.A.R.T. vascular stent system and the EXOSEAL Vascular Closure Device.  As the year progresses, the negative impact from exiting drug-eluting stents business will fade and the growth in other cardiovascular devices will become more prominent.
We estimate that medical devices & diagnostics business constitutes close to 65% of J&J’s value.
Our price estimate for Johnson & Johnson stands at $85, implying a slight discount to the market priceNotes:
- J&J’s Q1 2013 Earnings Transcript [↩] [↩] [↩] [↩]
- J&J’s SEC Filings [↩] [↩] [↩] [↩]
- Oncology, Neurology And Immunology Are Areas For Growth In Large Pharma, Says Editor Of Morningstar Healthcare Observer; Exclusive Interview Reveals His Top Picks In This Space, Yahoo News, Nov 17 2012 [↩]
- National Diabetes Fact Sheet, 2011, CDC [↩]
- The Type 2 Diabetes Drug Market Will Almost Double Over The Next Decade, Increasing From $26 Billion In 2011 To Nearly $50 Billion In 2021, Decision Resources, Oct 15, 2012 [↩]
- Research and Markets: Trauma Fixation Devices – Global Pipeline Analysis, Competitive Landscape and Market Forecasts to 2017, Business Wire, March 18 2011 [↩]