Johnson & Johnson’s (NYSE:JNJ) stock has done well this year, growing by roughly 20%. The company’s pharmaceutical division is showing strength, and its consumer business is doing better due to improvements in supply chain and manufacturing. We believe that investors should continue to watch Johnson & Johnson as the company looks poised for good growth. It has a very diversified business spanning across the pharmaceutical, consumer and medical devices segments. In this analysis, we’ll look at the key opportunities that Johnson & Johnson can leverage to fuel its future growth as well as the threats that it is likely to face over the next 2-3 years.
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Opportunity: Growing Cancer Therapeutics Market
Oncology, or cancer therapeutics, is one of the key growth segments for J&J 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 could help the company command better pricing. The opportunity comes from the fact that global incidence of cancer is likely to increase from about 12.7 million in 2008 to 21.3 million in 2030.  In addition, the number of deaths are likely to show a similar growth trajectory as depicted in the chart below. Cancer is a not a single disease, and it has in fact more than 200 types and thousands of subtypes affecting more than 60 organs. That gives an opportunity for the company to develop novel therapies and capture niche markets.
Johnson & Johnson has made meaningful advancement in the field of cancer therapy. Zytiga, which is now approved to treat both chemo refractory and chemo naïve metastatic castration resistant prostate cancer, saw its sales grow 70% globally due to strong market growth and share gain. The drug has captured 30% share of metastatic castrate resistant prostate cancer market in the U.S.  In addition to this, J&J’s acquisition of Aragon Pharmaceuticals will allow it to take ownership and control of Aragon’s androgen receptor antagonist program, which can complement Zytiga’s success. Under this program, Aragon is developing a second generation androgen receptor signaling inhibitor, ARN-509, which is currently in phase 2 development stage and could potentially become a very viable drug for treatment of castration resistant prostate cancer.
Prostate cancer is the second most common cancer in men globally. Approximately 900,000 men were diagnosed worldwide with this disease in 2008, which represented 14% of the cancer cases diagnosed in men that year.  If we look at only the U.S., we note that prostate cancer was the most common cancer in men in 2009, with a total of 206,640 men diagnosed with the condition during the year.  The number of deaths stood at 28,088. It is estimated that developed countries accounted for over 70% of the total number of prostate cancer cases in 2008.  This can be primarily attributed to widespread use of prostate-specific antigen testing in these nations, which detects the disease with high accuracy.  J&J has an opportunity here as it has significant expertise in developed markets, with added assurance of transparent patent laws.
According to Evaluate Pharma, the global oncology market stood at $67.7 billion in 2012.  This figure is expected to grow to $100.5 billion by 2017, implying a compounded annual growth rate (CAGR) of 7%. In comparison, the market for prostate, heme and lung cancer is expected to grow at a CAGR of 8% and it appears that J&J is aptly directing its efforts.
Opportunity: Leveraging Strong Medical Devices Portfolio
Johnson & Johnson is the market leader in medical devices and diagnostics business, which constitutes roughly 60% of its value. Orthopedics and surgical devices sub segments are doing well, and cardiovascular devices business has started to show some recovery. Given its strong brand, supply chain and marketing capability, the company is well positioned to dominate the global medical devices market.
Synthes, which J&J acquired in 2011 for $21.3 billion, 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, strong sales and marketing capabilities and vertical integration. J&J’s orthopedic devices & diagnostics revenues stood at close to $7.8 billion in 2012. We expect this figure to jump to $9.3 billion in 2013, mainly due the impact of Synthes acquisition. In the long term, the company will benefit from its strong brand and the overall growth in the global spinal & orthopedics devices market. We expect this market to touch $82 billion by the end of our forecast period compared to $56.6 billion in 2012.
Despite J&J’s gradual exit from drug-eluting stents business, its cardiovascular medical devices segment seems to have started doing well. Biosense Webster is gaining market share and J&J’s endovascular products are seeing good growth driven by the re-launch of the S.M.A.R.T. vascular stent system and the EXOSEAL Vascular Closure Device. Going forward, the negative impact from exiting drug-eluting stents business will fade and the growth in other cardiovascular devices will become more prominent
Threats: Competition From Generics, Pricing Pressure And Currency Fluctuation
Despite a strong product portfolio, Johnson & Johnson’s medical devices & diagnostics business is facing some pricing pressure. In the second quarter of 2012, this segment saw growth of only 0.5%, excluding the impact of Synthes’ acquisition and currency movements. Additionally, J&J’s exit from drug-eluting stents business has also weighed on its growth, although the impact will dilute going forward. The pricing pressure is likely to continue in the near term.
The healthcare giant has more than compensated for the lull in its devices business by growing its pharmaceutical sales. Driven by the surge in oncology and immunology drug sales, J&J’s global pharmaceutical revenues rose by 11.7% in the second quarter of 2013, with international markets leading the way. However, the company faces the risk of competition from generics as several of its major drugs are set to lose their patent protection in the next few years. For instance, its biggest drug Remicade, which accounted for roughly $6.2 billion in revenues in 2012, is expected to lose its Europe patent in 2015. In addition, Risperdal will lose its patent in 2014, with Prezista losing patent in 2015, and Velcade and Zytiga losing their exclusivity in 2016. As these major drugs lose their patent protection, J&J’s pharmaceutical sales will suffer significantly due to competition from lower priced generic drugs.
Besides the aforementioned pricing pressure and the risk of patent expiration, Johnson & Johnson faces currency risk due to its vast global operations. In the last two quarters, the company’s international pharmaceutical sales saw a negative impact of more than 2% due to currency movements. The year 2012 was no different as the company’s total sales witnessed a negative impact of 2.7% due to strengthening of dollar.
Our price estimate for Johnson & Johnson stands at $90, implying a premium of about 5% to the market price.Notes: