Johnson & Johnson‘s (NYSE:JNJ) fourth quarter sales were up 4.5% primarily due to the growth in its pharmaceutical and consumer segments.  While the company’s drug sales surged by 11.8% globally, consumer division grew by 2.8%.  On the other hand, the revenues from medical devices & diagnostics declined slightly due to adverse currency movements and the continued competitive pressure in diabetes care and diagnostics sub-segments. The overall message remains the same. The pharmaceutical business is getting increasingly important for Johnson & Johnson, as the growth in its bread and butter medical devices & diagnostics business stays flat. Additionally, the value contribution of consumer business remains small due to extremely low profit margins.
We are currently in the process of reviewing our price estimate for Johnson & Johnson, and will have an update ready soon. Our current price estimate for the company stands at $90, implying a slight discount to the market price.
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Oncology, Immunology And Anti-Infective Drugs Did Well
The growth in J&J’s immunology drug sales accelerated in Q4 2013. Compared to 15.1% growth observed in the first nine months of the year, the figure for the fourth quarter stood at an impressive 21.6%.  While Simponi and Stelara sustained their rapid gains, it was the company’s biggest immunology drug Remicade that registered higher than expected growth, due to strong performance in international markets. The overall immunology drug market is growing, and the fact that J&J is doing well internationally will help it in the longer run as major therapeutics come off patent in coming years. Anti-Infectives didn’t do bad either, growing by over 10% globally due to strong performance from Prezista, which is an HIV medication.
The Oncology division continued its outstanding performance on the back of strong volume growth from Zytiga and Velcade. Worldwide sales were up by 35.9%, amounting to $1.1 billion.  At the current pace, Zytiga could take over Velcade in the next quarter to become J&J’s biggest cancer drug. Zytiga is now approved to treat both chemo refractory and chemo naïve metastatic castration resistant prostate cancer, and has captured 34% share of metastatic castrate resistant prostate cancer market in the U.S. 
What Is The Outlook?
We have previously stated that immunology, oncology and anti-infectives are the way to go for Merck if it is to revive its business. Given that majority of J&J’s growth is coming from these segments, it appears that the company is focusing its resources in the right direction. J&J stated that 25% of its revenues are coming from products that were launched in the last 5 years, which suggests that patent loss risks for these products are a long way off.  However, the remaining 75% has to be considered. We note that a few of J&J’s major drugs—including Remicade, Risperdal, Prezista and Invega—will lose their patent protection in certain geographies in the next couple of years. This could rain on the company’s parade.
J&J also mentioned that 70% of its sales are coming from products that are at the first or the second position in their respective markets. While that looks good on the surface, what’s important to understand is that most of these products belong to medical devices & diagnostics segment. As we mentioned before, this segment is witnessing negative to flat growth which diminishes its value. In essence, while the company is going strong at the moment, there are certain risks that can not be overlooked. In the near term, J&J is likely to sustain its growth but things can change over the course of next two years.