Nevermind Currency Impact, Johnson & Johnson Is Responding To Other Challenges Reasonably Well

There was nothing unexpected in Johnson & Johnson‘s (NYSE:JNJ) Q1 2015 results. While the domestic and international pharmaceutical business grew on constant currency basis, medical devices segment saw a decline due the impact of divestitures and increased competition. As expected, the strengthening dollar impacted the company’s revenue growth significantly and the situation is unlikely to change this year. In addition, the decline in Olysio’s sales continued dampening pharmaceutical division’s momentum. While the impact of currency was huge, it is something that is transient and not specific to J&J. We expect most big pharmaceutical firms to suffer in a similar way. It is more important to understand J&J’s operational growth challenges in pharmaceutical and medical devices business, which together constitute more than 95% of the company’s value according to our estimates.

Our current price estimate for Johnson & Johnson stands at $105, which is at a premium of 5% to the market price.

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It appears that J&J’s infectious disease franchise is in trouble, primarily due to the fall of Olysio, but there is some hope from immunology and oncology drugs assuming Remicade’s U.S. growth can offset any declines in Europe. Remicade accounts for roughly 25% of J&J’s pharmaceutical revenues and the new biosimilar launched in Europe will create some competitive pressure. The drug saw an operational (excluding currency effects) decline of more than 6% in the first quarter. However, the U.S. business from Remicade is much bigger for J&J and considering that the biosimilar will be introduced to new patients, the overall impact can be gradual. So the decline in Remicade’s revenues will be spread out over the next few years. Other immunology drugs such as Simponi and Stelara are growing fast.  J&J’s oncology division, although small, is doing well. The addition of Imbruvica is likely to help. Overall, pharmaceutical business is still doing reasonably well but investors must be vary of developing competition. Following the last patent cliff, there has been a flurry of new drug approvals and pipelines are looking a little promising again. As far as J&J’s medical devices business is concerned, we don’t see any catalyst in the near term. The growth will continue to remain slow, and the company may resort to additional divestitures to focus on growing the pharmaceutical business.

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