Catalysts For Johnson & Johnson’s Stock

Johnson & Johnson‘s (NYSE:JNJ) story has been a mixed one for the past couple of years. While its medical devices and diagnostics segment faced immense competitive pressure, pharmaceutical business saw strong growth driven by immunology and oncology drugs. In addition, consumer healthcare saw some recovery due to the resolution of production and supply issues. However, its profit contribution remains miniscule compared to the other two segments. The situation has started to change a bit as we see the fast growing pharmaceuticals business slowing down in the coming years, with potentially more medical devices divestitures to follow. Our current price estimate for Johnson & Johnson stands at $105, which is at a slight permium to the market price. However, the stock could swing either way depending upon how the company’s medical devices business shapes up amid competitive pressure and the results of upcoming trials for immunology and oncology pipeline drugs.

See our complete analysis for Johnson & Johnson

Immunology And Oncology Pipeline Fires (+10%)

J&J’s hepatitis C drug Olysio was very successful last year, but its growth has plummeted following competitive launches. There was much hope that the drug will carry J&J’s pharma business forward but now, the situation is quite different. However, immunology and oncology drugs can still do dwell 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. We have factored in these expectations in our price estimate.

However, positive data pipeline drug trials could lead to our forecasts being conservative. For instance, it remains to be seen how Zytiga’s label extension will help it compete against Xtandi. There are additional clinical data that could potentially strengthen Imbruvica’s sales going forward. Also, the company is likely to file multiple immunology and oncology drugs for FDA review in the next two to three years. More than expected success could add additional $5-$6 billion in annual revenues by 2021. This could lead to an upswing of about 10% in J&J’s stock price.

Medical Devices Business Crumbles Under Competitive Pressure (-10%)

The revenues from this segment declined by more than 3% in 2014 which can be partially attributed to divestiture and partially to competitive pressure, which has resulted in lower prices. J&J is a world leader in medical devices and diagnostics, and its acquisition of Synthes has stengthened its orthopaedics portfolio. Despite its strong market position, the segment’s growth has flattened out, which has led to trimming of the business through divestitures such as Ortho-Clinical Diagnostics and Cordis. Competition from lesser kown names has led to pricing pressure, which has brought down incremental growth despite increased shipments. We currently expect low growth in medical devices and diagnostics business. However, if the competition intensifies and J&J fails to find new growth drivers, its revenues can dip further leading to approximately 10% downside.

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