Johnson & Johnson Needs To Step Up Its Game

+13.79%
Upside
158
Market
180
Trefis
JNJ: Johnson & Johnson logo
JNJ
Johnson & Johnson

Johnson & Johnson‘s (NYSE:JNJ) recently reported Q3 2015 earnings raised some important questions. First, what happens to its pharma business going forward? Second, can it ever revive the growth in its medical devices and diagnostics businesses? These questions are critical considering that 95% of J&J’s value comes from these businesses, according to our estimates. We believe that J&J may just manage to get back to double digit growth in pharma segment in 6 months time. However, the outlook for its medical devices business continues to be grim in terms of growth, unless the company can meaningfully accelerate its growth in Asia Pacific and other emerging economies. We are currently in the process of reviewing our price estimate for J&J in the light of third quarter results, and will have an update ready soon.

See our complete analysis for Johnson & Johnson

Relevant Articles
  1. Will Johnson & Johnson Stock Rebound To Its Pre-Inflation Shock Highs of $185?
  2. Should You Pick Johnson & Johnson Stock At $160?
  3. Should You Pick Johnson & Johnson Stock After A 6% Fall In A Month Despite Upbeat Q3?
  4. What’s Happening With Johnson & Johnson Stock?
  5. Johnson & Johnson Poised For A Muted Q2?
  6. Cross-Sector Comparison: Is Caterpillar Stock A Better Pick Over J&J?

Can J&J Manage Double Digit Operational Sales Growth In Pharma Segment?

There is no doubt that J&J’s pharma segment’s growth has been plagued by the performance of its hepatitis C drugs, in particular, Olysio. The drug’s growth trajectory was such that it inflated investor expectations in the beginning, and followed it up with a phenomenal downfall, thus correcting the company’s market price to some extent. Olysio’s sales in Q3 2015 stood at merely $79 million, down 90% from the same period last year. [1] So the impact of the drug is likely to reduce significantly in the coming quarters. If we exclude Olysio’s anomaly and the impact of acquisitions and divestitures, we find that J&J has managed to hang on to double digit operational growth (excluding impact of currency movement).

JNJ sales growth pharma

Nevertheless, the growth rate has come down slightly in the last two quarters which reflects growing competition for its other drug categories. For instance, while Zytiga is growing operationally (excluding the impact of currency movement), it has lost market share in the U.S. in recent quarters. [2] So the question is – can J&J sustain double digit operational sales growth? This is important to answer as going forward, the impact of hepatitis C drugs decline and currency movements will fade gradually, and EPS could see significant growth assuming other drugs continue to do well.

We believe J&J may just manage to do it. It has marketing rights for Remicade in the U.S. and Japan, where the drug still doesn’t have a biosimilar competitor approved. The decline in the drug’s revenues in Q3 2015 was due to inventory reduction in Japan in anticipation of label expansion. We expect this to correct in the next quarter or so. Additionally, the oncology drugs are growing and J&J has hopes from Xarelto, which is used for treatment of deep vein thrombosis (DVT). The drug’s prescription share in the U.S. increased in the third quarter to 15.8%. [2] Although generic manufacturers are filing drug applications to FDA seeking approval of generic version of Xarelto before its patent expires, the likelihood remains low. The patent expires in late 2020 and we expect J&J, along with its partner Bayer, to defend its turf.

J&J Needs To Step Up Its Game In Medical Devices & Diagnostics Business

Medical devices business was flat operationally, but grew slightly after excluding the impact of acquisitions and divestitures. J&J has been streamlining its medical devices operations and we expect that to continue. Looking at the expected market growth rate, J&J’s market position, and its own growth in the sector, it seems that the company is gradually falling behind. For instance, J&J expects global medical devices and diagnostics market to grow annually at 4%, but its own growth (excluding currency impact, acquisitions and divestitures) in this segment lacked the market growth significantly at 1.3%. [3]. This clearly indicates that the company may be losing share. Additionally, the Orthopedics division, which is one of the biggest medical devices segments for J&J, declined operationally by 0.7%. On the other hand, the knee market, which is the primary component of orthopedics, is growing at 3.8% annually. [3]

So what can J&J do? Could expansion in China be the answer?

Approximately 20% of J&J’s medical devices revenues came from emerging markets in Q3 2015. The company expects China to contribute nearly $1 billion for the full year 2015. According to USITC (United States International Trade Commission), medical devices market in China is expected to grow at 11% CAGR through 2018. The commission’s document also talks about growing medical devices exports to China from the U.S., as evident in the image below.

med device china

Source: USITC compilation

It appears that orthopedics and cardiovascular exports are still low in comparison to imaging. Interestingly, J&J has very strong presence in these two categories, which means that there is strong opportunity to be tapped in China. Expanding in China and other emerging nations could potentially help J&J keep up with the global market growth.

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

Notes:
  1. J&J’s SEC Filings []
  2. J&J’s Earnings Transcript [] []
  3. J&J’s earnings transcript and SEC filings [] []