We Expect The Stability In J&J’s Stock To Continue

Johnson & Johnson‘s (NYSE:JNJ) stock has barely moved following its Q2 2015 earnings announcement, as there was nothing unexpected or groundbreaking. Currency headwinds were a dampener in otherwise what was a quarter of modest operational growth. We previously stated that with Remicade going off patent and Olysio’s sales plummeting, J&J needs new catalysts to drive growth. It appears that its current drugs such as Simponi, Stelara, Zytiga, etc., are barely managing to pull off that role. This is likely to remain the case for the remainder of the year and the topline growth will be more visible from 2016 onward as the impact of Olysio’s plummeting sales in year-over-year comparison gets diluted. For us, the key takeaway from the earnings is that J&J’s pharmaceutical revenue growth will remain subdued this year, and it is still a waiting game in terms of how new drugs emerging from its pipeline play out. For now, we see few near-term triggers that can cause a significant stock movement on the horizon.  (Read Has Johnson & Johnson’s Stock Peaked?)

Our current price estimate for Johnson & Johnson stands at $107, which is at little over 5% premium to the market price.

See our complete analysis for Johnson & Johnson

Why Such Low Growth? 

Here is why J&J’s growth was low even after excluding the impact of currency and acquisitions and divestitures. First, the pharmaceutical segment was impacted by the continued fall in Olysio’s sales. The drug registered more than 90% year-over-year drop in revenues in the U.S., totaling just $50 million in Q2 2015. This was expected as the decline had started a couple of quarters ago and was one of the key reasons why J&J’s stock pulled back from its all-time high. This re-establishes Gilead Sciences’ supremacy in the hepatitis C market, and J&J has some work to do in this arena.

Second, J&J’s key drugs Zytiga and Remicade are facing more competition than ever. Remicade has lost its patent exclusivity in Europe and with the introduction of biosimilars, its revenues are expected to see a gradual decline. Zytiga, which was gaining share last year, lost some prescription share this quarter due to competition ramping up.

Third, J&J already has a strong position in the medical devices market and incremental growth becomes difficult in such a case. However, the company was still able to make some improvement in this area with some innovative product launches and growth in hospital utilization.

Is It A Waiting Game? 

At this point, we need to wait and see how new drug launches do going forward. J&J seems confident about multiple drugs becoming $1 billion franchises. Some of these are already in the market, and several others are in the pipeline. The company intends to file at least 10 new drugs for regulatory approval by 2019, each of which, according to J&J, has the potential to become a blockbuster product with annual sales of more than $1 billion. It has also announced its plans of 40 line extensions of current and new drugs. It is noteworthy that the FDA recently granted approval to Invega Trinza under priority review. Additionally, J&J has initiated the biologic licensing application for immuno-oncology drug daratumumab for treatment of multiple myeloma.

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