Risks To Consider As J&J’s Stock Inches Up

by Trefis Team
-9.35%
Downside
138
Market
125
Trefis
JNJ
Johnson & Johnson
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Johnson & Johnson‘s (NYSE:JNJ) market price fell 3% in a single day following its Q1 2017 earnings announcement, which is a rare occurrence for the generally steady stock. However, the stock price has rebounded by nearly 12% in the last 2.5 months, effectively adding $38 billion in market cap. This rally was initially fueled by JP Morgan’s price upgrade around mid-May. Additionally, Remicade has been holding its ground in the U.S. for the most part despite the launch of competing biosimilar Inflectra, which – along with positive indications for Zytiga – also contributed to the stock price increase. Overall, it appears that the market is discounting the recent weakness in J&J’s pharma business, and is optimistic about potentially higher organic growth in the second half of the year as more drugs get approval. While the expectation is not wrong, investors should still carefully consider the risks. Our price estimate of $119 for Johnson & Johnson is more than 10% below the market.

J&J’s pharmaceutical segment has underperformed recently, and has started facing pricing and competitive pressure for some of its key drugs in the U.S. In Q1 2017, the company’s U.S. pharma sales declined. J&J blamed the impact of price discounting in certain sales channels and competition for the underperfomance of its pharmaceutical business. In particular, Invokana/Invokamet sales fell by around 16.8% in the U.S. due to lower prices, which resulted from higher discounts for managed care contracting and more sales coming from the Medicaid channel where pricing is lower. Additionally, while Xarelto’s prescription share increased slightly, its revenue fell nearly 9.5% due to lower pricing in the managed care and government channels. We expect this trend to continue in the second quarter. In addition, Xarelto could suffer from higher competition from Bristol-Myers Squibb and Pfizer’s Eliquis.

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