J&J: Taking Stock of a Household Name

Archives Admin · #1 (**permalink**) 04-11-2006, 10:22 AM

Despite some near-term operating challenges, particularly within its pharmaceutical segment, we think Johnson & Johnson (JNJ; $58) continues to offer one of the more consistent long-term growth rates among large-cap pharma/device outfits, and a valuation that's compelling relative to the S&P 500 and the company's health-care peers.

We believe investors will continue to gravitate toward J&J as one of the few remaining "safe havens" in pharma, and believe that a rising percentage of revenues and operating profits generated from non-pharma businesses will help drive valuation expansion.

We anticipate that J&J will pursue smaller strategic deals going forward, and believe some incremental sales growth will result. We also think J&J has a number of options available to enhance shareholder returns, including additional common-share buybacks, increased dividend payouts, and the separation of individual business units. In our view, the company offers a strong balance sheet and diversified growth. We have a 5 STARS (strong buy) recommendation on the stock, with a 12-month target price of $67 a share.

BIG WINNERS. The company generated 44% of 2005 sales from pharmaceuticals, 38% from medical devices & diagnostics, and 18% from consumer products. Looking into 2006, S&P projects that revenues will grow approximately 7.8%, to $54.5 billion, as 3.9% projected growth in pharmaceuticals joins with an 11.9% gain in the medical devices & diagnostics segment and an 8.9% increase in consumer-product sales.

The pharma business ranks among the largest in the world, with products in the anti-fungal, anti-infective, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain-management, central nervous system, and urology fields. During 2005, the company had eight compounds that generated over $1.0 billion in sales.

Much like the pharma industry as a whole, however, J&J faces challenges due to patent expirations and intensifying competition in several key therapeutic categories. During 2005, for instance, J&J lost patent protection on Duragesic, and U.S. sales of Duragesic fell 54%, to $582 million. Globally, Duragesic had 2005 sales of $1.6 billion, down 24% from the $2.1 billion generated in 2004.

EXPIRATION DATE. Total pharma sales in 2005 actually declined 3.2% in the U.S., as the Duragesic erosion joined with the loss of patent protection on both Ultracet (2005 sales of $175 million, down from $348 million in 2004) and Sporanox ($36 million, vs. $117 million).

We don't believe J&J faces another wave of significant patent expirations until late 2007, when the patent on Risperdal, an anti-psychotic medication, is set to expire. This expiration is quite significant, in our view, as Risperdal is presently generating the highest annual sales in the pharma division -- $3.6 billion in 2005. The company is hoping to limit the damage by developing a follow-on product, Paliperidone ER, with an expected new drug application (NDA) filing with the FDA by the third quarter of 2006.

Our 2006 sales forecast for the pharma segment is $23.2 billion, excluding any potential swings from foreign-currency translations that may, in our view, remove 2% to 3% from reported growth. During 2006-07, we anticipate the potential launch of products including OROS Hydromorphone for chronic pain, DOXIL for multiple myeloma and breast cancer, Remicade for juvenile rheumatoid arthritis and psoriasis, and Paliperidone for schizophrenia.

STRONG SEGMENT. Johnson & Johnson's medical devices and diagnostics business unit offers a wide range of products. During 2005, this unit generated sales of $19.1 billion, representing approximately 38% of total revenues, and we estimate that total segment revenues in 2006 will reach $21.4 billion.

In recent years, the primary growth engine for this business segment has been the Cordis unit, which focuses on devices primarily used for treatment of cardiovascular diseases, most prominently the Cypher drug-coated coronary stent. Cypher, launched in the U.S. in May, 2003, is designed to reduce the incidence of vessel reclosure, or restenosis, following the implantation of a stent into a diseased coronary artery. During 2005, sales at Cordis rose 24% to $3.98 billion, including global Cypher sales of $2.59 billion. We think Cypher sales will grow in the high single digits over the coming three years.

Other core products within the device/diagnostics segment include orthopedic reconstructive joint and spinal hardware. We think the DePuy unit is the second-largest participant in the global reconstructive joint market, after Zimmer (ZMH; 4 STARS, buy; $66). It manufactures and sells hip, knee, shoulder, elbow, and extremity devices. The Ethicon unit sells products used for wound closure and cardiovascular surgery, gynecological health problems, wound management, and circulatory health. We believe Ethicon currently maintains about 75% of the global sutures market.

MARKET LEADER. The Ethicon Endo Surgery division sells various products that are used in both minimally invasive and traditional surgeries. J&J's Lifescan division is among the leading participants in the blood glucose monitoring market, where it commands an approximate 30% share of a global market that is estimated by S&P at $6 billion. The Ortho-Clinical Diagnostics unit ranks among the larger manufacturers of diagnostic reagents and instruments that are used by hospital and clinical laboratories, and blood donor centers.

The Vistakon unit was the pioneer in the disposable contact lens business, launching its Acuvue brand in 1998. This brand is the market leader, and remains the most highly prescribed disposable contact lens in the U.S., based on S&P and industry estimates.

While we think most J&J investors tend to focus on the pharma and medical-device segments, in our view the company's consumer-products franchise remains an important contributor to sales, earnings, and cash flow. This division represents one of the world's largest sellers of consumer products, with 2005 sales of $9.1 billion.

Thread Tools
Show Printable Version Email this Page
Display Modes
Linear Mode Switch to Hybrid Mode Switch to Threaded Mode

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)

J&J: Taking Stock of a Household Name

Contact Lenses