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"You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." – Warren Buffett
The same can be said of investors who have considered investing in Johnson & Johnson (NYSE: JNJ ) . The company has been a laggard in the long-term against its competitors like Sanofi (NYSE: SNY ) and Merck (NYSE: MRK ) . Its stock has also under-performed benchmark indexes in the last five years. However, Johnson & Johnson has never had a troubled balance sheet due to its diversified portfolio, which includes businesses like medical devices and diagnostics, pharmaceuticals, and consumer health care. However, Johnson & Johnson is a fundamentally strong company and its valuation also looks attractive at the current point of time.
Source: Yahoo! Finance
Source: Yahoo! Finance
It will be interesting to look at the prospects of Johnson & Johnson going forward, and whether it is good enough for investors to initiate a fresh long position on the stock.
As sweet as sugar
Diabetes is one of the most common diseases in the world today and countries like China and India with a high population of diabetic patients are being targeted by big pharmaceutical companies. It will be prudent to look at some of the facts on diabetes, which were presented by the World Health Organization.
1. More than 347 million people suffer from diabetes globally.
2. 80%of deaths due to diabetes are recorded in the middle-income and low-income countries.
3. Diabetes will be the 7th leading cause of death by 2030.
These are the factors, which will be the growth-drivers for big pharma companies like Johnson & Johnson, Pfizer (NYSE: PFE ) and many others, which have their footprints in these middle and lower income countries. Moreover, it is to be noted that diabetes also causes other diseases like kidney failure, blindness, which means more business to these pharma companies.
Poised to become a blockbuster drug
Johnson & Johnson's diabetes care sales were around $2.6 billion last year and this year its new diabetes drug Invokana got approval from the FDA. Invokana is commonly known as Canagliflozin, and used for treating diabetes type 2. Data presented by the company has shown that this drug reduces the sugar level in patients efficiently. Moreover, this is a first in its class drug to treat diabetes and hence it is unique for the treatment of this disease.
In the last month, the Committee for Medicinal Products for Human Use, or CHMP also gave a positive opinion about the company's diabetes drug Invokana in Europe. The rise of type 2 diabetes in Europe and the utility of this drug in treating diabetes in adults has prompted this opinion from CHMP. This has created optimism about this drug's revenue. In addition to this, I believe that Johnson & Johnson will have massive revenue generation opportunity from Invokana, as the company will leverage its footprints in the emerging markets like China and India, where the number of patients suffering from diabetes is rising. The uniqueness of this drug and better treatment will open the gates for higher revenue for Johnson & Johnson. As recent diabetes drug launches are getting expensive, Johnson & Johnson is expected to spend a lot of money to market this drug.
Competition from peers
Johnson & Johnson will face stiff competition from companies like Sanofi and Merck, which have blockbuster drugs like Lantus and Januvia. Lantus has sales of around $6.6 billion, which is rising, while Merck's Januvia brings home approximately $5.7 billion in annual revenue. Johnson & Johnson will have to fight for the lion's share in the diabetes drug market. However, the company's strong footprints in emerging countries, Invokana's uniqueness and high optimism in Europe will help this diabetes drug become the next blockbuster in the category. These factors will drive the revenue of Johnson & Johnson in the pharmaceutical segment, and will give long-term benefits to the company.
Benefiting from acquisition
Johnson & Johnson's orthopedics medical devices & diagnostics segment is considering paying around $3 billion for which it recalled 93,000 implants in 2010. The company has intentions to settle 11,500 cases with an average compensation of around $300,000 per case. However, this will not affect the company much, as medical devices and diagnostics segment contributes maximum revenue for Johnson & Johnson. DePuy became the global market leader in spinal and orthopedic devices after the acquisition of Synthes last year. I am expecting that Johnson & Johnson's revenue from spinal and orthopedic devices will give long-term benefits, as market size is set to rise in the upcoming years. The company's $7.8 billion revenue last year from orthopedic devices & diagnostics is expected to rise this year, mainly due to Synthes acquisition. Moreover, in the longer run, orthopedic devices and diagnostics market is also estimated to rise substantially from around $56 billion in the last year to $82 billion in the coming five to seven years. With the rise in market size, company's leadership position and new acquisitions will drive the revenue higher for Johnson & Johnson.
Source: Yahoo! Finance
Johnson & Johnson is trading at a forward P/E of 14.98, which is in-line with Sanofi and Merck, as other two companies in the table have forward P/E of 12.82 and 13.29, respectively. On the other hand, Johnson & Johnson has a PEG ratio of around 3.08, which is higher than the desired level of 1, but is still more reasonable than its peers. Also, Johnson & Johnson has lower debt to equity ratio, while its profit margin also tops the table with 18.40%. The company's expected EPS growth this year will remain at around 10.60%, which is better than that of Sanofi and Merck. Moreover, with the higher estimated EPS growth rate in next five years, Johnson & Johnson certainly looks like a solid investment for long-term investors. These metrics prompts me to say that stock of Johnson & Johnson, while not cheap, does have opportunities that can help the company grow in the future.
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