What Johnson & Johnson Needs to Take the Stock Higher

Johnson & Johnson reported a strong quarter, and management continues to execute well, but the company needs some help from its end markets. Moreover, Hospira could threaten future sales of Johnson & Johnson's best-selling drug.

Jul 18, 2014 at 2:00PM

The investment case for Johnson & Johnson (NYSE:JNJ) in the past few years has focused on a combination of two things: its ability to generate growth through internal execution, and a "growth kicker" from a potential improvement in the more cyclical parts of its heath-care portfolio. By the look of its recent second-quarter results, the company continues to do well with the former but is finding the latter harder to come by. Is Johnson & Johnson still a buy?

Lfj

Johnson & Johnson's consumer segment (19.2% of sales)
The company's management has certainly executed on most of the things it has set out to do in the past few years. In consumer products, after some well-documented product recalls and production difficulties, Johnson & Johnson has been steadily bringing the affected over-the-counter, or OTC, brands back into the marketplace. In fact, its U.S. OTC sales increased 9% in the quarter. Moreover, excluding the women's health category in the U.S., where a divestiture was made, would see U.S. consumer product sales rising 5%, instead of the reported 0.5% decline.

Moreover, management declared that its strategy to focus on its "mega brands" within consumer products was "working." Indeed, its international consumer product sales grew 5.8% on a constant currency basis, with its international baby care, oral care, and OTC categories, all growing above 7%. Clearly, it was a good quarter for its consumer products segment, and Fools can look forward to a good contribution from the segment going forward.

Johnson & Johnson's pharmaceutical segment (43.6% of sales)
The pharmaceutical segment has provided the most successful element of Johnson & Johnson's execution in recent years. Simply put, the company had an opportunity to rapidly expand sales of a host of new pharmaceutical products, while mitigating declines with off-patent drugs like Concerta, an ADHD treatment that saw sales falling 67% to just $28 million in the United States.

A look at some of its fastest-growing drug sales confirms how well Johnson & Johnson is executing. Fools should note that, excluding Remicade, the drugs in the table made up $2.96 billion in revenue, representing 34.7% of total pharma sales in the quarter.

DrugTreatmentSecond-Quarter Sales
(in Millions)
Sales Growth
Stelara psoriasis $528 41.3%
Simponi rheumatoid arthritis $282 61.5%
Invega Sustenna anti-psychotic $394 34.4%
Xarelto anti-coagulant $361 91%
Zytiga castration-resistant prostate cancer $562 40.7
Olysio hepatitis C $831 n/a
Remicade rheumatoid arthritis $1,804 8.7%

Source: Johnson & Johnson presentations.

Total pharma sales increased by an impressive 21.1%, but there are a couple of notes of caution. First, management pointed out that Olysio, whose sales contributed 56% of the growth in overall pharma sales in the quarter, would "face significant competition from new hepatitis C products later in the year, the full impact of which is difficult for us to predict at this point." Management continued: "And while we're not providing guidance for 2015, this will certainly pose a headwind next year."

Second, its biggest-selling drug, Remicade, made up 21.2% of total pharma sales (and 9% of the total growth), but with Hospira's (NYSE:HSP) partner, Alvogen, launching a bio-similar, called Inflectra, in certain markets in Europe this year, it's possible that Remicade sales could falter in the future.

When questioned on the subject on the conference call, Johnson & Johnson's management outlined that "the price erosion has also been limited" and suggested that with bio-similars, "the discount in which these products have been launched averaged about 25% to the branded price, so that's the situation today as far as the bio-similar to Remicade." Indeed, Remicade's international sales increased 6.3% operationally in the quarter, so no immediate impact seen there. Furthermore, management confirmed that it believed its Remicade patent would not expire until the latter half of 2018.

On the other hand, Hospira's partner has only, thus far, launched the drug in countries including Bulgaria, Croatia, Hungary, Poland, and Romania, so it's not surprising that a big impact hasn't been seen. A far bigger test will come in early 2015, when Western European countries are likely to see Inflectra.

Johnson & Johnson's medical devices and diagnostics (37.1% of sales)
Here again, management has been active in recent years. The acquisition of Synthes, and the recent sale of its ortho-clinical diagnostics unit to the Carlyle Group for $4 billion, signals its intent to restructure the segment toward growth. Unfortunately, the problem here is that end-market demand hasn't picked up in line with economic growth. The segment's overall sales grew a paltry 0.9% on an operational basis in the second quarter. Moreover, management outlined that it saw key metrics such as hospital utilization, surgical procedures, and primary-care physician visits as remaining "somewhat subdued" -- not good news.

Where next for Johnson & Johnson?
All told, this was a good report for its consumer-products segment, and an excellent one for pharmaceuticals. Johnson & Johnson still has growth prospects in pharma, but investors should be mindful of possible headwinds with Olysio, and potential competition from Hospira's Inflectra. Moreover, there are still no real signs of end-market improvement for its medical devices and diagnostics segment, and this doesn't augur well for the rest of the industry, either. Johnson & Johnson's execution has been excellent in the past couple of years, but it will need to be in the future as well, for the stock to move significantly higher.

Could this transformative blockbuster make even J&J jealous?
We all know that the best investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. To that end, there is a product in development that will change how we treat a common chronic illness and also potentially revolutionize the entire health industry. Analysts are already licking their chops at the sales potential. To outsmart Wall Street and realize multibagger returns, you need The Motley Fool's new free report on the dream team responsible for this game-changing blockbuster. Click here now.

Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers