"Excited" -- but with a "lot of uncertainty."
Those words were used by Johnson & Johnson (NYSE:JNJ) CEO Alex Gorsky in describing his take on the healthcare industry going into 2017. President Donald Trump could deliver both excitement and uncertainty for the giant healthcare company that Gorsky leads. What impact might four to eight years of a Trump presidency have on J&J?
On his first day in office, President Trump signed an executive order taking a swing at Obamacare. The executive order allows federal agencies to waive or delay enforcement of provisions in the health reform legislation that "impose a fiscal burden on any state or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications."
President Trump promised in his campaign that he would repeal and replace Obamacare. Republicans in Congress have already taken the first steps to repeal the legislation, although details aren't available yet on what will replace it.
How might a repeal of Obamacare impact Johnson & Johnson? A permanent removal of the medical device tax included in the legislation would help the company. But anyone thinking that a loss of Obamacare could mean bad news for J&J with lower hospital utilization of its products might be surprised.
Alex Gorsky stated at the J. P. Morgan Healthcare Conference on Jan. 9 that his company hasn't seen a significant increase in hospital volumes under Obamacare. It's possible that J&J won't feel much of an effect from repeal of the healthcare reform law.
President Trump's trade policies, however, could make a big difference for Johnson & Johnson. Nearly half of the company's revenue stems from international markets.
Perhaps the most important effect on J&J could be what happens between the U.S. and China. President Trump took a hard stance against China's trade policies during his campaign. His nominee for commerce secretary, Wilbur Ross, referred to China as "the most protectionist country of very large countries" in his confirmation hearing. Ross also said that the U.S. "should not put up with" unfair trading policies.
A trade skirmish with China would hurt Johnson & Johnson. Although the company doesn't detail how much of its revenue comes from the country, J&J has specifically cited growth in China as a big driver for the success of several of its products, including Dabao cosmetics and prostate cancer drug Zytiga.
President Trump wants to allow Medicare to negotiate drug prices with pharmaceutical companies. Should he succeed in making this a reality, it could cause heartburn for many drugmakers. How could this change impact J&J?
Medicare spent over $5.7 billion in 2015 on seven of J&J's drugs: Imbruvica, Invega Sustena, Prezista, Remicade, Velcade, Xarelto, and Zytiga. That represented 35% of the company's combined revenue from the drugs and over 18% of J&J's total pharmaceutical sales in 2015.
The financial effect on Johnson & Johnson from negotiating with Medicare will depend on how significant any price concessions are. It's fair to say, though, that the company's top and bottom lines could be negatively impacted from the proposed change.
So far, we've only looked at potential negative effects on J&J from potential actions by President Trump. However, there are a couple of the president's proposals that could help Johnson & Johnson tremendously.
First, President Trump has proposed reducing the corporate tax rate from 35% to 15%. We can relatively easily calculate the potential effect of such a reduction on J&J. The company expects to make around $72 billion for 2016. Assuming that roughly 52% of that total will be generated in the U.S., J&J would pay federal taxes of $13.1 billion under the current rate. With President Trump's proposed rate, the company would pay $5.6 billion. That's an additional $7.5 billion per year for Johnson & Johnson based on its 2016 performance.
Second, the president has also floated the idea of a one-time repatriation of corporate cash parked overseas at a lower tax rate of 10%. Johnson & Johnson reported $38.2 billion in cash, cash equivalents, and marketable securities held by its foreign subsidiaries at the beginning of 2016. Using that amount as a guide, the company could potentially free up around $3.4 billion after taxes for use in the U.S. under President Trump's proposed repatriation plan.
What's the overall impact of President Trump's policies on Johnson & Johnson? The potential positives from the corporate tax reform proposals should outweigh any negatives from allowing Medicare to negotiate drug prices. Repeal of Obamacare probably won't be a huge factor for the company. The big wild card, though, is the prospect of retaliatory trade policies with China.
Overall, it seems likely that Johnson & Johnson will do well under the Trump Administration. After all, the company has managed to perform well under the previous 22 presidencies. I think that J&J CEO Alex Gorsky is right, though: There's a lot of uncertainty.