Last year, shares of the big pharma company Johnson & Johnson (JNJ -1.10%) rose by 13%, a performance that trailed that of the pharmaceuticals industry, which was up by 24.7% as measured by the SPDR S&P Pharmaceuticals Index. The S&P 500 -- which was up by about 29% in 2019 -- also outpaced Johnson & Johnson last year.
There are several reasons why Johnson & Johnson did not perform as well as the broader market in 2019. First, some of its key products within its pharmaceuticals segment -- by far its largest segment by revenue -- have been recording declining sales. For instance, the company's rheumatoid arthritis drug Remicade reported $4.4 billion in sales for the full fiscal year 2019, down 17.8% year over year. Second, Johnson & Johnson is currently drowning in a sea of lawsuits. A California court recently ordered Johnson & Johnson to pay $344 million for "deceptively marketing" its pelvic mesh products, which are surgical implants aimed at treating pelvic organ prolapse. Johnson & Jonhson plans to appeal this decision, but there are more lawsuits the company has to worry about.
Amid all these troubles, investors might be inclined to avoid shares of the pharma giant altogether. However, a lot can happen in just one year, and despite its issues, Johnson & Johnson's trajectory within the next 12 months may not be that catastrophic. Here's why.
Johnson & Johnson's lineup and pipeline
While some of Johnson & Johnson's pharmaceutical products are losing steam, others are on the rise. The company's drug Stelara, which treats plaque psoriasis and psoriatic arthritis, recorded $6.4 billion in sales during fiscal year 2019, a 23.4% year-over-year increase. Tremfya, which is a treatment for severe plaque psoriasis, reported $1 billion in sales, up 85.9% compared with the previous fiscal year. Further, Johnson & Johnson's cancer drug Imbruvica recorded $3.4 billion in sales, up 30.4% year over year, and Darzalex -- which treats multiple myeloma -- recorded about $3 billion in sales, 48% higher than in fiscal year 2018.
In other words, Johnson & Johnson has enough products with sales on the rise -- and will likely continue delivering growing sales -- to keep revenue from its pharmaceuticals segment afloat. Some of the company's current products are also seeking additional indications. For instance, Imbruvica is currently in phase 3 testing for the treatment of mantle cell lymphoma, and Tremfya is in phase 3 testing for the treatment of pediatric psoriasis.
Also, Johnson & Johnson recently submitted a supplemental Biologics License Application to the U.S. Food and Drug Administration for Darzalex as a treatment for relapsed/refractory multiple myeloma (that is, multiple myeloma that does not respond to treatment or resurfaces after a period of remission). According to estimates, about 32,270 people will be diagnosed with relapsed/refractory multiple myeloma in 2020, and approximately 12,830 will die from it. Lastly, with the novel coronavirus outbreak worsening by the day, Johnson & Johnson is partnering with the U.S. Department of Health and Human Services to develop a vaccine for COVID-19, the deadly disease caused by the virus.
While Johnson & Johson boast a strong product lineup, the company has to contend with some competitors in these markets. For instance, AbbVie's (ABBV 0.37%) Humira is a treatment for plaque psoriasis. And although Humira is experiencing declining sales due to generic competition in Europe, it remains a blockbuster drug. Humira recorded $19.2 billion in sales in 2019. AbbVie's Skyrizi -- which also treats plaque psoriasis -- has been recording growing sales. Skyrizi was approved by the FDA for moderate to severe plaque psoriasis in April 2019, and the drug generated $355 million in sales last year.
Novartis (NVS 0.12%) is another pharma company with footprints in this market. The company's top-selling product Cosentyx, which treats moderate to severe plaque psoriasis -- generated $3.6 billion in sales last year.
In the market for multiple myeloma, Johnson & Johnson competes with Bristol-Myers Squibb (BMY 1.49%). Thanks to its acquisition of Celgene in a cash and stock transaction valued at $74 billion, Bristol-Myers acquired such products as Revlimid. Sales of Revlimid -- from the time of the closing of the acquisition on Nov. 20, to the end Bristol-Myers' third quarter, on Dec. 31 -- were $1.3 billion. Bristol-Myers should also submit ide-cel -- a potential treatment for relapsed/refractory multiple myeloma -- to the FDA sometime this year for approval.
Also, it isn't clear whether the company will benefit from its current efforts to develop a vaccine for COVID-19. While the epidemic continues to get worse -- with cases outside of China and in countries such as Italy and Iran growing -- several companies are currently working on that project, and some of Johnson & Jonhson's peers could beat the company to the punch.
Even given these competitors, Johnson & Johnson's pipeline, as well as its current lineup should allow the company's sales to remain afloat.
A stable dividend stock
One of Johnson & Johnson's biggest attractions is its dividend history. The company -- which ranks as one of the prestigious dividend aristocrats -- has more than 50 years of consecutive dividend increases under its belt, and Johnson & Johnson still affirms the importance of rewarding shareholders by way of dividend increases.
Chief Financial Officer Joseph J. Wolk said:
As investors in Johnson & Johnson know, delivering a competitive and increasing dividend is a capital allocation priority for us. In 2019, we returned almost $10 billion to investors, which is approximately 50% of our free cash flow, increasing the quarterly dividend by 5.6%.
The company's current dividend yield is 2.56%, and its payout ratio is 66.6%. Investors can count on Johnson & Johnson to keep increasing its quarterly dividend payout within the next year.
What about the lawsuits?
What should investors make of Johnson & Johnson's current legal troubles? On the one hand, the company has faced scores of lawsuits before. The pharma giant has always managed to come out of these relatively unscathed. The recent verdict mentioned above cost Johnson & Johnson $344 million. For context, this merely represents about 1.7% of the company's net sales during the fourth quarter.
On the other hand, these ongoing (and numerous lawsuits) represents a risk for Johnson & Jonhson. The company itself mentions risks, including "declining sales and reputational damage," that could ensue as a result of these lawsuits. Johnson & Jonhson continually monitors these legal troubles and the company records provisions for losses for those lawsuits for "which a loss is probable or reasonably possible." Investors should keep a close eye on the lawsuits that are currently plaguing Johnson & Johnson.
Should you buy?
Johnson & Johnson didn't outperform the S&P 500 last year, and it is unlikely to do so this year. Also, there are other pharma giants that are likely to outperform the company over the next year. For instance, Bristol-Myers is still riding the wave from its Celgene acquisition and the company performed well during the fourth quarter. Further, Bristol-Myers currently provides better value. The company is trading at 8.44 times future earnings and its price to earnings growth (PEG) is 0.76. By contrast, Johnson & Johnson forward P/E is 14.9 while its PEG is 2.93. While I think both of these companies deserve consideration, I believe Bristol-Myers is a better pick given the 12 months time horizon.