Johnson & Johnson (JNJ 0.15%) is one of the world's largest healthcare companies by market capitalization. The drugmaker has diversified operations, generating consistent revenue and profits.
However, Johnson & Johnson has lagged the market in recent years due to a combination of factors, leading some investors to question whether it's still a solid long-term pick. Looking at some critical company-specific developments may help answer that question. Let's review three key factors to keep in mind.
1. Legal problems
Johnson & Johnson has been dealing for years with thousands of lawsuits related to its talc-based products, which plaintiffs claim gave them cancer. This issue has somewhat affected the drugmaker's brand name and image. Although it has attempted to settle most of these lawsuits in court through a bankruptcy maneuver, its efforts have been rejected by several judges. The longer J&J's legal fights last, the worse the issue becomes for the company. Investors should monitor developments related to this challenge.
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2. Threats to revenue growth
Johnson & Johnson faces at least a couple of issues that could harm its top-line growth in the medium term. The first is patent expiration for some key products, most notably its immuno-suppressant Stelara. The plaque psoriasis treatment lost patent exclusivity in the U.S. earlier this year.
A second obstacle for the company is a recent law that grants Medicare the power to negotiate prices for some of the drugs it spends the most on. The first round of negotiations includes three of the drugmaker's products: Stelara, blood thinner Xarelto, and cancer medicine Imbruvica. Subsequent rounds of negotiations could target more of Johnson & Johnson's medicines, potentially leading to lower prices than the company would like. It's critical to monitor how the pharmaceutical giant will handle this threat.
The good news is that J&J appears to be handling the Stelara patent cliff relatively well. In the second quarter, revenue from its biopharma segment exceeded the $15 billion mark for the first time in its storied history. The company even increased its guidance for the full fiscal year, and all this despite Stelara's sales dropping off a cliff.
How will Johnson & Johnson manage the drug-price negotiations that will affect sales for other medicines? Investors should keep a close eye on those developments.
NYSE: JNJ
Key Data Points
3. A potential long-term growth opportunity
Johnson & Johnson's biopharma segment is its largest in terms of sales. However, the company's medtech unit is also noteworthy. And over the long run, the medical device segment could get even better, partly thanks to the Ottava system. This robotic-assisted surgery (RAS) device is being studied in clinical trials in the U.S. While it won't earn clearance this year, this device could represent a massive long-term opportunity for Johnson & Johnson.
RAS systems enable physicians to perform minimally invasive surgeries that offer significant advantages over traditional open surgeries. Yet this market is severely underpenetrated: As of two years ago, fewer than 5% of eligible RAS procedures were performed that way.
Johnson & Johnson's work in the RAS market could eventually become an important growth driver. So investors should pay attention to any updates on the Ottava system's progress that the company shares.
Is Johnson & Johnson stock a buy?
Johnson & Johnson's business is rock-solid. Despite its legal challenges, the company's credit rating remains the highest available, surpassing even that of the United States government. That's pretty good evidence that the lawsuits it faces won't sink its business -- not even close.
Furthermore, the company's ability to circumvent patent cliffs and navigate regulatory challenges while remaining successful -- something it has managed for decades -- should reassure investors that it's likely to find a solution to the latest regulatory roadblock it's encountered.
Lastly, J&J has an impeccable dividend track record, having increased its payouts for 62 consecutive years, which makes it a Dividend King. For all those reasons, Johnson & Johnson's shares remain attractive, at least for long-term, income-seeking investors.
