All things considered, it's been an exceptionally strong year for healthcare conglomerate Johnson & Johnson (JNJ 1.15%) and its shareholders. Although the stock market in general has had a strong year, Johnson & Johnson's 21% year-to-date gain has tacked on about $50 billion in market value this year alone! The best news of all for investors is that its move higher might be nowhere near complete.
As we head into the new year there are a handful of factors that could cause Johnson & Johnson's stock to soar in 2015. Today, we'll take a closer look at three of those reasons.
No. 1: An expanded label for Imbruvica
Johnson & Johnson has a number of ways to generate revenue and profits, but none has been more important in recent years than its pharmaceutical segment. In its recently released third-quarter earnings results J&J delivered 18% year-over-year growth in pharmaceutical sales all while consumer product sales flat-lined and medical device and diagnostic revenue dipped 5%. This is doubly important because pharmaceutical margins are considerably higher than its other two segments which are highly competitive and often commoditized.
Source: Johnson & Johnson.
Among Johnson & Johnson's dozens of approved drugs, it is blood cancer drug Imbruvica, which it licenses from Pharmacyclics (NASDAQ: PCYC), that could pack the biggest punch in 2015. Imbruvica's already been approved in the United States as a treatment for chronic lymphocytic leukemia and mantle cell lymphoma, but will be looking to eventually expand into diffuse large B-cell lymphoma, multiple myeloma, follicular lymphoma, and Waldenstrom's Macroglobulinemia. Additionally, J&J is testing Imbruvica in both single-agent and combo therapy indications for existing and sought after labels.
Imbruvica, which could provide in the neighborhood of $9 billion in annual peak sales, delivered impressive results in clinical trials. The expectation here would be that additional positive trial data, or perhaps even an expanded label in the U.S. or overseas in 2015, could really add some pep into J&J's step.
No. 2: Stronger than expected Obamacare enrollment
The second reason Johnson & Johnson could soar in 2015 is tied to the Affordable Care Act, which most people know better as Obamacare.
Over the long run, Obamacare is expected to be a driver of growth in the healthcare sector. The idea here is that as more Americans become insured they'll be more willing to visit their doctor. These extra doctor visits could yield more revenue for drugmakers, hospitals, and medical device makers.
Source: Flickr user Damon Sacks.
Of course, we won't know for many years if Obamacare is executing on all of these fronts. What we do know, though, is that better-than-expected enrollment figures in 2015 would likely make Obamacare's prospects look less opaque and might loosen the wallets of consumers and hospitals which have held back on spending in the wake of uncertainty surrounding its implementation. Specifically I'd see this as a quick domestic boost to Johnson & Johnson's medical device business which saw revenue decline 6.5% domestically in Q3.
Let's not also forget that a Republican-led Congress may wind up repealing the 2.3% medical device excise tax as early as next year, which would be a nice boost for J&J, which is one of the nation's top medical device makers.
No. 3: The potential for a breakup
Lastly, calls for Johnson & Johnson to break up into two or three separate companies may once again take center stage. I want to emphasize that there's no guarantee J&J will even consider the idea of splitting up its business, but there has been a definitive trend set by many other sectors – and even Theravance in the healthcare sector – that breaking up might be hard to do, but it's often a value creator.
The reason most companies go the route of a break up or spinoff has to do with visibility. When a company grows too large or gets too complex it can be difficult for investors and Wall Street to really understand how it earns its keep. By breaking a company into smaller components it's a lot more transparent. Plus, investors can choose whether they want to invest in slower, safer portions of a business, or perhaps the more untested, faster growth side.
J&J CEO Alex Gorsky. Source: Johnson & Johnson.
For J&J the logical choice would be to separate its rapidly growing pharma business from its medical device & diagnostics and consumer products business. This way shareholders could choose to take advantage of J&J's high-margin pharmaceutical products, or to relish in the safety of its inelastic consumer products division and the coming growth of its medical device segment.
Again, no guarantees this discussion even makes it to the table in 2015, but the rumor of a breakup is unlikely to die anytime soon. I'd suspect it will even provide a boost to Johnson & Johnson's share price in 2015.
Ultimately investors will decide if J&J stock soars in 2015, but with few sell-side catalysts I have reason to believe it'll be another solid year ahead.
