Johnson & Johnson (NYSE:JNJ) is a favorite name among income investors because the stock has a long tradition of beating the broader market and regularly increasing its dividend. In fact, JNJ's dividend has risen for 14 straight years, helping it to trounce the S&P 500 and Dow Jones Industrials over this time period.
The good times appear to be coming to an end, however. As J&J is facing some serious threats to its cash flows and revenue growth in the near term, this stock could be setting up for a major pullback. Here's why.
Pharmaceuticals have been JNJ's growth engine, but that is about to change
Per its fourth-quarter earnings release, J&J's pharmaceutical segment posted a stellar 25% increase in U.S. sales, and a healthy 16.5% rise in worldwide sales for the year. On the flip side, its consumer business saw sales grow by a meager 1%, and its struggling medical-device unit reported a 1.6% decline in sales for the full year. Put simply, J&J's overall growth rate of 4.2% (total annual sales for 2014) can be attributed largely to its pharma business.
Digging into these numbers a bit deeper, we can see that the bulk of this sales growth came from the hepatitis C therapy Olysio. For the full year, Olysio generated $2.3 billion in revenue, composing 7.1% of J&J's total pharma sales during 2014. A single drug was thus responsible for roughly 55% of sales growth within the pharmaceutical arena, based on the fourth-quarter numbers.
As I've discussed previously, Olysio's sales are nonetheless expected to drop by 99% starting in the first quarter of 2015 because of the approval of Gilead Sciences' Harvoni and AbbVie's Viekira Pak. Some of the major payers have already left Olysio off of their formulary list altogether, meaning it won't be eligible for reimbursement from these payers.
A new threat is looming
Although the loss of Olysio will undoubtedly have a major impact on J&J's top line, a new threat could cause pharma sales to absolutely crater. What I'm referring to is the looming launch of a generic version of the blockbuster anti-inflammatory drug Remicade in Europe next month, and a possible U.S. launch before the drug's patent expiration in 2018.
In 2014, Remicade sales grew by 4.1%, on an operational basis, to a staggering $6.8 billion, showing the drug's importance to J&J's top and bottom lines. However, Remicade is set to lose patent protection in most European countries next month, and a generic version known as a "biosimilar" called Remsima, manufactured by Celltrion, and Hospira, will launch following this event. Celltrion has also filed for regulatory approval within the U.S. and is attempting to invalidate Remicade's U.S. patents to clear the way for a subsequent commercial launch.
For the most part, J&J's management has brushed aside the threat of a Remicade biosimilar, saying that it expects generics to have minimal impact on the blockbuster's sales. Breaking this down, management essentially believes that doctors won't readily prescribe an untested knock-off version of a biologics-based medicine like Remicade. And therein lies the challenge for Celltrion -- and other biosimilar manufacturers.
I already expect J&J's stock to struggle this year because of the Olysio issue. When those dreadful first-quarter numbers hit the Street, J&J's shares should begin a steep pullback, in my opinion.
And while management's assessment that Remicade sales won't fall off a cliff following the launch of a generic competitor may turn out to be correct, I don't share their enthusiasm. Payers have grown tired of footing the bill for sky-high drug prices, and biologics have been some of the worst offenders in this regard, making generic competition to Remicade a key issue for J&J shareholders to pay attention to this year.
George Budwell owns shares of AbbVie and Gilead Sciences. The Motley Fool recommends and owns shares of Gilead Sciences and 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.