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Investors May Add Johnson & Johnson to Their Portfolio

June 16, 2014 | About:
abirk

abirk

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Johnson & Johnson (JNJ) is a holding company. The company is engaged in the research and development, manufacture and sale of a broad range of products in the health care field. The business of Johnson & Johnson is conducted by more than 275 operating companies located in 60 countries, including the U.S., which sell products in virtually all countries throughout the world.

Johnson & Johnson is one of the World’s Most Admired Companies. The United Nations awarded Johnson & Johnson the 2011 Humanitarian of the Year award for its leading role in its Healthy Mother, Healthy Child initiative. J&J is a brand trusted by mothers the world over and has an excellent product portfolio and high quality offerings.

Performance So Far

JNJ is a dividend aristocrat and has paid uninterrupted dividends on its common stock since 1944, and increased payments to common shareholders for 51 consecutive years. It has delivered an annualized total return of 6% to its shareholders over the past decade. There is an annual increase of 5.40% in the EPS since 2003. It is currently attractively valued at 14.60 times forward 2013 earnings. In 2012 it has increased its dividend payout ratio to 62% from 38% in 2003. Since 1972 it can be seen that Johnson & Johnson generally doubles its dividend every five years on average.

Over the past 10 years it has managed to increase its annual dividend by 11.70%. Oncology is a smaller segment for J&J and presents a substantial growth opportunity. JNJ’s global oncology drug sales grew by 33.2% during first quarter 2013. J&J received a major boost a few months back when its blockbuster potential type 2 diabetes drug, Invokana (commonly known as Canagliflozin), was granted FDA approval.

With 11% growth reported, it easily outpaced revenue growth the other two main components of JNJ's business -- consumer goods, which declined over 3%, and medical devices and diagnostics, which was basically flat.

A number of drugs contributed to this impressive growth, with revenue from Stelara for plaque psoriasis and psoriatic arthritis up 32% year-over-year to $456 million and Zytiga for metastatic castration-resistant prostate cancer up 49% to $512 million. Remicade continued its solid performance, up slightly to $1.6 billion in sales for the quarter.

Returns from Pharmaceutical Businesses

Johnson & Johnson's recently launched Hepatitis C drug, Olysio, has done better than expected. It echoes the success of Gilead Sciences' drug Sovaldi. Olysio's sales for Q1 2014 stood at $354 million, making it the second biggest anti-infective drug for the company within a short period of time. Gilead Sciences is currently the market leader in Hepatits C treatment and is on its way to making a fortune selling its breakthrough drug Sovaldi. The drug's sales for 2014 may amount to anywhere between $7 billion to $12 billion, according to ISI Group. This suggests strong growth potential for Johnson & Johnson's new drug, which has also been recommended by the Liver Society for concurrent dosage with Sovaldi.

Oncology, or cancer therapeutics, is also doing well for J&J. Zytiga has surpassed Velcade to become Johnson & Johnson's biggest oncology drug. While Velcade's sales grew by 15.8% in Q1 2014, amounting to $408 million, Zytiga's revenue surged by 48.8% to $512 million. Together, these two drugs constitute roughly 85% of the company's oncology revenues and continue to gain market share. In the U.S., Zytiga has increased its share in the metastatic castration resistant prostate cancer market to 34%, besides benefiting from the overall market growth.

Growth Predictions

The Johnson & Johnson pharmaceutical portfolio, and its large Medical Devices & Diagnostics (MD&D) and Consumer Health divisions, serve to reduce dependence upon any one area. The company plans to continue this broadening through 2008 to 2014. This diversification allows a wider range of choice when pursuing opportunities with the greatest growth prospects.

Johnson & Johnson is in a position to strategically develop a myriad of cross selling opportunities. Using the disease life cycle as a base, the company could exploit its product line in CV, oncology, diabetes and I&I therapy to formulate linkages between patents and care-giving resulting in greater efficiency. Maximizing its balance between Pharmaceuticals, Diagnostics and Medical Devices could result in increased revenues. The addition of further biologics to its portfolio can serve as a buffer as mall molecule patents expire. J&J is experienced in the development and commercialization of biologics — including the therapeutic proteins Procrit and Natrecor, and monoclonal antibodies Remicade, ReoPro, Simponi and Stelara. This represents an opportunity to gain key IP product rights or strengthen discovery capabilities.

To End

Johnson & Johnson is the big, diversified player of the pharma space, but that doesn't make it a sleepy conglomerate. Its pharmaceutical division is cranking out consistent double-digit growth rates thanks to strong products like Zytiga in prostate cancer and megablockbuster Remicade, and the success continues with recent approval for Imbruvica, a blood cancer drug with expected peak sales in the $6 billion-$7 billion range. Its medical device business is set for growth following the massive Synthes acquisition, and J&J is wisely selling off lower-margin diagnostics. This is a steady stock with a strong dividend, but a pharma division firing on all cylinders provides meaningful upside for investors.

Investors should continue to watch Johnson & Johnson as the company looks poised for good growth, and it has a solid track record in terms of rewarding its investors with dividends as well as a very diversified business with its focus across the pharmaceutical, consumer and medical devices segments.


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