Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 3Q17 Earnings Update
Prev. Ed.: 2Q17 Earnings Results
Brokers’ Recommendations: Positive: 63.16% (12); Neutral: 26.32% (5); Negative: 10.53% (2) Prev. Ed.: 6; 8; 2
Brokers’ Target Price: $147.75 (↑ $10.08 from the last edition; 16 firms) Brokers’ Avg. Expected Return: 6.3%
*Note: Though dated Dec 04, share price and broker material are as of Nov 30.
Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Executive Summary
Johnson & Johnson is one of the largest health care companies in the world, with a presence in the medical devices, biotechnology, pharmaceuticals, and consumer product markets.
Of the 16 firms covering the stock, 26.35% (5 firms) rendered neutral ratings, 63.16% (12 firms) assigned positive ratings and 10.53% (2 firms) rendered negative ratings on the stock.
Positive or equivalent outlook (12/19 firms): The positive firms expect accelerated growth in the coming quarters on the back of impressive performance of newer drugs like Xarelto, Tremfya, Darzalex and Imbruvica and decreasing impact of patent losses. Moreover, the firms are impressed by the diversified and decentralized business. The firms also believe that the company’s strong pipeline and acquisition of Actellion will boost growth in the long term. However, Remicade competition and slow growth in key drugs are concerns.
Neutral or equivalent outlook (5/19 firms): The neutral firms believe that although the Actellion acquisition is expensive, it improves J&J’s growth outlook. These firms believe that J&J will be better positioned to drive top- and bottom-line growth as it overcomes recent headwinds and reaps the benefits of ongoing investments, acquisitions and restructuring initiatives. However, some firms are concerned about biosimilar competition for Remicade and Zytiga’s patent challenge. The neutral firms believe that the strong Pharmaceutical segment pipeline remains the company’s most important near-term growth driver although the segment is facing competition and pricing pressure.
Negative or equivalent outlook (2/19 firms): No reports available.
Overview
Johnson & Johnson is one of the world’s largest providers of health care products in the consumer, pharmaceutical and medical devices markets. It has over 275 operating companies worldwide, and sells its products across the globe. It operates through three segments: Consumer, Pharmaceutical and Medical Devices division. The company has a diverse revenue stream comprising market leading products in all three of its business segments. The company’s website address is www.jnj.com.
The firms have identified the following factors for evaluating the investment merits of the company:
Key Positive Arguments / Key Negative ArgumentsJohnson & Johnson has the most diverse revenue stream in the industry with pharmaceutical, medical devices and consumer-related goods. / Zytiga patent challenge and increasing biosimilar competition for Remicade remain concerns.
Strong growth momentum is expected driven by new launches like Darzalex, Stelara, Xarelto and Tremfya. New products including Zytiga, Xarelto, Invokana and Invega Sustenna should drive revenues. / Three manufacturing facilities are operating under the FDA’s consent decree. Failure to comply with the terms of the decree could result in the company incurring penalties and fines.
With the acquisition of Actelion, Johnson & Johnson has strengthened its rare disease portfolio with the addition of two potentially multi-billion dollar drugs. The Abbott Medical Optics acquisition will give J&J the opportunity to enter the cataract surgery space. / Some firms believe that the acquisition of Swiss biotechnology company Actelion has been quite expensive for the company.
Note: The company’s financial year coincides with the calendar year.
Sep 29, 2017
Long-Term Growth
The Pharmaceutical division is expected to see better growth as new drugs are performing well. The company is looking to drive long-term growth through new drug launches, label extension, internal development and acquisitions. New drugs for cancer, pain, schizophrenia and AIDS should contribute, as should a number of line extensions and new indications, for existing products. Further, the pipeline has been augmented by acquisitions and partnerships. New products like Xarelto, Tremfya, Darzalex and Imbruvica hold immense potential. The company is looking to strengthen its pharma product portfolio.
Johnson & Johnson, which has launched 12 new products since 2011 (including 7 blockbuster or soon to be blockbuster products), intends to seek approval for more than 10 new products between 2017 and 2021. The company said that each of these products have blockbuster potential. The company is targeting more than 50 line extensions of both existing and new drugs.
Meanwhile, Johnson & Johnson has the world’s most comprehensive Medical Devices business. With the company planning to file more than 20 new major products through 2018, expanding its global presence and implementing novel commercial models, it expects to start delivering above-average growth within the next year. The business is also accelerating its pace of innovation, and estimates sales potential of more than $6 billion in its current pipeline of products, which are expected to be filed for regulatory approval by 2018. The company is restructuring its Medical Device segment, which is expected to result in annualized pre-tax cost savings of $800 million to $1.0 billion, the majority of which is expected to be realized by the end of 2018.
The company’s consumer businesses are facing competition and pricing. J&J is evaluating “potential strategic options” for its diabetes franchise including LifeScan, Inc., and Calibra Medical, Inc. It may form strategic partnerships and joint ventures or sell these businesses either separately or together. A restructuring initiative is expected to see the company cutting approximately 3,000 jobs in this segment and to deliver approximately $800 million to $1 billion in annual savings with the majority expected by the end of 2018.
J&J include many well-known brands including Listerine, Sudafed and Nicorette to its portfolio by purchasing Pfizer’s consumer business. The company is also looking to expand the Consumer segment in emerging markets which hold immense potential and has set up manufacturing and R&D centers in Brazil, China and India. These countries are trying to make healthcare accessible to more people primarily by improving insurance coverage. However, the company expects to keep witnessing pricing pressure, especially in Europe, as well as challenges in China.
Sep 18, 2017
Target Price/Valuation
Rating DistributionPositive / 63.16%↑
Neutral / 26.32%↓
Negative / 10.53%↓
Avg. Target Price / $147.75↑
High / $165.00↑
Low / $110.00
No. of Analysts with Target price/Total / 16/19
Risks include pipeline setbacks, negative currency movement and biosimilar and generic competition.
Recent Events
J&J Beats on Q3 Earnings, Actelion Buyout Drives Sales – Oct 16
Johnson & Johnson reported 3Q17 earnings of $1.90 per share, beating the Zacks Consensus Estimate of $1.80 and increasing 13.1% from the year-ago period.
Including amortization expense and special items, J&J reported third-quarter earnings of $1.37 per share, down 10.5% from the year-ago period.
Sales Beat
Sales came in at $19.65 billion, beating the Zacks Consensus Estimate of $19.28 billion by 1.9%. Sales increased 10.3% from the year-ago quarter, reflecting an operational increase of 9.5% and a positive currency impact of 0.8%. Organically, excluding the impact of acquisitions and divestitures, sales increased 3.8% on an operational basis.
Third-quarter sales grew 9.7% in the domestic market to $10.29 billion and 10.9% in international markets to $9.36 billion, reflecting 9.3% operational growth and 1.6% positive currency impact.
2017 Guidance Raised
J&J raised its adjusted earnings and sales outlook for the year.
J&J expects 2017 adjusted earnings per share in the range of $7.25 - $7.30 compared with $7.12 - $7.22 expected previously.
The revenue guidance was raised to a range of $76.1 billion to $76.5 billion compared with $75.8 billion to $76.1 billion expected previously.
Revenues
Johnson & Johnson recorded sales of $19.65 billion in 3Q17, up 10.3% y/y. Operational sales grew 9.5% while favorable currency movements impacted sales by 0.8%. Sales grew 9.7% in the domestic market and 10.9% in international markets in .3Q17, reflecting 9.3% operational growth and 1.6% positive currency impact.
The Zacks Digest average total revenue for 3Q17 was in line with the company’s report.
Revenue($ in million) / 3Q16A / 2016A / 1Q17A / 2Q17A / 3Q17A / 4Q17E / 2017E / 2018E
Digest Average / $17,820.0 / $71,890.0 / $17,766.1 / $18,838.9 / $19,650.0 / $20,072.5 / $76,288.7 / $80,739.3
Digest High / $17,820.0 / $71,890.0 / $17,767.0 / $18,839.0 / $19,650.0 / $20,150.0 / $76,405.0 / $81,407.0
Digest Low / $17,820.0 / $71,890.0 / $17,766.0 / $18,838.0 / $19,650.0 / $19,995.0 / $76,211.0 / $80,094.0
2017 Outlook: Johnson & Johnson expects revenues in 2017 in the range of $76.1 billion to $76.5 billion, including the impact of acquisition of Actelion The sales guidance reflects operational growth of 5% to 6%.
Johnson & Johnson continues to expect no biosimilar competition for Procrit in the United States and no generic competition for Zytiga, Risperdal Consta, Procrit, Prezista and Invega Sustenna in 2017.
Divisional Sales
Pharmaceutical Division
Johnson & Johnson recorded worldwide Pharmaceutical sales of $9.7 billion in 3Q17, up 15.4% y/y, reflecting operational growth of 14.6% and a positive currency impact of 0.8%. Domestic sales rose 15.4% to $5.82 billion, while international sales increased 15.5% to $3.88 billion.
New products like Imbruvica and Darzalex continued to perform well. Other growth drivers were core products like Xarelto, Stelara and Invega Sustenna. Sales of Concerta and Zytiga improved in the quarter.
The Zacks Digest average total revenues for 3Q17 were in line with the company’s report.
$ in million / 2016A / 2017E / 2018E / 2019E / Est. Growth (16-’19)Pharma Sales / $33,464.0 / – / – / – / –
Specific Products
Immunology
Remicade (infliximab)
Indication(s): Immune mediated inflammatory diseases like rheumatoid arthritis (RA), Crohn's disease (CD), psoriatic arthritis, active ulcerative colitis (UC), moderately to severely active UC in pediatric patients who have responded inadequately to conventional therapy.
Safety Issues: There are risks of blood toxicity and fungal infections from the use of Remicade. The FDA warned that drugs used to treat RA, including Remicade, can increase the risk of cancer (lymphoma and others) in children and teenagers, after they have taken the drug for more than two and a half years.
Product Life Cycle Status: Marketed, biosimilar competition for Remicade entered several major EU markets in February 2015. A biosimilar version, Inflectra, was launched by Pfizer in the United States November 2016.
Partners: Merck.
Sales: According to the company, Remicade worldwide sales amounted to $1.65 billion in 3Q17, down 7.6% y/y. Remicade sales declined due to the impact of biosimilars. The Zacks Digest average revenues for 3Q17 were in line with the company’s report.
Competitors: AbbVie’s Humira, Amgen’s Enbrel, Pfizer’s Xeljanz and Celltrion’s Remsima.
$ in million / 2016A / 2017E / 2018E / 2019E / Est. Growth (16-’19)Remicade Sales / $6,966.0 / –
Simponi/Simponi Aria (golimumab)
Indication: Moderate to severe RA, psoriatic arthritis, ankylosing spondylitis (AS), moderate to severe active UC ,severe active non-radiographic axial. Simponi plus methotrexate (MTX) approved in the EU for polyarticular juvenile idiopathic arthritis.
Safety Issues: The FDA warned that drugs used to treat RA including Simponi can increase the risk of cancer (lymphoma and others) in children and teenagers, after they have taken the drug for more than two and a half years.
Product Life Cycle Status: Marketed.
Partners: Merck.
Sales: According to the company, Simponi/Simponi Aria sales fell 1% y/y to $476 million in 3Q17, due to lower sales in the United States. The Zacks Digest average revenues for 3Q17 were in line with the company’s report.
Regulatory Update: In October 2017, J&J announced that it has received FDA approval for two line extensions for Simponi Aria - in psoriatic arthritis and ankylosing spondylitis.
$ in million / 2016A / 2017E / 2018E / 2019E / Est. Growth (16-’19)Simponi/Simponi Aria Sales / $1,745.0 / –
Stelara (ustekinumab)
Indication: Moderate-to-severe plaque psoriasis; active psoriatic arthritis, Crohn’s Disease
Product Life Cycle Status: Marketed.
Regulatory Update: In October 2017, J&J announced that the FDA has approved the label expansion of Stelara for use in adolescents (12 years of age or older).
Sales: According to the company, Stelara sales amounted to $1.12 billion in 3Q17, up 38.1% y/y reflecting strong uptake due to label expansion in Crohn’s disease. The Zacks Digest average revenues for 3Q17 were in line with the company’s report.
Additional Studies: The company is evaluating Stelara as a subcutaneous treatment for UC (phase III ongoing) and axial spondylytis (phase III).
Additional Data: In November 2017, results from a phase II study evaluating Stelara for active systemic lupus erythematosus (SLE or lupus) showed that a significantly higher proportion of patients in the Stelara arm (60%) experienced improvements in lupus disease activity versus placebo (31%). Stelara also showed significant improvements in various disease measures compared with placebo, including musculoskeletal, mucocutaneous, immunological markers and flares. Based on the positive phase II data, J&J plans to move Stelara into phase III development.
$ in million / 2016A / 2017E / 2018E / 2019E / Est. Growth (16-’19)Stelara Sales / $3,232.0 / –
Tremfya (Guselkumab)
Indication: moderate-to-severe plaque psoriasis
Product Life Cycle Status: Marketed.
Regulatory Status: Approved in the United States in July 2017 and EU in November 2017.
Additional Data: In November 2017, J&J announced new long-term data from a phase II study evaluating Tremfya for active psoriatic arthritis. Data from the study demonstrated that treatment with Tremfya led to improved psoriatic arthritis symptoms through one year. At week 56, more than 70% of the patients treated with Tremfya subcutaneous injections achieved at least 20% improvement in the signs and symptoms of disease (ACR 20) using observed data.
Additional Studies: Tremfya is also being evaluated in a phase IIstudy for active psoriatic arthritis.
Competitors: Lilly’s Taltz.
$ in million / 2016A / 2017E / 2018E / 2019E / Est. Growth (16-’19)Tremfya Sales / –
Infectious Diseases
Prezista (darunavir)