J&J Faces Headwinds in 2015

Many recently launched drugs continue to buoy the pharmaceutical group, but increasing competition should weigh on growth over the next few years. In particular, the very robust sales growth from immunology drug Stelara, hepatitis C drug Olysio, and oncology drug Zytiga will likely fade significantly as new competitors emerge with more effective drugs. Further, generic competition will likely emerge for neuroscience drug Invega in 2015. While the company lacks a robust late-stage pipeline, we expect early-stage pipeline drugs along with the redeployment of J&J's war chest of cash to gain external pipeline drugs will help mitigate competitive pressures over the long term.

While J&J is signaling an expected improvement in the consumer and medical device segment growth in 2015 to help offset slowing drug sales, we remain skeptical. We don't see enough innovation in either group to lead to accelerating growth. For the past several years, the lagging performance of these divisions has been offset by a strong drug division, but the magnitude of strong drug sales growth will likely fade over the next few years.

On the bottom line, a better than expected tax rate helped to offset lower-than-expected operating margins. As the company's drug division slows, we expect an amplified impact on the bottom line given the drug group's higher margins.

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