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Caution: Slowing Growth Ahead for J&J

Strong drug sales helped wide-moat J&J report a steady quarter, but increasing competitive threats to leading drugs and a relatively weak late-stage pipeline will be headwinds in the future.

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Following the recent trend, J&J's drug group once again led growth in the quarter, and we expect this trend will continue, but at a decelerating rate. Several of the company's core drugs--including cardiovascular drug Xarelto, oncology drug Zytiga, and immunology drugs Simponi and Stelara--posted double-digit gains. However, increasing competition to all of these drugs is likely to slow growth over the next several quarters. Over the next two years, we expect generic competition to increase for several neuroscience drugs (Concerta, Invega Sustenna, and Risperdal Consta), which represent 5% of J&J's drug sales. The increasing competition combined with a weak late-stage pipeline is concerning. However, we project a strong growth trajectory for several new drugs (diabetes drug Invokana and cancer drug Imbruvica) will help mitigate J&J's headwinds.

We expect the consumer group's strong resilience and the device group's struggles will continue. We believe the strong brand power supporting J&J's moat remains intact for the consumer group, which posted operational growth of 5%. While we expect the growth rate for consumer to accelerate as manufacturing issues are remedied, we believe the device segment (up 1% operationally) will continue to struggle as a result of poor pricing power and slow innovation trends.

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About the Authors

Damien Conover

Sector Director
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Damien Conover, CFA, is the director of healthcare equity research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is also director of equity strategy, responsible for helping to shape, package, and surface research based on Morningstar’s investment philosophy by working closely with the firm’s sector strategists and directors.

Before joining Morningstar in 2007, Conover was an equity research analyst covering the healthcare sector for Raymond James, Bank of Montreal, and Tucker Anthony.

Conover holds bachelor’s and master’s degrees in finance from the University of Wisconsin and was a member of its Applied Security Analysis Program. He also holds the Chartered Financial Analyst® designation.

Damien Conover, CFA, is the director of healthcare equity research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is also director of equity strategy, responsible for helping to shape, package, and surface research based on Morningstar’s investment philosophy by working closely with the firm’s sector strategists and directors.

Before joining Morningstar in 2007, Conover was an equity research analyst covering the healthcare sector for Raymond James, Bank of Montreal, and Tucker Anthony.

Conover holds bachelor’s and master’s degrees in finance from the University of Wisconsin and was a member of its Applied Security Analysis Program. He also holds the Chartered Financial Analyst® designation.

Alex Morozov

Regional Director
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Alex Morozov, CFA, is director of European equity research for Morningstar Holland BV, a wholly owned subsidiary of Morningstar, Inc. He leads a team of equity analysts based in Europe who cover European and global companies across all major sectors of the economy.

Before assuming his current role in 2014, Morozov was head of global healthcare equity research. Previously, he was a senior equity analyst, covering the medical instruments, life sciences, and diagnostics industries. Before joining Morningstar in 2006, Morozov worked in the insurance industry.

Morozov holds a bachelor’s degree in finance, with a minor in mathematics, from the University of Missouri. He also holds the Chartered Financial Analyst® designation.

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