Steady 3rd Quarter for Johnson & Johnson
We view the company as slightly overvalued but don't expect any major changes to our fair value estimate.
While Johnson & Johnson (JNJ) reported third-quarter results slightly ahead of consensus expectations, the results were just below our projections, and we don't expect any major changes to our fair value estimate. Operational sales growth of 6% was once again led by the drug group (up 8%) with additional gains from consumer (up 6%) and devices (up 3%). The steady gains across the group help reinforce its wide moat. However, we view the company as slightly overvalued and expect top-line growth will moderate over the next two years with patent pressures weighing down the drug group combined with a relatively modest late-stage pipeline.
In the drug group, broad strength across most drugs supported the divisional growth, but immunology drug Remicade (6% of total sales) continues to lose pricing power due to biosimilar pressures. While Remicade has held on to over 90% of the volume in the U.S., the continued sales declines suggest close to 20% annualized pricing declines. Offsetting the weakness in Remicade, the oncology division continues to post strong gains led by Imbruvica, Darzalex, and Zytiga. However, we expect generics to pressure Zytiga (5% of sales) later in the year. Despite the patent loss pressures, we expect the drug group will post close to 4% annualized growth from 2018 to 2021.
Outside of the drug group, the consumer growth was solid while the medical device group continues to lag. We expect some of the strength in consumer was tied to stocking as well as aggressive discounting based on the negative margin trend in the group. However, we need to see more consistency before increasing our long-term growth rate for the division of 3%. On the device side, price pressures and a lack of innovation is creating a headwind for the group. Longer term, the introduction of robotics and more data within the device division holds the potential to reaccelerate growth beyond 2020, but limited data on these products tempers our long-term growth rate of 2%.
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Damien Conover does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.