Company Reports

We are holding steady to our $164 per share fair value estimate for Johnson & Johnson following first-quarter results that largely matched our expectations. However, management slightly increased full-year 2024 sales and earnings guidance, but that was not meaningful enough to affect our fair value estimate. We continue to view the stock as undervalued, with the market not fully appreciating J&J's innovative products that should propel long-term growth and reinforce the firm's wide moat.

We are holding our $164 fair value estimate for J&J steady after its agreement to acquire Shockwave Medical for close to $13 billion. We believe the growth potential of Shockwave will help accelerate J&J’s medical devices segment by almost 50 basis points, largely in line with comments by high-level management. We expect close to $1 billion in sales from Shockwave products in 2025, followed by rapid growth in subsequent years.

Johnson & Johnson reported fourth-quarter results largely in line with our projections, and we are holding firm to our $164 fair value estimate. The stock looks slightly undervalued, as the market is likely not fully appreciating the firm’s long-term potential with pipeline products that also reinforce J&J’s wide moat.

Johnson & Johnson’s announced $2 billion acquisition of Ambrx Biopharma yields new antibody drug conjugate technology. While we don’t believe the deal will affect our fair value estimate or wide moat rating, it does increase J&J's potential in the increasingly important ADC landscape.

We are holding firm to our $164 fair value estimate for Johnson & Johnson following guidance updates at the firm’s analyst day. While the 2024 earnings guidance of 7% growth (at the midpoint) looks reasonable and is largely in line with our expectations, the 5%-7% compound annual sales growth expected between 2025 and 2030 seems too high, with major patent losses making the growth challenging to achieve. We project sales growth closer to 2% annually between 2025 and 2030. We already view the company as undervalued, and if J&J achieves its long-term guidance, there would be more upside to our fair value. However, irrespective of the growth potential, we expect returns to support the firm’s wide moat largely based on strong innovation boosting pricing power.

Johnson & Johnson reported solid third-quarter results slightly above our projections, but we are not changing our fair value estimate based on the minor outperformance. While we recognize that growth in the pharmaceutical division is likely slowing due to upcoming patent pressures, we continue to view J&J as slightly undervalued, with the market likely underappreciating the firm’s solid pipeline, a key factor also supporting the our wide moat rating.

Johnson & Johnson reported positive top-line Mariposa data for its cancer drugs Rybrevant plus lazertinib versus AstraZeneca’s Tagrisso in first-line epidermal growth factor receptor-mutated non-small cell lung cancer. With Tagrisso generating annual sales over $5 billion (over 10% of AstraZeneca's sales), the market size is significant. However, we need to see the detailed data—to be released at an upcoming scientific conference—before making any major changes to our sales projections for the drugs and company fair value estimates. Only the progression-free survival, or PFS, endpoint was statistically significantly better; the overall survival, or OS, endpoint only trended better. As a result, we expect the data to incrementally better position Rybrevant plus lazertinib over Tagrisso. However, we don’t see the data having an impact on either firm’s wide moat, given the very strong pipelines and product portfolios at both companies.

Following the successful split-off of Johnson & Johnson’s consumer division, Kenvue, J&J provided updated 2023 guidance for the remaining J&J business largely in line with our expectations. We don’t expect any changes to the firm’s fair value estimate or wide moat rating based on the updated outlook. The 2023 earnings outlook for the remaining J&J business fell as expected due to the divested consumer business. However, the reduced share count from the Kenvue split-off combined with $13 billion in proceeds from the debt offering and partial initial public offering of Kenvue as well as the 9.5% remaining stake of Kenvue still held by J&J largely offset the lost Kenvue earnings from a valuation perspective.

As part of the Inflation Reduction Act, the U.S. Department of Health and Human Services on Aug. 29 announced the first 10 drugs selected for mandated 2026 Medicare price negotiations. This doesn’t have a major impact on our valuations or moat ratings for the biopharma industry. The 10 drugs have been on the market for a prolonged period (seven years for small-molecule drugs and 11 years for biologics) and were selected based on the largest gross (before discounts) spending in Medicare Part D.

Johnson & Johnson plans to appeal the bankruptcy court's rejection of the proposed $8.9 billion settlement regarding the talc cancer claims. While the pathway forward with close to 100,000 talc claimants is now less clear, we believe the total cost of resolving these claims is likely still close to the $8.9 billion established in the proposed settlement and already factored into our valuation. As a result, we don't expect any major changes to the firm's fair value estimate or wide moat rating.

Johnson & Johnson announced the next step in the split off of the consumer healthcare group Kenvue by offering at least 80.1% of the shares of Kenvue through an exchange offer. We don’t expect this step to have a major impact on J&J’s fair value estimate or wide moat rating. We also don’t expect any material changes to Kenvue’s fair value estimate or wide moat rating. We expect the Kenvue divestment will reduce the shares outstanding of J&J by approximately the value of the divested unit. The exchange offer follows an initial public offering of just over 10% of Kenvue in May. Within the exchange offering, J&J shareholders have the option to exchange all, some, or none of their shares for shares of Kenvue. With J&J offering an incentive of a 7% discount on Kenvue shares, we expect a high preference for Kenvue shares, especially as Kenvue is trading below our fair value estimate and J&J is trading just above our fair value estimate.

Johnson & Johnson reported stronger second-quarter results than we had projected and raised 2023 guidance, but we don't expect any major changes to the firm's fair value estimate based on the slight outperformance.

Johnson & Johnson stands alone as a leader across the major healthcare industries. The company maintains a diverse revenue base, a developing research pipeline, and exceptional cash flow generation that together create a wide economic moat.

Johnson and Johnson raised close to $4 billion by selling almost 10% of its consumer business called Kenvue through an initial public offering. We expect J&J will divest the remaining Kenvue portion later in the year likely through a spinoff or split off. The implied valuation of close to $40 billion for Kenvue represents slightly lower valuation multiples than similar companies, but we don’t expect any major fair value estimate changes to J&J based on the initial partial sale of the unit.

Johnson & Johnson reported first-quarter results that were largely in line with our expectations, and we don’t foresee any major changes to our fair value estimate. While the company slightly increased its 2023 outlook, it also reduced 2025 drug guidance to $57 billion from $60 billion largely due to changes in foreign-exchange rates, which seems reasonable. J&J has a history of digesting currency headwinds and still meeting guidance, but we believe patent losses and slower new drug launches are weighing on the longer-term drug outlook. Nevertheless, the firm remains well positioned for steady growth from a wide portfolio of innovative products that reinforce its wide moat.

Johnson & Johnson’s move to refile talc claims into a bankruptcy subsidiary for a total of $8.9 billion looks likely to remove the litigation risk overhang without a major impact on our $164 fair value estimate for the shares. After reducing this $8.9 billion by the $2 billion already committed, our expectations for additional payments, the tax deductibility of the payment, and the potential for some insurance recoveries by J&J, the overall cost is not material relative to the company's $400 billion-plus intrinsic value. Further, the market is likely to see the removal of this risk overhang as a positive. We don’t see this payment as affecting the firm’s ability to reinvest in research and development to create the next generation of innovative products, which is key to the company’s wide moat. J&J’s consumer spinoff (Kenvue) remains on track for likely later in 2023.

A federal court ruling to deny Johnson & Johnson’s legal strategy of placing talc-related litigation into a bankrupt subsidiary doesn’t impact our fair value estimate. We continue to view J&J’s talc-related litigation expenses and reserves of close to $6 billion (along with an additional projected $2 billion) as likely sufficient to cover most of the talc legal costs. Further, we don’t see the litigation threat as impacting the firm’s wide moat that is largely based on intangible assets and switching costs from the drug and device segments. Also, the brand power of the consumer business is partly shielded from the talc controversy, since the firm uses many different branded names (like Neutrogena) that are not closely associated, which reduces the read through from talc to other product lines.

Johnson & Johnson reported solid fourth-quarter results that were slightly above our expectations, but we don’t expect any major changes to our fair value estimate based on the minor outperformance. J&J issued 2023 guidance in line with our expectations, further supporting our fair value estimate, which is slightly below the current stock price. The results show the firm’s ability to offset generic and branded competition with new innovative products, reinforcing its wide moat.

Johnson & Johnson’s announced acquisition of Abiomed for close to $17 billion enables the redeployment of capital into rapidly growing cardiovascular technology. While the valuation appears on the high side of the range of fair value estimates, we don’t expect any major changes to our fair value estimate for Johnson & Johnson. The deal should enable an acceleration of growth for the device business that has been posting more sluggish growth over the past several years. Additionally, we don’t see the deal as having a major impact on the firm’s wide moat, since the benefits of the acquisition look partially offset by the price paid.

Johnson & Johnson reported third-quarter results largely in line with our projections, and we don't expect major changes to our fair value estimate. We continue to see the firm as fairly valued, with the market outlook similar to our view. While inflation seems to slightly pressure J&J's costs (as shown by a 50-basis-point reduction to 2022 margin guidance), we don't expect a material headwind to earnings from increasing inflationary pressure, given J&J's relatively low production cost and ability to pass along price increases. We view the strong pricing power as reflective of J&J's innovative products and brand power, which also support the firm's wide moat.