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J&J’s Drug Pipeline Not Strong Enough to Accelerate Growth

Increasing commotion over its branded drugs and a device segment that seems to lack innovation will hold back J&J’s revenue growth in the coming years.

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In the quarter, after adjusting for several factors (acquisitions, divestitures, foreign exchange rates, and the hepatitis C sales declines), J&J posted 5% year-over-year growth led by drug sales. While we believe the 5% growth number is the best representation of underlying growth, the multiple adjustments to sales and earnings slightly reduces the quality of the reported growth rate. Going forward, we expect the growth rate of J&J to slow as pipeline products lack enough potential to offset increasing generic and branded competition. In particular, we expect increased generic and biosimilar pressure on hard to make drugs Risperdal Consta, Invega Sustenna, Procrit and Remicade (14% of sales in aggregate). Despite these pressures, several recently launched drugs, including diabheadwindsetes drug Invokana and cardiovascular drug Xarelto, should help mitigate .

Outside of the drug space, we expect the strength in J&J's consumer business to continue to offset slower growth in the medical device segment. J&J's improvement in manufacturing quality and stronger pricing power in vision care products should continue to improve consumer sales, which were up 3% year over year. However, we remain less optimistic regarding the slow growing medical device group (up only 1% in the quarter), which seems to lack innovative product development.

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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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