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Johnson & Johnson Looks Overvalued Today

Damien Conover, CFA

Damien Conover: Johnson and Johnson reported third-quarter earnings that were ahead of our expectations and better than Street consensus expectations. A lot of this is being driven by a lot of growth in the drug division. The drug division continues to post very robust growth, really led by its immunology and its oncology franchises. One area we were particularly surprised by is the continued strength in a drug called Remicade. Remicade is for a lot of different immunological disorders, in particular RA. This drug continues to hold up despite biosimilar competition coming.

We're anticipating this drug will face some headwinds going forward, and this will drag down the drug group in time. Hence, we see the stock of J&J to be slightly overvalued. Within the backdrop beyond the drug division, the consumer division and the device divisions are stagnating a bit in their growth. We do anticipate the growth to reaccelerate in those divisions, however we anticipate it will take some time for J&J to reinvest in the branding power in the consumer group and within some new devices within the overall device division. 

Nevertheless, we think J&J will post very steady growth with its earnings, but again we do see the stock as slightly overvalued because of growing concerns within the pharmaceutical division, due to generic competition, notably to Remicade, but to other drugs that are facing some generic competition over the next two to three years.