We think the market is not anticipating enough declines on several complex drugs due to generic and biosimilar pressures.
Johnson & Johnson
reported second-quarter results slightly ahead of both our and consensus expectations, but we don’t expect any major changes to our $112 fair value estimate, suggesting the stock looks slightly overvalued. We continue to believe the market is not incorporating enough declines on several complex drugs, including Concerta (2017-18 expected generic competition), Risperdal Consta (2017), Velcade (2016-19), Remicade (2016-18), and Invega Sustenna (2018). While the majority of these drugs will face slower declines then typical small molecules, we project more rapid declines than consensus. For the company’s largest drug, Remicade, we expect 2020 sales of below $4 billion relative to consensus expectations of $5.3 billion. While the magnitude of these losses is concerning, JNJ’s breadth of businesses helps reinforce its moat during times of excessive patent losses.
Damien Conover, CFA, is director of healthcare equity research and equity strategy for Morningstar.
In the quarter, total operational sales increased 6% year over year, driven by robust drug sales (up 11%), but upcoming generic and biosimilar pressures will likely slow this growth despite solid new drug launches. Strong growth in immunology and oncology drove the results. Further, immunology drug Stelara posted 33% growth and while the drug will likely lose market share to better psoriasis drugs, including new IL-17 and IL-23 therapies, the drug’s new indication in Crohn’s disease will likely lead to relatively stable growth. In oncology, the recent launch of Imbruvica continues to trend well, and the addition of another blood cancer drug, Darzalex, should help offset generic competition to Zytiga and Velcade expected over the next two years.
Outside of the drug group, the consumer and device segments posted close to 3% growth after adjusting for inventory changes. We don’t see organic growth increasing much beyond this level of growth, which may lead to more acquisitions in these areas. However, we do expect efficiency improvements to drive earnings contributions for these groups.
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