Steady growth in key divisions supports the company's wide economic moat.
Johnson & Johnson
reported fourth-quarter results that fell short of our and consensus expectations on the top line while beating on the bottom line partly because of a low tax expense. We don’t expect any major changes to our $112 fair value estimate, and we continue to view the stock as largely fairly valued. All of the key divisions posted steady growth (drugs up 10%, devices up 5%, and consumer up 8% on an operational basis), adding support to the company’s wide economic moat.
Damien Conover, CFA, is director of healthcare equity research and equity strategy for Morningstar.
The company laid out 2017 sales guidance of $74.1 billion-$74.8 billion, slightly below our expectations and probably impacted by increased generic competition to Remicade and neuroscience drugs as well as a strong U.S. dollar. We continue to view J&J's growth prospects as challenged by heavy generic competition and a pipeline that isn't strong enough to offset patent losses, resulting in our top-line annual growth projection of 2% over the next five years. The tepid growth is probably driving J&J to make acquisitions, and we view the potential acquisition of Actelion at close to $28 billion as giving most of the deal’s value to Actelion shareholders.
Despite the growth challenges, several products continue to post solid gains and should help mitigate the patent losses. In consumer, the over-the-counter business appears to remain on solid footing following manufacturing issues. New product launches are helping the device segment post steady gains that should accelerate in late 2017. In the drug space, recently launched cancer drugs Darzalex and Imbruvica have shown excellent data and should post 2020 sales (as recorded by J&J) over $3 billion and $2 billion, respectively. While immunology drug Remicade faces increased biosimilar pressure, other immunology drugs, including Stelara and pipeline drugs guselkumab and sirukumab, should help stabilize the franchise for J&J.
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