In contrast to the patent cliff facing the rest of the drug industry, Johnson & Johnson has largely passed this hurdle following the loss of patent protection on antipsychotic Risperdal and neuroscience drug Topamax. With the only near-term patent losses on heartburn drug Aciphex and neuroscience drug Concerta, J&J's new potential blockbusters should return the company to steady long-term growth. Within this group of new drugs Xarelto for cardiovascular disease and Zytiga for prostate cancer offer the potential to revolutionize treatment.
J&J revitalized its device segment with the acquisition of the fast-growing orthopedic company Synthes. Also, we expect to see the continuing improvements in the OTC business in 2013, setting up the company to have all three core divisions poised for growth by the end of 2013.
|Economic Moat||Fair value||Stewardship Rating|
KEY INVESTMENT CONSIDERATIONS
- We expect the majority of manufacturing capacity in the over-the-counter division to come back on line by mid-2014, which should add close to $650 million annually to the top line.
- The acquisition of Synthes brings in an industry-leading orthopedic company with better operating margins and better growth prospects than J&J's Depuy group.
- On the basis of currently marketed drugs, Johnson & Johnson ranks as one of the best-positioned companies in the pharmaceutical industry.
- Johnson & Johnson faces relatively few major patent losses over the next five years.
- The company's diverse health-care segments insulate the company from downturns in the economy, offering a defensive growth opportunity.
- As the baby boom generation ages, the entire spectrum of Johnson & Johnson's products should benefit from the increase in health-care needs.
- The company has launched an industry-leading amount of new potential blockbusters, including Xarelto in cardiovascular disease and Zytiga in oncology.
- New psoriasis drug Stelara is posting a very strong launch and should develop into a blockbuster by 2013, which should help reinvigorate growth for the company's drug division.
- Product recalls in the company's over-the-counter business could dent Johnson & Johnson's strong brand name in a segment where brand recognition is important in maintaining market share.
- Potential legal action against the company regarding product recalls for hip and knee replacements along with several consumer products could not only hurt the company's reputation and cost billions of dollars, but also create a major distraction for management.
- A key pipeline drug, Xarelto for cardiovascular disease, is entering an increasingly competitive market as several other drug companies may launch similar drugs in the next few years.
- Governments in developed countries are increasingly pressing for pricing cuts in health care, creating a headwind across most of J&J's key products.
- Corrections to manufacturing problems in the consumer products space have taken longer than expected and could signal a more significant quality control problem for the company.
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