Thin Air

J&J Lives Up to Its Valuation -- For Now

The risk of disappointment and its reliance on pharma keep growing.

The logo of Johnson & Johnson is arranged for a photograph in Tiskilwa, Illinois, U.S., on Monday, April 11, 2011.

Photographer: Bloomberg/Bloomberg via Getty Images
At Closing, May 18th
124.24 USD
At Closing, May 18th
35.64 USD

Johnson & Johnson is in rarefied air.

The world's largest health-care company (at $348 billion in market value, topping Pfizer by more than $130 billion) on Tuesday reported quarterly earnings and revenue that beat analyst estimates -- which has become a routine -- and raised its sales forecast for the year. But for all of its strengths, the company's hefty valuation leaves it little room for error.  

Leader of the Pack

Johnson & Johnson trades at a premium to its large pharma rivals

Source: Bloomberg

J&J's sales grew 12.6 percent in the quarter from a year earlier -- impressive for such a big company. But much of that was attributable to foreign-exchange trends; operating growth was sluggish outside of J&J's pharma unit. And the biggest revenue boost came from tacking on Actelion Ltd. sales; JNJ's $30 billion acquisition of the Swiss company closed in the middle of 2017. 

Breaking it Down

Johnson & Johnson's results are a good deal less impressive without boosts from acquisitions and foreign exchange rates

Source: Johnson & Johnson

Though it's still early days for the Actelion deal, it is arguably under-performing so far. Its newer drugs for pulmonary arterial hypertension -- its key franchise -- can't seem to make up for falling sales of Tracleer, an older medicine facing generic competition in Europe. This may eventually weigh on JNJ's growth.

Worth $30 Billion?

Total sales of the arterial hypertension drugs J&J acquired with its purchase of Actelion have declined sequentially in each of the past two quarters

Source: Bloomberg

Disappointing Actelion results leave JNJ even more dependent on the rest of its pharma unit. Fortunately, the news there has been good: Even excluding currency impact and Actelion, the division is outgrowing most of its large rivals. 

Not Bad, Big Guy

J&J's pharma sales growth compares rather favorably with its large rivals

Source: Bloomberg

*Q4 2017 for every company except for J&J

But J&J faces the same balancing act between new and old medicines every large pharma company does, with the added burden of making up for consumer and device units that have struggled to consistently grow sales. J&J does have an enviable track record of blockbusters and commercial success, and its blood cancer drugs Darzalex and Imbruvica delivered particularly strong sales growth in the first quarter. But sales of its largest drug Remicade fell 17 percent as cheaper biosimilar rivals forced price cuts. And that drug's decline could accelerate.

J&J doesn't expect generic competition this year for prostate-cancer drug Zytiga, its third-best-selling medicine in the quarter and one of its fastest-growing products. But J&J could be wrong about that. It has follow-up medicines that could replace some Remicade and Zytiga sales -- Tremfya and Erleada, respectively -- but reaching the sales heights of their predecessors will be tough. 

J&J trades at 15.8 times blended forward 12-month earnings estimates, down a good bit from 18.7 in January. But it's still more highly valued than big pharma rivals such as Pfizer and Novartis. Its guidance on Tuesday suggests it's confident its pharma unit won't slow down. But the higher it flies, the bigger the risk of a comedown.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Max Nisen in New York at

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    Mark Gongloff at

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