Johnson & Johnson’s (JNJ) stock has done well this year, growing by roughly 20%. The company’s pharmaceutical division is showing strength, and its consumer business is doing better due to improvements in supply chain and manufacturing.
We believe that investors should continue to watch Johnson & Johnson as the company looks poised for good growth, and it has a solid track record in terms of rewarding its investors with dividends as well as a very diversified business with its focus across the pharmaceutical, consumer and medical devices segments.
Strong Performance From Pharmaceutical Business
Johnson & Johnson’s pharmaceutical business is doing well on the back of a strong performance in its immunology and oncology drugs, which together account for about 25% of the company’s value as per our estimates.
Oncology and immunology are growth areas for the company and for the pharmaceutical industry in general. Primary care areas such as cardiovascular and allergy are already flooded with products and therefore the focus on oncology and immunology could help the company command better pricing.
Immunology - Recent Performance
J&J’s immunology drug sales surged by 16.3% globally in the first quarter of 2013.  While its biggest immunology drug Remicade showed moderate growth of 5.2%, the sales for Simponi and Stelara grew substantially. It appears that the overall immunology drug market is increasing and international markets present a large growth opportunity. Simponi and Stelara are doing well internationally, especially in Japan. 
Oncology – Recent Performance
Oncology is a smaller segment for J&J and presents a substantial growth opportunity. J&J’s global oncology drug sales grew by 33.2% during Q1 2013.  While Velcade was flat, Zytiga’s sales grew by more than 70%.  Zytiga and Velcade have been approved for additional indications, and it is likely that we’ll continue to see healthy growth in their sales in the near term. Velcade’s sales stood at $1.5 billion in 2012, and we expect the figure to continue to grow until 2014 when the drug loses its patent.
Diabetes Drug Could Play Important Role In Future Growth
J&J received a major boost a few months back when its blockbuster potential type 2 diabetes drug, Invokana (commonly known as Canagliflozin), was granted FDA approval. With obesity on the rise, diabetes is affecting more people globally. In the U.S. alone, roughly 26 million people suffer from the condition. 
Owing to these factors, the global diabetes drug market has seen a rapid growth rate in the last couple of years. According to GBI Research, a leading business intelligence provider, the type 2 diabetes drug market, which constitutes a significant chunk of the total diabetes drug market, is expected to grow from $26 billion in 2011 to $50 billion in 2021, in developed markets including the U.S., Japan and Europe. 
Medical Devices Business Is Recovering
J&J acquired Synthes last year, and the combined J&J/Synthes orthopedic division has the broadest orthopedic portfolio globally, and the company can leverage the growth in this market better than its competitors. The global trauma fixation devices market is expected to reach $6.7 billion by 2017, growing at a compounded annual growth rate of 6%.  This growth will be driven by the aging population in countries such as U.S., Europe, Japan and China.
Despite J&J’s gradual exit from the drug-eluting stents business, its cardiovascular medical devices segment seems to have started doing well. Biosense Webster is gaining market share and J&J’s endovascular products are seeing good growth driven by the re-launch of the S.M.A.R.T. vascular stent system and the EXOSEAL Vascular Closure Device.  As the year progresses, the negative impact from exiting drug-eluting stents business will fade and the growth in other cardiovascular devices will become more prominent.
As far as the surgical devices business is concerned, its revenues have steadily increased over the past several years, amounting to $9.96 billion in 2012. This growth has primarily resulted from healthy growth in the minimally invasive surgical devices market as well as the women’s health and hernia repair devices market. The outlook looks positive with Johnson & Johnson positioned well in multiple markets.
Currently Johnson & Johnson competes in only 35% of the global surgical devices market (including cardiovascular), which is estimated to be close to $100 billion.  This implies that the company has tapped a $35 billion market and another $65 billion is still unexplored. If we exclude the cardiovascular group, which we break out as a separate segment, we find that Johnson & Johnson’s surgical devices business spans across roughly a $25-30 billion market where it holds close to 30% market share. 
Good Performance In Terms Of Dividend Growth
Johnson & Johnson has been consistent with its dividend payments for past several decades, and has continued to increase these payments. This is not a common situation as there are a handful of companies in the U.S. that have rewarded their investors in such a consistent manner. This year, the company approved an increase of 8.20% in its dividend payments, amounting to 66 cents per share.  Although this increase was slightly less than the average annual dividend payment increase witnessed over the last decade, it is still very healthy.
Our price estimate for Johnson & Johnson stands at $85, implying a slight premium to the market price.
Disclosure: No positions.