Inside J&J's Medicine Chest: New Products, Renewed Growth by Robin Goldwyn Blumenthal
Highlighted companies: Johnson & Johnson (NYSE:JNJ), Pfizer Inc. (NYSE:PFE), Boston Scientific Corp. (NYSE:BSX), Bristol-Myers Squibb Co. (NYSE:BMY), GlaxoSmithKline plc (NYSE:GSK)
Summary: Health-care stocks have been on the move lately, and Johnson & Johnson (JNJ), at $64.50, is up 14% from February lows. Its business stems from three sectors: prescription drugs (44%), devices and diagnostics (38%), and consumer health care (18%). Its issues: patent-expiration, competition in medical devices, and safety/regulatory concerns. But J&J's ace-in-the-hole is its, "powerhouse over-the-counter health and beauty business (Tylenol, Band-Aids, etc.), buttressed mightily by its recent agreement to buy Pfizer's consumer health-care unit for $16.6 billion." The Pfizer purchase will boost consumer health to 25% of total sales. Earnings in the OTC business have doubled in the past seven years, while profit growth in pharmaceuticals and medical devices has slowed. In pharmaceuticals, its #1 seller (anti-psychotic Risperdal) had 2005 sales of $3.6B billion (one of eight J&J drugs with annual sales over $1B). In this year's H1 sales grew 20%. Sales of Remicade, an anti-inflammatory, also increased 20% in the H106. JNJ has some "potential blockbusters" in development including blood-thinner Rivaroxaban, two Remicade follow-on drugs, and a hepatitis C drug. Operations will generate $11B of free cash flow this year, rising by 5% to 7% a year in the next few years. In medical devices, J&J is best known for its development of artery-opening stents, which are under FDA scrutiny over questions about the possible increased risk of blood clots. Shares currently trade at 16x 2007 estimates; historically they have traded for 19.4x. Its price-to-cash-flow multiple is 15; historically 18. "Johnson & Johnson's dominance over the counter, not to mention its prominence behind it, will serve the company well as it seeks to grow even larger. That, and the defensive nature of its shares, should comfort investors when times get tough."
Quick comment: As noted in the article, J&J was among the Street's most respected companies for its seemingly endless sales increases • Clark & Ritchie picked it as a stock of the week • Johnson & Johnson -- The Stock Sells Itself • Best Name in a Weak Sector • Pfizer story: Pfizer Hopes It Can Sell Its Consumer Health Care Unit to J&J • Everyone's a Winner in J&J's Purchase of Pfizer Unit