- We expect no significant change in the intensity of the main trends driving the company's business.
- While the company's consumer and medical devices & diagnostics operations have practically flattened out, the surge in the sale of its drugs catering to immunology, oncology and infectious diseases will keep investors interested.
- Our price estimate for Johnson & Johnson stands at $96, implying a discount of about 10% to the market price.
Johnson & Johnson (NYSE:JNJ) will report its Q2 2014 earnings on July 15. We expect no significant change in the intensity of the main trends driving the company's business. The growth in J&J's pharmaceutical segment will significantly outpace the growth in its medical devices & diagnostics business due to the continued uptake of its current and new drugs. While the company's consumer and medical devices & diagnostics operations have practically flattened out, the surge in the sale of its drugs catering to immunology, oncology and infectious diseases will keep investors interested. J&J expects to grow its overall revenues by 4.5% to 5.5% in 2014, including the impact of currency movements. The second-quarter results are likely to re-affirm these expectations.
Our price estimate for Johnson & Johnson stands at $96, implying a discount of about 10% to the market price.
Pharmaceutical Business Will Gain From Cancer And Hepatitis C Drug Sales
The story for Johnson & Johnson's pharmaceutical business isn't likely to change. In fact, it may get better as the sales of its relatively newly launched Hepatitis C drug, Olysio, continue to ramp up. The drug has done better than expected. Olysio's sales for Q1 2014 stood at $354 million, making it the second biggest anti-infective drug for the company within a short period of time. To put things in perspective, let's take a look at the competition and the overall market which will help us understand the importance of Olysio for Johnson & Johnson. Gilead Sciences (NASDAQ:GILD) is currently the market leader in Hepatits C treatment and is on its way to making a fortune selling its breakthrough drug Sovaldi. The drug's sales for 2014 may amount to anywhere between $7 billion to $12 billion, according to ISI Group. This suggests strong growth potential for Johnson & Johnson's new drug, which has also been recommended by the Liver Society for concurrent dosage with Sovaldi. The demand for Olysio is likely to be high, as close to 150 million people suffer from Hepatitis C globally. The overall market for Hepatitis C treatment could reach $20 billion by 2020 and Gilead Sciences could capture around 80% of this market, according to Deutsche Bank, unless viable alternatives emerge.
Beside Olysio, we expect strong positive impact from cancer drugs such as Zytiga and Velcade. Zytiga recently overtook Velcade to become Johnson & Johnson's biggest oncology drug. While Velcade's sales grew by 15.8% in Q1 2014, amounting to $408 million, Zytiga's revenue surged by 48.8% to $512 million. Together, these two drugs constitute roughly 85% of the company's oncology revenues and continue to gain market share. However, the flip side is that flat sales of Remicade could moderate the company's overall growth. Remicade is an immunology drug and the biggest product for J&J's pharmaceutical segment.
Need More Clarity On Future Of Medical Devices & Diagnostics Business
Johnson & Johnson recently completed divestiture of Ortho-Clinical Diagnostics to The Carlyle Group (NASDAQ:CG) for approximately $4 billion. The impact of this transaction will be visible on the company's income statement assuming that it adjusts for the exclusion. The unit's revenues have declined in the last two years, and have also come down as a percentage of total medical devices revenues. This can be attributed to certain inventory issues and pricing pressure due to growing competition. It won't be surprising if we see more such divestitures in future. We'll look forward for more clarity on the company's vision about this business going forward, and how they plan to revive growth.
Disclosure: No positions