Johnson & Johnson: Dogged By Uncertainty

| About: Johnson & (JNJ)

by Mark Goldstein

Johnson & Johnson (JNJ) is only about a dollar and a half short of its 52-week high of $68. Although Johnson & Johnson offers a great dividend of $.61 per quarter and has achieved a fairly stable stock price over the past few years, I am not currently confident in buying Johnson & Johnson stock. The company has taken measures to continue its successful growth, but it has also been subject to lawsuits and unsuccessful pharmaceutical studies. With its price so high, and so little room for growth, the negative news will keep Johnson & Johnson from rising enough to truly reward investors.

Let's start with why Johnson & Johnson is trading so high right now.

Johnson & Johnson has recently completed a $19.7 billion acquisition of the Swiss medical device maker Synthes. Synthes is the world's largest producer of implants that mend broken bones while it also creates surgical power tools and other biomaterials. Johnson & Johnson intends to combine Synthes with its current orthopedics, Depuy Companies. This combination of Synthes and Depuy will greatly improve Johnson & Johnson's profitability in its medical devices segment, gaining ground over competitors Stryker (SYK) and Smith & Nephew (SNN). The former of these, Stryker, has just announced plans to shut down two facilities and cut more than 100 jobs.

Furthermore, Johnson & Johnson's subsidiary, Janssen Pharmaceuticals has signed a stock buyback deal with Goldman Sachs (GS) and JPMorgan Chase (JPM) to buy 203.7 million shares of Johnson & Johnson stock to fund the Synthes acquisition and avoid share value dilution.

All would seem good with the pharmaceutical giant, except for some negative news with lawsuits and drug rejections. As a point of reference, over the past two years Johnson & Johnson has had over 50 drugs or devices recalled. This equates to about $900 million in annual sales.

Currently, it appears the company is preparing to sign a settlement agreement with the United States Department of Justice to close out a dispute about its drug Risperdal. The claim against Johnson & Johnson concerns the company's promotion of the anti psychotic drug for uses that have not been approved by the Food and Drug Administration. This settlement may cost the pharmaceutical giant over $1.5 billion.

Johnson & Johnson will be facing further setbacks due to the high number of aforementioned recalled products and drugs. Stemming from these recalls has come a number of potentially costly civil lawsuits - including one that led Johnson & Johnson to begin talks with the Department of Justice for a settlement agreement - over Risperdal. Other civil suit topics include the drugs Invega and Natrecor, as well as Omnicare, a nursing-home pharmacy operator.

Johnson & Johnson had set aside $1.7 billion for paying litigation fees and potential settlements back in January, but recently added another $600 million to this fund. This shows me that Johnson & Johnson understands the importance of these lawsuits and is essentially admitting defeat. While it is good for the company to not let these civil suits drag out, it is unfortunate Johnson & Johnson seems to be in the wrong. Another major issue is that this nearly $2 billion fund for settlement funds probably is not large enough since the company is prepared to spend the majority of it over the Risperdal suit.

Most of these charges are associated with a claim that Johnson & Johnson offered kickbacks, or improper payments, to Omnicare so that it would purchase more of Johnson & Johnson's drugs and recommend them to doctors - knowing the doctors would likely follow through with the pharmacy's recommendations. Johnson & Johnson still claims these kickbacks were just pharmaceutical discounts, which is not only legal, but also very common. While these kickbacks, or discounts, helped Johnson & Johnson increase revenue at the time, it may cost them dearly in this struggling economy.

One other piece of bad news for Johnson & Johnson comes from its research and development division, known as Janssen Research & Development. Janssen R&D announced that the Food and Drug Administration has officially declined the expanded approval of the drug Xarelto. This drug, an anticoagulant, is approved for reducing the risk of blood clots, and to reduce the risk of strokes in certain cases. The company will miss out on a chance for great revenue, given that acute coronary syndrome is the leading cause of death in the United States.

Johnson & Johnson is a difficult company to analyze from a potential investors standpoint. The company has had great success throughout its history, with good revenue and very steady stock presence. However, recent headlines Johnson & Johnson has made lead me to believe the company may be running into a bit of trouble.

The closer Johnson & Johnson gets to the $70 mark, the more I worry about it being overpriced. Its earnings per share is still solid, and there are certainly some who think it will continue to go up. Analysts have a median price target of $75 for the company, but I don't see it getting there soon. Synthes will help, but the lawsuits will hold it back, and emptying $2 billion from its pockets will hurt. The company's market cap is over $180 billion, so the number is not as substantial as it looks. Still, with that short-term loss and Synthes breakthroughs still further down the line, I anticipate Johnson & Johnson will stay under the $70 mark and not excite too many investors. I say stay away for now, unless it can get out of court without much harm.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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