At minimum, current shareholders should hold Johnson & Johnson (JNJ) until the next earnings release; interested investors should initiate a position this month. This is currently the most popular candidate for a short in the big pharma sector; this stock could be very effective for a short squeeze as October and third quarter comes to a close. Johnson & Johnson's currently facing headwinds as it discontinued clinical trials for its Alzheimer's product and continues to enter settlements across the US due to claims that it promoted Risperdal for non-approved uses. But, Johnson & Johnson is having successful clinical trials for its diabetes drug, investing in four global innovation centers, and bolstering its rheumatoid arthritis franchise.
Pfizer (PFE), Novartis (NVS), Merck (MRK) and Abbott Laboratories (ABT) are the major pharmaceuticals that are most comparable to Johnson & Johnson. Pfizer and Johnson & Johnson's price is around 22 times earnings; Merck is closer to 21 times earnings while Abbott's price is closer to 23 times earnings. Each of these pharmas' price-to-sales ratios are around 2.9. Johnson & Johnson's EPS is $3.14; Novartis's $3.54 EPS is the highest among these pharmas. Johnson & Johnson's 27.1% EPS decline and 4% sales growth over the past 5 years is the worst among these pharmas.
Johnson & Johnson's 6% float short and 15.1 short ratio are the highest among these pharmas. Its average volume is around 10.9 million trades, and only Abbott has a lower beta score. Johnson & Johnson's 0.29 debt-to-equity ratio is the lowest among these firms. Its ROE is 14.2%, its operating margin is 17.7% and its profit margin is 13.4%. Its annualized dividend is around $2.44. Johnson & Johnson's shares are up around 2.6% since its last earnings release. Its 8.8% increase YTD and 2.3% stock increase in the past month are the lowest among these pharmas.
In its most recent earnings release, Johnson & Johnson's second quarter sales totaled $16.47 billion, decreasing 0.7%, YOY. Pharmaceutical sales totaled $6.29 billion, increasing 0.9%, YOY; Medical Devices & Diagnostics sales totaled $6.56 billion, decreasing 0.1%, YOY. Cost of products sold totaled $5.14 billion, accounting for 31.2% of total sales. Net earnings decreased by around 50%, YOY to $1.4 billion, accounting for 8.5% of total sales. Cash and cash equivalents at the end of first half 2012 totaled $14.04 billion, decreasing from $14.97 billion, YOY. Long-term debt decreased to $11.52 billion from $12.96 billion, YOY.
US sales totaled $7.36 billion, decreasing 1.2%, YOY; international sales totaled $9.11 billion, decreasing 0.4%, YOY. Europe sales totaled $4.16 billion, decreasing 8.3%, YOY. Western Hemisphere sales excluding the US totaled $1.72 billion, increasing 12%, YOY. Asia-Pacific and Africa sales totaled $3.22 billion, increasing 5.2%, YOY. Currency fluctuations had a 4.2% negative impact during the second quarter. Europe had operational growth of 1.6%, Asia-Pacific and Africa's operational growth was 7.7% and Western Hemisphere's operational growth, excluding the US, was 22.4%. Segments' operating profit totaled $2.65 billion, decreasing 24.9%, YOY; Medical Devices & Diagnostics profits totaled $1.87 billion, increasing 47.1%, YOY.
Within the Pharmaceuticals segment, total immunology sales were $1.91 billion, operations growth was 18.2%; Remicade sales totaled $1.52 billion, operations growth was 12.7%, YOY. Total neuroscience sales were $1.71 billion, this balanced franchise was relatively flat, YOY. Total oncology sales were $586 million, operations growth increased 14.1%, YOY; Doxil operations deficit totaled 89.7%, YOY while Zytiga sales totaled $232, increasing over 200%, YOY. Within Medical Devices & Diagnostics, general surgery sales totaled $1.64 billion, operations growth was 0.9%, YOY; orthopedics sales totaled $1.62 billion, operations growth increased 14%, YOY. The sales growth in this segment was primarily due to the Synthes, Inc. acquisition.
Johnson & Johnson's pharmaceutical and medical device segments are the primary catalysts for long-term growth and increasing revenues. The Synthes acquisition has given Johnson & Johnson one of the most expansive orthopedic portfolios worldwide. The acquisition also increases Johnson & Johnson's exposure in emerging markets like China, Russia, and India. Management expects spine market growth to increase 5% while trauma and knee markets are expected to increase 7%. Analysts expect Johnson & Johnson orthopedic revenues to increase by around 5%, retaining around 11% market share. Zytiga is currently awaiting FDA approval for additional applications; this could significantly increase oncology sales within the next year if Johnson & Johnson is successful. Remicade exclusivity expires in 2014; Johnson & Johnson will seek approval for 11 new products and more than 30 line extensions by 2015.
Johnson & Johnson recently filed with the FDA and EMA for a short-term solution to its Doxil shortage. Ben Venue will still manufacture Doxil while an unnamed third party manges the sterilization. Production is expected to resume by the end of 2012, but there is still no clear deadline set by the FDA or EMA. Johnson & Johnson will need to find a new supplier beyond this short term fix; its long-term plan is still underway.
Johnson & Johnson recently discontinued phase iii trials for the Alzheimer drug, Bapineuzumab IV as it failed to meet the co-primary endpoints. Another problem for Johnson & Johnson is the Risperdal suits and settlements impending with the Fed and several US states. This is creating poor publicity and hampering earnings; Johnson & Johnson's already settled for $258 million in Louisiana, $1.2 billion in Arkansas, and $327 million in South Carolina, just to name a few. The settlement with the federal government could be more than $2 billion.
Johnson & Johnson's Jansen subsidiary recently entered into a licensing agreement with Astellas Pharma for a JAK inhibitor to treat moderate-to-severe rheumatoid arthritis. Johnson & Johnson also partnered with GlaxoSmithKline to develop Sirukamab for rheumatoid arthritis; it's currently in phase iii trials. These two partnerships will help bolster's Johnson & Johnson rheumatoid arthritis franchise which currently consists of Remicade and Simponi. Johnson & Johnson recently provided data from late-stage phase ii trials to the FDA for canaglifiozin, a SGLT2 inhibitor to treat diabetes, but Eli Lilly (LLY) is developing empagliflozin, a similar SGLT2 inhibitor that will file for FDA approval in 2013. Merck already may have a strong hold in this sector as its diabetes franchise had strong growth throughout 2012.
Johnson & Johnson recently announced it will open four innovation centers in California, China, London, and Boston within six months in order to expedite innovation or collaborations with regional hubs and independent organizations. These are all promising prospects for the long-term but in the near to medium term, other major pharmas are more favorable candidates for capital appreciation and ROI. Johnson & Johnson's near term outlook is far too convoluted to make it the most appealing investment in the big pharma sector.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.