If you’re looking for the market’s most reliable healthcare picks, it’s hard to start anywhere else than with Johnson & Johnson (JNJ) stock.
What’s not to like? Johnson & Johnson has a leading presence across pharmaceuticals, medical devices, and consumer healthcare. JNJ boasts one of the sector’s best-selling drugs, immunology superstar Remicade, which sold nearly $7 billion over the past 12 months and still notched greater than 7% sales growth in the U.S. The dividend on JNJ stock has been hiked for 53 consecutive years.
And if that’s not enough, Johnson & Johnson shares have outperformed Big Pharma’s best both over the past year and through the early, topsy-turvy goings of 2016.
But is JNJ stock still the portfolio foundation it has always been?
The Basics Behind Johnson & Johnson
If anything has slowed JNJ stock over the past few years, it has been the strong dollar. In its most recently reported quarter, Johnson & Johnson noted double-digit percentage year-over-year drops in its international consumer health and medical device revenues and almost a 10% decline in international pharmaceutical revenues, despite respectable operational performance when currency impacts are removed.
Indeed, J&J’s consumer health segment reported double-digit YOY operating sales growth in a number of top emerging markets in its most recent quarter. With the company’s U.S. consumer health sales showing sluggish growth over the past 12 months and responsible for less than 40% of the division’s revenue, however, international growth is key for J&J here — currency issues or not. Developing standards of public health in emerging markets like India and Brazil should only help international consumer health sales in the long run.
That’s a solid foundation to stand on for Johnson & Johnson stock’s renowned dividend. With a yield of 2.9%, JNJ stock compares well against many of Big Pharma’s standout dividends. Plus, J&J manages a dividend payout ratio of 55% — a healthy and sustainable number. Add on that 53-year record of consecutive raises, and dividend investors have a stock to celebrate.
Johnson & Johnson’s core long-term foundation is solid. All that positivity matters a lot less, however, if the company’s faster-growing divisions fail to deliver in the coming years.
Drugs, Risks and Potential for JNJ Stock
Let’s start with Johnson & Johnson’s medical device branch.
While flying somewhat under the radar as compared to the company’s drug division, medical devices have chugged along as a powerful engine behind JNJ stock. Despite falling sales over the past 12 months even without currency issues included, medical devices still accounted for more than 35% of total 2015 sales.
The medical device industry as a whole isn’t known for dramatic growth like in pharmaceuticals, and Johnson & Johnson provides that stability in spades with a diverse portfolio of products here. The company has offerings in cardiovascular, diagnostic, orthopedic, and surgical devices among others, spreading out the risk of any one industry taking a big hit. That’s exactly what has happened to cardiac devices over the past few years with shaky pacemaker and defibrillator sales at a number of leading device providers.
J&J has seen its own woes from cardiac devices, with a sales drop off of more than 16% YOY there in its most recent quarter. However, the company has done a good job pivoting towards higher-growth areas such as its orthopedic and surgical device divisions, each of which saw positive YOY sales growth in 2015 and combined now make up nearly three-quarters of the company’s overall medical device revenue.
Nonetheless, despite the device sector’s strong contributions to the company’s revenue, this isn’t a high-growth area that will make or break JNJ stock in the near-term.
For that, it’s up to a few valuable drugs — including the biggest star of all, Remicade, which is staring down a fast-closing patent expiration.
Remicade has long been one of Big Pharma’s biggest blockbuster drugs. The immunology standout, approved to treat everything from rheumatoid arthritis to Crohn’s Disease, provided for more than 9% of the company’s overall sales alone over the most recently reported 12 months. Thus, the risk behind an important patent for Remicade often referred to as the ‘471 patent, which extends the drug’s exclusivity to late 2018, has become potentially the biggest threat to Johnson & Johnson’s stock.
Investors thus wept when the U.S. Patent and Trade Office ruled against the ‘471 patent last February. J&J’s since appealed the ruling, but generic copies of the blockbuster drug have already begun rearing their heads. Biosimilars cropped up in Europe last year, and South Korean pharmaceutical maker Celltrion won the recommendation of an FDA committee for its own Remicade biosimilar, CT-P13, earlier this month.
While generic copies of the drug likely would take some time to chip away at Remicade’s U.S. sales after the drug’s patent expiration, it’s still a top issue for investors to watch out for – and the biggest danger to J&J’s stock performance in the coming few years.
Fortunately, Johnson & Johnson is making moves to add to its powerful pharmaceutical arsenal. As of late January, the company boasted more than 35 drug indications in phase 3 clinical trials or filed with the FDA for approval. The star of that pipeline could be Darzalex, the multiple myeloma-fighting drug that won its first FDA approval last year. Jeffries analysts pegged potential Darzalex peak sales at up to $5 billion annually, which would provide a huge boost of growth for J&J’s stock.
Add that to the potential behind Imbruvica, the cancer drug that J&J and fellow Big Pharma AbbVie (ABBV) have progressed. AbbVie’s touted that the drug could earn the company up to $7 billion in annual sales, and it believes so strongly in Imbruvica that it spent $21 billion buying original drugmaker Pharmacyclics last year. That’s a ringing endorsement, and J&J will reap half of Imbruvica’s sales.
Then there’s the up-and-coming blockbusters already in the company’s portfolio. Recent billion-dollar annual sellers Invokana and Xarelto posted standout growth over the past 12 months and looked poised to keep going, leading a steady group of surging blockbusters that are fueling Johnson & Johnson’s future.
Like any stock, JNJ is not free from risks. Remicade’s patent expiration and the arrival of biosimilars could take a bite out of drug dollars in the coming future, and the sluggishness of the cardiac device industry and the hammer blow of the strong dollar on international sales have certainly dampened performance.
However, with potential oozing out of a few up-and-coming drugs, Johnson & Johnson’s leadership across multiple healthcare industries, and the steady-as-a-rock dividend, JNJ is one stock that’s sure to spruce up any under-the-weather portfolio.
As of this writing, Dan Carroll did not hold a position in any of the aforementioned securities.
