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J&J (JNJ) Stands Tall in 2016: Reasons for Outperformance

Zacks

Johnson & Johnson JNJ, the bellwether among healthcare companies, has a strong presence in the pharmaceutical, medical devices and consumer care markets across the world. This New Jersey-based company is well known for its baby-care products and brands like Tylenol in addition to drugs like Remicade and Concerta.

In a year which saw the pharma sector struggling with media and political focus on high prices of drugs, J&J’s share price is up 9.5% in the year-to-date period. This compares favorably with the 8.0% fall for the Zacks classified Large-Cap Pharma industry.

JOHNSON & JOHNS Price

JOHNSON & JOHNS Price | JOHNSON & JOHNS Quote


Let us analyse the reasons for the same.

Consistently Strong Results; Regular Guidance Increases: J&J has consistently delivered strong earnings results. It also came up with positive sales and earnings surprises in all the three quarters of 2016. Moreover, the company raised its full-year earnings expectations in these three quarters.

Pharma Division Well Poised: Johnson & Johnson has one of the most diverse revenue streams in the industry in the pharmaceutical division. The segment accounts for around 47% of its total revenues. The company boasts several multi-million dollar drugs covering a broad range of areas such as neuroscience; cardiovascular and metabolism; immunology; oncology and infectious diseases/vaccines. The segment continues to perform well despite challenges like generic competition for a few products, potential biosimilar competition and lower revenues from the hepatitis C virus (HCV)franchise.

However, Pfizer Inc’s PFE upcoming launch of biosimilar Remicade – Inflectra – creates some uncertainty regarding the segment’s sales prospects in 2017. In fact, this explains why J&J’s shares have declined 3.9% since elections compared to a 1% decline for the Large-Cap Pharma industry which gained significantly post elections. The company suffered the decline despite strong third-quarter results announced on Oct 18, wherein it beat on all fronts and raised the lower end of its earnings outlook for the year.

However, we believe that the U.S. Remicade biosimilar impact may be manageable. J&J should be able to retain share as the 15% discount offered by Pfizer may not really end up in huge patient switches especially with the products not being interchangeable.

New Products Driving Sales: New products like Imbruvica, Xarelto and Darzalex have been well received by the market. Zytiga and Imbruvica are notable among the company’s successful launches in the oncology portfolio. While strong patient uptake with new indications, approvals and demonstrated efficacy are driving sales of Imbruvica, Xarelto continues to gain market share and broader reimbursement. Darzalex is gradually gaining strong acceptance as a treatment for multiple myeloma.

The company is also working toward expanding the label of currently marketed products like Simponi, Stelara, Zytiga and Imbruvica which should further aid its top line.

Pipeline Matters: Johnson & Johnson, which has launched 12 new products since 2011, intends to seek approval for more than 10 new products between 2015 and 2019. The company said that each of these products have blockbuster potential. The company is targeting more than 40 line extensions of existing and new drugs as well. This should help it to lessen the impact of the genericization of key products in the pharma portfolio.

Key candidates in the company’s pipeline include esketamine (treatment-resistant depression), apalutamide (pre-metastatic prostate cancer), imetelstat (myelofibrosis and myelodysplastic syndrome), sirukumab (rheumatoid arthritis and major depressive disorder), guselkumab (psoriasis) and niraparib (prostate cancer) among others.

Conclusion

Like many of its peers like Eli Lilly and Company LLY and Merck & Co., Inc. MRK, J&J is facing generic competition and pricing pressure for some products in its pharmaceutical segment. J&J also had issues with its consumer segment manufacturing facilities.

Yet, we believe J&J’s diversified business model, deep pipeline, lack of cyclicality and strong financial position will continue to help the company navigate tough times. Meanwhile, J&J’s evolving product mix should drive growth in the face of biosimilar competition and market dynamics.

J&J carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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