This document provides an analysis of Johnson & Johnson (JNJ) including an industry outlook, company overview, investment rationale, catalysts, risks, and valuation. Key points include:
- The healthcare industry is expected to grow annually by 3.7-6.5% driven by an aging population and increasing access to pharmaceuticals.
- JNJ has a diverse product portfolio and generates nearly half its revenue in the US. It has a large R&D pipeline and spends over $8 billion annually on R&D.
- JNJ maintains a strong financial position with consistent profitability, low debt levels, and growing free cash flow that could support acquisitions.
- Near-term catalysts include potential
3. INDUSTRY OVERVIEW
ValuationCatalysts & RisksInvestment RationaleCompany OverviewIndustry Overview
• 6.5% annual growth rate will occur within the next 5 years. The past 5
year growth rate was 3.5%.
• 22% of revenues generated in Anastasia and Respiratory, another 22% in
Irradiation Services
• JNJ having 7.1% market share of this specific sector
• US residents aged 65 and over will be the largest target market within the
sector, growing at an annualized rate of 3.6%
• R&D spending and increasing technology bolster growth
SOURCE: IBIS WORLD
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US MEDICAL DEVICES INDUSTRY OUTLOOK GLOBAL PHARMACEUTICAL OUTLOOK
• Pharmaceutical manufacturers will exhibit growth over the next five
years, driven by the growing middle class enabling more individuals to
afford pharmaceuticals.
• 3.7% forecasted annual growth rate
• larger players will likely pursue low-risk strategies, such as acquiring
small companies that have developed commercial-ready technologies.
ex. neurology and cardiology.
• the industry is primarily growing by cutting costs, developing strategies
for more efficient R&D methods and completing mergers and
acquisitions (M&As).
• 2012 and 2011 patent cliff have caused R&D expenditures to be
constrained in 2014 due to increasing number of competitors.
4. COMPANY OVERVIEW
BUSINESS OVERVIEW
DIVERSE PRODUCT PIPELINE
ValuationCatalysts & RisksInvestment RationaleCompany OverviewIndustry Overview
• J&J is the world's comprehensive manufacturer of health care
products, as well as a provider of related services, for the
consumer, pharmaceutical, and medical devices market.
together with its subsidiaries, researches and develops,
manufactures, and sells various products in the health care field
worldwide
MANAGEMENT TEAM
Alex Gorsky
(CEO)
Sandra Peterson
Group Worldwide
Chairman
Dominic Caruso
(CFO)
Former worldwide
chairman of medical
devices and diagnostic
group
Oversees JNJ supply chain,
Former CEO of Bayer
Medical Care
Former VP of Finance
at Centecor
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REVENUE BY GEOGRAPHIC SEGMENT
45%
26%
19%
10%
USA
Europe
Asia- Pacific
Other
Strong domestic
presence in the
United States/
Brand Recognition
Market Cap: $283B Last Trading Price: $102.52Beta: 0.57
5. INVESTMENT RATIONALE I
ValuationCatalysts & RisksInvestment RationaleCompany OverviewIndustry Overview
5
CONSISTENT CURRENT RATIO REDUCES RISK
2010 2011 2012 2013 2014 2015
Current Ratio 1.8x 2.1x 2.4x 1.9x 2.2x 2.4x
R² = 0.37136
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
CURRENT RATIO PAST 5 YEARS
• JNJ’s current ratio remains consistent throughout the past 5
years. This highlights its ability to pay down debt if needed to be
liquidated. Their ratios have held at a healthy mean of 2.1,
demonstrating the company’s financial health. This number is
not too high and also not too low.
• This gives JNJ minimal risk when considering further
pharmaceutical projects.
2010 2011 2012 2013 2014 2015
Total Debt/Equity 28.7% 29.6% 35.4% 24.9% 24.5% 26.9%
R² = 0.21869
0.0%
10.0%
20.0%
30.0%
40.0%
DEBT/EQUITY % PAST 5 YEARS
DEBT LEVELS LOW: POSITIONED FOR GROWTH
• Financing through equity is important as banks prefer not to
lend to high risk projects. Though JNJ’s size is large, its debt levels
remain at a low level with minimal movement in the past 5
years. This demonstrates professional long term solvency and
minimal risk moving forward.
SOURCE: CAPITAL IQ
6. INVESTMENT RATIONALE II
ValuationCatalysts & RisksInvestment RationaleCompany OverviewIndustry Overview
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CONSISTENT R&D GROWTH SIGNALS INNOVATION MANY PHASE 3 STAGED DRUGS SIGNAL REVENUE INCREASE
SOURCE: CAPITAL IQ
2010 2011 2012 2013 2014 2015
R & D Exp. 6,986. 6,844. 7,548. 7,665. 8,183. 8,494.
R² = 0.93055
0
2,000.0
4,000.0
6,000.0
8,000.0
10,000.0
R&D EXP.
• To produce pharmaceutical drugs and medical devices, R&D
growth is vital. JNJ has consistently increased their R&D
expenses historically. A five year growth rate of 20% has been
achieved.
• Roughly 11% of revenue is spent on R&D expenditure, this ratio
has also remained constant over the past 5 years. JNJ definitely
has room to increase their R&D even more rapidly in the coming
years
• There is roughly a 6% chance of a preclinical drug to reach phase
3 of the stage. With 39 preclinical drugs, one would expect only 2
phase 3 drugs to be reached. Currently 9 are present therefore
demonstrating JNJ’s ability to have a high success rate with
regards to FDA approval.
• There is a 64% chance of phase 3 drugs reaching the market,
therefore we can expect roughly 6 new drugs to generate
revenue in the coming few years.
7. INVESTMENT RATIONALE III
ValuationCatalysts & RisksInvestment RationaleCompany OverviewIndustry Overview
7
JNJ IS IN A POSITION FOR A LARGE ACQUISITION
SOURCE: CAPITAL IQ
• With the last large acquisition occurring on June 2012, JNJ is due
to acquire another company. The past acquisition was a 21
billion dollars purchase of Synthes Inc.
• JNJ has consistently increased their free cash flow within the past
5 years, which can be used to subsidize an acquisition. Also with
such a diverse product portfolio (493 to be exact), it isn’t
surprising that JNJ is eager to add another company to it.
2010 2011 2012 2013 2014 2015
Levered Free Cash Flow 10,985.1 11,723.0 8,971.1 12,383.1 11,909.4 15,453.5
R² = 0.4434
0
2,000.0
4,000.0
6,000.0
8,000.0
10,000.0
12,000.0
14,000.0
16,000.0
18,000.0
LEVERED FREE CASH FLOW
8. CATALYSTS
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SOURCE: SEEKING ALPHA
ABBVIE PURCHASING PHARMACYCLICS
• This 21 billion dollar deal allows synergies to occur within the
two companies.
• Imbruvica is a drug sold by Pharmacyclics and is used to treat
Leukemia. Johnson and Johnson is a partner with Pharmacyclics
with regards to this drug.
• Sales around 500 million with projected end of year sales of 1
billion dollars – 5 billion post acquisition statement.
• Though JNJ did not acquire Pharmacyclics as people claimed they
would this past week, they still benefit from this deal.
• Cordis, owned by JNJ makes cardiology and endovascular devices
• a divestiture would be in-line with management’s efforts to prioritize
its medical device business and focus on faster growth assets where
J&J has strong competitive positioning
CARDINAL HEALTH BUYS CORDIS FROM JNJ
9. RISKS
ValuationCatalysts & RisksInvestment RationaleCompany OverviewIndustry Overview
9
COMPETITIVE PRESSURES RAPID TECHNOLOGICAL CHANGES
UNCERTAIN R&D OUTCOMES
• The development of new products increase the competitive
environment for JNJ. Patents expiring for generic drugs allow
competition to enter the market and produce the same product,
forcing JNJ to compete on a basis of cost.
• Adverse or inconclusive results have the potential to delay the
development of a product in testing. Uncertainty is always a
common theme therefore any products in the pipeline are under
risk of default. Profitability is always in danger even with JNJ’s
high success rate.
• The medical device sector consistently requires technological
updates. With a large segment of JNJ’s revenue coming from
medical devices, there is a large amount of pressure to
continuously update the company’s technology. Profits may
weaken if new devices are not accepted in to the market as well
as the research says it will.
10. VALUATION
ValuationCatalysts & RisksInvestment RationaleCompany OverviewIndustry Overview
10
SOURCE: CAPITAL IQ
Company Name Market Capitalization Latest TEV/EBITDA LTM - Latest NTM TEV/Forward EBITDA (Capital
IQ)
LTM Total Revenues, 1 Yr Growth % FQ Total Debt/Equity % FQ Current Ratio
Bristol-Myers Squibb Company (NYSE:BMY) 109,782.9 27.4x 28.74x (3.09%) 52.3% 1.73x
Pfizer Inc. (NYSE:PFE) 211,261.6 10.1x 10.79x (3.84%) 51.2% 2.67x
Merck & Co. Inc. (NYSE:MRK) 164,558.4 11.2x 10.06x (4.08%) 43.9% 1.77x
Sanofi (ENXTPA:SAN) 127,755.3 11.5x 11.07x 2.41% 26.3% 1.80x
Roche Holding AG (SWX:ROG) 224,170.2 12.2x 12.09x 2.58% 119.4% 1.35x
Johnson & Johnson (NYSE:JNJ) 285,055.7 10.8x 10.99x 4.23% 26.9% 2.36x
Summary Statistics
Market Capitalization Latest TEV/EBITDA LTM - Latest
NTM TEV/Forward EBITDA (Capital
IQ)
LTM Total Revenues, 1 Yr Growth % FQ Total Debt/Equity % FQ Current Ratio
High 224,170.2 27.4x 28.74x 2.58% 119.4% 2.67x
Low 109,782.9 10.1x 10.06x (4.08%) 26.3% 1.35x
Mean 167,505.7 14.5x 14.55x (1.20%) 58.6% 1.86x
Median 164,558.4 11.5x 11.07x (3.09%) 51.2% 1.77x
COMPANY COMPARABLES VALUATION