J&J’s Well-Positioned Broad Portfolio Sets Up a Steady Long-Term Growth Outlook

Business Strategy & Outlook

Johnson & Johnson stands alone as a leader across the major healthcare industries. The company maintains a diverse revenue base, a developing research pipeline, and exceptional cash flow generation that together create a wide economic moat. J&J holds a leadership role in diverse healthcare segments, including medical devices, consumer healthcare products, and several pharmaceutical markets. Contributing close to 50% of total revenue, the pharmaceutical division boasts several industry-leading drugs, including immunology drugs Remicade, Stelara and Tremfya as well as cancer drugs Darzalex and Imbruvica. The medical device group brings in almost one third of sales, with the company holding controlling positions in many areas, including orthopaedics and Ethicon Endo-Surgery’s surgical devices. The consumer division largely rounds out the remaining business lines, but the firm is planning to divest its consumer healthcare group in early 2023, which will leave the remaining company more focused on drugs and devices.

Research and development efforts are resulting in next-generation products. The pharmaceutical segment has recently launched several new blockbusters. However, relative to the company’s size, J&J needs to increase the number of meaningful drugs in late-stage development to support long-term growth. The company has also created new medical devices, including innovative contact lenses, minimally invasive surgical tools and robotic instruments. These multiple businesses generate substantial cash flow. J&J’s healthy free cash flow (operating cash flow fewer capital expenditures) is over 20% of sales. Strong cash generation has enabled the firm to increase its dividend for over the past half century, and this to continue. It also allows J&J to take advantage of acquisition opportunities that will augment growth. Diverse operating segments coupled with expected new products insulate the company more from patent losses relative to other Big Pharma firms. Further, in contrast to most of its peers, J&J faces the majority of its near-term patent losses on hard-to-make complex drugs, which should likely slow generic drug competition.

Financial Strengths

Johnson & Johnson holds one of the strongest financial positions in the healthcare sector with projected debt/ EBITDA of close to 0.9 for 2022. The acquisitions of Actelion and Momenta did put a dent in the company’s cash balance, but with annual free cash flow of close to $25 billion, J&J is in sound financial shape. Even with expected further bolt-on acquisitions and share repurchases, the company should remain on solid financial footing. From an operating standpoint, patent losses are mitigated by several diverse operating lines in medical devices and consumer products so cash flows should remain relatively stable. Additionally, the share repurchases over the next several years will drawdown the share count.

Bulls Say

The majority of J&J’s near-term patent losses are for products that are hard to manufacture, which should limit the intensity of generic competition.
Diverse healthcare segments help insulate J&J from downturns in the economy, offering a defensive growth opportunity with a steady and likely growing dividend.
Several of J&J’s key drugs and pipeline drugs are specialty drugs that tend to carry strong pricing power as well as lower regulatory hurdles for approval.

Company Description

Johnson & Johnson is the world’s largest and most diverse healthcare firm. Three divisions make up the firm: pharmaceutical, medical devices and diagnostics, and consumer. The drug and device groups represent close to 80% of sales and drive the majority of cash flows for the firm. The drug division focuses on the following therapeutic areas: immunology, oncology, neurology, pulmonary, cardiology, and metabolic diseases. The device segment focuses on orthopaedics, surgery tools, vision care, and a few smaller areas. The last segment of consumer focuses on baby care, beauty, oral care, over-the-counter drugs, and women’s health. Geographically, just over half of total revenue is generated in the United States.

(Source: Morningstar)

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