VALUATION HIGHLIGHTS

1. Pharmaceuticals constitute 74% of the Trefis price estimate for Johnson & Johnson's stock.
2. Medical Devices constitute 26% of the Trefis price estimate for Johnson & Johnson's stock.

WHAT HAS CHANGED?

1. JNJ Stock Performance In Recent Years
   • The changes in JNJ stock over the recent years have been far from consistent.
   • Returns for the stock were 11% in 2021, 6% in 2022, -9% in 2023, and -5% in 2024.
   • In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, 24% in 2023, and 23% in 2024 - indicating that JNJ underperformed the S&P in 2021, 2023 and 2024.

2. Q4 2024 Performance
   • Johnson & Johnson reported a 5.3% top-line expansion in Q4 2024, with both segments — Innovative Medicine and MedTech – seeing growth. Adjusted EPS fell by 10.9% y-o-y to $2.04 during the quarter, primarily due to the impact of acquired IPR&D. The company expects its full-year 2025 sales to rise between 2.5% and 3.5%, and the adjusted EPS is estimated to be in the range of $10.75 and $10.95.

3. Shockwave Acquisition
   • Johnson & Johnson in May 2024 completed its acquisition of Shockwave Medical for $13 billion. Shockwave will help J&J extend its offerings in the cardiovascular intervention market.
   • This acquisition will expand sales growth for J&J’s MedTech segment, which has seen its sales rise at an average annual rate of 9% between 2020 and 2024.

4. J&J Has Spun-off Its Consumer Healthcare Business
   • J&J, in late 2021, announced its plans to spin off its Consumer Health business into a separately listed company. The Consumer Healthcare business garnered $15 billion in 2022 sales, while the rest of J&J's revenues were $80 billion ($53 billion in Pharmaceuticals and $27 billion in Medical Devices sales). Our dashboard on Johnson & Johnson Revenues offers more details on the company's segments.

   • Johnson & Johnson's decision to spin off its Consumer Healthcare business aligns with a trend seen in the pharmaceutical industry, where giants like Pfizer and Merck have also divested less profitable units in recent years. This strategic move by J&J, which resulted in the creation of Kenvue as an independent entity, appears to be a positive step for the company's future.
   • For some time, J&J's overall earnings had been moderated by the performance of its Consumer Healthcare segment. This division, despite generating substantial sales (hovering between $13 billion and $15 billion for much of the previous decade), had not delivered significant operating profit growth.
   • Despite various efforts to invigorate the Consumer Healthcare business, including the acquisition of Dr. CI. LABO in 2019 and portfolio optimization in 2022, its profit margins remained considerably lower than those of J&J's other segments. Between 2018 and 2022, the Consumer Healthcare business averaged an 11% operating margin, in contrast to the 30% margin of Pharmaceuticals and 18% of Medical Devices.
   • Now, with Kenvue operating independently under its own management, the remaining Johnson & Johnson can concentrate its resources and efforts on its more profitable Pharmaceuticals and Medical Devices segments. This strategic separation is widely viewed as a beneficial move for J&J, with the potential to unlock greater value for its shareholders by allowing a sharper focus on higher-margin businesses.

5. Impact of Coronavirus On Johnson & Johnson
   • The 2020 coronavirus crisis impacted J&J on two fronts, 1. impact from hospitals deferring non-emergency and non-Covid cases, resulting in a lower number of prescriptions issued, and 2. on direct sales of Medical Devices due to the postponement of elective surgeries.

6. Loss of Patent Exclusivity
   • Over the past few years, several key drugs in J&J's portfolio have faced the expiration of their patent protection, leading to increased competition from generic and biosimilar products.
   • While older examples include Levaquin, Concerta, Invega, and Aciphex, more recently, J&J has seen patent exclusivity expire on other significant medications.
   • Notably, Remicade (infliximab), a former blockbuster drug that generated peak revenues of around $7 billion in 2016, has experienced a substantial decline in sales due to biosimilar competition.
   • Pfizer's Inflectra was an early entrant, and several other biosimilars have since been launched, contributing to Remicade's revenue decreasing to $1.6 billion in 2024.
   • Looking at more recent patent losses, Stelara (ustekinumab), a major immunology drug for J&J, began facing biosimilar competition in the United States in 2024.
   • This loss of exclusivity is expected to have a significant impact on Stelara's future sales, similar to what was observed with Remicade.
   • While the full impact is still unfolding in 2025, it is anticipated to be a major factor weighing on J&J's immunology drug sales growth.
   • The loss of patent exclusivity is a natural part of the pharmaceutical lifecycle and often leads to a decrease in revenue for the original drug as more affordable alternatives become available.
   • Companies like J&J continuously focus on research and development to bring new innovative drugs to market to offset the revenue impact from patent expirations.

7. Oncology Drugs Driving The Growth
   • Over the past few years, Johnson & Johnson has significantly strengthened its position in the pharmaceutical sector. While historically recognized for its medical devices, the company has increasingly shifted its focus towards its pharmaceutical business.
   • Within this division, Oncology has been the primary engine of growth in recent times, a trend that is expected to persist. A standout product in this area is Darzalex, which alone achieved an impressive $12 billion in sales in 2024, demonstrating the strength of J&J's oncology franchise.

8. Late-Stage Pipeline
   • Johnson & Johnson possesses a promising pharmaceutical pipeline poised to be a significant driver of revenue growth over the coming 3-5 years. Among the leading candidates in Phase 3 development are notable oncology assets like Amivantamab, and neuroscience compounds such as Aticaprant and Seltorexant.
   • Our estimates suggest that these late-stage pipeline drugs hold a combined peak sales potential exceeding $20 billion. While J&J's pharmaceutical division has experienced substantial growth in recent years, this momentum has begun to moderate, partly due to the impact of patent expirations. Consequently, the company is strategically focused on the successful development and launch of these late-stage pipeline assets to fuel future expansion.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key factors that present opportunities for upside or downside to the current Trefis price estimate for J&J:

Pharmaceuticals Business Margin Expansion

• J&J's Pharmaceuticals Profit Margin: Johnson & Johnson's pharmaceuticals profit margin saw a slight decrease from 34.5% in 2021 to 33.2% in 2024. Looking ahead to 2031, we anticipate an improvement in profitability, projecting margins to exceed 37%, driven by the introduction of new drugs. However, our analysis indicates that pressure on drug pricing, potentially causing margins to fall below 30%, could lead to a 15% reduction in our price estimate for JNJ. Conversely, if the company achieves stronger pricing power and expands margins to 43% by the end of our forecast period, it could result in a 10% increase to our JNJ price estimate.

Medical Devices Profit Margin Growth

• J&J's MedTech Profit Margin Johnson & Johnson's MedTech profit margin has seen a decrease from 16.2% in 2021 to 11.7% in 2024. However, we project a recovery in profitability, anticipating margins to reach 18% by the end of our review period in 2031. Our analysis suggests that if rising competition and pricing pressure prevent this rebound, and margins fall to around 10%, it could lead to a 10% downside in our price estimate for JNJ. Conversely, if the company's innovation allows for improved pricing, causing margins to surge to 28% by 2031, we could see a 10% upside to our JNJ price estimate.

BUSINESS SUMMARY

Founded in 1886, Johnson & Johnson (NYSE: JNJ) is an American multinational corporation focused on pharmaceuticals and medical devices. While historically also a manufacturer of consumer packaged goods, this division was spun off into a separate entity, Kenvue, in 2023.

Today, J&J and its numerous subsidiaries are dedicated to the research, development, manufacturing, and sale of a wide array of healthcare products globally. As a leading indicator in the healthcare sector, J&J's stock performance typically mirrors the overall health of the healthcare products market.

Furthermore, its shares are often viewed as a defensive investment, attracting investors seeking stability during periods of economic or market volatility due to the less cyclical nature of its earnings.

SOURCES OF VALUE

We believe that both pharmaceuticals and medical devices businesses are important to J&J's value.

Pharmaceuticals Business Has Grown Significantly In The Past Few Years

In 2024, Johnson & Johnson's pharmaceutical business was the primary revenue generator, accounting for 64% of the company's total. This segment's contribution to overall revenue has grown in recent years, fueled by strong performance in its immunology, anti-infective, and oncology drug portfolios. Furthermore, the pharmaceutical division is even more significant in terms of profitability, contributing a substantial 76% to J&J's overall EBITDA.

Strong Market Position In Medical Devices Industry

Johnson & Johnson maintains a dominant market share in numerous segments within the medical devices industry. This strong position is underpinned by its wide-ranging product portfolio, well-established brand reputation, consistent investment in research and development, and effective sales and marketing strategies. In 2024, the medical devices business contributed approximately 36% to J&J's overall revenues and 24% to its total EBITDA.

KEY TRENDS

Pharmaceutical Business Becoming Increasingly Important

Over the past decade, Johnson & Johnson has made remarkable advancements in its pharmaceutical division, transitioning from a company primarily recognized for medical devices towards a greater emphasis on its pharmaceutical business.

This segment has experienced significant growth lately, largely fueled by the success of drugs like Darzalex and Stelara. Looking ahead, while facing near-term headwinds such as biosimilar competition for Stelara and pricing pressures on cardiovascular drugs, J&J anticipates that much of its future growth will be driven by its oncology portfolio.

Furthermore, the company's robust pharmaceutical pipeline is expected to make a substantial contribution to its overall performance within the next five years.

Globalization of Healthcare Reforms

Governments around the world are trying to rein in fiscal spending in order to manage their budget deficits. Since healthcare costs are one of the biggest components of any national budget, increased healthcare legislation and reforms around the world will hurt revenues for the entire pharmaceutical sector.