Professional Documents
Culture Documents
Target $73
Upside 13%
Company Data
Stock Data
Region New Jersey
Initiate with a BUY; Potential 12%
Country USA
upside
Sector Healthcare
Industry Major Drugs We are initiating coverage on Johnson & Johnson with a BUY
Ticker JNJ rating as we expect revenue to grow across all segments. Also,
Stock Exchange NYSE the restructuring program initiated in 2007 is helping to cut costs
Reporting Currency USD significantly. We believe FY2009 should represent the bottom
M. Cap (mn/bn) $182bn
both in terms of the company’s top-line and the downward trend
Fiscal Year End December
in profitability. We see a potential 12% upside from current
Shares Outstanding (mn/bn) 2,760mn
Face Value of share $1.00
levels.
52 Week High $66.20
52 Week Low $50.12 Revenue growth to be propelled by
Share Price Data Medical devices and diagnostics
90 segment
The strong international order pipeline is expected to trigger the
70
growth in MD&D segment. The US sales for this segment will
50 remain relatively stable. The consumer care business sales are
also expected to remain stable with additional efforts going into
30 avoiding OTC products recall. International pharmaceutical sales
May-09 Aug-09 Nov-09 Feb-10
will pick up with the introduction of new drugs to offset the
JNJ US S&P500 rebased
drugs going out of patent.
Shareholder Information
Steady margins; cost control measures
5% 3%
3%
State Street Corp. pay off
2%
1%
Vanguard Group Operating margins are expected to remain steady at 23-24%.
Restructuring efforts are expected to result in $1.4-1.7bn of
BlackRock
Institutional Trust savings when the full program gets implemented in 2011.
FMR LLC
Pharmaceutical business is likely to be boosted by the newer products like Prezista, Delcade and Invega to offset
and overcome the expiry of Levaquin and Topamax. Also significant growth is expected in larger products such as
Remicade, Concerta and Risperdal Consta.
The medical devices and diagnostics segment is expected to benefit from windfall orders relating to the African
markets. Though the margins in this segment are going to be flat, we expect volume orders from emerging markets
as well as WHO, UNICEF to offset the effect. The segment is well set to grow in the BRIC markets at double the rate
of global MD&D market.
80% 30000
70%
Gross Profit 25000
60% Margin (%) Major Consumer
Franchise Sales
20000
50%
15000 Pharmaceuticals
40% Operating
Income
30% Margin (%) 10000
Medical Devices
& Diagnostics
20% 5000
Net Profit
10%
Margin (%) 0
0% 2007A 2009A 2011E 2013E
2007A 2009A 2011E 2013E
Strong drug and product pipeline
Robust pipeline of new medicines, devices and products is expected to be maintained through a mix of internal and
external sources. These newer products will be the drivers of sales as has been exhibited throughout the company’s
history. New products are expected to form 25% of net sales for Johnson & Johnson similar to its historical trend.
Continued investments in R&D are expected and we believe the recent acquisitions to be the new platforms of
growth. The company is believed to be in a better position than the rest of the industry moving forward when it
comes to patent expiration. The next expiry cycle, till 2014, will present an impact of only 4%, for Johnson &
Johnson, out of the $200bn at stake for the industry. The last five period patent expiry period ended in 2009 which
saw the company absorb $8.5bn or 10% of the industry impact.
9 20
8 18
Approved (2009) Approved (2009)
7 16
14
6
In Registration 12 Filed (2009)
5
10
4
8
3 Planned Filings Approved/Filed
(2010) 6 (2010)
2 4
1 Planned Filings 2 Planned Filings
(2011-2013) (2010)
0 0
Time Period Time Period
Litigations
The healthcare sector is prone to litigations and the effects of litigation are certainly arduous upon the
pharmaceutical industry. However, due to the externalities associated with mass litigation, a company has no
choice but to become more risk adverse when developing drugs for mass public consumption. Johnson & Johnson
is exposed to some product liability lawsuits that may negatively impact its top line as well as bottom line.
Favourable outcomes may add to the company’s income from other sources. Some of the product liability law suits
outstanding are with regards to Risperdal, Ortho Evra, Levaquin, Duragesic, Cypher and Remicade.
US Healthcare reform
While we don’t expect any impact in the forecast period out of the healthcare reforms, any such future trend may
affect the company’s the bottom line. The prediction by US FDA that the spending on healthcare is poised to grow
may either offset or deteriorate the company’s profitability.
Product pipeline
Our estimates are based on the assumption that the new products (drugs and devices) make it all the way through
clinical trials and are approved by the regulators. Depending on the drug’s stage of development, the probability of
success is greatly improved. But the failure to clear trials may affect our valuation.
Valuation
Using DCF method, we derived a TP of $72.3 which makes the company highly attractive. We have used a WaCC of
7.62% and a terminal growth rate of 2.5%.
(Dollars in Millions Except Per Share Figures) 2010E 2011E 2012E 2013E
EBIT 15394 15948 15289 15410
Tax Rate 35% 35% 35% 35%
EBIT(1-t) 10006 10366 9938 10016
Depreciation & Amortization 4288 4077 3778 3564
Funds from Operation 14294 14443 13715 13581
Change in Working Capital (953) (453) 769 (79)
Cash flow from Operation 13341 13990 14484 13502
Capital Expenditure (2874) (2971) (2659) (2680)
Free Cash flow from Operation 10467 11019 11825 10822
WACC 8% 8% 8% 8%
Period 1 2 3 4
PV factor 0.929 0.863 0.802 0.745
PV 9725 9513 9486 8067
PV of Cash Flows 36792
Terminal Value 216559
Discounted Terminal Value 161424
Terminal Growth Rate 2.5%
Value of Firm 198216
Cash and Cash Equivalents 15810
Value of Debt 14541
Implied Value of Equity 199485
No. Of Shares 2760 Sensitivity Analysis
WACC 7.62% WaCC
Cost of Equity 8% g 6% 7% 8% 9%
Cost of Debt (Pre-Tax) 3% 1% 77.0 64.3 55.3 48.5
Cost of Debt (Post Tax) 2% 2% 93.5 75.0 62.7 53.9
Growth
Rates
0 Abbott 0 Abbott
Laboratories Laboratories
Revenue Net Profit
0% 0%
Johnson &
Novartis
Johnson &
Pfizer
Laboratories
AstraZeneca
Roche
Novartis
Merck
Merck
Johnson
Johnson
Abbott
Though the outcome of R&D is always uncertain, novel products drive the bottom line of the company by giving a
first mover advantage or scope to charge premium. Newer drugs, historically, have been high margin generators.
The challenge of generics loom large as and when patents expire and can substantially erode the revenue of
companies which is why R&D as an on-going activity assumes monumental importance in this industry.
Company Overview
Johnson & Johnson engages in the research and development, manufacture, and sale of various products in the
health care field worldwide through its more than 250 companies located in 57 countries around the world. These
companies are organized into several business segments comprising of franchises and therapeutic categories.
Company Structure
Advanced Sterlization
Baby Care Products
Central Nervous
System & Internal
Animas Corp.
Medicine
Skin & Hair Care
Cordis Corp.
Biotechnology,
Oral Health Care Immunology & Ethicon Inc.
Oncology
Vision Care
Women’s Health
LifeScan Inc.
Over-The-Counter
Medicines Ortho-Clinical
Virology Diagnostics
Nutritionals
Virco BVBA
Consumer Care: The Consumer segment provides products used in baby care, skin care, oral care, wound care, and
women’s health care fields, as well as nutritional, over-the-counter pharmaceutical products, and wellness and
prevention platforms.
Pharmaceuticals: Pharmaceutical segment, representing the world’s seventh largest pharmaceutical business,
offers products in various therapeutic areas, such as anti-infective, antipsychotic, cardiovascular, contraceptive,
dermatology, gastrointestinal, immunology, neurology, oncology, urology, and virology.
Medical Devices & Diagnostics: The Medical Devices and Diagnostics segment primarily offers circulatory disease
management products; orthopaedic joint reconstruction, spinal care, and sports medicine products; surgical care,
aesthetics, and women’s health products; blood glucose monitoring and insulin delivery products; professional
diagnostic products; and disposable contact lenses.
Total Sales by Segment (2009) Medical Devices & Diagnostics
DePuy
M edi c al D ev i c es
11%
& D i agno s t i c s Diabetes Care
P har m ac eut i c al s
24% Ethicon
36% C o ns um er C ar e 11%
Johnson & Johnson’s business model is primarily driven by its ability to innovate. With a global presence in more
than 57 countries, the company has broadened its business both organically as well as through key acquisitions. Its
acquisition strategy has been modeled to complement its in-house research and development. Healthcare segment
is driven by its on-going R&D activities to roll-over patent expiries by introducing new drugs. Johnson & Johnson
has been successful in maintaining a healthy product pipeline to drive its growth.
Financial Statements
Income Statement
Selling, marketing and administrative expenses 21490 19801 21196 21774 22600
Restructuring 0 1073 0 0 0
Interest expense, net of portion capitalized 435 451 298 410 395
Earnings before provision for taxes on income 16929 15755 15582 16187 15708
Basic net earnings per share 4.62 4.45 4.29 4.46 4.33
Diluted net earnings per share 4.57 4.40 4.25 4.41 4.28
Decrease in accounts payable and accrued liabilities -272 -507 618 317 -466
Net Cash Flow From Operating Activities 14972 16571 15177 15926 16484
Additions to property, plant and equipment -3066 -2365 -2874 -2971 -2659
Net Cash Used By Investing Activities -4187 -7598 -2874 -2971 -2659
Proceeds from the exercise of stock options/excess tax benefits 1486 882 0 0 0
Net cash used by financing activities -7464 -4092 -6781 -6164 -7209
Effect of exchange rate changes on cash and cash equivalents -323 161 0 0 0
Increase in cash and cash equivalents 2998 5042 4322 7017 6616
Cash and cash equivalents, beginning of year 7770 10768 15810 20132 27149
Cash and cash equivalents, end of year 10768 15810 20132 27149 33765
Balance Sheet
ASSETS
Current assets
Accounts receivable trade, less allowances for doubtful accounts 9719 9646 10686 11161 10359
Prepaid expenses and other receivables 3367 2497 2497 2497 2497
Property, plant and equipment, net 14365 14759 13346 12240 11122
Current liabilities
Accrued rebates, returns and promotions 2237 2028 2028 2028 2028
Accrued salaries, wages and commissions 1432 1606 1606 1606 1606
Shareholders' equity
Common stock - par value $1.00 per share (authorized 4,320,000,000 shares; issued
3,119,842,000 shares) 3120 3120 3120 3120 3120
Less: common stock held in treasury, at cost 19033 19780 20880 20880 20880
10584 11010
Total liabilities and shareholders' equity 84912 94682 99161 2 6