Drug Group Lifts J&J; Shares Still Overvalued

Driven largely by outperformance in its drug group,

While partly supported by reserve adjustments in the quarter, the drug group continues to lead the company, with 13% normalized growth supported by both mature and new drugs. However, we expect this growth to decelerate in 2017 as branded competition increases and generics launch on complex older drugs. On the branded side, new competing immunology drugs (Novartis’ Cosentyx, Eli Lilly’s Taltz, and Takeda’s Entyvio) are likely to take market share from Johnson & Johnson's largest drug segment of immunology drugs. Further, we expect biosimilar Remicade to cause close to 20% annual declines in J&J’s branded Remicade sales by 2018.

While older drugs face increased competition, new drugs are mitigating the pressures. In particular, recently launched cancer drugs Imbruvica and Darzalex are posting rapid growth supported by excellent clinical data. Further, we expect immunology drug guselkumab will help J&J maintain its leadership in immunology based on the drug’s superior efficacy profile to AbbVie’s Humira in psoriasis.

Further helping support the bottom line, cost-reduction programs in consumer and device divisions should lead to almost 500 basis points of margin expansion for the company. As the consumer group finally fixes its manufacturing issues, we expect strong leverage from this segment.

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