Valuation Concerns at J&J

Modest growth across the board led to the company’s largely flat operational growth of 1% year over year, excluding acquisition and divestitures. In the pharmaceutical group, price discounts, competitive pressures, and an unfavorable prior period adjustment weighed on sales. We expect increasing generic competition to lead to 3% average annual growth for the segment over the next three years. While we remain optimistic about cancer drugs Imbruvica and Darzalex, the increasing competition for the company’s leading drug Remicade from both branded and biosimilar drugs will create a tough headwind for growth. Additionally, while the Actelion drugs help boost top-line growth, we believe the deal came at too high of a price. Nevertheless, we expect the deal to close late in the second quarter, in line with management guidance. Outside of the drug group, the device and consumer divisions look poised to contribute similar long-term growth, resulting in overall company growth of close to 3% annually over the next three years. While the consumer group posted growth below this longer-term view in the quarter due partly to competitive pressures, we believe the brand power and entrenched products should return to a more normalized growth rate in the remainder of the year.

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