This article was prepared by Jenny.T in collaboration with JR Research.

Investment thesis

Johnson & Johnson (JNJ) is a pharmaceutical company embroiled in long-term talc litigation worth more than $2 billion. In November 2021, the company announced that the Consumer Health segment would be spun off to provide more sustainable growth for the parent company. In addition, the new company will seek bankruptcy protection for the tens of thousands of lawsuits it currently faces.

JNJ also reported less than satisfactory performance for its COVID-19 vaccine, the demand for which lags massively behind competitors such as Pfizer (PFE) & BioNTech’s (BNTX) Comirnaty and Moderna’s (MRNA) Spikevax. Nonetheless, JNJ’s core performance has been exceptional over the past five years, with the company expected to report more than $100 billion in annual revenue by fiscal year 2023.

We discuss whether investors should add JNJ stock now.

JNJ’s strategic spin-off for its consumer healthcare segment

Spinoff from JNJ for its consumer healthcare segment. Source: Alpha Research

In November 2021, JNJ announced that it would split the business into two public companies, with the Consumer Health segment being spun off into a new company. He confirmed a story previously reported by CNBC in July 2021. The general consensus is that the fallout is a logical move, given the lawsuits facing the consumer health segment, worth more than $2 billion in talc-related settlements. Moreover, its overall performance has stagnated over the past ten years, accounting for 24% of revenue. to 14.6 billion dollars in 2010, declining just 16% to $14.1 billion in fiscal 2020. Analysts believe the spin-off will also allow JNJ to accelerate its growth in the pharmaceutical segment, which has doubled in the last ten years, growing from $22.4 billion in revenue in 2010 to $45.6 billion in 2020, at a CAGR of 7.37%.

In July 2021, CNBC reported that JNJ plans to discharge liability related to its ongoing talc-related litigation. In doing so, the newly created company would seek bankruptcy protection put an end to disputes among tens of thousands of lawsuits, previously worth over $4 billion. According to the CNBC article, the “Texas two-step bankruptcy maneuver” has often been used by other companies facing similar litigation, such as paper towel maker Brawny in 2017 and, recently, the maker of OxyContin Purdue Pharma. Purdue Pharma has filed for bankruptcy and agreed to settle its claims of more than $10 billion, a payment well below previous claims of trillions of dollars.

JNJ’s bankruptcy petitions will be heard again in February 2022, where all pending talc-related lawsuits will be temporarily suspended. If bankruptcy were approved by the judge, JNJ would pay more than $2 billion for the talc-related claims. While the company is financially able to pay these claims with its $17.6 billion cash and cash equivalents on its balance sheet in Q3’21, the strategic fallout and bankruptcy protection will help protect JNJ’s future liabilities throughout talc litigation. Moving forward, JNJ’s move is indeed a shrewd maneuver to better defend its future margins and growth in the pharma segment.

Its robust pipeline will increase JNJ’s future revenue

JNJ continues to grow with 76 programs in development. Of these, two new molecular entity (NME) products are in the registration phase, with nine NMEs to be filed before 2023. Among its pipeline, JNJ’s respiratory syncytial virus (RSV) vaccine has shown promise with an efficiency of 80% against Caused by RSV lower respiratory tract diseases in people aged 65 and over on. Additionally, it has also shown 70% efficacy for symptomatic acute respiratory infections caused by RSV. Despite ongoing global Phase 3 clinical trials, we expect JNJ’s RSV vaccine to be a resounding success upon future regulatory approval. The vaccine can be the first US FDA-approved vaccine for RSV, which is the main cause of respiratory diseases such as pneumonia. With a market size of $1.6 billion in 2020, the RSV market is expected to reach $4.2 billion by 2027, at a CAGR of 14.9%.

In addition, the company has multiple partnerships, such as:

Moving forward, guided by JNJ 14 new regulatory submissions by 2025, with sales peaking at $4 billion for each approved therapy. Depending on the timing of regulatory approval and patent expiration, JNJ’s strong pipeline can generate up to $56 billion in additional annual revenue. Additionally, JNJ is looking to further expand its vaccine portfolio with new technologies, such as adenovirus vector technology used in its COVID-19 vaccine, as well as mRNA technology used in PFE/BNTX’s Comirnaty vaccine. . As a result, it is evident that JNJ’s future growth in the pharmaceutical segment will be exceptional.

JNJ saw stellar revenue growth

Over the past five years, JNJ has experienced robust revenue growth at a CAGR of 4.93%. In fiscal 2020, the company reported revenue of $82.5 billion, representing a 0.6% year-over-year increase. During the third quarter of 2021, JNJ recorded revenue of $23.3 billion, representing an increase of 0.1% quarter-on-quarter and 10.7% year-on-year.

The growth is partly attributed to its COVID-19 vaccine, which is expected to account for $2.5 billion in sales in fiscal 2021. However, comparatively, JNJ’s COVID-19 vaccine sales had performed poorly against to those of Pfizer & BioNTech $36 billion community and Moderna Spikevax in the $15 billion to $18 billion range for fiscal 2021. Many vaccinated with a JNJ COVID-19 vaccine for the primary dose switched to other brands for their booster injection. As many as 43% switched to MRNA’s Spikevax while 31% preferred PFE’s Comirnaty, with only 26% adhering to JNJ’s vaccine as a booster. This is in stark contrast to 94% who stayed with MRNA and 96% with PFE for their booster shots. Most cited lower efficiency rates as the reason for the switch, while others were concerned about the rare blood clotting side effects. As a result, we don’t expect JNJ to report massive revenue from its COVID-19 vaccine from 2022.

For fiscal 2021, JNJ guided total revenue in the range of $92.8 billion to $93.3 billion, adjusting for the impact of currency. It represented a slight upward revision from the low of its revenue forecast for the prior fiscal year 2021 of $92.5 billion to $93.3 billion. Prior to the spin-off, JNJ is expected to report a deceleration in revenue growth to a CAGR of 2.76% over the next five years, with the company expected to reach $100 billion in revenue by fiscal year 2023. We we expect these numbers to revise as the company completes its spin-off within the next 18-24 months. Exiting the stagnant consumer healthcare segment will help drive future growth for the parent company. It is evident that despite the lackluster performance of its COVID-19 vaccine and ongoing talc-related litigation, consensus estimates agree that JNJ has a strong portfolio and a robust pipeline to deliver steady revenue growth to the market. ‘to come up.

So, is JNJ Stock a buy?

JNJ is currently trading at an EV/NTM turnover of 4.43x, in line with its 3-year average of 4.62x. Analysts also rate JNJ stock as fair value given its capacity and reasonable valuation. Although the company is a mature pharmaceutical company, it is still expected to achieve a decent revenue growth rate over the next five years as shown by its Income EV/Fwd. Additionally, we expect JNJ to report a higher accelerated growth rate once the Consumer Health segment is separated. Therefore, interested investors can take advantage of this opportunity to increase their exposure.

Consequently, we assess JNJ stock to buy.