Analyzing Johnson & Johnson (JNJ)

By Yaser Anwar, CSC of Equity Investment Ideas

• JNJ will announce its 4th Q sales and earnings results on Tuesday, January 23. The Street projects an in-line Q, with sales of $13.6 billion, up 8%, in line with the consensus estimate for the Q.

• One of the reasons I like JNJ is the cash flow it generates. J&J cash flow generation is more than $6 bn generated annually. Furthermore, cash on hand remains solid with an estimated $13 bn by the end of 07. I see room for J&J to continue to repurchase stock or make additional strategic acquisitions.
• The Street is encouraged by the JNJ’s mid- to late-stage pharma pipeline, now with the success of three new product approvals in 06 and with a number of upcoming product filings remaining on track for 2007.
• One of the main catalysts I see for JNJ is the launch of Invega. J&J intends to pursue a targeted approach in launching Invega, beginning with patients who may not be as compliant with their current treatment regimens or who may be dissatisfied with their current course of therapy due to side effects.
• Management believes that the drug will be an improvement upon its currently marketed injectable, Risperdal Consta, which today represents approximately 20% of the Risperdal franchise and is growing rapidly.
• Management highlighted the reduced dosing frequency (1ce a month for Invega vs 1ce every 2 weeks for Consta) and the lack of the need for product refrigeration, as particular advantages. The JNJ expects that it will file for US approval of the Invega injectable formulation sometime in 07.
  

  JNJ’s acquisitions– According to S&P, In June 06, the company agreed to purchase Pfizer’s consumer products unit for $16.6 billion in cash, subject to approvals. In our opinion, the deal fully values the operations at 4.3X 2005 sales, but we see revenue and cost synergies that could drive modest cash EPS accretion by 2008.

  In November, JNJ agreed to buy Conor Medsystems for $1.4 billion in cash, subject to approvals, in a deal that we believe would greatly improve JNJ’s competitive standing in interventional cardiology.

• Also, investors should keep in mind the catalyst of big cap pharma in 07 possibly is Democrats arguing for improved patient access to affordable pharmaceuticals. Initiatives including direct Medicare pricing negotiations with manufacturers, drug re-importation, and establishing regulatory pathways for generic biologics are likely to re-gain prominence in the political spotlight.
• Quick 3rd Q Update- JNJ’s revenue increased 7.9% to $13.29 billion in 3rd Q of 06, driven by healthy performances across all segments. Operational growth was 6.7%, with a favorable currency impact of 1.2% during the quarter. Sales in the US increased 7.5% to $7.49 billion, while international sales increased by 8.5% to $5.8 billion.
• When investing JNJ, investors are paying for the company’s ability to deliver consistent earnings growth from its diversified business platform, strong cash flow generation, and the likely entry into new markets with growth opportunities.

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