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Morningstar | JNJ Updated Forecasts and Estimates from 17 Jul 2018

Johnson & Johnson reported second-quarter results largely in line with both our expectations and those of consensus, and we don't expect any major changes to our fair value estimate. We continue to view the stock as largely fairly valued, as the investment community appreciates the company's strengths and weaknesses. The quarter's steady results reaffirm our wide moat rating.

Led once again by strong drug sales, total sales increased operationally 6% year over year. The drug group's 11% growth was slightly higher than we expected, driven by robust immunology and oncology drug sales. However, we expect the growth in these therapeutic areas will moderate. We expect further price declines from immunology drug Remicade due to biosimilar pressures that we estimate have caused Remicade's price to decline by close to 15% already. We also expect growth for immunology drug Stelara to stagnate as share gains in the Crohn's indication (led by strong clinical data) are offset by share losses in psoriasis due to increased competition from IL17 drugs. In oncology, increasing generic competition to Zytiga (expected in the fourth quarter, ahead of management guidance) and Velcade (expected in 2019) should pressure the company's overall cancer drug sales. Outside of drugs, the more modest growth of 1% in consumer and 3% in devices was largely expected as competitive pressures have weighed on growth, and we expect this trend will continue through 2019.

Earnings-per-share increased 18.5% as the strong sales gains in the higher margin drug group helped amplify growth on the bottom line. We expect this trend will continue as Johnson & Johnson's drug unit is best positioned for growth over the next three years. Additionally, while it faces potentially heavy legal charges against the firm's Talcum powder potentially causing cancer, we expect Johnson & Johnson will litigate the cases aggressively and the final related payments will not cause a major impact to its valuation.

For a complete overview on the company’s positioning in immunology, oncology, and other therapeutic areas, as well as a deep dive into the company’s pipeline, please see our Healthcare Observer, “Steady Pipelines Offset Generic Threats, Securing Big Biotech and Big Pharma Moats.”