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Morningstar | Johnson & Johnson Posts Steady 2Q With Growth Across Business Segments as Drug Pipeline Looks Solid

We don't expect any changes to our fair value for Johnson & Johnson after the firm reported second-quarter results largely in line with our expectations (after adjusting for divestitures) and slightly ahead of consensus expectations. We continue to view the stock as fairly valued and have factored in close to $3 billion in litigation charges for the opioid and talcum powder legal cases. Further, the firm's wide moat looks intact, especially following a research and development update for its drug unit that shows many promising molecules in areas with unmet medical need that should enable strong pricing power.

In the quarter, all three of J&J's major segments posted adjusted operational growth in the low- to mid-single-digit range. While the drug unit showed leadership growth in the quarter, the relative strength of this segment wasn't as robust as seen in the past few quarters as patent losses are weighing on the division, especially for cancer drug Zytiga. Nevertheless, the drug unit was able to post 4% operational growth and we expect continued steady growth for this division over the next several years, led by recently launched oncology and immunology drugs. Also, the firm's recent pipeline update in May increased our conviction in the division and led us to increase our fair value estimate by $4 per share to $134. These pipeline assets are tracking well, and we like the focus in oncology and rare diseases, where drug pricing is strong and development timelines can be short.

Outside of the drug franchise, the smaller divisions of devices and consumer products posted 3% and 2% adjusted growth, respectively, and we expect both divisions' growth to continue to trend in this magnitude over the next several years. A potential wildcard in the device segment is in robotic development that could accelerate growth, but J&J has been relatively secretive about this initiative, leading us to project more conservative growth assumptions for these new products.

Looking deeper into the pipeline, J&J continues to advance its drug portfolio by both expanding indications for currently marketed drugs and bringing new drugs to the market. For a complete review of J&J's pipeline, please see "Annual Drug Pipeline Report: Moats Remain Secure as Innovation Counters Pricing and Generic Headwinds, but M&A Accelerating."