Caution: Slowing Growth Ahead for J&J
Strong drug sales helped wide-moat J&J report a steady quarter, but increasing competitive threats to leading drugs and a relatively weak late-stage pipeline will be headwinds in the future.
Following the recent trend, J&J's drug group once again led growth in the quarter, and we expect this trend will continue, but at a decelerating rate. Several of the company's core drugs--including cardiovascular drug Xarelto, oncology drug Zytiga, and immunology drugs Simponi and Stelara--posted double-digit gains. However, increasing competition to all of these drugs is likely to slow growth over the next several quarters. Over the next two years, we expect generic competition to increase for several neuroscience drugs (Concerta, Invega Sustenna, and Risperdal Consta), which represent 5% of J&J's drug sales. The increasing competition combined with a weak late-stage pipeline is concerning. However, we project a strong growth trajectory for several new drugs (diabetes drug Invokana and cancer drug Imbruvica) will help mitigate J&J's headwinds.
We expect the consumer group's strong resilience and the device group's struggles will continue. We believe the strong brand power supporting J&J's moat remains intact for the consumer group, which posted operational growth of 5%. While we expect the growth rate for consumer to accelerate as manufacturing issues are remedied, we believe the device segment (up 1% operationally) will continue to struggle as a result of poor pricing power and slow innovation trends.
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