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Johnson & Johnson Investment Analysis

Overview

  1. Introduction
  2. Industry Overview
  3. Business Model
  4. Brands
  5. Revenue by Geographic Region and by Segment
  6. Main Risk Factors
  7. Balance Sheet
  8. Competitors
  9. Competitive Advantage
  10. Pros and Cons
  11. Resume: Key Facts

1. Introduction

Johnson & Johnson (J&J) was founded in 1887 in the State of New Jersey, USA, and currently has about 132,200 employees worldwide. The company focuses on products related to physical health. Johnson & Johnson is a holding company with 260 operating companies conducting business in virtually all countries of the world.

The mission of the company is to “Keep people well at every age and stage of life”. Alex Gorsky has been the CEO of Johnson & Johnson for the last eight years:

“Guided by our Credo and a true sense of purpose, we have created a powerful legacy of improving the health and wellbeing of people worldwide, while delivering sustainable, long-term value to stakeholders” (Alex Gorsky, Chairman and Chief Executive Officer at Johnson & Johnson).

In the following table, the largest shareholders of Johnson & Johnson are shown:

ShareholderShares owned% of total Johnson & Johnson shares
The Vanguard Group, Inc.220,969,4238.39%
SSgA Funds Management, Inc.151,549,0245.75%
BlackRock Fund Advisors128,718,1744.89%
Geode Capital Management LLC38,965,1561.48%
State Farm Investment Management34,574,7921.31%
Source: https://money.cnn.com/quote/shareholders/shareholders.html?symb=JNJ&subView=institutional

Holding about 2.3 million shares of Johnson & Johnson, Alex Gorsky is the largest individual shareholder of the company. This shows that he should care for the shareholder value of the company in his own interest.

Johnson & Johnson operates across three different business segments and has 26 brands creating revenue of more than $1 billion each and can be considered as one of the most innovative companies in the world. They build an enormous economic moat in comparison to their competitors (see chapter 10).

2. Industry Overview

The worldwide healthcare market is constantly growing. The medical progress, the increased life expectancy (the older people get, the more often they need medical treatment), as well as the growing demand for health products in the emerging markets, are leading to the continuous growth of the worldwide health care market. Even in times of economic instability, people tend to constantly demand health products.

3. Business Model

Johnson & Johnson is organized into three business segments:
Consumer products, pharmaceutical products and medical devices:

3.1 Consumer Products

The Consumer segment includes a broad range of products focused on personal healthcare used in the following markets:
• Beauty
• Oral care
• Over-the-counter pharmaceutical
• Women’s health
• Baby care
• Wound care

In chapter 4 you can find examples of Johnson & Johnson consumer product brands.

3.2 Pharmaceutical Products

The pharmaceutical segment is focused on six therapeutic areas:
• Immunology (e.g., rheumatoid arthritis, inflammatory bowel disease and psoriasis)
• Infectious diseases (e.g., HIV/AIDS)
• Neuroscience (e.g., mood disorders, neurodegenerative disorders and schizophrenia)
• Oncology (e.g., prostate cancer and hematologic malignancies)
• Cardiovascular and metabolism (e.g., thrombosis and diabetes) and
• Pulmonary hypertension (e.g., pulmonary arterial hypertension)

These medicines are distributed directly to retailers, wholesalers, hospitals and health care professionals for prescription use. In chapter 4 you can find examples of J&J pharmaceutical brands.

3.3 Medical Devices

The medical devices segment includes a broad range of products used in orthopedics, surgery, interventional solutions and eye health fields. These products are distributed to wholesalers, hospitals and retailers and are used in the professional fields by physicians, nurses, hospitals, eye care professionals and clinics.

4. Brands

In total, Johnson & Johnson has more than 100 different brands within its diverse business segments. At the same time, it has more than 26 different brands currently creating revenue of more than $1 billion each. In the following, examples of the Johnson & Johnson brands out of its consumer segment and pharmaceutical segment are shown:

Brands in the Consumer Product Segment:Brands in the Pharmaceutical Segment:
• BEBE®• CONCERTA®
• C&C BY CLEAN AND CLEAR®• DARZALEX®
• CAREFREE®• EDURANT®/rilpivirine
• CLEAN AND CLEAR®• IMBRUVICA®
• GENOMER®• INVEGA SUSTENNA®/XEPLION®/INVEGA TRINZA®/TREVICTA®
• IMODIUM®• INVOKANA®/ INVOKAMET®
• LABO LABO®• OPSUMIT®
• LE PETITE MARSEILLAIS™• PREZISTA®/ PREZCOBIX®/REZOLSTA®/SYMTUZA®
• LUBRIDERM®• PROCRIT®/EPREX®
• NICORETTE®• REMICADE®
• PEPCID®• RISPERDAL CONSTA®
• PIZBUIN®• SIMPONI®/SIMPONI ARIA®
• REGAINE®• STELARA®
• RHINOCORT®• TRACLEER®
• ROGAINE®• TREMFYA®
• STAYFREE®• UPTRAVI®
• SUDAFED®• VELCADE®
• SUNDOWN®• XARELTO®
• VISINE®• ZYTIGA®

In 2019, Johnson & Johnson generated revenue of about $82.1 billion. Taking a closer look at the brands out of the consumer products segment, we see that brands from the category beauty ($4.6 billion in 2019) and brands from the category over-the-counter-pharmaceutical ($4.4 billion in 2019) create most of the company’s revenue.

Looking at the pharmaceutical brands, we discover that the brands from the Immunology category create most of the company’s revenue. Especially the brands STELARA® ($6.3 billion in 2019) and REMICADE® ($4.4 billion in 2019) contribute to the success of the company. STELARA® and REMICADE® are pharmaceutical products used in the Crohn’s disease market. According to Forbes magazine, STELARA® could become the number 2 drug in this market in the upcoming years. The leader in this market is Humira® from Johnson & Johnson’s competitor AbbVie. As per Forbes magazine, the patents for STELARA® are still protected until 2023.

Regarding the Center for Disease Control and Prevention, the number of US adults diagnosed with IBD (Crohn’s disease or ulcerative colitis) has increased significantly from 1999 to 2015. The fact that the revenue of those brands is only 7.7% (for the brand STELARA®) and 5.3% (for the brand REMICADE®) of the total revenue of J&J in 2019 (see chapter 8.1.2) show that the success of the company does not significantly depend on its most important brands.

Looking at the medical device segment, we see that the categories surgery ($9.5 billion in 2019) and orthopedics ($8.8 billion in 2019) create most of Johnson & Johnson’s revenue.

5. Revenue by Geographic Region and by Segment

Johnson & Johnson’s main market is the U.S. (51.3%), followed by the European market (22.5%), the Asia-Pacific-African market (19.0%) and the Western Hemisphere market (excluding U.S.), (7.2%). Johnson & Johnson’s biggest business segment is the pharmaceutical segment (51.4%) followed by the medical segment (31.7%) and the consumer products segment (16.9%).

Revenue by Geographic Region:

Revenue by Segment:

In 2019, the consumer segment income before tax as a percent to sales was 14.8%, the pharmaceutical segment income before tax as a percent to sales was 20.9% and the medical devices segment income before tax as a percent to sales was 28.1%. This shows us that the medical devices segment of Johnson & Johnson can be considered as the most profitable business segment analysing the relation between income before tax and sales.

6. Main Risk Factors

Johnson & Johnson faces a number of risks that are difficult to predict and some of them are outside of the company’s control. Here are some of the risk factors, listed in the Johnson & Johnson annual report 2019:

• “Global sales in the Company’s pharmaceutical and medical devices segments may be negatively impacted by healthcare reforms and pricing pressures”

• “The Company is subject to significant legal proceedings that can result in significant expenses, fines and reputational damage”

• “The Company may not be able to successfully secure and defend intellectual property rights essential to the Company’s businesses”

• “Significant challenges or delays in the Company’s innovation of new product and technologies could have an adverse impact on the company’s success”

7. Balance Sheet

Johnson & Johnson is not a cyclical company. Its worldwide sales haven’t shown a significant degree of seasonality. In the past, the demand for products from the health sector has been constant and even in times of economic crises or instability, people haven’t reduced their requests for health products.

At the end of 2018, Johnson & Johnson’s debts were $10.8 billion. Considering its yearly constant high profit, in less than half a year, Johnson & Johnson could pay back all its debt.

Johnson & Johnson has the highest possible S&P credit rating (AAA)*. Besides Johnson & Johnson, Microsoft is the only company in the world with the same S&P credit rating (AAA). Below you can find a long-term chart from Johnson & Johnson beginning in 1970. You can see that the price of the Johnson & Johnson share hasn’t decreased significantly in past economic crises such as the dot-com bubble in 2000, the financial crisis in 2007 or the Covid-19 crisis in 2020.

*AAA reflects an opinion that the issuer has the current capacity to meet its debt obligations and has an extremely low insolvency risk

Johnson & Johnson chart from 1983 to 2020 (value of the share in $US):

Source: https://www.cnbc.com/quotes/JNJ

8. Competitors

In all product segments, Johnson & Johnson competes with companies locally as well as globally. The development of new and innovative products and the protection of intellectual property of the company’s product portfolio is important to the company’s success. The competitive environment requires substantial investments in continuing research. Furthermore, the company has made a practice of obtaining patent protection on its products and processes. Since Johnson & Johnson operates in different business segments (consumer products, pharmaceutical products and medical devices), Johnson & Johnson has different competitors in each of its business segments.

In the pharmaceutical industry, Roche, Novartis, Merck&Co, Pfizer and Abbvie can be considered as Johnson & Johnson’s competitors among others. For the competitive analysis these companies have been chosen because they can be considered as Johnson & Johnson’s biggest competitors in terms of market capitalization.

Johnson & Johnson in comparison to companies in the pharmaceutical business segment:

In the table below you can see Johnson & Johnson compared to the companies from the pharmaceutical business segment:

CompanyMarket Cap (Billion US$)Op. MarginFree Cash Flow YieldDividend YieldDividend Payout RatioP/E RatioD/E Ratio
Johnson & Johnson38028.25%5.24%2.77%65.5%24.761.65
Roche28227.53%6.24%2.73%57.07%20.881.32
Novartis17919.15%7.20%3.84%60.08%15.640.53
Merck & Co19520.87%5.11%2.98%59.32%19.910.86
Pfizer15731.50%6.62%4.47%49.32%11.021.65
AbbVie16839.03%7.60%4.61%82.83%17.951.90

The table above shows that Johnson & Johnson is the biggest company in the pharma industry in terms of market capitalization. It is compared to companies that have a market capitalization of at least $150 billion (date: 02.07.2020).

However, in terms of operating margin, free cash flow yield and dividend yield, Abbvie seems to be a more attractive investment in comparison to Johnson & Johnson. Having a look at the payout ratio, as well as the P/E ratio, Pfizer seems to be the most attractive investment. Having a closer look at the D/E ratio, Novartis has the lowest ratio (the lower the ratio, the more financially stable the company).

Johnson & Johnson in comparison to companies from the consumer product business segment:

In the table below you can see Johnson & Johnson compared to companies from the consumer product segment. It is compared to its biggest competitors from this industry in terms of market capitalization.
Johnson & Johnson is compared to companies from the consumer product segment, which have a market capitalization of at least $50 billion and which mainly produce consumer products in the health sector.

This is the reason why companies from the consumer product segment such as Nestle, Coca-Cola, PepsiCo (not specialized in the health segment) or Beiersdorf, Henkel (market capitalization less than $50 billion, date: 02.07.2020) are not listed as competitors of Johnson & Johnson in the following comparison:

CompanyMarket Cap (Billion US$)Op. MarginFree Cash Flow YieldDividend YieldDividend Payout RatioP/E RatioD/E Ratio
Johnson & Johnson38028.25%5.24%2.77%65.5%24.761.65
Unilever14616.80%4.69%3.33%75.35%22.612.25
Procter & Gamble2958.12%4.10%2.49%64.16%25.761.42
Colgate-Palmolive6222.60%4.52%2.37%61.96%26.1025.94

Comparing Johnson & Johnson to its competitors from the consumer market industry, we can highlight that J&J has a higher market capitalization, a higher operating margin and a higher free cash flow yield compared to its competitors. At the same time, J&J has one of the lowest P/E ratios (the lower the ratio, the more earnings the company has in comparison to the price you need to pay for it) and one of the lowest D/E ratios (the lower the ratio, the more financially stable the company).

9. Competitive Advantage

As shown before, Johnson & Johnson currently has more than 26 different brands, each one of them creating revenue of more than $1 billion. The company is extremely diversified and with its strong brands and diverse patents in the health market as well as its continuous innovation, the company can stand out from the competition.

In 2019, Johnson & Johnson made record investments in research and development (R&D) – more than $ 11 billion were invested in their pharmaceutical, medical devices and consumer business segments:

R&D Expenses in 2019Amount% of sales (as a percent to segment sales)
Consumer segment$0.493 billion3.5%
Pharmaceutical segment$8.834 billion20.9%
Medical devices segment$2.028 billion7.8%
Total$11.335 billion13.8%

With $11.3 billion worth of expenses in 2019, Johnson & Johnson is among the top 10 companies worldwide considering all industries, which spend the most on research and development (R&D). Johnson & Johnson can be considered as one of the most innovative companies in the world.
Operating across different business segments, Johnson & Johnson has an enormous competitive advantage in comparison to its competitors.

Here we can see what Alex Gorsky, CEO of J&J tells us about the competitive advantage of Johnson & Johnson in comparison to its competitors:
“Leading across the pharmaceutical, medical devices and consumer sectors provides us with a unique and powerful perspective that enables us to see more, touch more, learn more and do more across the full spectrum of health, as well as throughout every stage of our patients’ and consumers’ lives.” (Alex Gorsky, Chairman and Chief Executive Officer of Johnson & Johnson).

In the following table, you can see the expenses in research and development (R&D) of Johnson & Johnson in comparison to the expenses of its competitors. Also displayed is the revenue of the companies in 2019 as well as the expenses in % of the revenue.

In terms of revenue, Johnson & Johnson is the biggest company in comparison to its competitors. After Roche, Johnson & Johnson is the company in the pharmaceutical business segment that spends most on research and development (R&D). Being able to spend this amount of money on R&D could allow Johnson & Johnson to maintain its market position in the future and continue to be one of the most innovative companies in the sector. Furthermore, it is shown that in 2019 Johnson & Johnson had only spent 13.81% of its revenue in expenses on R&D. In terms of percentage, this is less than its competitors (see the graphic above and the table below).

The fact that J&J is one of the companies which spends most on R&D today ($11.335 billion) and the fact that in percentage of the revenue they are still spending less than their competitors, this shows that J&J is already very innovative, but that there is still a lot of potential to be even more innovative in the future. If Johnson & Johnson were to spend 19% of its revenue on research & development such as its competitor Roche, they would be able to spend $15.6 billion on research and development. In this scenario, they would be the company that would spend the most in R&D.

Those facts show that Johnson & Johnson could be able to continue being one of the most innovative companies in this sector and that they could have a sustainable competitive advantage compared to their competitors.

CompanyMarket Capitalization (in billion US$)Expenses in R&D in 2019 (in billion US$)Expenses in % of RevenueRevenue (in billion US$)
Johnson & Johnson38011.33513.81%82.10
Roche30512.3919.00%65.11
Novartis2048.1517.18%47.45
Merck & Co1939.9021.15%46.80
Pfizer1818.6516.70%51.75
AbbVie1686.4019.00%33.27

The following facts help Johnson & Johnson to build an economic moat:

• Johnson & Johnson operates across different business segments and can use this knowledge across all business industries

• Johnson & Johnson has 26 different brands creating revenue of more than $1 billion each

• Johnson & Johnson is one of the most innovative companies in the world. Besides Roche, it is the company from the pharmaceutical sector that spends most on research and development (R&D) and the patents of their products protect them from their competitors

• Johnson & Johnson still has enormous potential to increase its spending on research & development (R&D) in the future

10. Pros and Cons

Arguments for a Johnson & Johnson investment:

• With an investment in Johnson & Johnson, you invest in a consumer product, pharmaceutical and medical devices company. You diversify your risk by investing in one company with multiple divisions

• The AAA Rating of Johnson & Johnson by S&P Credit Rating shows that an investment in Johnson & Johnson is of less risk than other investments. Beside Johnson & Johnson, the only other company with an AAA Rating by S&P Credit Rating is Microsoft

• As a dividend aristocrat, Johnson & Johnson was a very liable dividend payer for the last 57 years

• Since J&J is not a cyclical company, it has had very stable performance during times of previous economic crises and instability (such as the dot-com bubble in 2000, the financial crisis in 2007 or the covid-19 crisis in 2020)

• With a long-term investment in Johnson & Johnson you could obtain more financial stability for your portfolio by reducing your risk

• Compared to the other companies from the consumer product industry (Unilever, Procter & Gamble and Colgate-Palmolive), Johnson & Johnson currently has the highest market capitalization, the highest operating margin and the highest free cash flow yield

Arguments against a Johnson & Johnson investment:

• Currently there are companies operating in the pharma industry, which have a higher operating margin and a higher free cash flow yield (such as Pfizer and Abbvie)

• Compared to competitors such as Pfizer, Roche, Merck&Co, Novartis and Abbvie, Johnson & Johnson is currently rated with the highest price to earning ratio

11. Resume: Key Facts

• The medical progress, the growing expectancy of life and the growing demand for health products in the emerging markets is leading to the continuous growth of the worldwide healthcare market (see chapter 2)

• Johnson & Johnson is operating in three different business segments, which are constantly growing industries: consumer products, pharmaceutical products and medical devices (see chapter 3)

• Johnson & Johnson currently has more than 26 different brands generating revenue of more than $1 billion each (see chapter 4)

• Johnson & Johnson is an anti-cyclical company, its worldwide sales do not have a significant degree of seasonality. The demand for products from the health sector is constant and even in times of economic crises or instability, people do not reduce their demand for health products (see chapter 7)

• The company has the highest possible S&P Credit Rating (AAA). Worldwide, the only other company that has an AAA Rating from S&P is Microsoft (see chapter 7)

• Different financial ratios show the enormous financial stability of Johnson & Johnson

• Johnson & Johnson has paid 57 consecutive years of increased dividends

• Since J&J operates across three different business segments, it has 26 brands creating revenue of more than $26 billion each and is one of the most innovative companies in the world that it builds an economic moat (see chapter 9)

Here you can download for free the complete Johnson & Johnson investment analysis.

Sources

Abbvie, annual report 2019, https://investors.abbvie.com/static-files/71f9318f-9a32-42ee-92ee-a34975edcd19

Boerse.de, https://www.boerse.de/langfristchart/Johnson-und-Johnson-Aktie/US4781601046

Center for Disease Control and Prevention, Inflammatory Bowel Disease Prevalence (IBD) in the United States, https://www.cdc.gov/ibd/data-statistics.htm


CNN.com, https://money.cnn.com/quote/shareholders/shareholders.html?symb=JNJ&subView=institutional
Colgate-Palmolive, annual report 2019, https://investor.colgatepalmolive.com/static-files/4e950006-c6b9-43b4-abb1-d06ad88fbc7a

Deloitte (2020), 2019 Global life sciences outlook, https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Life-Sciences-Health-Care/gx-lshc-ls-outlook-2019.pdf

Forbes (2019), Can Johnson & Johnson’s Stelara Become Number 2 Drug In Crohn’s Disease Market?, https://www.forbes.com/sites/greatspeculations/2019/12/03/can-johnson–johnsons-stelara-become-number-2-drug-in-crohns-disease-market/#1171932354f4

Johnson & Johnson annual report 2019, http://www.investor.jnj.com/annual-meeting-materials/2019-annual-report

Johnson & Johnson (2020), Products, https://www.jnj.com/healthcare-products

McKinsey & Company (2020), The growth imperative for medical-device companies, https://www.mckinsey.com/industries/pharmaceuticals-and-medical-products/our-insights/the-growth-imperative-for-medical-device-companies#

McKinsey & Company (2020), The consumer sector in 2030: Trends and questions to consider, https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/the-consumer-sector-in-2030-trends-and-questions-to-consider

Merck & Co., annual report 2019, https://s21.q4cdn.com/488056881/files/doc_financials/2019/q4/2019-Form-10-K-Final.pdf

Novartis, annual report 2019, https://www.novartis.com/sites/www.novartis.com/files/novartis-annual-report-2019.pdf

Pfizer, annual report 2019, https://s21.q4cdn.com/317678438/files/doc_financials/2018/ar/Pfizer-2019-Financial-Report.pdf

Procter & Gamble, annual report 2019, https://www.pg.com/annualreport2019/download/PG-2019-Annual-Report.pdf

Reuters, J&J CEO questioned over stock sale ahead of story on asbestos in Baby Powder, https://www.reuters.com/article/us-johnson-johnson-talc-ceo/jj-ceo-questioned-over-stock-sale-ahead-of-story-on-asbestos-in-baby-powder-idUSKBN1ZQ1R4

Roche, annual report 2019, https://www.roche.com/investors/annualreport19.htm#financials

Unilever, annual report 2019, https://www.unilever.com/Images/unilever-annual-report-and-accounts-2019_tcm244-547893_en.pdf

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