Wednesday, January 29, 2014

J&J Gets $257 Million Louisiana Risperdal Verdict Thrown Out- 01/31/2014

Johnson & JohnsonDrug Manufacturers - MajorUSA
http://www.bloomberg.com/news/2014-01-28/j-j-gets-257-million-louisiana-risperdal-verdict-thrown-out-1-.html?cmpid=yhoo

10 comments:

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    1. Sources: Trefis, Bloomberg, Company MD&A
      (Reference items: 2013 revenue=71.3B, OI 19.1B, FCF 13.8B, OCF 17.4B)
      3 Operating segments, % of rev/% of OI
      Medical devices& diagnostics 40%/41%, Pharmaceutical 39%/49%, Consumer 21%/12%.
      Major products
      Depuy (Othopaedic/Spinal care), Remicade, Ethicon, OTC Pharma& nutritional and skin care product all contribute more than 5% of total revenue.
      Operating margin: Pharma 33.5%, MD&D 27.8%, Consumer 15.1%, Total 26.8%, up from 25.9% in 2012.
      Return and benchmarks
      JNJ 1 y ROE in line with benchmarks such as S&P 500 and S&P pharma, 5 y ROE was 12.6%, comparing with S&P 17.9% and S&P Pharma 16.8%.
      2013 FCF, 19% of revenue
      - CapEx (3.6B) 26% outflow of FCF
      Highlights
      - In July 2012, JNJ acquired Synthes, a global manufacturer of orthopedic spine and trauma products. Combing DePuy/Synthes orthodepics division equip JNJ a broad portfolio globally. JNJ's market share of spinal& orthopedic devices grew from 11% in 2010 to 16% in 2013.
      - Metal-on-metal hip joints raised concerns, and DePuy's business was adversely affected. MoM mix declined from 25%-35% to less than 10%.
      Product pipelines
      - Over 2012-2015, JNJ plans to file 11 new products. Recently products, Prostate cancer drug- Zytiga almost gained block buster (>1 B revenue) status instantly, Its revenue grew 77% to 1.7 B last year, which is quite promising.( It accounts for 2.4% of JNJ's total revenue currently). 25% of sales come for new products introduced in last 5 years.
      Risks
      - Patent expiration, high, 6 major products are expected to lose their patents.
      - Competition, medium, industry trend that mega pharma companies establish generic product segment. Lower priced generic products are stealing market share from branded products.
      Outlook
      Neutral

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  2. Revenue Breakdown—

    Pharmaceutical Segment Sales 25.4 38% 6.075 41%
    Medical Devices and Diagnostics 27.4 41% 7.187 48%
    Consumer Segment Sales 14.4 21% 1.693 11%
    Total 67.2 100% 14.955 100%


    FCF—

    FCF Revenue FCF/Revenue CFO FCF/CFO
    30-Sep-13 5.138 70.52 7% 5.947 86%
    30-Jun-13 4.28 69.99 6% 5.051 85%
    31-Mar-13 1.691 68.59 2% 2.277 74%


    USES OF FCF
    1, Maintain AAA credit rating—
    2, Pay Dividends—
    3, Acquire company—

    Guidance—
    Johnson & Johnson delivered strong results in 2013 led by the outstanding performance in our Pharmaceutical business, the strength of key brands in our US OTC and other Consumer businesses and continued progress in integrating Synthes into our Medical Devices and Diagnostics business.

    FX risk—
    Company enters into forward foreign exchange contracts to protect the value of certain foreign currency assets and liabilities and to hedge future foreign currency transactions primarily related to product costs.

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  3. Source: Bloomberg Terminal, annual report, 10Q, Seeking Alpha
    Segment:
    Medical devices & Diagnose: 40.8% of revenue, 48.1% of pretax profit
    Pharmaceutical: 37.7%, 40.6%
    Consumer: 21.5%, 11.32%

    2013 Rev growth rate: 6.08%, operating income: 11.30%, net income: 27.44%

    Geographic segment:
    US: 44.75%
    Europe: 26.08%
    Asia-Pacific & Africa: 18.77%
    Western: 10.41%

    ROE:
    2012: 17.81% Industry avg: 27.95%
    Stryker: 19.28%
    Pfizer: 11.40%
    Eli lilly: 29.04%
    Merck: 9.74%

    Margin:
    Net profit margin in 2013: 19.40% Industry avg: 17.65%
    Stryker: 11.15%
    Pfizer: 42.65%
    Eli lilly: 20.27%
    Merck: 13.05%

    R&D expense/Rev: 11.5%
    Pfizer: 13.4%
    Eli lilly: 24%
    Merck: 16.7%

    Free cash flow/sales:
    2012: 18.54% 12462/67224 2011: 17.5% 11405/65030
    Free cash flow/CFO:
    2012: 80.9% 12462/15396 2011:79.8% 11405/14298
    Use of FCF
    Pay dividend: 54%
    Repurchase shares: spend 12,919 to repurchase
    Acquisition: Synthes Inc. The net acquisition cost of the transaction is $17.5 billion based on cash on hand at closing of $2.7 billion. 22% of free cash flow
    Debt cost: 0.5 billion interest expense account 4% of FCF

    Guidance
    The Company announced earnings guidance for full-year 2014 of $5.75 to $5.85 per share, which means the earnings will rise between 4 and 6%

    Pipeline:
    In 2013, 3 new drugs get approved, 4 are in registration currently, 7 drugs are planned filings 2014-2017

    Risks:
    Product recall and quality control

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  4. Data sources from Johnson and Johnson 2013 Fourth Quarter Report
    MorningStar.com
    Seekingalpha.com
    Bloomberg article
    businessinsider.com

    Business structure (page 6) in 2013
    • Consumer 20%
    • Pharmaceutical 40%
    • Med Devices & Diagnostics 40%

    Segment growth in 2013
    • Consumer 1.7%
    • Pharmaceutical 10.9%
    • Med Devices & Diagnostics 3.9%
    • Total 6.1%

    Pharmaceutical segment in Q4 2013
    • Industry-leading drugs
    • Remicade: (up 13.8% in fourth quarter)
    • Prezista: (up 30.6% in fourth quarter)
    • Stelara: (up 55% in fourth quarter)
    • Zytiga: (up 87.5% in fourth quarter)
    • Xarelto: (up 185% in fourth quarter)
    • Simponi: (up 40.3% in fourth quarter)
    • Very diversified
    • Strong pricing power

    Comparison with peers
    • Johnson & Johnson 25.1 (operating profit margin) 0.1 (D/E ratio)
    • Pfizer Inc 20.1 0.4
    • Novartis AG 19.4 0.2
    • Merck & Co Inc 16 0.5
    • Sanofi 17.6 0.2
    • GlaxoSmithKline PLC 28.5 2.6

    Free cash flow
    • TTM 19%
    • 2012 19%
    • Healthy free cash flow
    • Strong cash generation/dividend
    • Acquisition

    Pipeline
    • 17 drugs in Phase III development stage

    2014 guidance
    • Earnings guidance for 2014 of $5.75 to $5.85 per share
    • Below the $5.86 average of 18 analysts’ estimates

    Bull cases
    • A program to save $1 billion
    • AAA debt rating
    • Strong pricing power/specialty drugs

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  6. I used Bloomberg, Wall Street Journal, latest 8-K filing that includes 4th quarter earnings release, 10-Q, 10-K, and the company’s website.
    Johnson & Johnson have three business segments. In terms of revenue, Medical Devices and Diagnostics 40%, Pharmaceutical 39%, and Consumer 21%. By Geography, U.S. is 45%, Europe is 26%, Asia-Pacific and Africa is 19%, and Western Hemisphere excluding U.S. is 10%. Based on 2012 pretax income, Medical Devices and Diagnostics is 48%, Pharmaceutical 41%, and Consumer 11%. Medical Devices and Diagnostics includes products used primarily by healthcare professionals. It is the largest and most profitable segment. Pharmaceuticals addresses and solves unmet medical needs. It is No. 2 in Johnson & Johnson. Consumer Healthcare is relatively small and declining. It includes products used in the baby care, skin care, oral care, wound care and women’s healthcare fields, as well as nutritional and OTC pharmaceutical products, and wellness and prevention platforms.
    Free cash flow remains stable and robust. Free Cash Flow as % of revenue is somewhere between 18% to 23% from 2008 to 2012; free cash flow as % of cash from operations is between 80% to 86% in the same period. The company probably uses its free cash flow to pay down its debt and to make acquisitions. As a result, long-term debt was reduced by 15% at the end of the 3rd quarter, and in August 2013, the company acquired Aragon Pharmaceuticals for $650 million. Although dividends increased 8% in 2013, it is more of a common practice.
    In the 4th quarter earnings release, the company provided guidance of full-year 2014 of $5.75 to $5.85 per share, excluding special items. It is about 5-6% higher than this year’s EPS, which reflects company’s optimistic view into 2014. My finding I believe is consistent with Stone’s
    On the investors’ website, the company provides a summary of its pharmaceutical pipeline which looks OK. As Summer has mentioned, 3 products were approved in 2013, 4 are in registration, and 7 are to be filed before 2017. I did not find it useful as there is no comparison with competitors. In a recent agreement with Yale University, Johnson and Johnson will share detailed clinical trial data from hundreds of drugs and other products with outside academic researchers. This is a significant move toward greater transparency in drug research, and hopefully will help us better analyze the pharmaceutical pipeline.

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  7. The resource I used: JNJ Fourth Quarter Record & Full year Record in 2013
    Seeking Alpha, S&P Capital ,Stock Analysis on Net, Morning Star


    CORPORATE OVERVIEW

    3 Business Segments (Revenue %, Sales increase %) Fiscal year 2013

    - Medical Devices and Diagnostics Segment 40%, 1.7% (Biggest Segment)
    - Pharmaceutical Segment 39%, 10.9%
    - Consumer Segment 21% 6.1%

    U.S. 45% of 2013 sales
    International 55%

    Medical Devices and Diagnostics Segment (Core Business)

    Orthopedics 33% (13% of total sales)
    Surgical Care 22%
    Vision Care 10%
    Specialty Surgery 9%
    Diabetes Care 8%
    Cardiovascular Care 7%
    Diagnostics 7%
    Infection Prevention/ Other 3%

    Pharmaceutical Therapeutic Segment (Revenue % in Consumer Segments 2013)

    Immunology 33% (13% of total sales)

    - Remicade Continues to Drive Growth Remicade, the best-selling drug at Johnson & Johnson, continues to maintain momentum. Contributing about 24.2% to pharmaceutical product revenues, the drug generated $6.1 billion sales in 2012, up 11.8%.

    Neuroscience 24%
    Infectious Diseases 13%
    Oncology 13%
    Other 18%

    Consumer Segment (Core Business) (Revenue % in Consumer Segments 2013)

    OTC Pharmaceuticals & Nutritionals 27%
    Skin Care 25%
    Baby Care 16%
    Women’s Health 11%
    Oral Care 11%
    Wound Care/Other 10%




    FINANCIAL DATA
    - Revenue increase 6.1% in 2013 led by the outstanding performance in our Pharmaceutical business, the strength of key brands in our US OTC and other Consumer businesses
    - The company had about $29 billion of cash and investments, and $18 billion of debt

    Free Cash Flow:
    - FCF in FY 2013 $13.8 billion increase 10.4% from 2012
    - FCF/OCF 79% in 2013 there are 2% decrease from 2012
    - FCF/Revenue 19% in 2013 there are 1% decrease from 2012
    - Use of FCF: 1. M&A Aragon Pharmaceutical for 10 billion in August 2013.
    2. Pay Dividend & Repurchase, the company will increase dividend by 5%
    3. Pay down debt, JNJ pay down almost 12% of long term debt
    Cash Flow Statement
    Morning Star
    R&D / Pipeline (Strong Pipeline)
    - R&D spending in 2013 totaled $8.2 billion, representing 11.5% of sales
    - As of January 2014, JNJ had some 18 drugs in late-stage development, most of which were in Phase III trials or under FDA review
    - New Drug approved 2013 - 3 drugs
    - In registration 2014 - 4 drugs
    - In phase 3 plan to file (2014-2017) - 7 drugs

    Profitability: ROE 19.29%
    ROA 10.48%


    INVESTMENT RATIONAL/RISK
    PRO
    - Strategic Acquisition: Johnson & Johnson struck several deals, which should boost the company’s top line.
    - Deep Pipeline
    - Promising new products
    1. Johnson & Johnson acquired privately-held, pharmaceutical discoveryand development company Aragon in Aug 2013. With this acquisition, Aragon s lead pipeline candidate, ARN-509, which is in phase II development for castration resistant prostate cancer


    CON
    - Product Recalls
    J&J recalled thousands of bottles of Tylenol again, this time removing 500,000 bottles of infant Tylenol because of dosing problems
    - FDA Warning to Affect Sales

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  8. Sources:
    - Morningstar
    - MD&A
    - J&J Reports 2013 Fourth-Quarter and Full-Year Results
    - Seekingalpha

    Business Segments: (2013 % of sales, 2013 operational sales growth versus 2012)
    - Medical devices and diagnostics segment: 40%, 6.1%
    - Pharmaceuticals segment: 39%, 12%
    - Consumer segment: 21% of our total sales, 2.8%

    Core Businesses:
    Largest business Medical Devices and Diagnostics:
    - % of segment sales: Orthopaedics: 33% - 23% growth vs. 2012; Surgical care:22% of sales; other parts of businesses are all less than 10% of segment sales
    Second largest business and also the fastest growing segment Pharmaceuticals:
    - % of segment sales: Immunology: 33%, 18% growth vs. 2012; Neuroscience 24%; Infectious Diseases 13%; Oncology 13%; Other 18%

    Financial Highlights:
    FCF: 13.8b in 2013, 10.4% increase from 2012; Steady and healthy cash flow position
    - FCF % of sales: 19.35% 2013, 18.54% 2012, 17.54% 2011, 22.73% 2010
    - FCF % of operating cash flow: 80% TTM, remains around 80% since 2011
    - Use of FCF: used cash outside the U.S. for acquisitions first, continue with paying dividend and invest in growing the business.
    • pay dividends: 7.1b
    • Share repurchase: 3.05b
    • pay down debt: repaid 3.35b
    • make acquisition: acquisition of Aragon Pharmaceuticals, Inc. for an upfront cash payment of $650 million, plus additional contingent payments of up to $350 million
    R&D: 8b, 11.5% of sales, remains around the same level during last three years

    Guidelines: FY 2014 of $5.75 to $5.85 per share

    Positives:
    - strengthen and streamline the supply chain to ensure demand can be reliably met
    - Strong pipeline: launched three new major medicines in 2013 and plan to file more than 10 NMEs for approval between 2013 and 2017, and over 25 additional line extensions for our end market products.

    Risks:
    - Failure to get approval from FDA: one of the latest blockbusters Xarelto has failed to get approval from the FDA
    - Currency: the impact of the devaluation of the yen will have a significant impact in 2014

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