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J&J Stock Witnesses Volatility in '19: What to Expect in 2020

Zacks Equity Research

Among the large-cap pharma stocks, Johnson & Johnson JNJ witnessed maximum volatility in its share price performance this year.

While J&J delivered strong quarterly results, raised its sales guidance thrice this year and witnessed rapid progress in its pipeline, which gave an impetus to the stock, its litigation issues pulled the same down.

J&J’s stock has risen 8% this year so far compared with an increase of 5.7% recorded by the industry.

 

 

Here we discuss the ups and downs of J&J’s stock this year.

The Highs

Above Market Performance of Pharma Unit: J&J’s Pharma segment is performing above-market despite currency headwinds and the impact of biosimilar and generic competition on sales of some key drugs like Remicade and Zytiga. Pharmaceutical segment sales rose 6.2% in the first nine months of 2019 on an operational basis. The sales increase was led by the company’s oncology drugs, Imbruvica and Darzalex as well as psoriasis treatment, Stelara. Meanwhile, other core products like Stelara, Simponi/Simponi Aria and Invega Sustenna and new immunology medicines like Tremfya also contributed to growth. Importantly, J&J sounds confident about its Pharmaceutical business continuing to deliver growth above market in 2020.

Rapid Pipeline Progress: This year, J&J announced promising data from several pivotal studies and made rapid progress with its pipeline and line extensions. J&J gained FDA approval for two new drugs in 2019 — Spravato (esketamine) for treatment-resistant depression and Balversa (erdafitinib) for metastatic urothelial cancer. J&J believes that both Spravato and Balversa have the potential for more than $1 billion of peak revenues. Moreover, new products launched in late 2017/2018, Tremfya for plaque psoriasis and Erleada for prostate cancer, are off to a promising start in 2019.

Among line extensions, a key FDA approval was that of Imbruvica in combination with Roche’s RHHBY Gazyva (obinutuzumab) for Waldenström's macroglobulinemia, a rare form of Non-Hodgkin’s lymphoma and first-line chronic lymphocytic leukemia/small lymphocytic lymphoma. Please note that J&J markets Imbruvica in partnership with AbbVie, Inc. ABBV. It also gained approvals for some of its other drugs like Stelara, Darzalex, Invokana, Erleada and Xarelto in an expanded patient population.

Medical Devices Segment Sales Improving: The company is also working on turning around its Medical Devices business by developing innovative products, expanding global presence and implementing novel commercial models. Sales in the segment improved in 2017 and 2018 from 2016 levels. J&J is optimistic that this segment will deliver above-market growth by 2020 driven by innovation, strategic partnerships, portfolio management and new business models

The Downsides

Numerous Litigations – An Overhang: J&J faces a slew of lawsuits, which allege personal injuries to patients caused by the use of its medicines, mainly its talc and opioid products. These lawsuits have resulted in uncertainty.

J&J faces more than 16,000 lawsuits for its talc-based products, primarily its baby powders. The lawsuits allege that its talc products contain asbestos, which caused many women to develop ovarian cancer. In 2018, J&J was ordered by a Missouri court to pay $4.7 billion in damages to 22 women who made such allegations, affirming a St. Louis court jury’s verdict given earlier. J&J has appealed the decision and insists that talc-based products are safe and do not cause cancer. In early October, J&J announced a voluntary recall of one lot of its Johnson’s Baby Powder. The recall was initiated following tests done by the FDA, which revealed traces of asbestos in samples from one bottle purchased online. Earlier this week, J&J announced that a total of 155 tests were conducted by two different third-party labs on the same bottle of Johnson’s Baby Powder that was previously tested by the FDA. The tests found no asbestos.

J&J also faces thousands of other lawsuits related to abuse of its opioid-based drugs. These lawsuits claim that J&J is one of the several companies whose opioid-based drugs were responsible for fueling the state’s opioid epidemic. J&J faces more than 13,000 similar lawsuits alleging that use of its antipsychotic drug, Risperdal causes enlargement of breast tissues in boys – a condition called gynecomastia.

Generics Hit Sales: Quite a few products in the company’s portfolio are facing generic competition. In 2019 so far, biosimilar competition for Remicade and Procrit and generic competition related to Velcade, Tracleer and Zytiga in the United States have hurt revenues significantly. Please note that J&J markets Remicade in partnership with Merck MRK.

Conclusion

Nevertheless, J&J’s sales and earnings growth is expected to accelerate in 2020 supported by above-market performance of its Pharmaceuticals unit as well as continued improvement in the Medical Devices segment. It also plans to improve the profitability of its Consumer unit while continuing to optimize its portfolio for competitive growth. Also, share buybacks and restructuring initiatives should provide bottom-line support.

With several pivotal data readouts and regulatory milestones expected in 2020, the stock should remain afloat.

J&J currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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