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Solid Drug Sales, Cost Control Boost Johnson & Johnson

Damien Conover, CFA (damien.conover@morningstar.com)

Buoyed by strong drug sales and solid expense management,  Johnson & Johnson JNJ reported first-quarter results slightly ahead of our and consensus expectations, but we don't expect any major changes to our fair value estimate based on the minor outperformance. Recent drug launches in oncology and immunology supported total operational drug sales growth of 8% year over year, outpacing device (up 4%) and consumer (up 1%) sales. The strong drug sales reinforce the intangible assets moat source backing our wide moat rating.

While first-quarter drug sales were solid, we expect the division's growth to slow later in the year because of increasing generic pressure. We expect intensifying generic competition to cancer drugs Zytiga and Velcade along with continued pressure from biosimilar Remicade in immunology to weigh on total drug sales. We believe these factors played a part in management's decision to sell Advanced Sterilization Products and record the gain in adjusted earnings to maintain overall earnings growth for the year. Following 2019, we expect generic pressure to ease and recently launched drugs to return the drug group to steady growth.

The medical device segment continues to accelerate growth, offsetting weakness in the consumer group. Strong growth from devices in interventional solutions, including in electrophysiology for atrial fibrillation, helped offset relatively flat operational growth from orthopedics. In consumer, slow overall industry growth weighed on sales, but we also believe Johnson & Johnson's strong brand power is not holding up as well in the increasingly important online sales channel.

Johnson & Johnson is holding expenses in check slightly better than we expected, but the one-time legal charge of $423 million is concerning and probably relates to talcum litigation. We continue to expect only a minor impact to our fair value estimate based on this litigation and have modeled close to $2 billion in related charges.


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