Is Johnson & Johnson a Rare Big Pharma Opportunity?

Johnson & Johnson

Johnson & Johnson (NYSE:JNJ) is a rare big pharma seeing long-term consistent growth unlike its peers Eli Lilly (NYSE:LLY) and Pfizer (NYSE:PFE). Given valuations seen with the likes of Gilead Sciences (NASDAQ:GILD), is there any real question as to whether J&J is a great investment?

A familiar trend in big pharma

For most of big pharma, the patent cliff has been a fundamental killer. Pfizer lost its patent protection on Lipitor a few years back, losing rights to a drug that peaked with sales of more than $13.5 billion in 2006. Since then, Pfizer has lost patent protection on a slew of drugs, which has rapidly weighed on the fundamental performance of the company.

Back in 2010, Pfizer reported total sales of $65.1 billion, and for 2014 revenue is expected to be under $50 billion, representing a 3 percent year-over-year decline. Clearly, this is a major problem — one that has challenged the business strategy of the company and has created a sense of desperation to keep shareholders happy while trying to create the next wave of great products.

Then, there are companies like Eli Lilly, that haven’t yet felt the wrath of the patent cliff but soon will. In 2014, Eli Lilly will operate without patent protection on three of its best-selling drugs. Cymbalta, taken for depression, earned sales of more than $4 billion last year; Humalog, used for diabetes, earned more than $2 billion; and Eivsta, administered for osteoporosis, created a billion dollars. Hence, more than 30 percent of Eli Lilly’s $23.3 billion in sales over the last 12 months will be in jeopardy, and this rings a similar tune of what we’ve heard and seen throughout the big pharma industry.

Growth, security, and consistency

In the midst of an industry-changing patent cliff lies Johnson & Johnson, or J&J, a company that apparently hasn’t missed a beat. J&J reported earnings during this last week, announced revenue of $18.36 billion and net income of $3.52 billion, representing year-over-year gains of 4.5 percent and 37 percent respectively. Moreover, its full-year sales of $71.3 billion shows a consistent rise during each of the last five years. As a result, J&J has not been effected by the patent cliff in any way, and more impressively, it is expected to continue growing in the years ahead.

Is J&J a Good Investment?

Lately, there have been a lot of people saying that J&J — at 15 times next year’s earnings and a 3.7 times sales — is a bit pricey. This assumption couldn’t be further from the truth, in my opinion. While many of its peers are fundamentally falling from a cliff, J&J trades with the same multiples that are seen throughout the industry, but its growth is solid.

Then, there is the issue of new big pharma, or the emergence of a new class of biotechs that many believe can become dominant players in the industry. The problem is that many of these new companies are already priced for ultimate success. For example, Gilead trades with a market cap of $125 billion, which is approximately half of J&J. Looking ahead, Gilead is expected to produce revenue of $14.5 billion in 2014, and over the last 12 months, it has earned net income of $3 billion.

To put this in perspective, J&J earned more revenue and profit in its last quarter than Gilead is expected to create next year, and earned in the last year. Ultimately, for a company like Gilead to trade with a market cap of $125 billion it means that investors anticipate that fundamentals will one day support the valuation. But, with J&J, not only does it continue to grow, but it is many times cheaper than this new wave of big biotechs, thus implying that long-term J&J looks to be a better investment than the companies that are presumed to become the next J&J.

Final Thoughts

The bottom line is that J&J is on a different level of growth compared to its peers. Furthermore, companies such as Gilead, Biogen, and Regeneron that have products or near-term launches that are creating investor optimism, J&J has more products with the same level of growth and an even larger pipeline for the next wave of growth. For example, take a look at a few of J&J’s top drug performers during its last quarter.

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Clearly, J&J has blockbusters galore that are still creating rapid growth. Also, J&J had three FDA approved drugs last year, including Imbruvica and a partnered lymphoma drug with Pharmacyclics, that some analysts believe can earn $9 billion in peak sales. Then, there are comments from J&J where it expects 10 more product approvals over the next few years , thus creating more growth, which all combines with a consumer product and medical device segment that is also growing. All things considered, there is a lot to like about J&J, and at $90.60, you have to like the prospects of large returns for many years to come.