Johnson & Johnson

Bill JusticeGB 540 Economics for Global Decision Makers

International Economic and Emerging Economies - Final Project 

November 23, 2010

Company History

Founded in 1885, New Brunswick, NJ

By the Johnson brothers Robert,

James, and Edward

Started with 14 employees in a

former wallpaper factory

First product was surgical dressings

Company Overview

The world's largest healthcare group

R&D, manufacture, and sale of a range of products in the healthcare field

Operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics

115,000 employees worldwide

More than 250 operating companies

Sell products in 60 countries throughout the world

Product Categories

AllergiesBaby Care

Dental Care

Diabetes Care

Feminine

Hygiene Gastrointestinal

Nutritional OrthopedicsPrescription Drugs

Vision Care

Wound Care

Colds and FluCardiology

Denture CareFamily Planning

First Aid Medial

Devices/Diagnostics Oncology

Pain RelieverSkin and Hair Care Women’s Health

Corporate Leadership

Management

Weldon Williams- (1971) CEO Joined the company in 1971 Served in several sales, marketing and international management positions

Dominic Caruso - (1999) CFO & Vice President of Finance Previously VP of the Finance for the Medical Devices and Diagnostics KPMG Joined in October of 1999 through the acquisition of Centocor (has been with that

company since 1985)

Russell C. Deyo - (1985) Vice President, Human Resources and General Counsel

Joined the company in 1985 as a general attorney Previously VP of Administration, named to post in 1996 Appointed to General Counsel in April 2004 Given additional responsibility for Human Resources in 2009

Strong Sense of Seniority

Current Financial Status

Highlights

A stable and strong company that meets all the needs of a stock an investor should have going into a recession

DIVERSIFICATION-not only produces medication, but also medical equipment, and human staple goods

Unlike many other pharmaceutical companies, they

are not in big trouble with patents Proven successful during the recent recessions

Performance in 2001 Recession

Had a 2:1 stock split during the recession

Performance in Past Recession

JNJ Adjusted CloseDJIA

Track Record of Performance

Exceptionally consistent performance 75 consecutive years of sales increases 24 consecutive years of earnings increases 45 consecutive years of dividend increases

Few, if any companies, can claim this

JNJ Common Stock

Johnson & Johnson Common Stock(NYSE: JNJ ) After Hours: 63.85 0.02 (0.03%) 7:58PM EST Last Trade: 63.83 Trade Time: Nov 19 Change: 0.00 (0.00%) Prev Close: 63.83 Open: 63.89 Bid: 63.72 x 300 Ask: 63.95 x 200 1y Target Est: 67.84

Day's Range: 63.65 - 64.22

52wk Range: 56.86 - 66.20

Volume: 12,890,323 Avg Vol (3m): 10,326,100

Market Cap: 175.29B P/E (ttm): 13.11 EPS (ttm): 4.87 Div & Yield: 2.16 (3.40%)

Source: Yahoo Finance

JNJ Common Stock

Source: Yahoo Finance

Financial Highlights

Fiscal Year Fiscal Year Ends: Jan 3 Most Recent Quarter (mrq): Oct 3, 2010 Profitability Profit Margin (ttm): 21.76% Operating Margin (ttm): 26.56% Management Effectiveness Return on Assets (ttm): 10.93% Return on Equity (ttm): 25.26% Income Statement Revenue (ttm): 62.49B Revenue Per Share (ttm): 22.68 Qtrly Revenue Growth (yoy): -0.70% Gross Profit (ttm): 43.45B EBITDA (ttm): 19.51B Net Income Avl to Common (ttm):

13.60B Diluted EPS (ttm): 4.87 Qtrly Earnings Growth (yoy): 2.20%

Balance Sheet Total Cash (mrq): 22.13B Total Cash Per Share (mrq): 8.06 Total Debt (mrq): 12.02B Total Debt/Equity (mrq): 20.99 Current Ratio (mrq): 2.45 Book Value Per Share (mrq): 20.85 Cash Flow Statement Operating Cash Flow (ttm): 17.85B Levered Free Cash Flow (ttm): 9.99B

Source: Yahoo Finance

Q3 and Fiscal 2010 Earnings

Sales declined 0.7% to $15 billion compared to prior year

Domestic sales declined by 2.5% due to recent successive recalls

International sales increased by 1.1%

Slight growth over 2009 results with net earnings up 2.2%

after 3rd Qtr results

Consumer sales of $3.6 billion for 3rd Qtr, down 10.6% from prior year

along with 10.6% operational decline

Pharmaceutical sales of $5.5 billion for 3rd Qtr, up 4.7% from prior year

along with operational growth of 5.9% realized

Medical Device and Diagnostic sales achieved $5.9 billion for 3rd Qtr,

up 1.3% over prior year along with slight operational increase of 1.3%

Q3 and Fiscal 2010 Earnings

Pharmaceutical segment:

Has returned to growth and has a promising pipeline lined up for the

future

Newly launched products have shown strong performance

Weaker dollar and growth in Pharmaceutical and Medical

Device & Diagnostic off-setting decline in the Consumer

segment

Various recalls of Tylenol and other OTC drugs impacting

domestic sales, decrease of 24.5% realized

Economic, Social, and Political Forces

JNJ Current IndicatorsEconomic Indicators

Unit 2006 2007 2008 2009

Sales U.S. dollars, millions % change over previous year

53,3245.6

61,09514.6

63,7474.3

61,897(2.9)

Net Earnings U.S. dollars, millions % change over previous year

11,0539.9

10,576(4.3)

12,94922.4

12,266(5.3)

Share Price (end of calendar year)

U.S. dollars 66.02 67.38 58.56 64.41

Operating Companies

Number (approximate) 200 250 250 250

Employees Number (approximate) 122,200 119,200 118,700 115,500

R&D U.S. dollars, millions As % of sales

7,12513.4

7,68012.6

7,57711.9

6,98611.3

Effective Income Tax Rate

% of income 24.2 20.4 23.5 22.1

Advertising Costs

U.S. dollars, billions As % of sales

1.93.6

2.74.4

2.94.5

2.43.9

Charitable Contributions

Total U.S. dollars, millionsAs % of pretax income Non-cash

544.83.7419.4

509.93.8370.3

510.33.0365.5

588.13.7461.5

Global Economic Indicator Impacts

Weak dollar resulting in fav earnings forecast for 2010, from $4.70 to $4.80 per share

Industrial Product Index results from September 2010 signal manufacturing is recovering slowly

Pricing pressures are in control with CPI and PPI slightly up in September 2010 causing Federal Reserve Bank to be concerned with risk of inflation

Labor market continues to be weak with employers remaining reluctant to add new employees as unemployment rate remains at 9.6%.

Recent drops in stock market and China’s decision to increase benchmark on interest rate has lenders confidence levels down

Pharmaceutical Plague

Many companies are not showing any positive signs in R&D

Blockbuster drugs are lacking

Even if they do break through, they are being shut down by the FDA for undesired and dangerous side effects

Pharmaceutical Plague

2007-2010: Disappointing, dissipating, and decaying time for many pharmaceutical companies around the world

Key drugs that provide profit and revenue will be losing their patent protection Allows these medications to go generic which will

provide the consumer with the same medication at a cheaper and more reasonable price

 

Medications(Top Sellers)

RISPERDAL CONSTA and INVEGA, both antipsychotic medications

TOPAMAX, an antiepileptic and a treatment for the prevention of migraine headaches

REMICADE, for the treatment of a number of immune mediated inflammatory diseases

VELCADE, a treatment for multiple myeloma

CONCERTA, a treatment for attention deficit hyperactivity disorder

LEVAQUIN, an anti-infective

Newly Acquired

Introduced 600 products and line

extensions under its consumer business in

recent years Rolaids, Rogaine, Sudafed, Visine, Neosporin, Listermint,

Listerine, Bengay, and Benadril just to name a few

Always evaluating licensing and acquisitions

Highly respected for making business

deals/buying/selling operating companies

In the Pipeline

9 drugs in early FDA approval stages

14 drugs in Phase III of FDA approval Could be as soon as 12 months before

release

4 drugs have received FDA approval for releases in 2009

Competition

Competition

JNJ vs. Industry Leaders

Statistic Industry Leader JNJ JNJ Rank

Market Capitalization BYR.L N/A 175.29B 12 / 159

P/E Ratio (ttm) BYR.L N/A 13.11 70 / 159

PEG Ratio (ttm, 5 yr expected)

BMY 4.90 2.18 8 / 159

Revenue Growth (Qtrly YoY)

IPXL 368.10% -0.70% 91 / 159

EPS Growth (Qtrly YoY) BRAWN.BO 1300.00% 2.40% 61 / 159

Long-Term Growth Rate (5 yr)

PVCT.OB 116.00% 6.17% 14 / 159

Return on Equity (ttm) RHO5.DE 219.46% 25.26% 22 / 159

Long-Term Debt/Equity (mrq)

20.989 N/A

Dividend Yield (annual) LLY 5.70% 3.40% 7 / 159

Source: Yahoo Finance

SWOT

Strengths

• Diversified product offerings: company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics

• Company covers the almost the full spectrum of the supply chain (research and development, manufacture and sale of products)

• Support from non-pharmaceutical business divisions• Brand recognition• Strong drug pipeline

Weaknesses

• Conglomerate of relatively independent companies that can sometimes go off the corporate plan or directive

• Big drugs like Risperdal have lost or will lose patent protection• Generic drug's exposure• Private label exposure

Opportunities

• Leverage experience and development of new drugs• Integrate recent acquisitions • Global expansion of companies with complementary products

Threats

• Healthcare regulations • Private label growth; generic drugs growth• Weaker consumer environment expected in the US• Spreading too thinly - made investments in non-core areas, like

social media• Stiff competition in markets like stents where competition is gaining

ground

Financial Forecast

Analyst Estimates

Earnings Est

Current Qtr Dec 10

Next Qtr Mar 11

Current Year Dec 10

Next Year Dec 11

Avg, Estimate

1.03 1.30 4.75 4.99

No. of Analysts

18.00 6.00 22.00 17.00

Low Estimate

0.99 1.26 4.70 4.84

High Estimate

1.07 1.35 4.80 5.10

Year Ago EPS

1.02 1.29 4.63 4.75

Revenue Est

Current Qtr Dec 10

Next Qtr Mar 11

Current Year Dec 10

Next Year Dec 11

Avg Estimate

16.09B 15.88B 62.06B 64.22B

No. of Analysts

17 5 19 14

Low Estimate

15.68B 15.62B 61.62B 62.72B

High Estimate

16.48B 16.10B 62.44B 65.76B

Year Ago Sales

16.55B 15.63B 61.90B 62.06B

Sales Growth (year/est)

-2.80% 1.60% 0.30% 3.50%

Earnings & Revenue

Source: Yahoo Finance

Analyst Estimates

EPS Trends

Current Qtr Dec 10

Next Qtr Mar 11

Current Year Dec 10

Next Year Dec 11

Current Estimate

1.03 1.30 4.75 4.99

7 Days Ago

1.03 1.29 4.75 4.99

30 Days Ago

1.05 1.30 4.70 5.02

60 Days Ago

1.05 1.30 4.71 5.03

90 Days Ago

1.05 1.30 4.71 5.03

EPS Revisions

Current Qtr Dec 10

Next Qtr Mar 11

Current Year Dec 10

Next Year Dec 11

Up Last 7 Days

0 0 0 1

Up Last 30 Days

0 0 3 2

Down Last 30 Days

1 0 0 0

Down Last 90 Days

N/A N/A N/A N/A

Earnings Per Share

Source: Yahoo Finance

Analyst Estimates

Growth Estimate

JNJ Industry Sector S&P 500

Current Qtr 1.00% 41.90% 89.50% 61.70%

Next Qtr 0.80% 62.90% -70.70% 38.60%

This Year 2.60% 55.60% 47.00% 41.00%

Next Year 5.10% 34.10% 34.80% 13.10%

Past 5 Years (per annum)

7.47% N/A N/A N/A

Next 5 Years (per annum)

6.17% 12.33% 15.14% 10.82%

Growth

Source: Yahoo Finance

Accelerating Growth in 2010

“Back Up Products” Patients getting used to certain drugs,

especially antipsychotic RISPERDAL CONSTA and TOPAMAX Prevents generics from taking over

Make their own generics Will continue to pull in a strong profit from

loss of patent protection

Investment Rationale

Diversity

Stability (low Beta)

Profiting acquisition

Determination for consistent

improvement

Strong pipeline

“Safe Haven”

“A safe haven away from volatility” Goldman Sachs

“JNJ certainly could be a haven in a

bear market because of its diversity” Raymond James & Associates

Recommendation: BUY

JNJ Global Growth Strategy

Continue to diversify within only one industry –

“Healthcare”

Hedge aggressively on the future, thinking 10-20 years out,

while creating large sums of cash reserves for difficult

years

Remain decentralized and let local managers run their own

companies

Maintain disciplined approach and not allow themselves to

get in bidding wars with competitors

Keep its reputation that they have a purpose beyond profits

– remain true to their “Credo”: “We believe our first

responsibility is to the doctors, nurses, and patients, to

mothers and fathers and all others who use our products

and services.”

Questions?

References

Alazraki, M. (2010). Johnson & Johnson earnings hurt by children’s medicine recall. Retrieved November 14,

2010, from http://www.dailyfinance.com/story/company-news/johnson-and-johnson-earnings-hurt-by-

childrens-medicine-recalls/19679865/

Business Day. (2010). Johnson & Johnson. Retrieved November 14, 2010, from

http://topics.nytimes.com/top/news/business/companies/johnson_and_johnson/index.html

Carnevale, C. (2009). Johnson & Johnson: Well positioned for growth. Retrieved November 7, 2010, from

http://seekingalpha.com/article/164353-johnson-johnson-well-positioned-for-growth

CNN Money. (2010). Fortune 500 2010: Top 1000 American companies – Johnson & Johnson. Retrieved November

7, 2010, from http://money.cnn.com/magazines/fortune/fortune500/2010/snapshots/235.html

ecPulse. (2010). Companies earnings lead financial markets to fluctuate heavily as economic data proves

insignificant to investors. Retrieved November 13, 2010, from

http://www.fxstreet.com/fundamental/analysis-reports/top-fundamental-stories/2010-10-23.html

Investor. (2010). Johnson & Johnson our responsibility – 2009 sustainability report. November 7, 2010, from

http://www.investor.jnj.com/2009sustainabilityreport/economic/index.html

Investor. (2010). Johnson & Johnson reports 2010 third quarter results. Retrieved November 7, 2010, from

http://www.investor.jnj.com/releasedetail.cfm?releaseid=520146

References

Lens Shopper. (2009). Johnson & Johnson – Information and history about the world’s most comprehensive and

broadly. Retrieved November 7, 2010, from http://www.lensshopper.com/johnson-johnson.asp

Molina, I. (2009). Henry fund research: Johnson & Johnson. Retrieved November 13, 2010, from

http://tippie.uiowa.edu/henry/reports09/jnj_sp09.pdf

Mueller, J. (2010). Johnson & Johnson: Strengths, weaknesses, opportunities, threats. Retrieved November 7,

2010, from http:// http://www.fool.com/investing/dividends-income/2010/06/08/johnson-johnson-strengths-

weaknesses-opportunities.aspx

Norup, K. (2009). The secret of J&J’s success. Retrieved November 7, 2010, from

http://www.msquared.com/blog/category/life-sciences

Pierson, R. (2009). J&J profit rises, ’09 profit view disappoints. Retrieved November 7, 2010, from

http://in.reuters.com/assets/print?aid=INTRE50J3DH20090120

Seeking Alpha. (n.d.). Johnson & Johnson (JNJ) description. Retrieved November 7, 2010, from

http://seekingalpha.com/symbol/jnj/description

U.S. Bureau of Labor Statistics. (2010). Major economic indicators. Retrieved November 13, 2010, from

http://data.bls.gov/cgi-bin/print.pl/bls/newsrels.htm

Yahoo Finance. (2010). Johnson & Johnson (JNJ). Retrieved November 20, 2010, from

http://finance.yahoo.com/q/ae?s=JNJ+Analyst+Estimates