Launches Of TREMFYA And RYBREVANT Will Expand Treatments In Inflammatory Diseases And Lung Cancer

Key Takeaways

• Strategic acquisitions in MedTech and Innovative Medicine, along with key product launches, are driving revenue growth and expanding market reach.
  
• Cost management and investment in high-margin innovations are enhancing net margins and operating income.
  
• Entry of biosimilar competition, macroeconomic pressures in China, and competitive challenges in MedTech could impact Johnson & Johnson's revenue and profitability.

Catalysts

Researches, develops, manufactures, and sells various products in the healthcare field worldwide.

• The acquisition of Intra-Cellular Therapies, which focuses on central nervous system disorders, could accelerate revenue growth by broadening the product lineup in the mental health arena and expanding market reach. This is expected to positively impact revenue by introducing CAPLYTA into new geographies and indications.
  
• Significant investments in R&D, including the anticipated 2025 launches of TREMFYA for inflammatory bowel disease and RYBREVANT/LAZCLUZE for lung cancer, are designed to drive growth in the Innovative Medicine segment. These new products are expected to contribute to revenue growth.
  
• In MedTech, recent acquisitions like Shockwave and Abiomed are anticipated to drive sales growth through expanded product offerings and gaining market share in cardiovascular solutions, thus positively impacting revenue.
  
• The strategic pivot towards high-growth and high-innovation markets likely means better margins, as resources are funneled into segments like oncology and neuroscience. This can improve net margins by substituting lower-margin products with higher-margin innovations.
  
• Reduction in SG&A expenses and strategic cost management, such as leveraging existing infrastructure post-consumer health spin-off, are projected to improve operating income and expand net margins, contributing to enhanced earnings.

Johnson & Johnson Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Johnson & Johnson's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.8% today to 21.1% in 3 years time.
• Analysts expect earnings to reach $20.4 billion (and earnings per share of $8.53) by about March 2028, up from $14.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $22.5 billion in earnings, and the most bearish expecting $17.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.0x on those 2028 earnings, down from 27.6x today. This future PE is greater than the current PE for the US Pharmaceuticals industry at 17.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Johnson & Johnson Future Earnings Per Share Growth

Risks

• The entry of biosimilar competition for STELARA in the U.S. and Europe poses a risk to Johnson & Johnson's revenue, as this could lead to a significant decline in sales for this high-revenue drug.
  
• Macroeconomic pressures in China, including headwinds from value-based purchasing (VBP) and anti-corruption measures, could impact revenue growth expectations in that region.
  
• Competitive pressures in the electrophysiology market, particularly from new pulsed field ablation (PFA) entrants in the U.S., may affect revenue from the MedTech segment.
  
• The significant investment in R&D and acquisitions may not translate to expected financial returns, potentially affecting net margins and earnings if new products do not meet market expectations.
  
• Changes in foreign currency exchange rates pose a risk to financial results, particularly with projected unfavorable impacts on reported sales and earnings in 2025, which could affect overall profitability.

Valuation

• The analysts have a consensus price target of $169.065 for Johnson & Johnson based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $190.0, and the most bearish reporting a price target of just $150.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $96.6 billion, earnings will come to $20.4 billion, and it would be trading on a PE ratio of 24.0x, assuming you use a discount rate of 6.2%.
• Given the current share price of $161.02, the analyst price target of $169.07 is 4.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.