Business World

Monday 26 August 2019

Share Watch: The biggest of Big Pharma a winner if it avoids the courts


Johnson and Johnson
Johnson and Johnson

John Lynch

For some readers it may sound a bit like poverty of ambition, but the age-old advice has always been "stick with the Blue Chips" when financial uncertainty lurks.

So with international politics and the world economy in danger of going dangerously negative, the task today was to pinpoint an investment that has travelled the world with distinction and shown that it can withstand shocks. The New Jersey-based US pharmacy giant Johnson & Johnson (J&J) - no relation to Boris - fits the bill without qualification, even given the litigious world we live in.

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J&J is a perfect example of the term 'Big Pharma'. It is the largest pharma group in the world, ahead of Roche, Pfizer and Novartis. Its worldwide sales last year were $82bn (€73.6bn) - almost $1.6bn a week - and research is an unbelievable $10bn. While the public perception of J&J is household brands such as Neutrogena, Listerine and Johnson's Baby Powder, it is also a specialist in hip replacement, stents for hearts and surgical dressings.

The American giant has been around since the West "was being won", and its first product was a surgical dressing. Early in the last century it set up a consumer division and opened its first plant outside the US.

Today it has over 260 subsidiaries conducting business in almost every nation in the world. It also has more than 125 facilities in 60 countries and is valued by the market at $345bn.

The group is organised into three divisions: consumer, pharma and medical devices.

Its consumer division offers a large range of care products for babies, skin and wounds. It is also the smallest division - but this is relative, with revenues in excess of $13.5bn.

The group's pharma division accounts for almost half of J&J's total sales. It is focused on vaccines, arthritis, mood disorder, prostate cancer, thrombosis and hypertension.

Its medical devices division, which generates one-third of group revenue, manufactures and markets products for hips, knees, spines, contact lenses and surgery.

Big Pharma has always encountered questions of ethics. There is no doubt that making products to improve human life can run risks and J&J is no stranger to this.

Recently, US authorities began probing alleged asbestos contamination in its baby powder. This came on top of a raft of assertions that the company knew of the asbestos problem for some time and did not act on it.

The company also has US state prosecutors holding it and others responsible for the country's opioid epidemic by reckless and illegal distribution of these drugs.

So it no surprise that group litigation expenditure last year alone was a hefty $1.3bn.

J&J and its industry counterparts also face another challenge with the development of genetics.

This modifying of DNA to make human cells able to fight disease will either usher in an exciting new era, or add to further controversy about price gouging and margins. Pharma's big decision rests on whether it should commit to the costly genetic research or miss out on medicine's biggest new opportunity.

In spite of its legal woes, J&J recorded global sales of $82bn. This is up by a third over the last decade, an impressive achievement.

The results were driven by the pharma division offsetting poor performance in baby care and a fall in medical device revenues.

The company has for a long time enjoyed high margins, which last year were 18pc, resulting in net profit of $15bn after allowing for litigation costs. In spite of these problems the group launched a $5bn share buyback programme.

However, investors are concerned with a fall of 14pc of net earnings in the first quarter of this year and the continued cost of litigation.

As a result, its shares at $130 have eased back from a yearly high of $149.

In spite of these difficulties, J&J shares are worth having.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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