Johnson & Johnson



| Johnson & Johnson |(JNJ - NYSE) |$126.76 |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 1Q18 Earnings Update

Prev. Ed.: Changes in Estimates and News Update.

Brokers’ Recommendations: Positive: 55.56% (10); Neutral: 33.33% (6); Negative: 11.11% (2) Prev. Ed.: 10; 6; 2

Brokers’ Target Price: $150.33 (↓$0.05 from the last edition; 15 firms) Brokers’ Avg. Expected Return: 15.3%

*Note: Though dated Apr 25, broker material are as of Feb 1.

Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.

Executive Summary

Johnson & Johnson is one of the largest health care companies in the world, with a presence in the medical devices, biotechnology, pharmaceuticals, and consumer product markets.

Of the 18 firms covering the stock, 33.33% (6 firms) rendered neutral ratings, 55.56% (10 firms) assigned positive ratings and 11.11% (2 firms) rendered negative ratings on the stock.

Positive or equivalent outlook (10/18 firms): The positive firms expect accelerated growth to continue in the coming quarters on the back of impressive performance of newer drugs like Xarelto, Tremfya, Darzalex and Imbruvica and decreasing impact of patent losses. Moreover, the firms are impressed by the diversified and decentralized business. The firms also believe that the company’s strong pipeline and potential label expansion of drugs will offset pricing pressure and biosimilar competition. The firms are also encouraged by the re-launch of Baby care products and re-acceleration pharma growth. However, Remicade competition and slow growth in key drugs like Concerta, Risperdal Consta and Procrit are concerns.

Neutral or equivalent outlook (6/18 firms): The neutral firms believe that although the Actellion acquisition is expensive, it improves J&J’s growth outlook. These firms believe that J&J will be better positioned to drive top- and bottom-line growth as it overcomes recent headwinds and reaps the benefits of ongoing investments, acquisitions and restructuring initiatives. However, some firms are concerned about biosimilar competition for Remicade and Zytiga’s patent challenge and lower-than-expected performance of Darzalex and Xarelto. The neutral firms believe that the strong Pharmaceutical segment pipeline remains the company’s most important near-term growth driver although the segment is facing competition and pricing pressure.

Negative or equivalent outlook (2/18 firms): No reports available.

Overview

Johnson & Johnson is one of the world’s largest providers of health care products in the consumer, pharmaceutical and medical devices markets. It has over 275 operating companies worldwide, and sells its products across the globe. It operates through three segments: Consumer, Pharmaceutical and Medical Devices division. The company has a diverse revenue stream comprising market leading products in all three of its business segments. The company’s website address is .

The firms have identified the following factors for evaluating the investment merits of the company:

|Key Positive Arguments |Key Negative Arguments |

|Johnson & Johnson has the most diverse revenue stream in the industry with |Zytiga patent challenge and increasing biosimilar competition for |

|pharmaceutical, medical devices and consumer-related goods. |Remicade remain concerns. |

|Strong growth momentum is expected driven by new launches like Darzalex, |Three manufacturing facilities are operating under the FDA’s consent |

|Stelara, Xarelto and Tremfya. New products including Zytiga, Xarelto, |decree. Failure to comply with the terms of the decree could result in |

|Invokana and Invega Sustenna should drive revenues. |the company incurring penalties and fines. |

|With the acquisition of Actelion, Johnson & Johnson has strengthened its rare|Some firms believe that the acquisition of Swiss biotechnology company, |

|disease portfolio with the addition of two potentially multi-billion dollar |Actelion has been quite expensive for the company. |

|drugs. The Abbott Medical Optics acquisition will give J&J the opportunity to| |

|enter the cataract surgery space. | |

Note: The company’s financial year coincides with the calendar year.

Jan 31, 2018

Long-Term Growth

The Pharmaceutical division is expected to see better growth as new drugs are performing well. The company is looking to drive long-term growth through new drug launches, label extension, internal development and acquisitions. New drugs for cancer, pain, schizophrenia and AIDS should contribute, as should a number of line extensions and new indications, for existing products. Further, the pipeline has been augmented by acquisitions and partnerships. New products like Xarelto, Tremfya, Darzalex and Imbruvica hold immense potential. The company is looking to strengthen its pharma product portfolio.

Johnson & Johnson, which has launched 12 new products since 2011 (including 7 blockbuster or soon to be blockbuster products), intends to seek approval for more than 10 new products by 2021. The company said that each of these products have blockbuster potential. The company is targeting more than 50 line extensions of both existing and new drugs. The acquisition of Actelion is also expected to boost top-line growth.

Meanwhile, Johnson & Johnson has the world’s most comprehensive Medical Devices business. With the company launching 16 new products in 2017, expanding its global presence and implementing novel commercial models, it expects to start delivering accelerated growth within the next year. The business is also accelerating its pace of innovation, and estimates sales potential of more than $6 billion in its current pipeline of products, which are expected to be filed for regulatory approval by 2018. The acquisition of Abbott’s vision care business, Abbott Medical Optics, has strengthened J&J’s Medical Device segment.

The company’s consumer businesses are facing competition and pricing. J&J is evaluating “potential strategic options” for its diabetes franchise including LifeScan, Inc., and Calibra Medical, Inc. It may form strategic partnerships and joint ventures or sell these businesses either separately or together. A restructuring initiative for the Medical Device segment is expected to see the company cutting approximately 3,000 jobs in this segment and to deliver approximately $800 million to $1 billion in annual savings with the majority expected by the end of 2018. Some global supply chain initiatives will annually save approximately $600 million to $800 million in pre-tax costs by 2022.

J&J include many well-known brands including Listerine, Sudafed and Nicorette to its portfolio by purchasing Pfizer’s consumer business. The company is also looking to expand the Consumer segment in emerging markets which hold immense potential and has set up manufacturing and R&D centers in Brazil, China and India. These countries are trying to make healthcare accessible to more people primarily by improving insurance coverage. However, the company expects to keep witnessing pricing pressure, especially in Europe, as well as challenges in China.

Apr 25, 2018

Target Price/Valuation

|Rating Distribution |

|Positive | 55.56%↓ |

|Neutral |33.33%↑ |

|Negative |11.11%↑ |

|Avg. Target Price |$150.33↑ |

|High | $175.00 |

|Low |$110.00 |

|No. of Analysts with Target price/Total |15/18 |

Risks include pipeline setbacks, negative currency movement and biosimilar and generic competition.

Recent Events

J&J Tops Q1 Earnings Estimates, Raises Sales Guidance – Apr 17

Johnson & Johnson reported 1Q18 earnings of $2.06 per share, beating the Zacks Consensus Estimate of $2.01 and increasing 12.6% from the year-ago period.

Including amortization expense and special items, J&J reported first-quarter earnings of $1.60 per share compared with earnings of $1.31 per share in the year-ago period.

Sales Beat

Sales came in at $20 billion, beating the Zacks Consensus Estimate of $19.48 billion. Sales increased 12.6% from the year-ago quarter, reflecting an operational increase of 8.4% and a positive currency impact of 4.2%. Organically, excluding the impact of acquisitions and divestitures, sales increased 4.3% on an operational basis driven by continued positive momentum in the pharmaceutical segment and improved Consumer segment sales.

First-quarter sales grew 6.1% in the domestic market to $9.95 billion and 19.9% in international markets to $10 billion, reflecting 10.9% operational growth and 9% positive currency impact.

2018 Outlook Updated

J&J maintained the previously issued earnings guidance for 2018 while increasing the sales range.

J&J still expects 2018 adjusted earnings per share in the range of $8.00 - $8.20, reflecting an operational growth rate between 6.8% and 9.6%.

However, now it expects revenues in the range of $81.0 to $81.8 billion, higher than $80.6 billion to $81.4 billion, reflecting operational constant currency sales growth rate in the range of 4% to 5% (previously 3.5% to 4.5%).

Revenues

Johnson & Johnson recorded sales of $20 billion in 1Q18, up 12.6% y/y. Operational sales grew 8.4% while favorable currency movements impacted sales by 4.2%. Sales grew 6.1% in the domestic market and 19.9% in international markets in 1Q18, reflecting 10.9% operational growth and 9% positive currency impact.

The Zacks Digest average total revenues for 1Q18 were in line with the company’s report.

2018 Outlook: Johnson & Johnson increased revenues expectation for 2018 in the range of $81 billion to $81.8 billion (previously $80.6 billion to $81.4 billion), including the impact of acquisitions. The sales guidance reflects operational growth of 4% to 5%.

Johnson & Johnson expects generic competition for Procrit and Tracleer and biosimilar competition for Remicade. However, it continues to expect no generic competition for Zytiga, Risperdal Consta, Prezista and Invega Sustenna in 2018.

|Revenue |4Q16A |

|($ in million) | |

|Last Updated |Indrajit Bandyopadhyay |

|Copy Editor |Debasmita Banerjee |

|Content Editor |Debasmita Banerjee |

|Lead Analyst & QCA |Kinjel Shah |

|Reason for Update |1Q18 Earnings Update |

DISCLOSURE

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

DISCLOSURE

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

DISCLOSURE

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

DISCLOSURE

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

DISCLOSURE

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

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Apr 25, 2018

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