Does This Pharmaceutical Company Need to Downsize?

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Johnson and Johnson (NYSE: JNJ) had a run during a two week period over the summer and since then has held its own. But structural changes are taking place within the medical/pharmaceutical industry that some analysts think Johnson & Johnson is missing. Goldman Sachs recently downgraded the stock from neutral to sell stating that the current stock price is about as high as it thinks Johnson and Johnson will go. Even though the company has been through hard times over the last few years (recalls, lawsuits, and generic competition), it has held its own.

But it is hard to see it growing. The pharma division is not expecting to see the stock move much because recent new releases are seeing stiff competition. As an example:

  • Zytiga (prostrate cancer) competing with new drugs Medivation (Xtandi)
  • Incivo (Hepatitis C) competing with Merck’s (Victrellis)

The changing landscape of the medical/pharma industry is another reason. Johnson and Johnson has traditionally focused on acquisition and growth, but many of its competitors are moving in the opposite direction.  Management has not hinted any change of direction or plans while major competitors are talking downsizing to generate better value for shareholders. Pfizer, Abbott Laboratories, and Covidien are a few examples of direct competition planning or doing this now. Analysts want the company to focus on the same thing, but it has yet to mention anything. Here are what three companies are presently doing:  

Abbott Laboratories (NYSE: ABT)

The drug and medical device company plans to spin off its pharmaceutical business into a separate company by the end of 2012. The new company, named AbbVie, will focus solely on branded drugs, including the blockbuster anti-inflammatory drug Humira. The split is intended to help the company free itself from risks and obligations to develop new pharmaceutical drugs and giving it a more stable business model built around nutritional formula, generic drugs, and heart stents. Analysts believe it will be poised for significant growth after the spinoff.

Pfizer (NYSE: PFE)

Back in the spring of 2011, Pfizer started to explore spinning off four non- pharmaceutical businesses as well as other units to reduce annual revenue to $35 billion to $40 billion from $67 billion. The company wanted to narrow both the focus and size of the company, presumably with the goal of achieving sustainable growth off a new base. A year later (March of 2012) we hear the company is exploring a spinoff of its animal health division, which will appeal to investors.

Covidien (NYSE: COV)

Back toward the end of 2011 and into early 2012, Covidien announced plans to turn its pharmaceutical unit into a stand-alone public company, as it looks to increase shareholder value. Splitting up the pharma business from the medical products will bring more value to both portions of the business.

Analysts have been advocating the same thing for Johnson and Johnson, but the company has not given any indication it will move in that direction. With a PEG Ratio of 2.26 it would appear the company is greatly overvalued at the moment. With a P/E of 22.1, well above the industry average of 18.7, the stock appears overpriced and is not expected to increase much more. It looks like stockholder value may come to a dead stop for a while unless the company explores other methods to increase value.








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