Is J&J a Good Buy?
Dawn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After two years of rampant recalls, Johnson and Johnson (NYSE: JNJ) has announced their CEO Bill Weldon will step down in April. He is being replaced by Alex Gorsky, J&J’s head of pharmaceuticals in Europe, the Middle East and Africa. Weldon will remain the company’s chairman. While J&J’s sterling reputation may have been tarnished, surprisingly its stock price has been in an upward swing over the past year. The question remains whether it is the right time to buy J&J or look into companies such as Merck (NYSE: MRK), GlaxoSmithKline (NYSE: GSK) or Sanofi (NYSE: SNY).
Since 2009, J&J has had over 20 separate recalls on a variety of products including artificial hips, prescription drugs, contact lenses, over the counter drugs and body lotion. Several of the recalled products were children’s products. Some were due to bacteria, some to faulty dosing and others were due to quality.
In contrast, Merck, GSK and Sanofi combined had less recalls in 3 years than Johnson and Johnson. Merck had one recall that was a joint venture between them and Johnson and Johnson.
In addition to the recalls, the FDA has warned J&J about false claims involving Listerine and the Securities and Exchange Commission charged them with bribing doctors in several countries to prescribe its drugs and medical devices.
Although J&J’s artificial hips could no longer be sold in the United States, they still continued to sell the devices in other countries until 2010. The company faces approximately $3 billion in legal and medical costs regarding these devices. In 2010, the company was charged with over $800 million in fines while making a record $13 Billion.
From an investment standpoint you can’t deny that being profitable is a good thing. But the questionable business practices and the decline in quality standards will eventually catch up with J&J. As a parent, I wouldn’t trust giving any of their products to my child and I am sure others would feel the same way.
On the other hand Merck has received a lot of goodwill because of the recent press release from AIDS Healthcare Foundation (AHF) saluting them for the price cuts on their AIDS drug. The company recently received approval for expanded use for their HIV drug. They are making great strides in their pipeline and have applied for FDA approval on 8 products.
GlaxoSmithKline is a solid company, with excellent management and a solid balance sheet. The company is strong in consumer healthcare, especially in emerging markets where they have teamed up with companies in India, a growing market. The vaccines division is very strong and unlike other big pharmaceutical companies they don’t have too many patents expiration issues.
Sanofi has taken a different approach to its business model by concentrating on the diversity of their products and their geography. Sanofi is steadily building a nice pipeline of drugs that are not blockbusters that will provide consistent revenue. They have made some great strides in improving the bottom line of their recent acquisitions as well. In addition, they are doing very well in emerging markets and have established a global presence.
Some analysts predict J&J’s stock is a buy. I personally think it is overvalued and not worth the risk. Until they can get their quality issues under control and regain consumers trust, I wouldn’t touch this stock. I have serious doubts as to whether they can pull it off with the new management team in place. Perhaps J&J should have looked outside their company to turn things around. Investors looking into pharma stocks should really consider Merck, GlaxoSmithKline and Sanofi. These three companies take different approaches but their profits, stock value and reputation seems to be headed in a positive direction.
Motley Fool newsletter services recommend GlaxoSmithKline and Johnson & Johnson. The Motley Fool owns shares of GlaxoSmithKline and Johnson & Johnson. webgirlpa has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
