JNJ growth rates

Posted by: grandpagates (IP Logged) [Ignore this user]
Date: July 15, 2009 11:17PM

So JNJ 2Q09 earnings are out. As expected Risperdale and Topamax got hammered by generics. Of interest, is that currency fluctuations were a huge negative drag. Of interest is that the Risperdale and Topamax damage is now largely historical.

So the question is, with so many gurus owning JNJ, is it time to back up the truck and buy? Bear in mind that I get PTSD flashbacks when CEOs make vague promises that new drugs will replace those coming off patent.

I have never seen any estimates about how much JNJ's newer drugs could contribute and what the odds of them are in making it to market. So for the time being, I will temporarily just value their contribution at $0.

What I was able to wrap my brain around was a projection of pharmacuetical sales for 2Q10. I just took that quarterly results from JNJ, projected the plus or minus growth rate for each drug into 2Q10 based on the rate for the last 12 months, and came up with a very approxmate projection. Not very precise, no deep business insights, but at least, it is a number that does not come out of the hat. This was done while ignoring currency fluctuations.

If my arithmetic (See below) is right, which is very questionable at this late hour, pharaceutical sales will go up 5% between 2Q09 and 2Q10.

There is value in doing this by individual drug instead of globally because of the enormous impact of patent expiration.

Noting that consumer sales went up 3% in the last 12 months (ignoring currency fluctuations) and that medical device sales went up 3% in the last 12 months (ingoring currency fluctuation), I then arrive that total JNJ sales will go up 3.5% or so in the next 12 months. Any sales of new drugs by a so called "promising pipeline" would be a kicker bonus. Any improvement of the consumer segment due to a possibly improving economy would be a bonus.

In conclusion, JNJ appears to likely be priced as a fair deal masked by the damage of patent expiration and masked by currency fluctional, with potential upside due to an improved economy and a potential upside due to new drugs. And there is a management that appears to have a history of apparently reasonable investment of earnings (20% ROE), nice earnings growth rate, and nice dividend growth rate. No crazy mergers of 2 struggling companies to come up with one bigger company struggling in more ways.

In brief, this quick exercise seems to confirm that the gurus who hold JNJ know what they are talking about and that the loss of patent damage is history.

I am planning to buy some more.