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Johnson & Johnson and its subsidiaries have approximately 119,200 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the health care field.

Johnson & Johnson is a holding company that has more than 250 operating companies operating in virtually all countries of the world. Johnson & Johnson’s primary focus has been on products related to human health and well-being. It has been around since 1887.

JNJ’s structure is based on the principle of decentralized management.

The Executive Committee of Johnson & Johnson is the principal management group responsible for the operations and allocation of the resources of the Company. This Committee oversees and coordinates the activities of the Consumer, Pharmaceutical and Medical Devices and Diagnostics business segments. Each subsidiary within the business segments is, with some exceptions, managed by citizens of the country where it is located.


Johnson & Johnson’s operates in three segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics.


Substantial and impressive product lines. No doubt about their popularity and sustainable competitive advantage. And as consumer products they are a very attractive investment in a recession.

With the acquisition of Pfizer’s consumer products in 2006. consumer went from 18% to 26% of revenue in 2007. This is a trend I like.

Johnson & Johnson Buys Pfizer Unit for $16.6 Billion

Published: June 27, 2006

When Pfizer announced in February that it wanted to unload its consumer health care unit — well-known products like Listerine for bad breath, Rolaids and Zantac for heartburn, Lubriderm for dry skin and Rogaine for hair loss — the group became the object of William C. Weldon's desires.

"When this asset became available, immediately we were interested," said Mr. Weldon, the chief executive of Johnson & Johnson. "Very, very rarely do you see.

Analysts said the move would make Johnson & Johnson the world's largest consumer health care company. Several analysts, however, said the price — more than four times the group's 2005 sales of $3.9 billion — seemed high compared with previous deals in the field.

In addition to the other household names, the deal will give Johnson & Johnson rights to the over-the-counter version of Zyrtec, the top-selling prescription antihistamine, and the foreign rights to the Nicorette smoking cessation line.

The company said it had evaluated the value of the products based on their merits, not compared to other, similar deals.
"This is a very different set of assets," said Robert J. Darretta Jr., Johnson & Johnson's chief financial officer.

Several analysts said the deal seemed to represent a strategic shift for Johnson & Johnson by increasing its smallest division — consumer health — to a size closer to the company's more dominant pharmaceutical and medical device divisions.

In the first quarter, pharmaceuticals accounted for 43 percent of the company's $13 billion in sales, while medical devices and diagnostics accounted for 39 percent of sales. Consumer health care accounted for only 18 percent.
With the Pfizer acquisition, Mr. Weldon said, the company's divisions will be more equally weighted, at 40 percent pharmaceuticals, 35 percent medical devices and diagnostics and 25 percent consumer health care.

By changing that ratio, the company increases the overall weighting of a fairly predictable part of its business at a time when results in the pharmaceutical and medical device businesses are volatile.

During a telephone conference with investment analysts yesterday, Mr. Weldon acknowledged that the consumer business was the least risky of its businesses. "Does that come into the equation? Yes. But it doesn't really drive it," he said, asserting that the company's strategy has always been broadly based.

Mr. Weldon also noted that the use of over-the-counter medications was growing rapidly and that increasing disposable income in developing nations was creating additional demand for consumer products.
Among positive aspects of the acquisition is that it will enhance the overall relevance of the company's consumer brands, help secure shelf space in retail establishments, and open up new markets. About 50 percent of the Pfizer portfolio's sales are outside the United States.

While the pharmaceutical segment continues to slide, this move in to consumer products looks like a necessary strategic move to help offset the big declines we will see in pharma in 2009 and 2010.
In 2005 Pfizer’s consumer health did $2 billion and was growing around 10%. In 2007 JNJ did $14.5 billion in consumer in 2007. It was still 26% of revenue in 2008 Q3

Consumer includes products used in the baby care, skin care, oral care, wound care and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products.

Major brands include

• AVEENO skin care products;
• BAND-AID Brand Adhesive Bandages;
• CLEAN & CLEAR teen skin care products;
• JOHNSON’S Baby and Adult
• LISTERINE oral care
• MOTRIN® IB ibuprofen
• NEUTROGENA skin and hair care
• RoC skin care product
• REMBRANDT Brand of oral care
• SPLENDA No Calorie Sweetener
• STAYFREE sanitary protection
• SUDAFED cold, flu and allergy
• TYLENOL acetaminophen products
• Vendôme skin care product lines

These products are marketed principally to the general public and sold both to wholesalers and directly to independent and chain retail outlets throughout the world.


Somebody talk me down.I am looking at JNJ again

I sold JNJ because the pharmaceutical division is under pressure from generics and a weak pipeline.That has started to come true especially over the last 9 months

JNJ has a few big blockbusters and not a lot of other drugs. The loss of any one of them hurts the segment significantly. JNJ is losing many of them

This is the 2007 results for top performing drugs

% change
(Dollars in Millions) 2007 2006 2005 07/06 06/05
Antipsychotics $4,697.00 4,183 3,552 12.30% 17.8
REMICADE(infliximab) 3,327 3,013 2,535 10.4 18.9
PROCRIT/EPREX 2,885 3,180 3,324 -9.2 -4.3%
TOPAMAX(topiramate) 2,453 2,027 1,680 21.0 20.7
LEVAQUIN/FLOXIN 1,646 1,530 1,492 7.6 2.5
ACIPHEX/PARIET 1,357 1,239 1,169 9.5 6.0
DURAGESIC/Fentanyl 1,164 1,295 1,585 -10.0 -18.3
CONCERTA 1,028 930 774 10.5 20.2
Hormonal Contraceptives 925 1,016 1,136 -9.0 –10.6
Other 5,384 4,854 5,075 10.9 -4.4
Total $24,866.00 23,267 22,322 6.90% 4.2

the first nine months of 2008—hurt by Risperidal and Duragesic

(Dollars in Millions)

Sept. 2008 Sept. 2007 change

REMICADE $2,862.00 $2,419.00 18.30%
TOPAMAX 2,051 1,801 13.9
PROCRIT /EPREX 1,900 2,257 -15.80
RISPERDAL 1,841 2,546 -27.70
LEVAQUIN /FLOXIN 1,180 1,214 -2.80
CONCERTA 967 739 30.9
ACIPHEX /PARIET 884 1,010 -12.50
DURAGESIC 764 900 -15.10
Other 5,443 4,750 14.6
Total $18,882.00 $18,469.00 2.20%

Q3 sales of $6.1 billion, up 0.2% from a year ago. While sales international sales were up 10%, U.S. sales dropped 6%, hurt by the recent introduction of competing generic versions Risperdal-- down 61.5% to $320 million. Generic competition also continued to hurt the company's pain drug Duragesic, whose sales fell 16.2% to $259 million.

Third quarter sales of the long-acting injected version of the antipsychotic drug Risperdal Consta, that still has patent protection, increased 15% to $338 million.

Sales of cancer drug Velcade increased 46.2% to $190 million and Topamax rose 19% to $728 million. Remicade grew 19.4% to 978 million.
Combined sales of the company's anti-anemia drugs Procrit and Eprex dropped 9.2% to $619 million in the quarter, hurt by reduced use amid safety concerns.

Brief overview of a few of the blockbusters

Remicade (infliximab) is a biologic approved for the treatment of Crohn’s disease, ankylosing spondylitis, psoriasis, psoriatic arthritis, ulcerative colitis and use in the treatment of rheumatoid arthritis. U.S. sales growth is driven by market growth. An increase in export sales is due to the increased demand outside the U.S. and customer production planning needs. Remicade is competing in a market that is experiencing increased competition due to new entrants and the expansion of indications for existing competitors. While there are more biologics for inflammatory disease in the past few years from Abbott(humira) Enbrel (Amgen) Raptiva(Genetech) and Amevive (Biogen), competition from generics is a distant threat. There are only a few biologics to date that have generic competition. Most do not and will not for years.


TOPAMAX approved for adjunctive and monotherapy use in epilepsy, as well as for the prophylactic treatment of migraines, is a blockbuster. The loss expected in 2009 could see the over $2 billion in revenue cut in half if not more. The growth is primarily due to increases in the migraine category partially offset by generic competition in certain markets outside the U.S.

The patent for TOPAMAX in the U.S. expired in September 2008. In July 2008, the U.S. Food and Drug Administration granted pediatric exclusivity for extending market exclusivity in the U.S. until March 2009.

The major contributor to the growth was the continued success in the migraine category. The patent for TOPAMAX® in the U.S. expired in September 2008. This means per annum sales of $2.5 billion will no doubt see some significant declines starting in Q4

A federal judge issued an injunction permanently barring Mylan Pharmaceuticals from selling generic topiramate tablets and capsules in the United States before September 26, 2008, the expiration date of the patent for TOPAMAX.

JNJ won approval for the pediatric extension and has delayed the Mylan launch until March 2009. In 2007, U.S. sales of TOPAMAX® were $2.0 billion. The expiration of a product patent or loss of market exclusivity is likely to result in a significant reduction in sales.

In the first fiscal nine months of 2008, U.S. sales of TOPAMAX were $1.7 billion.


PROCRIT® is a biologic and is not suffering generic competition ( in the US)but has seen indication demand erode at the prescribing level as main users in dialysis centers are forced to curtail prescriptions.

Hemoglobin guidelines were revised down and use of erythropoietin contributed to a sales decline of 11.9% in Q3 after seeing significant declines of 9% in 2007 Outside the US, Stada and Hospira have copycat Procrit drugs.


CONCERTA a product for the treatment of attention deficit hyperactivity disorder saw sales growth of 66.4% over the fiscal third quarter of 2007. Much of the sales growth was market growth. Although the original CONCERTA patent expired in 2004, the FDA has not approved any generic version that is substitutable for CONCERTA. Two parties have filed Abbreviated New Drug Applications (ANDAs) for generic versions of CONCERTA, which are pending and may be approved at any time. Hat would mean the immediate vaporization of over half a billion dollars


Risperdal is used to treat bipolar disorder and schizophrenia. Johnson & Johnson had reported declining sales of Risperdal even before generic versions were available in the U.S., as the cheaper versions were already available in other countries.

Mylan's will be the second generic version of Risperdal on the U.S. market. Teva Pharmaceutical Industries Inc. launched its generic on June 30, and at the time, the company expected that no other generics would be approved for at least 180 days. Teva said Monday that a federal appeals court had voided the ruling that gave it exclusivity, which paved the way for Mylan's launch.

The FDA approved Mylan's generic risperidone tablets in doses of 0.25 milligram, 0.5 mg, 1 mg, 2 mg, 3 mg and 4 mg. Mylan said sales of Risperdal, which is marketed by a subsidiary of Johnson & Johnson, reached $2.67 billion in the U.S. in the 12 months ended June 30. Mylan launch was 9/17/2008

Barr Pharmaceuticals Inc. has also requested approval for a generic form of Risperdal.

In Q3 Risperdal sales for JNJ were $323 million—down over 60%. Generic competition is devastating.

Q3 LEVAQUIN/FLOXIN, RISPERDAL(risperidone), ACIPHEX/PARIET and DURAGESIC/Fentanyl Transdermal (fentanyl transdermal system) experienced operational declines of 10.4%, 63.0%, 19.0% and 20.7% respectively, versus the prior year. Generic competition continued to negatively impact the sales of these products.


In Q3 2008, other pharmaceutical sales grew 10.7% versus the prior year. The biggest contributor to the increase was VELCADE, a treatment for relapse multiple myeloma, which was co-developed with Millenium

Johnson & Johnson is trying to open new sources of revenue growth by introducing new drugs. During the quarter, the company submitted a New Drug Application to the U.S. Food and Drug Administration for rivaroxaban, an investigational, oral, once daily anticoagulant for the prevention of deep vein thrombosis and pulmonary embolism in patients undergoing hip or knee replacement surgery. The company also submitted a supplemental new drug application to the FDA for the combination of Doxil and Taxotere for the treatment of women with advanced breast cancer who have received prior anthracycline treatment. In July, the FDA granted pediatric exclusivity for Topamax extending the marketing exclusivity through March 2009.

Running a gloomy scenario one year ahead assuming Topamax expires and Concerta expires and the others that are off patent decline anywhere from 20-30% I get revenue of $20 billion down around 25%. I am not pretending this is accurate but it gives at least an estimate of what can happen. If the lost medications go down faster, it could be worse. If Concerta holds it might be better. The main point is that pharma for JNJ is in decline and the pipeline is not promising.

Medical Devices and Diagnostics

The segment includes products distributed to wholesalers, hospitals and retailers, used principally in the professional fields by physicians, nurses, therapists, hospitals, diagnostic laboratories and clinics.

These products include:

• Cordis’ circulatory disease management products
• DePuy’s orthopaedic joint reconstruction and spinal care
• Ethicon’s wound care and women’s health products;
• Ethicon Endo-Surgery’s minimally invasive surgical
• LifeScan’s blood glucose monitoring and insulin delivery
• Ortho-Clinical Diagnostics’ professional diagnostic
• Vision Care’s disposable contact lenses

(Dollars in Millions)

% change
2007 2006 2005 07/06 06/05
DEPUY $4,587.00 4,105 3,847 11.70% 6.7
ETHICON ENDO-SURGERY 3,834 3,376 3,105 13.6 8.7
ETHICON 3,591 3,213 3,092 11.8 3.9
CORDIS 3,425 4,088 3,982 -16.2% 2.6
LIFESCAN 2,373 2,074 1,909 14.4 8.6
Vision Care 2,209 1,879 1,694 17.6 10.9
DIAGNOSTICS 1,642 1,488 1,408 10.3 5.7
Other 75 60 59 25.0 1.7
Total $21,736.00 20,283 19,096 7.2% 6.2

Total devices for 2007 grew 7.2%, with operational growth of 3.9% and 3.3% due to a positive impact from currency fluctuations. U.S. sales were $10.4 billion, an increase of 3.2%. International sales were $11.3 billion, an increase of 11.1%, with 4.6% from operations and a positive currency impact of 6.5%.

DePuy had revenue of $4.6 billion -- an 11.7% increase over prior year. This growth was primarily due to DePuy’s orthopaedic joint reconstruction products including the hip and knee product lines. Strong performance came from Mitek’s sports medicine products.

Ethicon Endo-Surgery had sales of $3.8 billion in 2007, a 13.6% increase over 2006. A major contributor of growth continues to be endocutter sales, which include products used in performing bariatric procedures for the treatment of obesity, an important focus area for the franchise. Strong results also were seen in HARMONIC SCALPEL, an ultrasonic cutting and coagulating surgical device. There was also strong growth in the Advanced Sterilization Products line.

Ethicon sales grew 11.8% in 2007 with $3.6 billion in sales. This was a result of solid growth in the hemostasis, women’s health, biosurgicals, and the mesh product lines. There was also continued growth in suture sales.

Sales were $3.4 billion, a decline of 16.2% over 2006. This decline reflects lower sales of the CYPHER® Sirolimus-eluting Coronary Stent due to increased competition outside the U.S., as well as the global contraction of the drug-eluting stent market following reports of a potential risk of late stent thrombosis associated with the use of drug-eluting stents. These results were partially offset by strong performance by the Biosense Webster and the neurovascular businesses. In response to challenges facing the Cordis franchise the Company announced a restructuring initiative in 2007.

LifeScan had revenues of $2.4 billion -- an increase of 14.4% over 2006, reflecting the continued success of the ULTRA product lines. An additional contributor was the growth of the Animas business due to the launch of the 2020 insulin pump[Medtronic competitor] during the year.

Vision Care franchise had sales of $2.2 billion in 2007, a growth rate of 17.6% over the prior year. This growth was led by the continued success of such brands as ACUVUE OASYS, ACUVUE ADVANCE for ASTIGMATISM, ACUVUE ADVANCE, 1-DAY ACUVUE MOIST™, 1-DAY ACUVUE DEFINE and 1-DAY ACUVUE® for ASTIGMATISM.

The Ortho-Clinical Diagnostics had $1.6 billion in sales in 2007, a 10.3% increase over 2006. This is due to the continued global growth in the Immunohematology product line, as well as the growth in the Immunodiagnostic product line and the 2007 launch of the Chagas screening assay in the U.S.

Medical Devices and Diagnostics segment revenue was $20.3 billion in 2006, representing an increase over the prior year of 6.2%, with operational growth of 6.4% and a negative impact from currency of 0.2%. U.S. sales were $10.1 billion, an increase of 6.5%. International sales were $10.2 billion, an increase of 5.9%, with 6.2% from operations and a negative currency impact of 0.3%.

As of December 2007 the segments were as follows:

2007 2006 2005 2004 2003

Consumer 14,493.0 9,774.0 9,096.0 8,333.0 7,431.0
Pharma 24,866.0 23,267.0 22,322.0 22,128.0 19,517.0
Devices 21,736.0 20,283.0 19,096.0 16,887.0 14,914.0
Revenues 61,095.0 53,324.0 50,514.0 47,348.0 41,862.0

Percentage of revenue

Consumer 24% 18% 18% 18% 18%
Pharma 41% 44% 44% 47% 47%
Devices 36% 38% 38% 36% 36%

Seeing growth in consumer is a positive. The acquisition from Pfizer supercharged 2007 results.

Q3 percentages

Consumer 26%
Pharmaceutical 38%
Medical Devices & Diagnostics 36%

I expect consumer to continue to grow at 10-15% per year. Medical devices might expect 10% and my doomsday scenario for pharma sees a 20% decrease[overly pessimistic]

For 2009, revenue might be $64 billion give or take for a growth rate of 5% over 2007 and possible negative growth over 2008 depending on how pharma does. With a net margin of 20% that is $12.8 billion net income for nearly flat performance and EPS of $4.47 and a PE of 13. Pharma may not fall off that fast in 2009 but by 2010 it should given the loss of Concerta, Topamax and Risperdal.

Dividend is $1.84 and a the yield is 3.2%. Total dividends paid are around $4 billion and seems safe.


LTM 2007 2006 2005 2004

Cash from Ops. 15,295.0 15,249.0 14,248.0 11,799.0 11,089.0
Capex 3,176.0 2,942.0 2,666.0 2,632.0 2,175.0
Acquisitions 410.0 1,388.0 18,023.0 987.0 580.0

Total debt is $14.6 billion and cash is an astounding $4.8 billion.

The only solid drugs are Remicaide and Velcade and possibly Procrit will stabilize –good for around $7 billion. By 2010 without new drugs things could get a whole lot worse. JNJ really dropped the ball on pharma.But the other segments are attractive with the exception of Cypher.

JNJ just bought Mentor—silicone implants, Botox and facial fillers. Mentor does about $400 million in revenue per year but when Botox is approved I estimate it should see $1 billion if it can capture 1/3 of the market. The acquisition was fairly priced.

I guess I have talked myself out of JNJ just now at $56 but would look again at lower prices. Sure wish they had paid more attention to the pipeline. Consumer is strong and medical devices will survive well without blockbuster sales of Cypher. But replacing billions in lost patent revenue is going to hurt -- a lot. OK somebody talk me in to it.
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I agree, this is a WEB company to the max - at the right price.

so what is JNJ's valuation, Value Hound? Do you have a smoothed growth of revenue, earnings, cash flow etc for the past ten years? Take that, project out ten years, discount back for 30-50% margin of safety?

What's the price it would take to put YOU into the JNJ driver's seat?

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Kit, marvelous writeup, as always. Just to add a tidbit, JNJ has the marketing rights to VRTX's anti-HCV protease inhibitor outside North America, IIRC. This drug is likely to be approved in late 2009 or 2010 and has "blockbuster" potential.........missash, likes JNJ and VRTX but no current positions.
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Cash on hand is $14.18 billion--missed the one in my typing frenzy. The reason I found this astounding is because they have enough cash on hand to pay off debt. For a company the size of JNJ zero net debt is phenomenal.

Didn't know about the VX-950 rights. That helps offset some losses Looks like the drug is going to be effective. Data from Phase III shows good response in combination with Pegasys interferon and ribavarin.

It has also been fast tracked by the FDA -- good news

Approval in 2010--just when JNJ loses Topamax. It wont replace lost revenue but will help

No rights in Japan and US but has international rights. According to one article for every one HepC patient in the US there are two in the European Union and a total of 170 million world wide.

Don't see any estimates of revenue but should be in the billions if insurance will approve use with interferon and ribavarin Sometimes insurance is slow to pay on new drugs when they have older treatments on formulary. Imagine it will start slow and build. Perhaps a few hundred million for a year or two. Topamax is a $2.5 billion drug and Concerta over a billion. It's a lot to replace.

Probably time to do a DCF. i have become increasingly wary of using any cash flow growth estimates to lull myself into a false sense of security in the current economic climate of "who knows where we will go next?"

But it might be useful
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Hi Jean,

Kudos, once again.

Any thoughts on the political risks here? With Ms. Clinton in the Secretary of State role, perhaps national health care is not a worry to have to endure?

Probably time to do a DCF. i have become increasingly wary of using any cash flow growth estimates to lull myself into a false sense of security in the current economic climate of "who knows where we will go next?"

Might I suggest a nominal "stable" growth assumption. Simply get all future growth in excess of GDP for free.

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hey Rich

Don't foresee a lot of trouble with reimbursement in general for meds or devices. They are a medical necessity and the reimbursement is usually Medicare prices with private insurance being contracted and negotiated based on Medicare. So Medicare is the bottom usually and for instance if I am negotiating with United health they may offer me 110% of Medicare.I dont know what hospitals do as far as stocking things like stents and implants but imagine it is similar. Medicare has a price for everything right down to bandaids.

Here is a value with 6% CAGR followed by 2% terminal. At $44 it's low and JNJ will not see that price until and if they get hit with lost billions from pharma

Margins by segment

2007 2006 2005 2004 2003

Consumer 24% 18% 18% 18% 18%
Pharmaceutical 41% 44% 44% 47% 47%
Medical Devices 36% 38% 38% 36% 36%


LTM 2007 2006 2005 2004
Gross Margin 70.75% 70.95% 71.76% 72.27% 71.54%
SG&A Margin 33.39% 33.47% 32.69% 34.07% 34.16%
EBIT Margin 25.27% 24.90% 25.71% 25.40% 26.10%
Net Margin 19.54% 17.31% 20.73% 19.92% 17.28%

With 6% CAGR over 10 years JNJ has to make $118 billion in revenue—now at $64 billion. Sounds like a lot but maybe with acquisitions. I allowed 1% growth 2009 and 0% growth in 2010. I can see a scenario where they actually see negative growth 2010-2011 but 6% per year seems conservative.

Discount is 10.5%
Terminal growth 2%
Margins go from current 25% op margin down to 24% and 23% for a couple of years to reflect enlarging consumer segment. Then back to 25%

I used book value of debt
There is no options expense taken out

Present Value of FCFF in high growth phase $44,607.25
Present Value of Terminal Value of Firm $80,695.92
Value of the firm $125,303.17
Market Value of Debt $14,640.00
Market Value of Equity $110,663.17
Cash $14,800.00

Value of Equity in Common Stock $125,463.17
Value of Equity per Share $43.91
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A nice summary. In general I agree with your view, but am somewhat more optimistic. I retired from J&J in Feb of this year, after 24 years. I spent the last 10 doing business development for their OTC and specialty pharma areas. In my retirement planning I used a value of $75/share in 2013 (to value my options and RSUs). I still think that is pretty likely. By the way Value Line has much more optimistic projections in the $100 range for their 3-5 year target.

As you point out the consumer area is solid. High growth is not likely here but these brands have good staying power. J&J increased its international business very signficantly with the Pfizer acquisition. It continues to look ex-US for example with a recent important acquisition of the Dabao beauty/skin business in China earlier this year.

The Nicorette smoking cessation products not on your list also have good ex-US growth potential.

In terms of the Pharma pipeline you can get the list on the J&J website:

It is not as strong as I would like but the monoclonal antibody products from Centocor have good potential. (CNTO 1275, CNTO 148). Those NDAs are filed. The Centocor acquisition was one of J&J's best ever. J&J has been putting a lot of emphasis on dapoxetine for premature ejactulation, but the FDA rejected the NDA. I think that is filed in Europe. Tapentadol was recently approved as a new pain reliever:

This is the type of product (e.g. like Ultram) that J&J typically does well with.

Clearly the loss of risperdal and Topamax will present challenges. J&J has a follow-on to Topamax called carisbamate (now in Phase 3). Topamax was originally developed as an anti-epileptic but in recent years the bulk of sales have been for migraine prevention. Carisbamate seems to work in both, but it is not clear to me if has any advantage over Topamax.

Telaprevir could be big but this area (HCV) has seen many dissapointmeents. J&J has ex-US rights.

I think pharma and device will see increasing cost pressures in the years to come. The next 2-3 years will be the most challenging for J&J in my view, but being a world leader in human healthcare is not a bad spot for the long term.

sw- former Director Science and Technology, Business Development, J&J
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There's a simple way to ask yourself if JNJ is a buy — in a big picture sort of way.

$60.00 a share equates to a yield on free cash flow of just over 7% — very similar to the earnings yield.

The dividend is a healthy 3%, with a pay-out ratio of 39%. Baring something unforeseen the dividend is safe and it's reasonable to expect annual increases in line with earnings growth.

So you could look at it this way. You're getting a 7% return on cash flow, plus a 3% dividend in hand — a 10% return.

Value Line expects earnings to grow at around 8% annually to 2011-13. If this happens then you're getting a 10% return, compounding at 8% a year. The questions are: is this a satisfactory return, and how predictable is it? Wether it's a satisfactory return is an individual matter, but given negligible returns on 'safe investments,' it presumably holds some attraction.

So how safe is it? JNJ has a long history of increasing earnings, free cash flow, book value, and dividends almost every year. They're in an extremely strong financial position and Value Line gives them a Financial Rating of A++ (the highest). They also have a long history of stella returns on equity and total capital which have consistently been in the mid to upper 20% range. On a risk/reward basis, even in todays unsettled world, there probably isn't much risk to permanent loss of your capital; provided you are prepared to hold the stock for a while. Meanwhile you can collect, or reinvest, the 3% dividend yield.

JNJ hasn't been this cheap (stock price to fundamentals) for a very long time, but it's come close. If you go by Benjamin Graham's rule of thumb then with a p/e of 13 it's fairly priced if they grow earnings at 2 1/2% a year. Hopefully, they will best that and if they do at some point down the line it's almost inevitable that the p/e ratio will expand. Value Line is guessing to 18 come 2011-13.

And there's always the old adage that it's better to buy a great company at a reasonable price, than a good company at a cheap price…
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If you go by Benjamin Graham's rule of thumb then with a p/e of 13 it's fairly priced if they grow earnings at 2 1/2% a year.

I believe Graham used a 10-yr average earnings for his PE. Is JNJ's 10 yr avg earnings PE 13? Seems high.
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I believe Graham used a 10-yr average earnings for his PE. Is JNJ's 10 yr avg earnings PE 13? Seems high


Graham wrote a lot of things and I did forget about averaging earnings over several years. However, a 10 year average p/e as a valuation tool wasn't one of them.

There are some good industrial companies on sale now that pass all Graham's seven criteria for purchase — it's the first time in a very long time. However, Johnson & Johnson isn't one of them; and isn't an industrial company either.

Graham specialized in cheap stocks, wanting to buy good (or even not-so-good) companies at cheap prices. This is how Buffett started out, until he teamed up with Munger who persuaded him that it was better to: "Buy great companies at good prices rather than good companies at great prices." The rest is history, as they say.

I would argue that J&J is a great company at a good price, and a candidate for serious consideration at today's valuation.

I was slightly off in quoting Graham. You were right that he averaged several years earnings to establish a p/e; but it is three years and not ten. In Graham-speak this gives J&J a p/e of just over 15. If I'm right about Graham's rule of thumb that a reasonable price is a p/e of 8 for a company that isn't growing earnings and that each percentage point of growth is worth a p/e expansion of 2 then J&J is now reasonably priced if it grows earnings going forward at least at 3 1/2% annually.

Here's how J&J stacks up to Graham's seven tests:

From the Intelligent Investor: (chapter 14: Stock Selection for the Defensive Investor)

1. Adequate Size of Enterprise

Our idea is to exclude small companies which may be subject to more than average vicissitudes especially in the industrial field… pass

2. A Sufficiently Strong Financial Condition

For industrial companies current assets should be at least twice current liabilities—a so-called two-to-one current ratio. fail
Also, long-term debt should not exceed the net current assets (or "working capital"). pass
For public utilities the debt should not exceed twice the stock equity (at book value).

3. Earnings Stability

Some earnings for the common stock in each of the past ten years. pass

4. Dividend Record

Uninterrupted payments for at least the past 20 years. pass

5. Earnings Growth

A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end. pass

6. Moderate Price/Earnings Ratio

Current price should not be more than 15 times average earnings of the past three years. borderline

7. Moderate Ratio of Price and Assets

Currently price should not be more than 1 1/2 times book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier times the ratio of price to book value should not exceed 2.55 (This figure corresponds to 15 times earnings and 1 1/2 times book value. It would admit an issue selling at only 9 times earnings and 2.5 times net assets,etc.) fail

Graham also wrote that: "Our basic recommendation is that the stock portfolio, when acquired, should have an overall earnings/price ratio—the reverse of the P/E ratio—at least as high s the current high-grade bond rate. This would mean a P/E ratio no higher than 13.3 against a AA bond yield of 7.5%."

So, valuation is relative in relation to other return opportunities; what return you can get elsewhere. This is common sense. That is why in today's economic climate I suggested that at its present valuation J&J is a good conservative candidate for purchase.
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POD for Kelbon--woohoo!

thanks to both sw and the big k for input on JNJ. May be a buyer at some point after all
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