J&J's 'Steady Cash Flow Is Key,' Barclays Upgrades To Overweight

Analyst Geoff Meacham elaborated, “JNJ has underperformed the S&P 500 and DRG over the past 12 months due to concerns about the impact of biosimilars on Remicade, low near-term earnings growth, and a lack of significant near-term pipeline catalysts.”

While this has led to calls for the conglomerate to be broken up, Meacham believes that such calls are premature, especially given that splits/spins in the pharma segment in recent times have often resulted in higher than anticipated transition and support costs but only mixed success.

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Johnson & Johnson Moving Forward

According to the Barclays report, “JNJ's balance sheet provides it the flexibility to acquire various growth assets.”

However, a pharma deal would be preferable to a large med tech/ortho acquisition, given that industry consolidation could be a “cost-savings play that is unlikely to boost longer-term growth or to provide significant multiple expansion.”

Although Johnson & Johnson’s next growth wave is likely to come from its autoimmune pipeline, Meacham believes that the company also needs to focus on new therapeutic categories.

“JNJ has historically acquired late stage pipeline/early commercial stage assets and then leveraged the acquired R&D expertise into next generation drugs,” Meacham mentioned.

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