Johnson & Johnson (JNJ), a globally recognized leader in healthcare, presents a compelling value investment proposition due to its diversified presence across major healthcare industries. As the world's largest and most diverse healthcare firm, JNJ's operations span pharmaceuticals, medical devices, and consumer healthcare products, counsels Larry Cheung, founder of Letters from Larry.

The pharmaceutical division, contributing close to 50% of total revenue, boasts several industry-leading drugs in areas like immunology and oncology. The medical device group, accounting for almost a third of the company’s sales, maintains controlling positions in several areas, including orthopedics. Additionally, JNJ’s consumer division, though slated for partial divestment, has traditionally rounded out its robust product lineup.

JNJ’s strong R&D efforts are a critical pillar of its long-term growth strategy. The company has a track record of launching new blockbuster drugs and is committed to increasing the number of meaningful drugs in late-stage development to support long-term growth.

This focus on innovation is evident in its pharmaceutical segment, where recent launches are expected to mitigate upcoming patent expirations. JNJ’s R&D spending is substantial, with over 20% of sales in the drug business allocated to this area, showcasing the company’s commitment to maintaining a competitive edge through innovation.

The company’s wide economic moat is another key strength. This moat is underpinned by JNJ’s intellectual property in the drug group, high switching costs in the device segment, and strong brand power in the consumer group.

JNJ’s extensive salesforce, and its role as a desirable partner for smaller biotech firms, further reinforce this competitive advantage. The diversity of JNJ’s operations, along with its no single product dominance within each segment, contributes to its resilience against market fluctuations and competitive pressures.

Financially, JNJ is on solid ground. The company reported healthy organic growth in its MedTech division and an optimistic outlook for 2024, reflecting its operational strength and resilience. Furthermore, the company’s management, under the leadership of CEO Joaquin Duato, suggests strategic continuity and focus on diverse product lines, promising steady growth. The company has a sound balance sheet, a reasonable investment track record, and solid shareholder distributions.

JNJ does face some challenges, including legal issues such as talcum powder and opioid litigation, potential slower growth due to biosimilar competition, and risks associated with large-scale investments in technology like robotic-assisted surgery.

Despite these headwinds, JNJ’s diversified portfolio, robust R&D pipeline, and strong financials, combined with its wide economic moat, position it well for sustained value creation in the healthcare sector. This makes Johnson & Johnson a solid value investment, offering stability and potential for continued growth in the dynamic healthcare industry.

Subscribe to Letters from Larry here…