Johnson & Johnson spread its root into India 70 years ago.

Since then, the company

has brought many innovative ideas, products and services to improve the health and
well-being of people in India. The company today employs more than 3,500 people and
is organized into three business segments: Consumer Healthcare, Medical Devices
and Pharmaceuticals.

Consumer Healthcare
The consumer division of Johnson & Johnson India has a portfolio of iconic brands that
are #1 or #2 in their categories. Our products, across baby care, feminine hygiene, face
care, OTC, oral care and wound care, feature brands such as Johnson's Baby®,
Stayfree®, Clean & Clear®, Benadryl®, Listerine®, BAND-AID® and ORSL™ that are
trusted by consumers and healthcare professionals in India and around the world. By
anticipating needs and creating solutions and experiences, we help people live healthy,
vibrant lives.

Medical Devices
Having made significant contributions to surgery for more than 60 years in India, the
medical division of Johnson & Johnson India is the largest medical devices company in
India with products dedicated to addressing unmet needs in the fields of orthopaedics,
cardiovascular disease, coronary artery disease, peripheral vascular and obstructive
disease, neurovascular disease, arrhythmias, diabetes care, bariatric and metabolic
surgery, cancer surgery, vision care, general surgery, urologic surgery, hernia surgery
and infection prevention. We touch the lives of around 40 million patients every year.

Pharmaceuticals
Janssen India, the pharmaceutical division of Johnson & Johnson India, is dedicated to
addressing and solving some of the most important unmet medical needs of our time in
India, in oncology, immunology, neuroscience and analgesia, dermatology, infectious
diseases and metabolic diseases. At Johnson & Johnson India, we continue to be
driven by a vision of caring for the people by anticipating their needs, creating solutions
and experiences that help them and those that they care for living live healthy, vibrant
lives.

 1947
 Johnson & Johnson Spreads Its Roots to India
In 1947, Johnson & Johnson expands into India, marketing Johnson’s® Baby
Powder. Today, Johnson’s® remains a trusted brand by mothers and doctors.

 1957
Johnson & Johnson Is Incorporated in India
In September 1957, Johnson & Johnson incorporated a separate legal entity in
India with 12 employees. Today, the company employs 6,040 people across
three business segments: consumer products, medical devices and
pharmaceuticals.
Read More

 1959
The First Manufacturing Facility for Consumer Products
Is Established in Mumbai
Production began in 1959 at the Johnson & Johnson India plant in Mulund,
Mumbai, for Johnson’s® Baby Powder, BAND-AID® and specialized products.

 1962
The First Medical Devices (Sutures) Manufacturing
Facility Is Established
In 1962, the first Ethicon suture manufacturing facility was set up in Mumbai for
catgut sutures. Suture manufacturing was expanded with full-fledged state-of-
the-art plants in Aurangabad (1991) and Baddi (2007), respectively.
Read More

 1968
Johnson & Johnson Begins Manufacturing Sanitary
Napkins
In 1968, the company introduces the Stayfree® brand to India. Prior to this,
women had to rely on homemade methods that were often ineffective
 1975
A Pharmaceutical and Ethical Products Manufacturing
Facility Is Established
Ethnor Ltd (merged with Johnson & Johnson in 1994) set up a plant for
manufacturing pharmaceutical and ethical products of Ortho McNeil Laboratories
and Cilag Chemie (members of the Johnson & Johnson family of companies).

 1975
A Pharmaceutical and Ethical Products Manufacturing
Facility Is Established
Ethnor Ltd (merged with Johnson & Johnson in 1994) set up a plant for
manufacturing pharmaceutical and ethical products of Ortho McNeil Laboratories
and Cilag Chemie (members of the Johnson & Johnson family of companies).
Read More

 1975
Vicryl® Sutures Enter the Market
The Vicryl® Suture, a synthetic absorbable suture that can be naturally absorbed
into the skin, was launched in India. In 2008, a triclosan-coated version of the
Vicryl® Plus Antibacterial Suture was introduced. Today, in the field of synthetic
absorbable sutures, the company also offers PDS® and Monocryl® sutures.
Read More

 1989
The Ethicon Plant Receives the President’s Safety Award
The Ethicon catgut manufacturing facility was awarded the prestigious
President's Safety Award in 1989, a recognition of the company’s high
manufacturing safety and quality standards.

 1993
The First Professional Education Institute for Healthcare
Professionals Is Established
To help improve access to quality healthcare and accelerate the building of a
skilled India, Johnson & Johnson India took a pioneering step in 1993 by
establishing its first professional education institute–the Ethicon Institute of
Surgical Education (EISE) in Mumbai. Since then, the company has trained more
 than 250,000 healthcare professionals through its owned institutes and via
partnerships with government and educational institutions.

1998
DePuy Joins the Johnson & Johnson Family of Companies
In 1998, Johnson & Johnson acquired DePuy followed by Synthes in 2012 to tackle
some of the toughest problems in the orthopaedics industry. Today, their joint
reconstruction, sports medicine and facial fracture repair technologies can be found in
hospitals, clinics, and sports arenas across the world.

1999
An Analytical and Pharmaceutical Development R&D Center
Opens
A commercial drug stability testing center was set up in Mulund, Mumbai, in 1999.
Today, it is a full-fledged Analytical Centre of Excellence and plays a critical role in the
development of new medicines for patients around the world, delivering cutting-edge
development through open innovation that connects experts, researchers and partner
organizations and firms. Johnson & Johnson India is one of the few multinational
pharmaceutical companies with an analytical development center in the country.

2009
The Company Begins Partnering With the Indian Academy of
Pediatrics to Support Child Survival
Johnson & Johnson India’s Neonatal Resuscitation Program was founded in 2009 and
is the largest child survival project to be implemented in India. Over seven years,
Johnson & Johnson India, along with the Indian Academy of Pediatrics, has trained
more than 180,000 healthcare professionals and infant caregivers on resuscitation
skills to reduce infant mortality in India.

 2013
Construction Begins on a New Manufacturing Facility for
Consumer Products
The foundation laid stone for Johnson & Johnson India’s largest consumer
products greenfield facility in Telangana to manufacture personal hygiene and
skincare products.

 2015
 The Company Launches a New Class of Type 2 Diabetes
Medicine in India
In 2015, Janssen India, the pharmaceutical division of Johnson & Johnson India,
introduced canagliflozin, a new class of medication called sodium glucose co-
transporter 2 (SGLT2) inhibitors, for the treatment of type 2 diabetes.

 2016
Global Clinical Operations Are Established in India
Johnson & Johnson India establishes global clinical operations in India helping
patients access and participate in global clinical trials for the company’s
innovative therapies.

 2016
The Company Establishes an Innovative Partnership
With the Government of India on MDR-TB
In 2016, Janssen India donated 600 courses of bedaquiline to the Revised
National Tuberculosis Control Program (RNTCP) of India for use as part of a
conditional access program for multidrug-resistant tuberculosis (MDR-TB).
Discovered by Janssen researchers, bedaquiline is a therapy with a novel
mechanism of action against TB, and addresses a significant unmet need for
patients with MDR-TB.

Since then, the program is due to be expanded, with an additional 10,000

courses of treatment to be received by RNTCP through the Johnson & Johnson
USAID donation program.

 2017
The Company Supports the Humana People to People
Project, Designed to Save and Improve the Lives of
Women and Children
Johnson & Johnson began supporting the “Raising Healthy & Educated
Community” project, which aims to improve the quality of life, basic and
preventive healthcare and the quality of education for six villages in the
Mahbubnagar district of Telangana, with its main focus on women and children.
This project has successfully organized static clinic and health camps to reach
out to approximately 15,000 direct beneficiaries. It also focuses on strengthening
 preschool education for 3- to 6-year-old children, thereby improving health as
well as the quality of education in the community.
Read Less

 2018
Johnson & Johnson India Joins Forces with the
Government of Maharashtra to Boost Public Health in the
State
Johnson & Johnson India announced a strategic partnership with the
Government of Maharashtra to implement focused disease interventions that
have the potential to significantly improve the health of people and strengthen
health are in the state.

PRODUCT CYCLE

Johnson & Johnson Pharmaceutical Ltd. is a subsidiary of Johnson & Johnson, one of
the world's largest healthcare companies. The product cycle of Johnson & Johnson
Pharmaceutical Ltd can be described as follows:

1. Research and Development: This is the first stage of the product cycle where
the company invests heavily in research and development to come up with new
drugs and treatments. The company has a dedicated team of scientists who
work on discovering new molecules that can be used to develop medicines.
2. Clinical Trials: Once a new molecule has been discovered, the company
conducts extensive clinical trials to test its safety and efficacy. These trials
involve testing the new drug on human subjects in a controlled environment.
3. Regulatory Approval: After successful clinical trials, the company submits the
drug for regulatory approval to the appropriate authorities in the countries
where they plan to market the drug. The regulatory authorities evaluate the
safety and efficacy data from the clinical trials before granting approval.
4. Launch: Once the drug has been approved by the regulatory authorities, the
company launches it in the market. The company uses various marketing
strategies to promote the drug and create awareness among healthcare
professionals and patients.
5. Growth: As the drug gains acceptance among healthcare professionals and
patients, its sales start to grow. The company continues to invest in research
and development to improve the drug and expand its applications.
6. Maturity: Eventually, the drug reaches maturity, and sales growth slows down.
At this stage, the company may consider introducing a generic version of the
drug or focus on developing new drugs and treatments.
7. Decline: As the drug becomes outdated or faces competition from newer drugs,
its sales start to decline. The company may decide to discontinue the drug or
sell it to another company.
Overall, the product cycle of Johnson & Johnson Pharmaceutical Ltd is a continuous
process of research and development, clinical trials, regulatory approval, launch,
growth, maturity, and decline. The company's success in this cycle depends on its
ability to discover and develop new drugs and treatments that meet the needs of
patients and healthcare professionals.

RATE OF RETURN

The rate of return of the pharmaceutical industry varies depending on various factors,
such as the company's size, financial performance, market conditions, and regulatory
environment. However, the pharmaceutical industry is generally considered to be a
profitable and lucrative industry, with many companies generating high returns on
their investments.

According to a report by Statista, the average net profit margin of the global
pharmaceutical industry in 2020 was around 16.6%, which is higher than the average
net profit margin of many other industries. However, it's important to note that this is
an average, and some companies may have higher or lower rates of return depending
on their individual circumstances.

In addition, the pharmaceutical industry is also known for its high research and
development costs, which can affect the rate of return for companies in the industry.
It can take years and billions of dollars to develop a new drug, and not all drugs that
enter clinical trials end up being approved for sale. This means that companies in the
pharmaceutical industry need to carefully manage their investments in research and
development to ensure that they are investing in drugs that have a high potential for
success.

Overall, while the rate of return of the pharmaceutical industry may vary, it is
generally considered to be a profitable industry with high potential for returns on
investment.

INDUSTRY LIFE CYCLE

SCOPE OF INDUSRY

The research, development, and production of pharmaceuticals and medications are considered to be
the core activities of the pharmaceutical industry. It is pervasive and includes research, chemicals,
regulation, and participation from government organizations. The pharmaceutical industry, however,
has different features depending on the location and region.
Pharmaceutical businesses make significant financial investments to develop and produce
pharmaceuticals for patients. Patients and healthcare professionals (doctors, nurses, hospitals,
nursing homes, clinics, and so on) rely on these companies to treat ailments. These businesses
conduct research on the illnesses, build innovative and create new treatments for them. Drug
discovery and marketing are significant expenses for these companies. Pharmaceutical
businesses utilize patient medical information and reports in order to conduct research and develop
new medications.

Pharmaceutical firms typically trade in brand or generic drugs as well as medical equipment. All
nations have different laws and rules that apply to pharma products. The pharmaceutical sector has
grown to be a significant and extremely complicated company as a result of the numerous compliance
that must be followed in order to follow law and procedure. Outsourcing has emerged as a defining
feature of the sector. In other words, a lot of businesses hire specialized manufacturers or research
organizations to handle specific stages of the drug development process on their behalf. Others strive
to keep the majority of the procedures within their own organization.

Pharmaceutical Sector around the world

To begin, let’s consider the pharmaceutical sector in Europe. The European Medicines Agency and
EU-wide regulations, which center on the packaging, safety, transparency, and authorization
processes, govern this sector. Bayer is Europe’s largest pharmaceutical firm, and prescription
medication is most commonly used by women and the elderly. The estimated 35.2 billion euros that
pharmaceutical companies spend on R&D in 2017 is still rising, indicating a bright future for this sector
in Europe.

Then there’s Africa’s pharmaceutical industry. In this region, the industry is predicted to grow
significantly and reach a value of $40 to $65 billion by 2020. This expansion is being driven by
urbanization, increased healthcare capacity, and a more favorable business environment. Modern
medications are available for urban households to use, healthcare is becoming more effective, and
governments have implemented pricing controls and import quotas across the continent. In order to
decrease the demand for imports, some governments are also thinking about encouraging increased
domestic drug manufacture.
Although growth in the pharmaceutical business is projected in Latin America, the market is difficult
to forecast due to relatively fewer data points available than in other regions. Brazil, Argentina, Mexico,
and Colombia are anticipated to see the highest growth. Brazil and Mexico are global pharmaceutical
powerhouses. Colombia has the potential to lead the pharmaceutical sector in Latin America

The USA, last but not least. Prescription medications are used by 119 million Americans.
The pharmaceutical sector in the United States underscores the enormity of this figure. It controls
about half of the pharmaceutical market. Pfizer is the largest pharmaceutical corporation in the US,
with total revenues of $53.6 billion. The United States Food and Drug Administration is in charge of
overseeing medications before they are made available to the public.

Evolution of the Pharmaceutical Industry

in India
The growth of the Indian pharmaceutical industry can be outlined through four stages. Prior to 1970,
when there was minimal domestic competition and foreign firms controlled the Indian market, it is
known as the first stage.

The second stage encompasses the years 1970 to 1990. In this period there were many homegrown
enterprises begun. During this time, the Indian Patent Act of 1970 was passed and export initiatives
were launched.

The third phase spanned the years 1990 to 2010. The liberalization encouraged Indian companies to
start doing business overseas.

The fourth stage is marked by the amendment of The Patents Act in the year 2005. India became a
significant producer of generic medications during this time.

India is the world’s largest provider of generic medications by volume, accounting for 20% of total
worldwide pharmaceutical exports. With more than half of all vaccines produced worldwide, it is also
the leading vaccine manufacturer globally in terms of volume. Currently, in terms of volume and value,
the Indian pharmaceuticals market is the third-largest in the world. It has established itself as a hub for
industry and research on a global scale. A substantial supply of raw materials and access to a skilled
staff provide the company a distinct competitive advantage

As of 2021, the majority of medicines manufactured in India are low-cost generic drugs, which account
for the majority of India’s pharmaceutical exports. In light of the ongoing pandemic’s

Future Prospects
The pharmaceutical business will continue to thrive both internationally and in India. The high
prevalence of disease, the steady rise in individual disposable incomes, the development of the
healthcare infrastructure, and healthcare financing all support the industry’s outlook for the future.
Health insurance and medical technology advancements can help the pharmaceutical
business thrive by eliminating both financial and physical barriers to healthcare access in India. Over
the past five years, the Indian pharmaceutical business has expanded at a compound annual growth
rate (CAGR) of over 15%. Companies must adapt new business strategies and come up with unique
approaches to ensure the maximum achievable consumer satisfaction. Through partnerships and
agreements, Indian pharmaceutical businesses may continue to expand both organically and
inorganically. They should, however, continuously strive to improve operational efficiency and
production.

The pharmaceutical industry is expected to adapt and evolve throughout time because it is primarily
driven by profits and competition, with each company seeking to be the first to discover treatments for
different diseases.

INDUSTRIES
Agriculture and Allied Industries

Auto Components

Automobiles

Aviation

Banking

Biotechnology

Cement

Chemicals

Consumer Durables

Defence Manufacturing
 E-Commerce

Education and Training

Electronics System Design & Manufacturing

Engineering and Capital Goods

Financial Services

FMCG

Gems and Jewellery

Healthcare

Infrastructure
 Insurance

IT & BPM

Manufacturing

Media and Entertainment

Medical Devices

Metals and Mining

MSME

Oil and Gas

Pharmaceuticals

Ports
 Power

Railways

Real Estate

Renewable Energy

Retail

Roads

Science and Technology

Services

Steel
Telecommunications

Textiles

Tourism and Hospitality

 J&J PRODUCT LIFE CYCLE

Product Stewardship/Earthwards ®

Our Approach
At Johnson & Johnson, sustainability and innovation go hand in hand, as seen through
Earthwards®, our approach for encouraging the development of more sustainable
products. By fully integrating sustainable design solutions into our product innovation
processes, the Earthwards® approach helps make our products better for the places we
live and the billions of people who call our planet home.


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


The Earthwards® approach is a four-part process that starts with making sure that every
product satisfies regulatory compliance and delivers on Johnson & Johnson’s high
standards. To ensure our products meet environmental, health and safety
prerequisites, every product team must answer the following questions:

 What materials are we using?

 Where do they come from?
 What happens to the product after it’s used?

Life Cycle Assessments

Next, we look at each stage of a product’s life cycle—from formulation and
manufacturing, to product use and end-of-life—to find opportunities to drive
improvements throughout a product’s development. By focusing on the life cycle areas
with the highest potential impact, we can prioritize improvements for the largest
possible effect.


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



Earthwards® In Action
Earthwards® recognition is an honor reserved for our most broadly improved products.
When a product achieves at least three significant improvements across our seven
impact areas, a board of external experts determines if it warrants Earthwards®
recognition. Watch this video to learn more.



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

Example Product Recognitions

The Expedium Verse® spinal system’s innovative design led to a reduction of
instruments needed per procedure when compared to competitors. It also led to a
reduction in energy and water used to sterilize and disinfect instruments by more than
70%, while also helping create time and cost efficiency in the operating room.

Pharmaceutical product etravirine is a prescription HIV (human immunodeficiency

virus) medicine that is used with other HIV medicines to treat HIV infection in adults
and children 6 years of age and older. This is the first product from the Janssen
Pharmaceutical Companies of Johnson & Johnson that uses direct solvent reuse in the
manufacturing process, and it saw a 74.8% reduction in both solvent material and
waste from manufacturing.

Clean & Clear® Acne Triple Clear Bubble Foam Cleanser achieved a 31% reduction in
primary packaging through use of a non-metal pump. The facial cleanser uses the
innovative personal care ingredient Natrasurf®, developed by researchers at Johnson &
Johnson Consumer Inc. using green chemistry techniques.

Product life cycle is the cycle through which every product goes through from introduction
to withdrawal or eventual demise. It consists of four different stages which the product gets
through in its life cycle in the market namely,
 Introduction - the stage where in the product is introduced to the market and the sales are
slightly low
  Growth - the phase where in the sales of the product increases mostly due to heavy
promotions done for the brand and product
 Maturity - the phase where in the product is well known with the customers and is doing
well in the market
 Decline - the brand and product identity is on the the decreasing slope and the sales
numbers faces a decline.
Johnson's baby powder's product life cycle starts well back with introduction in 1950's with the growth of the
product among the people starting from 1962 with increasing profit. The brand and the product was well known
with the customers in a very short time from there and has attained maturity phase in the early 1970's. Since
then there is no look back for the product till early 2000's during when the product started declining in sales due
to the entry of several other global brands in the same category into India. However this was only a slight
decline and with the recovery of sales, the product still prevails in the market and the hearts of the consumers
with constant sales in the market. Thus the product follows a Growth slump maturity pattern.

Product life cycle

Growth slump maturity pattern

Johnson & Johnson: This Aging Star Is Starting To Dim

Sep. 07, 2021 5:47 PM ETJohnson & Johnson (JNJ)86 Comments18 Likes

Summary
  JNJ has underperformed both the market and its sector for many years.

 JNJ is one of the oldest companies on the NYSE but time is catching up
with this company's financial performance which is showing signs of
decline.

 JNJ's future growth is vested with its Pharmaceutical division. Revenues

from the division have grown in step with the market.

 Pharma businesses are reliant on the output quality of their R&D

investments both internally generated and via acquisitions. JNJ's
internal processes appear sound but one major acquisition has
dragged down the financial performance of the company.

 Some investors are attracted by JNJ's reliable performance and

dividend but I suspect that there are better places to invest over the
long term. I believe that JNJ is currently significantly overpriced relative
to its intrinsic value.

Sundry
Photography/iStock Editorial via Getty Images

Business Overview
Johnson & Johnson's (NYSE:JNJ) business model comprises three divisions:

1. Consumer Health – a relatively mature business which has grown revenues by 3% to

4% annually for the last 20 years. Along with this modest growth rate the division’s
reported earning’s margin (not withstanding extraordinary one-off expenses) is also
relatively modest.

2. Medical Devices – a business which hit peak revenues in 2013 and they have
been slowly declining ever since. Reported margins for this division are quite
lumpy but significantly higher than the Consumer Health division.

3. Pharmaceutical – this division is the jewel in the JNJ crown. Revenue growth has
been accelerating over the last few years and has averaged just over 7% per
year for the last 10 years. Reported margins for this division are also much
higher than the other two divisions.

Source: Author’s compilation using data from JNJ’s 10-K filings.

JNJ’s Strategy
Many years ago, JNJ used to state that its primary objective was to achieve superior
levels of capital efficient growth by focusing on the development of new and
differentiated products and services to sustain long term growth.

The company’s focus was on those segments of the healthcare market which were
growing (or had the potential to grow) and where JNJ could use its capability to
become a market leader in that segment.

The key to JNJ’s growth has been its investment in internal product development
through fundamental research and development (R&D) which has been supplemented
by strategic acquisitions. There have been some divestments along the way as well,
some of which have been forced on management by the corporate regulators for anti-
trust reasons.

The following chart shows how JNJ has been skewing its R&D investments by division
since 2007:

Source: Author’s compilation using data from JNJ’s 10-K filings.

The data demonstrates that although JNJ is continuing to invest in its lower growth
divisions in order to maintain their current levels of activity, the vast majority of
incremental investment is being directed into the higher growth Pharmaceutical
division.

JNJ has made many acquisitions to supplement its internal product development
efforts. Since 2000, JNJ has spent $71,234 M on acquisitions. Most of the acquisitions
have been relatively modest in size but there have been two very large ones:

 Pfizer’s consumer health division – this was acquired for $16,600 M in

2006.

 Actelion Ltd was acquired for $35,151 M in 2017.

Over the same time frame JNJ has made divestments totaling $23,196M.

In terms of a company’s natural life cycle JNJ is in the later stages. It is trying hard to
stave off the final stages of company life (The End Game as defined by Dr Aswath
Damodaran). JNJ is attempting to keep its growth rate above maturity through
investments in pharmaceuticals. This strategy is working from a revenue growth
perspective, but I note that it is coming at the expense of returns on invested capital
which is continuing to decline (as discussed later).
JNJ’s Historical Financial Performance
JNJ’s historical revenues and adjusted operating margins are shown in the chart
below:

Source: Author’s compilation using data from JNJ’s 10-K filings.

JNJ’s published Income Statement requires many adjustments in order isolate the
performance of the operating assets. I have made the following adjustments:

 Gains on asset sales and security trading have been eliminated.

 Acquisition expenses and asset impairment charges have been

eliminated.

 Operating leases payments have been converted to debt and

depreciation.

 R&D expenses have been eliminated (treated as a capital investment)

and I have inserted an R&D amortization charge (I have assumed that
the R & D investments have a 10-year life).
  Capitalizing 33% of the expensed Advertising charge and turning it into
an investment with a 3-year life (I assume that this portion of the
expense is about the promotion of the long-term brand).
The chart indicates that JNJ’s adjusted operating margins have been in decline since
2015 (this is also confirmed by JNJ’s published financial statements).

Due to JNJ’s limited reporting of product margins it is difficult to pin down exactly what
is causing the decline in operating margins. JNJ claims that the decline in margin is
across all of its divisions.

A chart of JNJ’s gross margins confirm that the decline in operating margin is likely
coming from an increase in manufacturing costs:

Source: Author’s compilation using data from JNJ’s 10-K filings.

The chart shows that since 2016 there has been a step change reduction in gross
margin and a significant increase in amortization charges. This change coincides with
the acquisition of Actelion.

At this stage the Actelion acquisition has yet to demonstrate a reasonable return on
investment and at the time there were several concerns raised in the financial media
that JNJ may have over-paid.

JNJ’s Moat
My moat assessment for JNJ is shown in the following table:
Source: Author’s assessment.

The major sources of moat strength for JNJ are spread across its 3 divisions:

 The JNJ consumer brand is potentially the strongest in the sector.

 The intellectual property (IP) embedded within the Pharmaceutical

division is thought to be of high quality (with a strong development
pipeline).

 There are believed to be relatively high user switching costs (for

surgeons) associated with the Medical Devices division.
It is encouraging that each division has a source of competitive advantage and it is for
this reason I have assigned JNJ a relatively wide moat. The question remains how
deep is the moat?

The depth of JNJ’s moat can be measured by its return on invested capital which is
shown in the chart below:
Source: Author’s compilation using data from JNJ’s 10-K filings.

Note that I have adjusted the published financial data for:

 One-off extraordinary expenses.

 Operating leases.

 Capitalization of Research & Development expenses.

 Partial capitalization of Advertising expenses.

 Adding back to the capital base any historical asset impairments over
the last 10 years.
JNJ’s return on invested capital is not spectacular and is indeed showing a concerning
downward trend.

I estimate that JNJ’s return on invested capital is around the median of the Healthcare
sector. The data suggests that a significant contributor to JNJ’s relatively modest
return on invested capital is related to potentially over-paying for acquisitions.

As a result of JNJ’s mediocre return on invested capital I have assigned JNJ a relatively
shallow moat.

JNJ’s Capital Structure

The following chart demonstrates that the company has kept its gearing ratio
reasonably steady (measured by total debt plus operating leases divided by the
market value of equity) for many years:

Source: Author’s compilation using data from JNJ’s 10-K filings.

The chart indicates that JNJ has increased its level of debt significantly since 2015
when it funded the acquisition of Actelion but the debt ratio has been relatively
steady because the share price has increased to support the additional load.

I have no major concerns about JNJ’s capital structure. JNJ’s debt is currently easily
serviced by its operating cash flows.

JNJ’s Cash Flows

The following table summarizes JNJ’s cash flows over the last 10 years:

Source: Author’s compilation using data from JNJ’s 10-K filings.

There is good alignment between JNJ’s reported Net Income and the Net Operating
cash-flow. This gives me confidence that there is probably very little smoothing of the
reported profit by management.
JNJ reinvests about 40% of its operating cash flows but this has been particularly
skewed by the acquisition of Actelion. Nevertheless, this is quite a good performance
relative to other companies in the sector.

JNJ returns cash to its shareholders both through share buybacks and a healthy
dividend (with a bias towards dividends). The dividend is easily covered by operating
cash flows whilst the buybacks are partially funded by debt.

Over the last 10 years JNJ has generated a free cash flow to capital / sales ratio of
16% and does an excellent job in generating free cash flow from its operations.

Recent Share Price Action

The chart
indicates that for the last 7 months although the share price has been on quite a
journey it has barely moved higher. Over the course of the last year, JNJ has
significantly under-performed the market.

Traders, no doubt, have been in and out of the stock during this journey as the price
has ebbed and flowed.

Historical Returns
Source: Morningstar

The data from Morningstar shows that JNJ has, for most of the last 10 years, under-
performed the sector and the broader S&P 500 index.

Although the stock is a favorite for those chasing solid dividends, the data indicates
that this hasn’t been sufficient compensation for investors relative to investing in a
broad market ETF.

Key Risks Facing JNJ

There are 2 major threats to JNJ’s future profitability:

 Government healthcare policies and particularly the policies relating to

drug pricing. JNJ acknowledges that around 30% of its revenues are
generated by prescriptions in the US. Governments, globally, are
focused on driving down the costs of healthcare. Each year since 2016
JNJ’s revenues have been impacted by a reduction in prices of around
2% (as reported in the Notes to the JNJ Financial Statements). This
trend has the potential to get worse as government budgets come
under increasing pressure post-COVID.

 The company supplements its R&D process with acquisitions. There is

already evidence to suggest that JNJ has overpaid in the past. The
returns from any future acquisitions need to be significantly higher
than JNJ's cost of capital.
The other significant risks which investors need to be mindful of include:

 The company is heavily dependent upon generating high quality

outcomes from its R&D investments. The R&D process must continue
to generate profitable new products.

 The company is regularly impacted by product governance and

litigation issues. The financial statements indicate that over the last 4
years, litigation expenses have totaled nearly $14,000 M. The regular
nature of these expenses is making it almost impossible for them to be
classified as extraordinary hence they are having a material impact on
operating margins.
My Investment Thesis for JNJ
For ease of projecting forward I am assuming that the world starts to adjust to a
“COVID- normal” way of life at the end of 2021. The key metrics for many markets are
being impacted by the disruption to normal market forces because of the COVID-19
pandemic. I expect that these impacts on revenue trends will begin to wash out of the
data towards the end of 2021.

My scenario for JNJ contains the following key assumptions for its three key markets:

 The Consumer Health sector according to market researchers such as

Globe Newswire confirm that the sector is mature. The sector as a
whole is growing at around global GDP (1% to 2%) but it is noted that
this sector comprises a wide variety of sub-markets (wellness, oral
health, nutrition and skin care, etc) each having their own growth
trajectories.

 The global Medical Devices market has been severely impacted by the
COVID-19 pandemic which has resulted in delays in the performance of
elective medical procedures (which normally includes these types of
devices). There has been a significant catch-up in these procedures
during 2021 which has caused a demand spike. According to Fortune
Business Insights the market is expected to grow at around 5% per
year until 2028.

 The global Pharmaceutical market is very broad and it is expanding

every year as a result of new drug developments. According to Statista
the market has been growing at around 6% per year for the last 20
years and this is expected to continue for the foreseeable future.
Prior to the COVID-19 pandemic, JNJ’s Consumer Health division for the last 5 years
had been growing at an average of less than 1% per year. I expect that this trend will
continue.

Similarly, JNJ’s Medical Devices division prior to the pandemic has seen very “lumpy”
sales with growth in some years and declines in others. There has been no
discernable growth trend. At the end of this year, I expect that the Medical Devices
future revenue growth will be around 1% per year.

The Pharmaceutical division is the main focus for the company. JNJ has been growing
this division’s revenues by almost 8% for the last 5 years. I expect that this trend will
continue from the end of this year and should be sustainable for at least 5 years
(based on the disclosures that JNJ has made about its development pipeline) before
slowly declining.
On-going external government pricing pressure will continue to put pressure on JNJ’s
operating margins. I am optimistic that this will prompt JNJ to work harder on reducing
internal expenses to balance the impact of this pressure. I expect that the high
amortization rates which are currently impacting gross margins will begin to roll off in
the next few years. For these reasons coupled with a more heavily weighted high
margin sales mix, I am projecting that adjusted operating margins will increase by
nearly 2% over the next 10 years.

In order for JNJ to maintain the projected growth for the Pharmaceutical division I see
no opportunity to reduce their investment levels in R & D over the forecast period.
Similarly, the historical level of acquisitions and divestments will also need to
continue in order to tactily support the R&D effort.

Key Assumptions in JNJ’s Valuation

 I have used the consensus analyst estimates for revenues in 2021.

From 2022 to 2025 I expect that revenues will grow by 4.5% ± 1%
before growth begins to decline to maturity at my estimate of GDP
(1.3%) at the end of 2030.

 Operating margins (which have been adjusted for operating leases,

research and development, and advertising) will improve from pre-
COVID levels of 21.9% to 23.5% ± 1.5% into perpetuity.

 Reinvestment (as represented by Δ Sales / Adjusted Net Capital) will

slightly improve from the current levels to 0.7 ± 0.1 over the next 10
years (this is the sector median).

 The return on adjusted invested capital (currently around 12%) will

slowly decline over time before settling at 10% ± 1% in perpetuity.
This will be substantially above the long-term cost of capital.

 JNJ currently has a relatively low effective tax rate. I expect that the
long-term tax rate for the company will increase over time to the
current US corporate marginal rate of 21%.

 I have used the Capital Asset Pricing Model (CAPM) to estimate JNJ’s
current cost of capital to be 6.1%. I have decreased the mature cost of
capital to 6.0% ± 0.2%. I estimate that this is marginally above the
 median of the typical cost of capital on the S&P500 which is reflective
of the risks involved in this business.

 I have estimated that the value of management’s outstanding options

is about $6,306 M.

 I have also made an adjustment for the unfunded pension liability of

$5,105 M.

2.1. SWOT Analysis of Johnson and Johnson in Detail

Strength:

Analyzing the strength of any company is a very significant part of their SWOT
analysis. The company must be well aware of its strengths as those features have
helped them earn its name in the market. The company must keep in mind that they
must not neglect their strengths when working on their weaknesses and new
opportunities. Like most other brands, The Johnson and Johnson also has some
strengths:

 The company has its dominance globally as it operates through its 265 subsidiaries in
over 60 countries. It also has a leading position among other health-care companies
throughout the world;
 All over the world, this company stands to be the one which is the most influential
company as well. They influence the economies of the countries' wellbeing and include
the USA's stock market;
 With over a century of experience, the company is excellent in fulfilling the market
targets' needs. Thus, this works as a significant strength for the company;
 The company has a substantial supply chain, which secures the availability of the raw
materials and distribution of the finished materials efficiently.
Weakness:

For any company, it is pretty common to have some weaknesses. The companies
need to find strategies that can remove those weaknesses. When a company is in a
competitive market, any weakness can impact its growth against its competitors. The
company can plan some long-term plans to change those weaknesses into their
strengths. Johnson and Johnson also has some weaknesses. For example:

 The lawsuits on various projects like Johnson and Johnson's talc-based baby powder
and Xarelto, and other things influenced the customer's trust a lot. It leads to a
negative impact;
 The company's global revenue encircles mainly between three divisions, medical
devices, diagnostics, and pharmaceutical. Thus, this proves they do not have any
diversity, which has incurred a catastrophic loss;
 The company is over depended on Zyitga till 2018, which use to incur $ 3.5 billion per
year. Their sales declined when the court provided an allowance to the sales of the
generic version.

Opportunities:

A company must consider the opportunities that they can get to survive the high
market competition. They must set their policies as per those opportunities to ensure
their growth in the future. They should also consider the condition of the market while
working on their opportunities. Here are some opportunities for Johnson and Johnson:

 There has been an increment in the total revenue to 80%. The increase in the sale of
health-care products for the consumers leads. It has rebalanced its portfolio;
 57% of the sales come from the USA. Therefore the company needs to focus on
pharmaceutical sales in Asia, Africa, and Latin America;
 They can offer a discounted price on drugs to attract the lower-class.

Threats:

All the companies that survive in a competitive market must have some threats that
can stop their growth. Other competent opponents' market conditions change of taste
of the customers can be prevalent threats. Similarly, a famous brand like Johnson and
Johnson also has some threats:

 The company faces tough competition from Abbott, Procter and Gamble, and many
more. If this goes on, then they might lose their market share as well. It is a fear for
them;
 Increment in sales of Generic drugs leads to a significant threat for the company;
 The rapid emergence of innovative drugs in many countries like India works as a threat
for the company. They need to make themselves advance with new technology.
POLITICAL

Government has a high level of influence and power in the pharmaceutical industry.
This impact can affect pricing, taxes and duty. Although the FDA cannot control the
cost of drugs, it has the power to approve generic versions of drugs, offering cheaper
alternatives. There are ‘drug companies abusing government processes to block
generic competition and keep drug prices rising’. It is evident that although the
government and federal agencies are attempting to keep the price of medication
down, their processes are sometimes flawed and can be manipulated, at detriment to
the consumer.

LEGAL

Factors such as product efficacy and safety concerns over ingredients can have a
detrimental impact on a company within the pharmaceutical industry. Linking in with
Political factors, the healthcare industry is often falling under scrutiny from
government bodies. This can result in legal investigations and prosecutions.
Pharmaceutical companies such as Johnson and Johnson are often embroiled in patent
related disputes. The expiration of existing patents from competitors can impact the
company massively.

SOCIOLOGICAL

It is important to understand how society has an impact on the culture of an

organisation within its environment. The populations attitude plays an important role
in how an organisation understands its customer base. Demographics of the
population, surging rates of health issues and falling birth rates as well as financial
circumstances, educational levels and attitudes towards health and the environment
are all impacting factors. In the case study we see how ‘the demand for
pharmaceuticals and innovative medicines will increase, driven by a growing and
ageing population’.

TECHNOLOGICAL

With the fast pace of technological change, coupled with the advancement of
technological research, it is important for the pharmaceutical industry to stay ahead.
The introduction of AI enables companies to make smarter, faster, and more strategic
decisions. ‘AI will increase drug development efficiency by not wasting research
efforts’.

ECONOMIC

Pricing pressures and volume slowdowns affect markets globally and as a result,
generic players are finding it difficult to source growth from traditional means market
expansion. The changing foreign exchange current rates and the risk of global
inflation can often mean loss but as Johnson and Johnson is a company that operates
in multiple global markets, it may be in a position to balance its loss from the profits
made in other markets around the world. Biosimilar competition and the placement of
substitutes in the market will inevitably have an impact on revenue.

ENVIRONMENTAL

As ‘the pharmaceutical industry is one of the most wasteful, it needs to increase

efficiency’. Linking technological factors here through the use of AI will ‘enable
companies to make smarter, faster and more strategic decisions’ which should benefit
both the company but also the end user of its products. R&D into waste management
will ensure that the risk posed by the company to the environment is minimal.
Constitution of Corporate Social Responsibility Committee

The Board of Directors of J&J India (the “Board”) have formed a Corporate Social
Responsibility Committee (the “CSR Committee”) in line with section 135 of the
Companies Act, 2013 (the “Act”) read together with the applicable rules thereto.

The CSR Committee will carry out the following functions:

(i) to formulate and recommend to the Board, a CSR policy indicating activities to be
undertaken as specified in Schedule VII of the Act;

(ii) to recommend the amount of expenditure to be incurred on the activities referred to

in sub-paragraph (i) above; and

(iii) to monitor the CSR policy from time to time.

CSR projects, programs, and activities:

We believe that a targeted approach to corporate giving enables us to focus our

resources to support identified needs in the most effective way. As healthcare and
improving the trajectory of health are closest to our hearts, our efforts focus on
strategic platforms to help advance health and improve people’s lives through targeted
initiatives.

In accordance with the primary CSR philosophy and the specified activities listed under
Schedule VII of the Act read with Section 135 and the Companies (Corporate Social
Responsibility Policy) Rules, 2014 (the “CSR Rules”), and any amendment(s) thereof,
the CSR activities of J&J India will have the following broad thrust areas:

Advancing women’s and children’s health

 Safe Motherhood
 Neonatal Resuscitation
 Nutrition for maternal and infant well-being
 Programs/projects that address the issues of woman and child health
Strengthening the healthcare workforce

 Training and capacity building of healthcare personnel such as ASHA workers,

ANMs etc.
 Supplementary training for doctors working in government, not for profit
hospitals, rural settings and NGO sectors
 Support for educational events such as seminars/symposiums/summits on health
issues or advanced management of diseases

Building Livelihood Capacity

 Impart technical training and skills development to enhance

livelihood/employability of underprivileged adults and youth
 Training for disadvantaged girls on skills such as ANM or Nursing or healthcare
assistants
 Undertake, support or partner livelihood projects/programs

Accelerating innovative solutions to address global disease challenges:

 Awareness and Prevention of HIV/AIDS

 Awareness and Prevention and treatment of Diabetes, Obesity and associated
co-morbidities
 Awareness and Treatment of Tuberculosis
 Awareness and Issues related to Mental Health
 Issues related to Eye Health
 Awareness, Prevention and treatment of cancer, stroke, COPD and all non-
communicable diseases that are listed by the Central Government as NCDs
requiring intervention
 Any other disease or condition that merits focus due to the magnitude of the
problem and relevance to India

Community Responsibility

 Disaster Relief
 Undertake, support or partner rural or community development projects/programs

Encouraging Innovation
  Contributions or funds provided to technology incubators and startups located
within academic institutions which are approved by the Central Government,
State Government, Union Territories or Government approved agencies

Sustainability

 Ensuring environmental sustainability, ecological balance, protection of flora and

fauna, animal welfare, agroforestry, conservation of natural resources and
maintaining quality of soil, air and water.

STRATEGIC ANALYSIS

Business Strategy and Management’s Objectives

A business strategy focuses on a certain business field and identifies a proper approach to establish an
advantageous position to compete. Another explanation of a business strategy is it focuses on a certain business unit and
studies how to enhance its competitiveness, such as choosing a more attractive segmented market. From the perspective of
business operations, there are different levels of strategies. Generally, academia categorizes strategies into Corporate
Strategy, Business Strategy and Functional Area Strategy. The formulation of a business strategy requires taking the
business objective, business capability, opportunities and threats of the market into consideration.

The Company manages within a strategic framework with Our Credo as the foundation. The Company believes
that our strategic operating principles: being broadly based in human health care, managing the business for the long term,
a decentralized management approach and commitment to our people and values are required to successfully meet the
demands of the rapidly evolving markets in which we compete. To this end, management is focused on our growth
drivers: creating value through innovation, expanding our global reach with a local focus, excellence in execution and
leading with purpose.

The Company engages in areas of human health care where there is an opportunity to make a meaningful
difference, and is committed to creating value by developing broadly accessible, high quality, innovative products and
services. New products introduced within the past five years accounted for approximately 25% of 2014 sales. In 2014,
$8.5 billion, or 11.4% of sales, was invested in research and development, reflecting management’s commitment to
delivering new and differentiated products and services to meet evolving health care needs and sustain the Company’s
long-term growth.

Our diverse businesses with more than 265 operating companies located in 60 countries are the key drivers of the
Company’s success. Maintaining the Company’s decentralized management approach, while at the same time leveraging
the extensive resources of the enterprise, uniquely positions the Company to innovate, execute and reach markets globally,
while focusing on the needs and challenges of the local markets.

Broadly based in Human Health Care

Strategic Framework
 Managed for the long-term

Decentralised Management approach

People and values

Broadly Based in Human Health Care

As a major player in three market segments and with a focus on the full continuum of care—prevention, diagnosis
and treatment —Johnson & Johnson competes in fully one-third of the global health care marketplace. The breadth helps
drive consistent performance and enables the company to pursue growth opportunities— including in some of the fastest
growing segments of health care —wherever they arise. It allows to respond to purchasing trends with governments and
large customers.
 Perhaps more important, it allows them to think about patient care holistically, drawing on insights from multiple
perspectives in a disease category. In the end, being broadly based allows company to stay true to the Credo in the face of
an ever-evolving health care environment.

Managed for the Long Term

At Johnson & Johnson, the focus is on managing for the long term—building the long-term equity of our brands,
building sustainable customer loyalty and building shareholder value over time. As a result, 70% of the sales are from
products in global market share. Key to this long term approach is disciplined portfolio management—maintaining focus
on specific therapeutic areas and building a critical mass of innovation in those areas. Indeed, they invested $7.5 billion in
R&D in 2011 and have one of the strongest new product portfolios in the industry. Approximately two-thirds of the
growth over the past 10 years has come from organic growth tied to innovation, with the balance coming from licensing,
partnerships and acquisitions.

Decentralized Management Approach

Decentralized management approach is based on the belief that the leaders—those closest to patients and
customers—are in the best position to understand and address their needs. This philosophy has been critical to the global
expansion. R&D centers in emerging markets develop products based on local insights and patient needs—often starting
with one of the powerful global brands. They are expanding the product offerings to meet the unique needs of the
growing middle-class and emerging markets in high-growth countries.

People and Values

People and values are the common thread behind the Credo, the strategic principles and growth drivers. Johnson
& Johnson people are engaged, caring and committed. The unique Johnson & Johnson culture and the values are inspired
by the company’s Credo. They are complimented by extensive efforts to cultivate and develop the talents of people. At
Johnson & Johnson, commitment to attract, develop and retain the very best talent—talent that fosters the aspiration and
growth.

Impact of Global Business

Strategy on Growth Business
strategy
 Johnson & Johnson (JNJ) operates in nearly 60 countries. It sells its products in about 200 countries. The
following chart shows the breakup of sales to customers by business segment.

Figure 1
 Johnson & Johnson’s operations

Nearly 55% of Johnson & Johnson’s revenue comes from non-US markets. The company focuses on the
innovation of new products that bring value to people, healthcare professionals, and health systems around the world.
The company operates 134 manufacturing facilities and eight innovation centers across the globe. In the US, there
are eight manufacturing facilities for the Consumer Products segment, eight for the Pharmaceuticals segment, and 26 for
the Medical Devices and Diagnostics segment. There are 41 manufacturing facilities in Europe, 15 in the Western
Hemisphere—except the US, and 36 in Africa and Asia-Pacific.
Most of the manufacturing facilities outside the US serve more than one business segment. Major research
facilities are located not only in the US, but also in Belgium, Brazil, Canada, China, France, Germany, India, Israel, Japan,
the Netherlands, Singapore, Switzerland, and the United Kingdom.

Consumer segment
Consumer segment sales in 2014 were $14.5 billion, a decrease of 1.4% from 2013, which included 1.0%
operational growth offset by a negative currency impact of 2.4%. U.S. Consumer segment sales were $5.1 billion, a
decrease of 1.3%. International sales were $9.4 billion, a decrease of 1.4%, which included 2.3% operational growth offset
by a negative currency impact of 3.7%.

Major Consumer
Franchise Sales:
Table: 1
(Dollars in Millions) 2014 2013 2012
OTC 4,106 4,028 3,766
Skin Care 3,758 3,704 3,618
Baby Care 2,239 2,295 2,254
Oral Care 1,647 1,622 1,624
Wound Care/Other 1,444 1,480 1,560
Women’s Health 1,302 1,568 1,625
Total Sales 14,496 14,697 14,447
Source: Annual report of Johnson and Johnson Co., 2014

Major Sales in Consumer

segment
9%

10% 28% OTC

Skin Care
Baby Care
11%
Oral Care

Wound Care/Other
16%
26%
Figure 2
 Pharmaceuticals segment

The Pharmaceutical segment achieved sales of $32.3 billion in 2014, representing an increase of 14.9% over the
prior year, with strong operational growth of 16.5% and a negative currency impact of 1.6%. U.S. sales were $17.4 billion,
an increase of 25.0%. International sales were $14.9 billion, an increase of 5.0%, which included 8.3% operational growth
and a negative currency impact of 3.3%. In 2013, Pharmaceutical segment sales included a positive adjustment to previous
estimates for Managed Medicaid rebates. This negatively impacted 2014 Pharmaceutical operational sales growth by 0.8%
as compared to the prior year. In 2014, sales of the Company’s Hepatitis C products, OLYSIO® /SOVRIAD®
(simeprevir) and INCIVO® (telaprevir), had a positive impact of 6.9% on the operational growth of the Pharmaceutical
segment.

Major Pharmaceutical Therapeutic Area Sales:

Table: 2
(Dollars in Millions) 2014 2013 2012
Total Immunology 10,193 9,190 7,874
REMICADE® 6,868 6,673 6,139
SIMPONI® /SIMPONI ARIA® 1,187 932 607
STELARA® 2,072 1,504 1,025
Other Immunology 66 81 103
Total Infectious Diseases 5,599 3,550 3,194
EDURANT® 365 236 102
INCIVO® 226 517 443
OLYSIO® /SOVRIAD® 2,302 23 –
PREZISTA® 1,831 1,673 1,414
Other Infectious Diseases 875 1,101 1,235
Total Neuroscience 6,487 6,667 6,718
CONCERTA® /methylphenidate 599 782 1,073
INVEGA® 640 583 550
RISPERDAL® CONSTA® 1,588 1,248 796
INVEGA® SUSTENNA® /XEPLION® 1,190 1,318 1,425
Other Neuroscience 2,470 2,736 2,874
Total Oncology 4,457 3,773 2,629
VELCADE® 1,618 1,660 1,500
ZYTIGA® 2,237 1,698 961
Other Oncology 602 415 168
Total Other 5,577 4,945 4,936
PROCRIT® /EPREX® 1,238 1,364 1,462
XARELTO® 1,522 864 239
OTHER 2,817 2,717 3,235
Total Pharmaceutical Sales 32,313 28,125 25,351
Source: Annual report of Johnson and Johnson Co., 2014
 Major Sales in Pharmaceutical
segment

17%

32%
Total Immunology

Total Infectious Diseases

14%
Total Neuroscience
Total Oncology

Total Other

20% 17%

Figure 3

Medical Devices and Diagnostics segment

The Medical Devices segment sales in 2014 were $27.5 billion, a decrease of 3.4% from 2013, which included an
operational decline of 1.6% and a negative currency impact of 1.8%. U.S. sales were $12.3 billion, a decrease of 4.3% as
compared to the prior year. International sales were $15.3 billion, a decline of 2.7% as compared to the prior year, with
operational growth of 0.5% offset by a negative currency impact of 3.2%. In 2014, the divestiture of the Ortho-Clinical.
Diagnostics business had a negative impact of 3.2% on the operational growth of the Medical Devices segment.

Major Medical
Devices Franchise
Sales:
Table: 3
(Dollars in Millions) 2014 2013 2012
Orthopaedics 9,675 9,509 7,799
Surgical Care 6,176 6,269 6,483
Specialty Surgery/Other 3,541 3,504 3,478
Vision Care 2,818 2,937 2,996
Cardiovascular Care 2,208 2,077 1,985
Diabetes Care 2,142 2,309 2,616
Diagnostics 962 1,885 2,069
Total Medical Devices Sales 27,522 28,490 27,426
Source: Annual Report of Johnson and Johnson Co., 2014
 Major Sales in Medical and Diagnostics
segment
4%
8% Orthopaedics

8% Surgical Care
35%
Specialty Surgery/Other
10%
Vision Care
Cardiovascular Care
13% Diabetes Care

22%

Figure 4

Results of Operations

In 2014, worldwide sales increased 4.2% to $74.3 billion, compared to increases of 6.1% in 2013 and 3.4% in
2012. These sales changes consisted of the following:

Table: 4
Sales increase/(decrease) due to (%) 2014 2013 2012
Volume 6.3 7.6 5.7
Price -0.2 0.1 0.4
Currency -1.9 -1.6 -2.7
Total 4.2 6.1 3.4
Source : Annual Report of Johnson and Johnson Co., 2014

Result of
Operations

25%
31%
1

44%

Figure 5
 In 2014, sales of the Company’s Hepatitis C products, OLYSIO® /SOVRIAD® (simeprevir) and INCIVO®
(telaprevir), had a positive impact of 2.8%, and the divestiture of the Ortho-Clinical Diagnostics business had a negative
impact of 1.4% on the worldwide operational growth. The acquisition of Synthes, Inc., net of the related divestiture,
increased worldwide operational growth by 2.5% and 3.1% in 2013 and 2012, respectively.
 Sales by U.S. companies were $34.8 billion in 2014, $31.9 billion in 2013 and $29.8 billion in
2012. This represents increases of 9.0% in 2014, 7.0% in 2013 and 3.2% in 2012. Sales by international
companies were $39.5 billion in 2014,
$39.4 billion in 2013 and $37.4 billion in 2012. This represents increases of 0.4% in 2014, 5.4% in 2013
and 3.5% in 2012.

The five-year compound annual growth rates for worldwide, U.S. and international sales were
3.7%, 2.4% and 5.0%, respectively. The ten-year compound annual growth rates for worldwide, U.S. and
international sales were 4.6%, 2.3% and 7.3%, respectively.

Sales in Europe achieved growth of 1.9% as compared to the prior year, including operational
growth of 2.6% partially offset by a negative currency impact of 0.7%. Sales in the Western Hemisphere
(excluding the U.S.) experienced a decline of 3.5% as compared to the prior year, including operational
growth of 5.2% offset by a negative currency impact of 8.7%.

Sales in the Asia-Pacific, Africa region achieved growth of 0.4% as compared to the prior year,
including operational growth of 4.4% and a negative currency impact of 4.0%.

In 2014, the Company had one wholesaler distributing products for all three segments that
represented approximately 11.0% of the total consolidated revenues. In 2013 and 2012, the Company did
not have a customer that represented 10% or more of total consolidated revenues.
INTRINSIC VALUE
STOCK VALUATION

Stock valuation refers to the process of estimating the intrinsic value of a

company's stock based on its financial performance, growth prospects,
and other factors. There are several methods of stock valuation, including
the discounted cash flow (DCF) method, the price-to-earnings (P/E) ratio
method, and the dividend discount model (DDM).

In the case of JNJ Ltd, which is a publicly traded company, its stock price is
determined by market forces based on supply and demand. However,
investors and analysts may use various valuation methods to assess
whether the current stock price is overvalued or undervalued.

One commonly used method is the P/E ratio, which measures the price of
a company's stock relative to its earnings per share (EPS). As of my
knowledge cutoff date, JNJ Ltd's P/E ratio was around 23, which suggests
that the market was willing to pay $23 for every $1 of JNJ Ltd's EPS.

Another method of stock valuation is the DCF method, which estimates

the present value of a company's future cash flows. This method requires
assumptions about future growth rates, discount rates, and other factors,
and is subject to a higher degree of uncertainty than the P/E ratio method.
However, it can provide a more detailed and comprehensive analysis of a
company's intrinsic value.
Investors and analysts may also consider qualitative factors such as JNJ
Ltd's competitive position, industry trends, and management quality when
assessing its stock valuation.

It is important to note that stock valuation is subject to market volatility

and other factors that may impact a company's stock price over time.
Investors should conduct their own research and analysis and seek
professional advice before making investment decisions.

Is Johnson & Johnson's Stock Overvalued Or Undervalued?

Johnson & Johnson JNJ shares have lagged the S&P 500 in 2021,
generating a year-to-date total return of just 3.6%.

Johnson & Johnson has gotten plenty of headlines for its COVID-19 vaccine,
but investors may be wondering just how much value is left in the pharma
giant’s stock?

Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental

metrics for gauging a stock’s value. The lower the PE, the higher the value.
For comparison, the S&P 500’s PE is currently at about 33.4, more than
double its long-term average of 15.9.

Johnson & Johnson’s PE is currently 23.9, significantly below the S&P

500 average as a whole. Johnson & Johnson's PE ratio is up 15.6% over the
past five years, suggesting the stock is currently priced at the high end of its
historical valuation range.

Growth: Looking ahead to the next four quarters, the S&P 500’s forward PE
ratio looks much more reasonable at just 20.3. Johnson & Johnson’s
forward earnings multiple of 15.2 is still well below the multiple of the
S&P 500 as a whole, making Johnson & Johnson stock look undervalued.

Johnson & Johnson’s forward PE ratio is even slightly lower than its financial
sector peers, which are currently averaging a 16.9 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren't everything.

The growth rate is also critical for companies that are rapidly building their
bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to
incorporate growth rates into the evaluation process. The S&P 500’s overall
PEG is currently about 0.9; Johnson & Johnson’s PEG is 2.6, suggesting
Johnson & Johnson is currently overvalued after accounting for its modest
growth.
Price-to-sales ratio is another important valuation metric, particularly for
unprofitable companies and growth stocks. The S&P 500’s PS ratio is
currently 3.08, well above its long-term average of 1.62. Johnson & Johnson’s
PS ratio is 4.7, more than 50% higher than the S&P 500.

Finally, Wall Street analysts see value in Johnson & Johnson stock over the
next 12 months. The average analyst price target among the 16 analysts
covering Johnson & Johnson is $188.05, suggesting about 17.1% upside from
current levels.

CASE STUDY

Case – Cancer Causing Agent Found in Johnson & Johnson’s Baby Powders

The other Johnson‟s baby product which proven to be hazardous to the users are
Johnson
& Johnson‟s Baby [Link] 9 shows the packaging label of Johnson &
Johnson‟s Baby
Powders. It shows that the Johnson & Johnson‟s Baby Powdersdid not list all the
ingredients
used to produce the products. However, it was tested to containEthylene Oxide
which is very
important material used in large-scale chemical production. It also produces
ethylene glycol,
one of the components used in plastics. Ethylene Oxide has been used globally
to produce
solvents, lubricants, paint thinners and detergents. Ethylene Oxide is a
very dangerous
chemical as at room temperature, the chemical is flammable, carcinogenic,
mutagenic, and
irritating. It is an anesthetic gas with a misleading pleasant smell. Hence,
unprotected and
constant exposure to ethylene oxide can cause genetic mutation or DNA
alternation which
leads to cancer. It can damage the lungs and the cardiovascular system. Physical
manifestation
after exposure includes headache, vomiting, dizziness, sleep disturbances, leg
pain, weakness,
stiffness, sweating, liver enlargement and suppression of antitoxic functions of
the body.

In response to the tested results, the famous cosmetic brand manufacturer

Johnson &
Johnson loses its license in India due to an ordered case by the Food and Drug
Administration
after 15 batches of baby powder products was found sterilized by an irritant
and cancer-
causing component. Moreover, Food and Drug Administration (FDA) cancelled
the license of
Johnson & Johnson India to produce the product at their Mulund plant. The order
will come to
effect on June 24, 2013. "While ethylene oxide can be used for sterilization, the
company did
not bother to carry out a test after the process to check the amount of residue in
the product.
The products are used for new born babies. It is must for the company to follow
all measures,"
said by FDA joint commissioner KB Shende quoted by Pune Mirror.

 Keep out of reach of children

 Do not use if quality seal is broken
 Warning: Keep powder away from child‟s face to avoid inhalation, which
can cause
Based on the case study, it shows that there are some ingredients in the product
that are
flammable, poisonous and harmful if swallowed, inhaled or absorbed by skin.
Therefore, these
precautions are included to warn and inform the consumers on possible hazard
of the product,
as well as to protect themselves from legalproduct liability lawsuit.

As consumers, the legal action by current laws is useful to protect them in

product liability
malpractice. The manufacturers, in another side, should increase their
awareness and provide
best product without harmful chemicals. They should consider providing
consumer and
organic products or product contents such as herbs and plants. Furthermore,
although baby
product packaging has not mention in this paper, the manufacturers should
consider on how to
produce eco-friendly packaging such in shampoo bottle or powder container to
reduce non-
biodegradable waste. The non-biodegradable waste could affect the
environment. Therefore,
the product liability practice could bring the benefit to both sides, either the
consumers or
manufacturers.

11
Conclusions
 The products liability has become a very important issue for both

consumers and
manufacturers. Every year, millions of people adversely affected by defective
products, and
manufacturers and sellers pay huge amounts for products-liability insurance and
damages. The
law has responded with causes of action to regulate the safety of consumer
goods and product
related services. The manufacturers or distributors are responsible to provide a
safety warning
notice about their product‟s risk to alert the consumers.

The products liability has become a very important issue for both
manufacturers. Every year, millions of people adversely affected

consumers and
by defective products, and
manufacturers and sellers pay huge amounts for products-liability insurance and
damages. The
law has responded with causes of action to regulate the safety of consumer
goods and product
related services. The manufacturers or distributors are responsible to provide a
safety warning
notice about their products risk to alert the consumers.