A Work Project, presented as part of the requirements for the Award of a Master Degree in Economics /

Finance / Management from the NOVA – School of Business and Economics.

Equity Research Johnson &

Johnson
Beyond the Pharmaceutical Industry

Marta Soares Condeço - 43864

A Project carried out on the Master in (Economics/Finance/Management) Program, under the

supervision of:

Professor Rosário André

January 2022
Abstract

The goal of the Field Lab – Equity Research was to elaborate a report regarding Johnson
& Johnson in order to evaluate the company and arrive at an intrinsic value. Therefore, the
present document was produced by Diana Patrícia Campos da Silva and Marta Soares
Condeço, two students from the master's degree in finance at Nova School of Business and
Economics (“Nova SBE”). Before computing the model, an in-depth macro and micro
analysis was performed by investigating not only the business segments of the company
but also the industry and the overall economy. After that and after considering several
assumptions, the outcome was a share price of $225.6 thus representing a value higher than
the market price. The interpretation is that J&J is trading its stock at a lower price than its
fair value. The relative analysis made afterwards reached the same conclusion. Finally, to
better understand the price fluctuations when any of the assumptions changed, a sensitivity
and scenario analysis was computed. We consider that all the assumptions chosen are fair
since they reflect both internal and external features that may affect the company.

Keywords: Drugs, Regulation, Patents, Forecasting

This work used infrastructure and resources funded by Fundação para a Ciência e a
Tecnologia (UID/ECO/00124/2013, UID/ECO/00124/2019 and Social Sciences DataLab,
Project 22209), POR Lisboa (LISBOA-01-0145-FEDER-007722 and Social Sciences
DataLab, Project 22209) and POR Norte (Social Sciences DataLab, Project 22209).
This report is part of the … report (annexed) and should be read has an integral part of it.
Table of Contents
1. COMPANY OVERVIEW ........................................................................ 5

1.1. COMPANY OVERVIEW ...........................................................................5

1.2. PANDEMIC CHALLENGES ......................................................................6
1.3. OWNERSHIP AND PAYOUT STRUCTURE ...............................................8
2. FORECAST ANALYSIS ....................................................................... 9

2.1. REVENUES .....................................................................................................9

▪ 2.1.1. Pharmaceutical ..................................................................9
▪ 2.1.2. Medical Devices .............................................................. 11
▪ 2.1.3. Consumer ......................................................................... 13
▪ 2.1.4. Conclusion ....................................................................... 15
2.2. OPERATING COSTS ..................................................................................... 15
2.3. NWC & CAPEX ......................................................................................... 17
3. CONCLUSION .....................................................................................18
 1. Company Overview
Johnson & Johnson, Inc. (referred in this report as J&J or the company) is one of
the largest and most well-known companies with specialization in the production
of pharmaceuticals, consumer health products and medical devices.

Despite J&J has a long 1.1. Company Overview

history of improving its
performance, in terms of ESG The company was founded in 1886, in New Jersey, United States, as a family
J&J presents a lower
performer when looking at the project developed by Edward, James and Robert Johnson. The main highlights of
overall pharmaceutical the company history are described in the timeline below:
industry.

Exhibit 1: J&J Employees Evolution

140,000

135,000
Number of Employees (#)

130,000

125,000
In our days, with physical presence in more than 60 countries and around 134,500
120,000

115,000 employees (Exhibit 1), Johnson & Johnson is a holding company that controls its
110,000 operations through its worldwide established subsidiaries. Such exponential
105,000
growth can be proven by the analysis of the company’s sales evolution. In the last
100,000

10 years, J&J revenues increased from $61,587 mn (2010) to $82,584 mn (2020),

corresponding to a 10-year growth rate of approximately 34.09% (Exhibit 2).
Source: MacroTrends
Throughout the years, the company also started to take environmental, social and
Exhibit 2: J&J Sales Evolution governance (ESG) issues more into consideration. In a world here sustainability is
$90.00bn
seen as a global responsibility, it became clear the need of having a metric that
$80.00bn

$70.00bn would allow to combine sustainability with investment management. According to

$60.00bn Refinitiv ESG data, J&J has a current ESG Combined Score of 45.05%, for 2021,
J&J Sales

$50.00bn
which is equivalent to a C+ rating, where a higher score is correlated to a lower risk
$40.00bn
premium. The Covid-19 pandemic also allowed to conclude that companies which
$30.00bn
presented a higher score reported lower financial losses. The ESG Controversies
$20.00bn

$10.00bn of 0.79%, equivalent to a D- rating, demonstrates an insufficient transparency in

$0.00bn reporting material ESG data publicly1. Johnson & Johnson committed ESG
dez/10 dez/15 dez/20
management approach seeks to continue improving and effectively manage the
Source: Johnson & Johnson Annual Reports
ESG risks and future opportunities.

To corroborate such valuation, J&J presents a lower ESG performer when looking

1
Refinitiv (2021), Environmental, Social and Governance Scores from Refinitiv
 at the overall pharmaceutical industry being outperformed by Roche, with an ESG
2020 Score of 75.37% (A-) and a ESG Controversies of 57.03% (B-), and Novartis,
with an ESG 2020 Score of 46.45% (C+) and a ESG Controversies of 7.03% (D-),
also according to Refinitiv ESG data. Besides Refinitiv having not made the
disclosure of the ESG Score value for 2021 of both these companies, since this is
a qualitative measure, it is not expected to significantly deviate it’s result from 2020
to 2021. A study pursued by RepTrak, demonstrated below, shows the impact that
ESG Score have, in our days, in terms of consumer purchase decisions increasing
the pressure on Johnson & Johnson to overcome their current issues and increase
their score position2.

Exhibit 3: Johnson & Johnson

Annualized Arthimetic Returns- Johnson & Johnson
Base 250
Total Return 28.03%
N 506
Annualized arth,return 13.85%
Annualized volatility 23.52%
Source: Own Calculations Lastly, it was crucial to have the S&P500 Index as a benchmark value to the overall
Exhibit 4: S&P500 Index economy growth. In the past 20 years, Johnson & Johnson have shown a positive
Annualized Arthimetic Returns- S&P500 Index trend in terms of stock performance, however it did not outperform S&P500 in the
Base 250
past 2 years, as the annualized arithmetic returns of the index was 23.39% (Exhibit
Total Return 47.33%
N 506 4) compared with the 13.85% achieved by JNJ stock performance (Exhibit 3). To
Annualized arth,return 23.39% balance the results, J&J registered, in the same observable window, an annualized
Annualized volatility 26.02%
volatility of 23.52% while the S&P500 Index a value of 26.02%. Looking at the
Source: Own Calculations
same metric value for the S&P500 Pharmaceutical Select Industry Index (Exhibit
Exhibit 5: S&P500 Pharmaceutical 5), it is possible to analyse that Johnson & Johnson (13.85%) outperformed the
Select Industry
Industry Index (3.47%) and still has a lower annualized volatility, a value of 23.52%
Annualized Arthimetic Returns- S&P500 Pharmaceutical Select Industry Index
Base 250 in comparison with 27.75%. Even though a lower performance of Johnson &
Total Return 7.03%
N 506 Johnson when compared to the S&P500 Index, Johnson & Johnson presents an
Annualized arth,return 3.47%
Annualized volatility 27.75%
annualized return higher than the Industry Index.

Source: Own Calculations 1.2. Pandemic Challenges

J&J has made efforts to
deal with several The pharmaceutical company Johnson & Johnson is known for its long existence
pandemics over the
years and Covid-19 was and for dealing with several pandemics. For example, in 1918 the world
no exception. experienced the deadliest pandemic, Spanish Flu, which has infected over 500
million people in just two years. At that time, Johnson & Johnson had a
fundamental role by bringing in the epidemic mask composed of sterile gauze.
From then on, this pharmaceutical company has dealt with epidemics from Ebola

2
RepTrak, Pharma ESG is up, but it’s not universal, released on 8 th June 2021
 (with J&J‘s Ebola vaccine approved in July 2020) to HIV (working for 25 years to
combat this disease and developing nine HIV medicines). 3 The covid-19 disease
was not an exception and from the very beginning this company began to make
efforts not only to fight this pandemic, but also to support all those who needed it.

The first death linked to 2019-nCoV took place on January 11, 2020 and on several
weeks after, J&J initiates efforts to develop a vaccine against SARS-CoV-2. On
March 30, 2020, BARDA and J&J commit $1 bn to vaccine research and
development (R&D). On one hand, if Janssen Covid-19 vaccine only took 1 year
to be approved by United States Food and Drug Administration (U.S. FDA), on the
other hand, it is possible to conclude that J&J is the one that is taking the least
gains so far even if the profits shown in the table below are for the third quarter of
2021. The comparison between the most sucessful vaccines in terms of available
budget to R&D, time to develop and profits earned can be seen in the following
table.

Investment Announcement FDA Approval EMA Approval

Exhibit 6: Top 5 J&J Shareholders Vaccine Profit
in R&D Date Date Date
Top 5 J&J Shareholders (# Janssen ~$1B March, 2020 February, 2021 March, 2021 $502M
thousands shares) Pfizer-BioNTech ~$1B January, 2020 August, 2021 December, 2020 $13B
Alex Gorsky 2,900.00 Moderna ~2.5B January, 2020 December, 2020 January, 2021 $4.8B
Joaquin Duato 916.58 AstraZeneca ~104.2M April, 2020 Not Approved January, 2021 $1.05B
Paulus Stoffels 739.24
Jennifer Taubert 402.59 The covid-19 vaccine development was not the only effort taken by this company
Joseph J. Wolk 85.00 in the struggle against the pandemic. A few days before J&J announced the
Source: MarketBeat, NYSE: JNJ investment for the vaccine development, the pharmaceutical company announced,
together with the Johnson & Johnson Foundation, a commitment of $50 mn to
Exhibit 7: Shares Outstanding Evolution
2850.0 support frontline health workers battling COVID-19 - from meals to protective
# Shares Outstanding (in billions)

2800.0
2,789 equipment, extra training to mental health.
2,745
2,729
2750.0 Finally, the company has mobilised resources to leverage its deep scientific
2,684
2700.0 2,671 expertise, collaborations and global reach to provide essential training to frontline
2650.0 healthcare workers and to update the public on scientific developments concerning
2600.0 COVID-19 and vaccines.
2550.0
Currently, although the development of the pandemic is heading in the right
jun/18

jun/19
jun/16
set/16

jun/17
set/17

set/18

set/19

jun/20
set/20
dez/18
dez/16

dez/17

dez/19

dez/20
mar/16

mar/17

mar/18

mar/19

mar/20

direction, the efforts are not over yet. Not only it is necessary to respond to a post-
Source: J&J Annual Reports
pandemic crisis, where many diseases have been left behind for various reasons,
but also is important to closely monitor people inoculated with Janssen to
understand what are the medium-long term vaccine consequences.

3
Johnson & Johnson News, 4 Innovative Ways Johnson and Johnson has helped protect the public’s health during outbreaks since
the late 1800s, released in August 2020
Exhibit 8: J&J EPS Evolution 1.3. Ownership and Payout Structure
7.0
$5.93
6.0 $5.61 $5.63 $5.51 Johnson & Johnson’s ownership institutional4 percentage is round 69.65% of the
Earnings per Share ($)

5.0 company common equity, with the main shareholders being Institutional Investors
4.0 – 35.18% and Mutual Fund Holders – 34.47%.
3.0
Insider ownership amounts to 0.20% in this pharmaceutical company where the
2.0
main insiders, as Exhibit 6 shows, are the company executives and directors. CEO,
1.0 $0.47
Alex Gorsky, holds roughly 2.9 million shares which makes him the largest
-
individual investor.
jun/19
jun/16
set/16

jun/17
set/17

jun/18
set/18

set/19

jun/20
set/20
dez/16

dez/17
mar/18

dez/18

dez/19

dez/20
mar/16

mar/17

mar/19

mar/20

At the end of 2020, the total number of shares outstanding was approximately
Source: MacroTrends
2,671 billion which represent a 0.51% decline from 2019. Accordingly, to the
Certificate of Incorporation of Johnson & Johnson, the holders of common stock
Exhibit 9: J&J Annual Dividends
shall be entitled to one vote per share. By analyzing Exhibit 7, a downward trend
Evolution
4.50

4.0 in the number of shares outstanding is verified meaning that the company is
3.50
repurchasing shares, this is, J&J is buying back its shares under a share
Annual Dividends ($)

3.0
repurchase program, raising the market value of the remaining shares. Looking at
2.50

2.0 Exhibit 8, a big drop in 2018 is noticeable. The reason behind it is a loss of $50 bn
1.50 in market value due to a story from Reuters claiming that J&J knew its talcum
1.0
powder contained asbestos. After that, J&J decides to repurchase $5 bn shares
.50

-
through a buyback program which resulted in an increase of Earnings per Share
1996
1999
1972
1975
1978
1981
1984
1987
1990
1993

2002
2005
2008
2011
2014
2017
2020

(EPS) from $0.47, in 2017, to $5.61, in 2018. This is the type of situation that
Source: Johnson & Johnson database justifies the oscillations in the number of shares outstanding.

Regarding the company payout structure, J&J dividends have been growing for 49
consecutive years (Exhibit 9), with the last three years registering an overall growth
rate of 19.88%5. The company dividends payment is done quarterly, with an
expected annual dividend payment, reported by J&J, of $4.19 per share for 2021.

By assuming a current share price of $173.01, the Dividend Yield computed is

2.42%, reflecting the dividend return of the share purchased, with no expectations
for extreme value changes by the company leaders. The reason why dividends
have increased consecutively is related to the rise in profits of this mature
company. This value is higher than the average dividend yield for Big Pharma,
which is currently 2.4%, and bigger than the S&P 500 metric, which is 1.3% in
November 2021. Such value is strictly correlated with the company’s 12 months
earnings, current and future estimations, and cash flow generation. Along the
report, we will analyze the company’s business sectors that are expected to

4
MarketBeat, Johnson & Johnson Institutional Ownership
5
The values were taken from Johnson & Johnson data.
 generate a higher value for the company, being these sectors able to contribute
for an overall continuous dividend growth rate.

2. Forecast Analysis
This section aims to forecast the financial situation of Johnson & Johnson,
alongside with the industry possible trends, in a time window between 2021F and
2040F for valuation purposes.

Overall, it is expected 2.1. Revenues

that J&J continue to
grow in the future with Johnson & Johnson is expected to keep its business units in the predictable future.
every business unit
increasing its revenues. Therefore, to forecast the company overall revenues the analysis was made per
business segments.

▪ 2.1.1. Pharmaceutical

Exhibit 10: J&J Pharmaceutical

The global pharmaceutical market size is expected to reach approximately $2,151
Revenues bn in 20276, with U.S market forecasted to growth significantly due to the presence
70.0%
of multi giant companies that keep investing and developing new drugs to the
60.0%
60.1% 59.2% market, with a forecasted value of $548 bn by 2020. The values assumed for the
50.0% 57.2% 56.6% 56.5% 56.7%
40.0%
30.0%
39.9% 40.8% 42.8% 43.4% 43.5% 43.3% U.S market share in the forecasted years has this trend as a base point but also
20.0% considering Johnson & Johnson significant position in the market (Exhibit 10).
10.0%
0.0%
2016 2017 2018 2019 2020 2021F In the Pharmaceutical unit, each segment was analysed per si to produce the
(%) U.S revenues (%) International revenues overall growth of this unit. Within this unit, Oncology is projected to be the segment
with the highest growth rate in 2021 (forecasted 20%) mainly due to an increase
Source: Own Calculations
of 44% in global sales of Darzalex® (a subcutaneous formulation of multiple
myeloma drug) already registered in the third quarter report. Moreover, to
corroborate the expected growth for this segment, the second highest demand
cancer drug Imbruvica® just obtained the federal court approval for a new patent
that gives J&J and AbbVie (who has developed and commercialize together this
cancer drug) nine years of exclusivity with no expected generics production until
20327.

Regarding pulmonary hypertension it is forecasted a growth rate of 11.10% in

2021, compared to 2020 results. Such increase was mostly driven from Uptravi®
(pulmonary arterial hypertension drug) revenues. The revenues from this medicine
have been growing, registering a sales growth rate of proximally 33.4% from 2019
to 2020, and the FDA approval of the intravenous version of the drug in August
2021 makes the projected growth of such new feature in turn of 16%.

6
GlobeNewswire, Pharmaceutical Market Size 2021, 6th May 2021
7
Reuters, AbbVie, J&J units’ Imbruvica patents upheld by Delaware court, released on 19th August 2021
 It was also assumed a conservative position for the Immunology segment, since
that the company has submitted a SBLA (supplemental biologics license
application) for their medicine Stelara® (immune treatment drug), to the FDA. The
goal is to expanse the drug treatment to juvenile psoriatic arthritis (JPSA) for
children of five years old and older. Johnson & Johnson, according to Nasdaq
news, is positive regarding the acceptance of such licence, predicting this way a
bust on the medicine sales8. The expected continuous decrease in Remicade®
(treatment for inflammatory bowel diseases) revenues, due to heavy pressure of
biosimilar products that started back in 2016, and continuous loss of market share
in Tremfya® drug (used to treat plaque psoriasis and psoriatic arthritis), make this
segment revenue forecast with a lower forecasted growth of 7% in 2021 down to
2.5% in 2040.

The Cardiovascular/ Metabolism/ Other segment is the only one with negative
historical growth, from 2016 to 2020, in the Pharmaceutical Unit. In 2020, Xarelto®
(used for treatment and prevention of deep venous thrombosis) revenues counted
for more than 48% of the total revenues of this segment. With the patent for such
medicine coming to an end in 2024, its revenues are projected to decrease even
more, with a loss of approximately 12% in 2026, according to Fierce Pharma. The
emerge of Trulicity® (by Eli Lily) and Ozempic® (by Novo Nordisk) are taking a
significant part of the market share of Invokana/Invokamet® drug (used in patients
with type 2 diabetes) with Johnson & Johnson not developing any new technology
to overcome such trend.

The Infectious Diseases segment is probably the one with highest attention at this
moment. Johnson & Johnson Covid-19 vaccine development and production has
come in a slow rhythm due to unexpected complications in manufactory at
Baltimore factory and blood clot disorder in secondary effects. Moreover, the
company already stated they do not have intention to profit from Covid-19 vaccine,
during the period of the pandemic. For those reasons, we have not considered the
revenues of such vaccine a significant driving metric of the segment, in the long
term. Even so, Covid-19 vaccine revenues are expected to have a positive
significant impact on the segment in 2021 and 2022. With Prezista® (protease
inhibitor drug) patent loss in 2015, sales started to decrease in 2016 due to the
entry of generics in the market. Even though J&J is preparing a new licensing
agreement with Gilead Sciences to combining Prezista® with booster drug
cobicistat, to overcome the loss of patent and increase its market share by defining
this new technology/strategy, it was assumed a slower decrease of this drug

8
Nasdaq, J&J (JNJ) Seeks Stelara Label Expansion in Juvenile Arthritis, released on 11thOctober 2021
 through the years. With a reported decrease of 1.7% already in the third quarter of
2021, the predicted trend for this segment is a decrease in the market share
reaching a 2% growth in 2040.

Lastly, the Neuroscience segment revenues are driven in more than 50% by
Invega Sustenna®/Xeplion®/Invega Trinza®/Trevicta® products revenues. With
European regulators approving the licence for Xeplion® (used for schizophrenia
patients) the market share of this drug is expected to increase in the following year.
The Neurology Devices Market is expecting a CAGR of 8.1%, accordingly to
DelveInsight Business Research, from 2019 to 2026. Even so, the projected
growth of the segment from 2021 towards was based on a conservative
perspective, accounting for 4.4% in 2021 ending with a projected growth of 2.8%
in 2040.

Overall, based on the previous descriptions, the forecasted breakdown sales for
the Pharmaceutical business unit can be observable in the following table:

Johnson & Johnson Pharmaceutical Revenues Forecast (in millions of $)

2019 2020 2021F 2022F 2023F 2024F 2025F … 2040F
Immunology 13,950 15,055 16,129 17,279 17,894 18,519 19,153 … 29,505
Infectious Diseases 3,412 3,574 4,046 4,313 4,518 4,721 4,924 … 7,572
Neuroscience 6,328 6,548 6,833 7,105 7,383 7,665 7,953 … 12,762
Oncology 10,692 12,368 14,838 17,028 18,284 19,498 20,663 … 31,447
Pulmonary Hypertension 2,623 3,148 3,497 3,883 4,097 4,311 4,526 … 7,449
Cardiovascular/Metabolism/Other 5,192 4,878 4,600 4,255 3,982 3,722 3,469 … 1,287
PHARMACEUTICAL REVENUES 42,197 45,571 49,943 53,862 56,157 58,437 60,686 … 90,021
(%) growth 3.6% 8.0% 9.6% 7.8% 4.3% 4.1% 3.8% 2.0%

▪ 2.1.2. Medical Devices

The unit were the Covid-19 effects are expected to be more visible is Medical
Exhibit 11: J&J Medical Devices
Revenues Devices since it considers the market recovery from Covid-19, for example, the
overdue medical procedures from the previous year that came back up to date (this

53.0%
can be seen through lower revenues in 2020 compared with 2019, in the overall
52.0%
52.4% 52.3%
51.9% 51.8%
unit, and an expected increase in 2021). According to Precedence Research, the
51.0% 51.8%
51.2%
50.0% global market size of Medical Devices is expected to reach nearly $672 bn by 2027,
49.0%
48.0% 48.8%
48.2% 48.2%
an CAGR of 5.2% from 2020 to 2027. The United States is forecasted to remain
47.0% 48.1%
47.6% 47.7%
46.0% the largest medical device market in the world, with a value of $208 bn by 2023,
45.0%
2016 2017 2018 2019 2020 2021F being the company constant investments in this unit a significant driver for a
(%) U.S revenues (%) International revenues predictable increase of its market share (Exhibit 11).
Source: Own Calculations
Starting with the first segment in Medical Devices, Interventional Solutions was the
only with a growth between 2016 and 2020 and it is projected to be the one, in
2021, with the highest growth inside this business unit (around 46.5%). This
segment focuses on developing innovative tools that help professionals to
overcome hearth rhythm disorders and neurovascular diseases through J&J’s
subsidiaries called Biosense Webster Inc. and Cerenovus, respectively. The Atrial
Fibrillation (AFib) is, accordingly to Biosense Webster, “an irregular heart rhythm
that is quickly placing a critical burden on patients and healthcare systems” and
the number of people with AFib is expected to increase more than 70% by 2030.
Once again, J&J stands to benefit from their expertise and investment as the use
of Novel HELIOSTARTM Balloon Ablation Catheter was completed on treating this
disease, in 2021. This will be a cost-saving procedure since it will provide more
efficient ablation procedures, implying less anaesthesia and radiation and hence
less nursing and facility time. Please note that this is just one of J&J's many
developments contributing to increased revenues in this sector.

Regarding Orthopaedics, the services provided are related with hips, knees,
trauma, spine and other. Therefore, beyond market recovery that regularised these
services, the development and approval of new products are predicted to continue
boosting revenues in this segment. Some product’s approvals in 2021 are a 2.7
mm Variable Angle Locking Compression Plate Clavicle System designed to treat
lateral, shaft and medial fractures for small, medium and large clavicles and a
VELYSTM Robotic-Assisted Solution intended for use with the ATTUNE Total Knee
System. In addition, the sales of products like CONDUITA and VIPER Prime
launched in 2019 and 2017, respectively, are also forecast to raise revenues in a
post-pandemic future. Besides the market recovery from the current pandemic, the
previous reasons led to a positive forecasted growth in 2021, of 20.9%, higher than
the value reported in the previous year.

As said before, with the pandemic many surgeries were cancelled and therefore in
2020 we saw a big decrease in this segment (-13.4%). However, in 2021 and in
the following years, it is expected that the situation will reverse as the market is
recovering (with an expected growth, in 2021, of around 29.3%). Even during the
pandemic, this pharmaceutical company brought virtual learning options to several
surgeons around the world. If before it was necessary to be in person in an
operating room, now it is possible that all representatives and clinical staff maintain
assistance for surgeons through live video chat, making these services more
efficient and health safer. Moreover, J&J has brought together institutions, doctors
and millions of healthcare professionals to its webinars, seminars and virtual
training sessions at a global scale to discuss health issues and find possible
solutions to a post-pandemic crisis.

Lastly, Vision is another segment that should grow in the coming years. This
segment records sales from contact lenses and surgical services. At the 2021
British Contact Lens Association (BCLA) Virtual Conference, J&J Vision present a
new eye care innovation and clinical data directed to patients with presbyopia. With
the launch of this product to Europe in 2021 (already approved in the US in 2020),
 the contact lens sales are expected to increase due to an expansion of the
ACUVUE OASYS portfolio. Also, with the pandemic, vision surgeries were
postponed therefore expected to return to normal in 2021, contributing in this way
to the growth of 29.3% projected for this segment.

By taking the previous assumptions into consideration, Medical Devices business

unit is expected to present the below breakdown revenues:

Johnson & Johnson Medical Devices Revenues Forecast (in millions of $)

2019 2020 2021F 2022F 2023F 2024F 2025F … 2040F
Diabetes Care 0 0 0 0 0 0 0 … 0
Diagnostics 0 0 0 0 0 0 0 … 0
Interventional Solutions 2,997 3,046 4,462 5,376 6,256 7,075 7,817 … 12,778
Orthopaedics 8,839 7,763 9,385 10,156 10,948 11,759 12,587 … 25,354
Surgery 9,501 8,232 10,644 12,203 13,097 14,009 14,935 … 28,860
Vision 4,624 3,919 5,067 5,810 6,405 6,865 7,210 … 10,466
MEDICAL DEVICES REVENUES 25,961 22,960 29,559 33,545 36,706 39,708 42,548 … 77,458
(%) growth -3.8% -11.6% 28.7% 13.5% 9.4% 8.2% 7.2% 2.7%

▪ 2.1.3. Consumer

Exhibit 12: J&J Consumer Revenues The unit with the smallest weight in the total revenues of the company (17% in
70.0% 2020) is Consumer which includes sales derived from Baby Care, Skin Health &
60.0%
59.3% 59.1% 58.4% 58.0% Beauty, Oral Care, OTC, Women’s Health and Wound Care. Overall, this unit is
50.0% 54.7% 56.4%

45.3% 43.6%
expected to have a more conservative growth on a post-pandemic scenario since
40.0%
40.7% 40.9% 41.6% 42.0%
30.0% all the segments were affected by Covid-19 in different ways. According to J&J,
20.0% one of the goals of the upcoming company split is to embrace the opportunity for
10.0%
a better capital allocation in the Consumer unit, increasing this way its agility and
0.0%
2016 2017 2018 2019 2020 2021F consequent market shares (Exhibit 12). Due to the lack of further information, since
(%) U.S revenues (%) International revenues
this is a recent global announcement, the predicted forecast has a conservative
Source: Own Calculations
approach not only regarding this business unit revenues but also the potential
increase in the U.S market share.

Concerning the Baby Care segment is noticeable that sales have been decreasing
since 2016. When people were asked why they did not choose J&J products for
their babies, they replied that they increasingly want to rely on products made with
natural ingredients, as everything applied to the skin is absorbed into the
bloodstream. Thus, J&J baby products have been left on supermarket shelves.
Even if during the pandemic the sales of primarily diapers and baby food has
boosted the market for baby products, this was not enough to cover the losses that
had already been registered. Moreover, in 2020 J&J announced it was cutting
around 10% in the consumer unit's portfolio, with the most divestitures being in the
baby products category outside the US9. For this reason, in 2021 this segment
presents a negative revenue growth rate of 7.4%.

9
Informa Pharma Intelligence, J&J International Baby, Beauty Lines could lead trimming 10% of consumer portfolio, released in
January 2020
 The reason why J&J want to divest in the baby care segment is driven by a focus
on the skin health market, especially in products like Aveeno. In fact, J&J
announces a commitment of $800 million, through 2030, to invest in the
sustainability of its products10. Aveeno is one of the brands which will aim to use
100% recycled plastic in its packaging. Therefore, although in 2020 this market
was very much affected by the pandemic as people were confined to their homes
and changed their skin health and beauty routines, with the return to normality and
the investments highlighted, this segment is expected to grow in the coming years.

With the emerge of the pandemic, Oral Care segment was positively affected
driven by the increase the Listerine’s sales. This was reflected by a growth rate of
7.5% in 2020 Oral Care sales, the first positive rate since 2016. With our lives
returning to normality and given the competitiveness of this market (with
companies like Procter & Gamble and Colgate-Palmolive), a more conservative
approach was taken into consideration (about half of the 2020 growth in 2021).

OTC sales represented, in 2020, 34.3% of the total revenues meaning that this is
the segment with the highest weight in the Consumer’s unit. The drug providing
the most OTC growth has been Tylenol, an analgesic and antipyretic used to treat
pain and fever. Therefore, the sales of this medicine saw a spike in demand in
2020 conducted by the Covid-19 disease (a growth of 8.6% in 2020 when
compared with 2019). The forecasted 2.5% growth for 2021 took into consideration
the normalisation of the sales of this drug to the same levels as before the
pandemic as consumers are expected to continue buying Tylenol, particularly to
relieve vaccine symptoms.

Regarding the Women’s Health segment, the total market is expected to reach a
global market size of approximately $ 41.05 bn, representing a CAGR of 3.2% from
2019 to 202711. Even though such positive trend, Johnson & Johnson has
registered a continuous decrease on the revenues of this segment. The main
reason for such results was the increase competition in Europe and India markets.
According to J&J, one of the strategies that are being take into action drive this
segment growth to a positive field, is to focus their attention and marketing
resources into a younger consumer market. Such efforts aligned with the end of
the quarantine are contributing to a positive expected growth in 2021 (2.10%) when
compared to 2020 results, since the lockdown took the consumer availability to buy
such products.

10
Johnson & Johnson News, Johnson & Johnson Consumer Health commits $800 millions through 2030 to make its products more
sustainable for a healthier planet, released in September 2020
11
Fortune Business Insights, Women’s Health Market Size, Share & Covid-19 Impact Analysis
 Concerning the Wound Care segment, it has been increasing because of the
growth in the geriatric population and therefore a CAGR of 4.1% is expected
between 2021 and 202812. Although, in 2020, the global market size of this
segment was estimated at $19.83 bn, wound care was the segment with the
smallest weight in J&J’s Consumer revenues (5.1%). It is also important to note
that this type of services was more requested during the pandemic with an
expected growth rate in 2021 aligned to the previous year (8%). After 2022, a more
conservative growth was assumed reaching a value of 1.7% in 2040.

The consumer business unit revenues are directly influenced by the previous
assumptions made on its segments therefore being projected in the table below:

Johnson & Johnson Consumer Revenues Forecast (in millions of $)

2019 2020 2021F 2022F 2023F 2024F 2025F … 2040F
Baby Care 1,675 1,517 1,404 1,302 1,209 1,124 1,047 … 423
Skin Health/Beauty 4,593 4,450 4,668 4,771 4,875 4,980 5,086 … 6,817
Oral Care 1,527 1,641 1,703 1,756 1,811 1,866 1,923 … 2,915
OTC 4,444 4,824 4,946 5,072 5,201 5,333 5,468 … 7,723
Women's Health 986 901 920 929 938 948 957 … 1,094
Wound Care/Other 671 720 778 793 809 825 841 … 1,101
CONSUMER REVENUES 13,896 14,053 14,419 14,623 14,842 15,076 15,322 … 20,074
(%) growth 0.3% 1.1% 2.6% 1.4% 1.5% 1.6% 1.6% 1.8%

▪ 2.1.4. Conclusion

After analysing in detail the expected trends for each of J&J's segments, it is
important to make a comparison between them to understand which segment will
grow and contribute more to the revenues of this pharmaceutical company in the
coming years.

It is forecasted that the Pharmaceutical sector continues to be the one with a

highest percentage of revenues (around 50% in the steady state), followed by the
Medical Devices sector (which represent approximately 40% of the total revenues)
and lastly the Consumer sector (with an average weight of 10%). In addition, all
business units are expected to converge to a growth about 2% resulting in a total
steady-state growth (g) of 2.3% for J&J total sales in 2040.

Furthermore, by comparing such percentage with the US GDP perpetual growth of

2.3%, accordingly to Statista, we conclude that Johnson & Johnson revenues are
expected to have the same perpetual growth.

J&J Gross Profit is 2.2. Operating Costs

expected to increase in
1.31x with Medical Based on the Damodaran’s database, the gross margin in January 2021 for the
Devices being the
business unit with more pharmaceutical industry is roundly 70.68% which is slightly above Johnson &
impact. Johnson’s percentage of 65.58% (reported in December 2020). The interpretation

12
Yahoo! Finance, Worldwide Wound Care Industry to 2028, released in March 2021
of those values implies that J&J has a slighter lower available cash to pay for the
remaining costs, such as interests and single period expenditures, when compared
to the U.S. overall pharmaceutical industry.

The gross profit margin of J&J was computed as the sum of each value of its
business units. The highest registered gross profit margin comes from the
pharmaceutical sector with a percentage of 36.19% in 2020. Until 2024 it is
expected an increase in this metric of 0.1pps annually in accordance with the trend
verified in the past four years. After that, as a predictable successful plan
implementation (described in section 3) by the U.S. president, the prices are
foreseeable to be reduced as a regulation strict up. Adding to that factor, since
drugs patent expiration also needs to be considered in this segment, the decrease
of the gross profit margin is reenforced projected therefore in 0.2pps yearly.

Regarding Medical Devices business segment, the 2020 gross profit margin
dropped to 18.23% due to the impact of Covid-19 pandemic as many surgeries
were postponed and product related sales affected. With the market recovery, and
mostly driven by a raise in foreseen sales, the gross profit is estimated to increase
in 0.4pps annually until 2024. This value falls to 0.3pps after that year because of
the economy stabilization. Overall, this metric also tends to increase since the
company is investing in robotics and digital programs to boost the performance in
the segment.

Lastly, the Consumer segment profit margin is forecasted to decrease in 0.13pps

annually in all the foreseen time window. Even though being expected a slight
increase in this segment revenues, a projected value of $20,074 mn compared to
the $14,053 mn reported in 2020, the forecasted growth of the cost of products
sold tend to increase more than the revenues. Such cost increase has been seen
from 2016 to 2020, and therefore can be expected to continue due to strong
presence of peer’s competition.

The table below demonstrates the evolution of the metrics previous exposed:

Johnson & Johnson Gross Profit Forecast (in millions of $)

2019 2020 2021F 2022F 2023F 2024F 2025F … 2040F
Sales 42,197 45,571 49,943 53,862 56,157 58,437 60,686 … 90,021
Cost of products sold -14,171 -15,686 -15,862 -16,737 -16,859 -17,013 -17,547 … -27,403
Pharmaceutical Gross Profit 28,026 29,885 34,081 37,125 39,299 41,424 43,139 … 62,618
Pharmaceutical Gross Profit Margin (%) 34.16% 36.19% 36.29% 36.39% 36.49% 36.59% 36.39% … 33.39%
Sales 25,961 22,960 29,559 33,545 36,706 39,708 42,548 … 77,458
Cost of products sold -8,718 -7,903 -12,060 -14,126 -15,777 -17,254 -18,680 … -31,260
Medical Devices Gross Profit 17,243 15,057 17,499 19,418 20,929 22,454 23,868 … 46,198
Medical Devices Gross Profit Margin (%) 21.01% 18.23% 18.63% 19.03% 19.43% 19.83% 20.13% … 24.63%
Sales 13,896 14,053 14,419 14,623 14,842 15,076 15,322 … 20,074
Cost of products sold -4,667 -4,837 -4,060 -3,502 -3,243 -3,030 -2,863 … -4,021
Consumer Gross Profit 9,229 9,216 10,359 11,120 11,599 12,046 12,459 … 16,053
Consumer Gross Profit Margin (%) 11.25% 11.16% 11.03% 10.90% 10.77% 10.64% 10.51% … 8.56%
Total Sales 82,054 82,584 93,921 102,030 107,706 113,221 118,557 … 187,553
Total Cost of products sold -27,556 -28,427 -31,982 -34,366 -35,879 -37,297 -39,090 … -62,684
Total Gross Profit 54,498 54,157 61,939 67,664 71,827 75,924 79,466 … 124,869
Total Gross Profit Margin (%) 66.42% 65.58% 65.95% 66.32% 66.69% 67.06% 67.03% … 66.58%
Both NWC and CAPEX 2.3. NWC & CAPEX
are expected to present
higher values in the The company Net Working Capital (NWC) was projected as the sum of six main
upcoming years being
related with the accounts. The forecasted operating cash was driven as 2% of the company
company foreseen expected revenues from 2021 to 2040. Inventories, accounts payable and
performance.
accounts receivable 2021 projections were based on the average values for the
holding period, payable period and collection period, respectively, in the last three
years, with such formula applied to the remaining years. The last two captions,
prepaid expenses and accrued liabilities, were also forecasted as the average
percentage of revenues, resulting in the below NWC projection:

Johnson & Johnson Net Working Capital Forecast (in millions of $)

2019 2020 2021F 2022F 2023F 2024F 2025F … 2040F
Core Business …
Operating cash 1,641 1,652 1,878 2,041 2,154 2,264 2,371 … 3,751
Accounts receivable trade, less allowances for doubtful accounts $293 14,481 13,576 16,082 17,416 18,177 19,273 20,143 … 31,850
Inventories 9,020 9,344 10,281 11,127 11,726 12,295 13,022 … 21,308
Prepaid expenses and other receivables 2,392 3,132 3,136 3,417 3,762 3,842 4,045 … 6,413
Accounts payable -8,544 -9,505 -9,744 -10,803 -11,477 -11,875 -12,655 … -20,691
Accrued liabilities -9,715 -13,968 -11,919 -14,095 -15,588 -15,465 -16,577 … -26,175
Net Working Capital Requirements 9,275 4,231 9,714 9,103 8,755 10,335 10,349 … 16,457

Regarding property, plant and equipment (PP&E), since the company do not
provide a detailed information about current needs of production facilities (land and
buildings), a progress in PP&E forecasted values was assumed as a percentage
of revenues. By doing so, an increase in such account is expected from 2021 to
2030. The reasons are related with the machinery and equipment increase mainly
due to Medical Devices segment boosting expected sales and also Johnson &
Johnson investment plans of approximately $ 176 mn in a manufacturing site
expansion in Ringaskiddy, Ireland13. Such manufacturing building was inaugurated
in October 2019, registering already an investment of $354 mn in J&J accounts.

From 2030 onwards it was assumed a lower growth rate as a result of a solid
market position implying a lower necessity of continued improvement in equipment
and production facilities.

To have a better understanding of the intangible assets caption, a division has

been made into three subaccounts: patents and trademarks, customer relationship
and other intangibles and lastly intangible assets with indefinite lives. As patents
are a hard feature to forecast, the assumption made was its development based
on the percentage of revenues. Therefore, until 2030 it was assumed the average
growth of the past 3 years since J&J is in 2nd place, according to 2021 Access to
Medicine Index, related to its strong performance in R&D with 16 late-stage priority
R&D projects in pipeline. To be more precise, J&J has 95 R&D projects which is a

13
Fierce Pharma, On heels of one expansion, J&J will pour $176M into another boost for its manufacturing site in Ireland, released
on 13th September 2021
 higher value when compared to its peers (51 projects). In addition, more than half
of these projects are focus on priority diseases meaning that it is expected an
increase in the number of drugs approved and, consequently, in the number of
patents held (roundly 39 R&D projects are in late-stage development).14 After that,
the assumption is more conservative, with the value decreasing from 2030 to 2040
due to a lower patent creation rhythm. Customer relationship and other intangible
assets was assumed to have the same value reported on 2020 every year until
2040, as it was not expected a significant change on the forward years. Lastly,
intangible assets with indefinite lives caption growth was also driven as percentage
of revenues, by assuming the average of the last three years, decreasing the
growth rate from 2030 forward.

It is possible to observe some of the forecasted values for the above-mentioned

features, and the positive effects on the projected CAPEX:

Johnson & Johnson Capital Expenditures (in millions of $)

2019 2020 2021F 2022F 2023F 2024F 2025F … 2040F

Property, Plant and Equipment & Intangible Assets 72,310 79,399 90,250 98,548 107,080 116,435 126,537 … 236,994
D&A of property and intangibles 7,009 7,231 8,568 9,294 10,006 10,972 11,894 … 22,273
Property, Plant and Equipment, net & Intangibles, net 65,301 72,168 81,682 89,254 97,074 105,464 114,644 … 214,721
CAPEX 7,664 14,098 18,082 16,866 17,826 19,361 21,074 … 30,341

3. Conclusion
By taking the pharmaceutical industry evolution, the market possible trends and
the macroeconomic features, the equity valuation produced for Johnson &
Johnson concluded that the final recommendation would be for investors to BUY
the stock, as of 31st December 2021, generating a potential return for its
shareholders of approximately 32.83%, based on the DCF methodology.

Although the current pandemic is affecting the worldwide economy, it is expected

that the market recovery has a positive impact on J&J financials. Even so, a
conservative approach was taken all along our assumptions as this industry might
face lumpy earnings.

Nevertheless, J&J performance might also be affected by macroeconomic effects

such as US price regulations and geopolitical interests. In addition, J&J current
lawsuit over baby powder cancer claims might increase reputational risks
contributing to a higher uncertainty in the company future.

14
2021 Access to Medicine Index, 2021 Ranking – Johnson & Johnson, released on 26th January 2021