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Johnson & Johnson Stock Facing Negative Catalysts Ahead of Q2 Results

Larry Ramer

It’s definitely not a great time to be an owner of Johnson & Johnson (NYSE: JNJ ) stock, especially for investors who don’t plan to hold it for many years.

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Heading into its second-quarter results, expected to be announced tomorrow before the market opens, JNJ has been hit with a slew of bad news.

Specifically, it’s facing lawsuits and a criminal probe over allegations that its talcum powder caused cancer. At the same time, its pharma unit is facing tougher competition and Oklahoma has hit it with a huge lawsuit over its opioid drugs. As if that wasn’t enough, JNJ’s medical devices business and its overall revenue are expected to shrink, and, like all drug companies, it’s bracing for the next attack from the Trump administration.

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On the positive side, JNJ does have a few potential blockbuster drugs in its arsenal, and some of its drugs have been selling better. Further, as the Fed gets set to possibly cut interest rates, there generally should be strong demand for stocks with decent dividend yields (JNJ stock currently has a 2.7% dividend yield).

Still, unless and until at least a couple of JNJ’s pipeline drugs become big hits, lawsuits will probably keep Johnson and Johnson’s cash balance dropping. As a result, JNJ stock is likely to remain in the doldrums for some time.

Legal Troubles Will Weigh on JNJ Stock

In 2018, a jury awarded a nearly $4.7 billion verdict to 22 women and their families who claimed that asbestos in JNJ’s talcum powder had contributed to their ovarian cancer. The company is appealing the lawsuit. As of May, JNJ was facing 2,400 cases related to baby powder, according to Bloomberg .

Even if JNJ manages to get the verdict stemming from the class-action lawsuit lowered to $2 billion, that still works out to about $90 million per plaintiff. If the 2,400 plaintiffs get an average award of $90 million, the company would be on the hook for $216 billion. JNJ only has $15.3 billion of cash on hand as of the end of Q1, along with over $30 billion of debt. Given that data, one can see how many investors would begin to shy away from JNJ stock as the lawsuits against it proceed.

On Friday, JNJ stock dove over 4% after Bloomberg reported that the Department of Justice had launched a criminal probe into whether the company had misled the public about the risks of its talcum powder. Moreover, “a grand jury in Washington is examining documents related to what company officials knew about any carcinogens in their products,” added Bloomberg , citing unnamed sources.

Even if the DOJ’s probe doesn’t ultimately amount to much, until it’s resolved, many of JNJ’s executives will be distracted by the investigation, and many investors will be afraid to buy Johnson & Johnson stock.

Finally, the state of Oklahoma has sued JNJ for over $17.5 billion, alleging that the company had created a public nuisance by selling raw materials for opioids. Although Johnson & Johnson has many defenses against the allegations, it could potentially lose the case. That, in turn, could lead other states to mount similar lawsuits against it, creating more huge legal headwinds for JNJ stock.

Other Negative Catalysts

Johnson & Johnson probably won’t be rescued by its medical-device business or its overall top-line results. Analysts, on average, predict that JNJ’s revenue from medical devices dropped to $6.435 billion last quarter from $6.942 billion a year earlier, according to Marketwatch . Additionally, analysts’ consensus estimate for the conglomerate’s overall Q2 revenue is $20.29 billion, lower than its $20.83 billion top line a year earlier.

Furthermore, like all drug companies, JNJ has to worry about new attacks from the Trump administration. The administration’s attempt to force drug companies to disclose their prices on TV ads was blocked by a judge, and it decided against eliminating rebates on drugs bought by the government.

But JNJ is considering lowering the prices paid for drugs by Medicare so that they are more in-line with prices paid by other countries. That could have a meaningful, negative impact on JNJ’s profits and JNJ stock.

Drugs Are a Mixed Bag for JNJ Stock

On the other hand, analysts expect JNJ’s Q2 earnings per share to surge 17% to $2.36 versus $2.07 during the year-earlier period. The discrepancy between the company’s top and bottom line is likely tied to the strength of a few of the company’s drugs, as pharmaceuticals are extremely profitable, with huge revenue and very little cost once they become successful.

Among the company’s newer successful treatments include cancer treatment, Stelara, which generated $1.4 billion of sales in Q1, representing a 34% year-over-year (YoY) surge, and multiple myeloma treatment Darzalex, of which sales jumped 45% YoY in Q1 to $629 million, FiercePharma reported in April.

But a number of its drugs are facing tougher competition from biosimilars. The sales of another immunology cancer treatment, Remicade, sank 15.5% YoY to $1.1 billion in Q1. U.S. revenue from prostate cancer drug Zytiga tumbled 55% to $185 million, and the American sales of anemia treatment Procrit fell 22% to $148 million.

And according to FiercePharma , JNJ warned in April that “pulmonary arterial hypertension med Tracleer and multiple myeloma blockbuster Velcade will likely face copycat competition” in the near-term.

So pharma now seems to be, at best, a mixed bag for JNJ.

But help is on the way. Recently, the FDA approved JNJ’s nasal spray depression treatment and its metastatic bladder cancer drug, Balversa. The company also has multiple other cancer treatments, including Niraparib, which has been approved for breast cancer, and a CAR-T therapy, which the EU has deemed a “priority medicine.” Meanwhile, JNJ is working on multiple HIV vaccines. 

The Bottom Line on JNJ Stock

Lawsuits could easily crush JNJ. As the lawsuits against the company progress, it will grab the attention of investors. Meanwhile, the company is facing increased competition and the specter of stepped-up regulation on the pharma front. Only three or four blockbuster drugs can make JNJ stock worth betting on at this point. Johnson & Johnson’s Q2 results aren’t likely to meaningfully alter the fundamental outlook of Johnson & Johnson stock.

As of this writing, the author did not own any shares of companies mentioned above.

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