J&J Seeks 3rd Talc-Related Bankruptcy: Time to Sell the Stock? – September 24, 2024

Last week, Johnson & Johnson (JNJ Quick QuoteJNJ – Free Report) filed for voluntary bankruptcy for the third time in an attempt to bring an end to thousands of lawsuits related to its talc products. J&J filed for Chapter 11 bankruptcy in a bankruptcy court in Texas via a subsidiary called Red River Talc.

J&J’s Talc Suits and Bankruptcy Attempts

J&J faces more than 62,000 lawsuits for its talc-based products, primarily its baby powders. The lawsuits allege that its talc products contain asbestos, which caused many women to develop ovarian cancer. J&J insists that talc-based products are safe and do not cause cancer. J&J has permanently discontinued the sale of its talc-based Johnson’s Baby Powder.

Previously, J&J failed twice in its attempts to seek bankruptcy to fully resolve thousands of lawsuits related to its talc products. J&J’s subsidiary, LTL Management, which was established to manage claims in the cosmetic talc litigation, filed for voluntary bankruptcy twice in New Jersey. However, both the bankruptcy filings were rejected by courts stating that J&J was not under enough financial stress to qualify for bankruptcy. In May 2024, LTL Management proposed a new plan committing to pay claimants approximately $6.5 billion to be paid over 25 years, which could resolve 99.75% of all pending lawsuits against the company.

J&J said that Red River filed the bankruptcy case after it received support from around 83% of current claimants for the proposed bankruptcy plan. This exceeds the 75% approval threshold required by the US Bankruptcy Code to secure confirmation of the proposed plan. Red River also increased its settlement commitment by $1.75 billion to approximately $8 billion.

J&J faces a slew of lawsuits, which allege personal injuries to patients caused by the use of its medicines, mainly its talc products. J&J’s legal and other troubles have long been overshadowing its strengths. Let’s discuss a few of the company’s strengths and weaknesses to understand how to play the stock amid its legal issues.

JNJ is the Most Diversified Drug Maker

J&J’s biggest strength is its diversified business model. In August 2023, J&J separated its Consumer Health business into a newly listed company called Kenvue (KVUE Quick QuoteKVUE – Free Report), which now operates as a separate and fully independent company. In mid-2024, J&J exited its remaining 9.5% stake in Kenvue’s common stock, bringing the separation to a close. The separation of Kenvue has allowed J&J to focus on its pharmaceuticals and medical device businesses, J&J has more than 275 subsidiaries, which clearly means that the business is extremely well-diversified. Its diversification helps it to withstand economic cycles more effectively. J&J has 26 platforms with more than $1 billion in annual sales. It also has one of the largest R&D budgets among pharma companies.

JNJ’s Innovative Medicine Unit Showing Consistent Strength

J&J’s Innovative Medicine (previously Pharmaceuticals) unit is performing at above-market levels. Its growth is being driven by existing products like Darzalex, Stelara, Tremfya, Uptraviand Erleada and also continued uptake of new launches, including Spravato, Carvykti and Tecvayli. J&J has a goal of growing the Innovative Medicines unit into a $60 billion ($57 billion on a constant-currency basis) segment by 2025. The segment’s sales rose 6.8% in 2022, 9% in 2023 and 5.3% in the first half of 2024 on an organic basis. In 2024, J&J expects to record above-market growth in the Innovative Medicine unit for the 13th consecutive year. J&J expects the Innovative Medicine business to grow 5% to 7% from 2025 to 2030.

Furthermore, J&J believes 10 of its new Innovative Medicine products have the potential to deliver peak non-risk adjusted operational sales of $5 billion, including new cancer drugs like Talvey and Tecvayli and pipeline candidates like nipocalimab and JNJ-2113.

Upcoming Patent Expiration of J&J’s Blockbuster Drug Stelara

J&J will also face the patent expiration of its blockbuster drug, Stelara, in 2025. Stelara generated sales of $5.3 billion in the first half of 2024. The launch of generics could significantly erode the drug’s sales and hurt J&J’s sales and profits. Stelara biosimilars are expected to be launched in the United States in 2025, while a biosimilar version of Stelara was launched in some European markets for certain indications in July 2024.

Slowing Sales in J&J’s MedTech Segment

While strong global procedural growth, new product uptake and commercial execution are contributing to the growth of J&J’s MedTech business, a weaker performance in China and competitive pressure in some categories in the United States is partially offsetting the growth. In the second quarter of 2024, sales in China were hurt by the impact of the volume-based procurement (VBP) program, the anti-corruption campaign and a difficult comparison with the year-ago quarter. VBP is a government-driven cost containment effort in China.

In the second quarter, J&J’s MedTech growth fell below its expectations of being at the upper end of the expected market growth of 5-7%. J&J expects growth to accelerate in the second half of the year. J&J expects MedTech growth closer to 6% by 2024, lower than the prior expectation of growing at the upper end of the market expectation of 5-7%.

J&J Stock’s Price, Valuation and Estimates

So far this year, J&J’s stock has risen 4.1% compared with an increase of 23.5% for the industry. J&J has also underperformed the sector as well as the S&P 500 in the same timeframe, as seen in the chart below.

JNJ Stock Underperforms Industry, Sector & S&P 500

Image Source: Zacks Investment Research

From a valuation standpoint, J&J appears attractive relative to the industry and is trading below its 5-year mean. Going by the price/earnings ratio, the company shares currently trade at 15.61 forward earnings, lower than 19.63 for the industry and the stock’s mean of 16.07.

JNJ Stock Valuation

Image Source: Zacks Investment Research

The Zacks Consensus Estimate for 2024 as well as 2025 has gone down in the past 60 days, as seen in the chart below.

JNJ Estimate Movement

Image Source: Zacks Investment Research

Short-Term Investors May Sell J&J’s Stock

J&J’s Innovative Medicines segment is showing a growth trend. The company has an interesting R&D pipeline that can generate innovative products and drive its growth further.

However, the softness in the MedTech unit, seen in the second quarter, is a concern. It remains to be seen if the trends improve in the second half. Also, Innovative Medicine sales growth is expected to be slightly lower in the second half of the year compared to the first half due to the entry of Stelara biosimilars in Europe. The company is likely to continue to incur billions of dollars for legal expenses in future quarters due to its pending lawsuits.

We suggest a new investor should avoid buying this Zacks Rank #4 (Sell) stock right now due to the uncertainty surrounding its legal battles and the expectation of slower sales growth in the second half.

There are several other large drugmakers that are generating better growth than J&J and appear to be decent investment options. An investor interested in buying a large drugmaker may consider investing in Eli Lilly (LLY Quick QuoteLLY – Free Report) instead, which has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

However, those who already own J&J’s stock may stay invested for some time and see how its sales perform in the second half and if the company can manage to completely resolve its talc lawsuits. Some attorneys of the claimants in the talc lawsuits feel J&J is manipulating the bankruptcy process so that it can delay jury trials and also underpay the claimants. However, the higher settlement offer and a high percentage of claimant support may improve J&J’s chances of success after the previous two failures.