Johnson & Johnson Stock: Litigation Protection Guide – Bankruptcy (NYSE:JNJ)

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Investment thesis

Johnson & Johnson (JNJ) is finally parachuting away from the “plane crash” of talc lawsuits originally worth more than $4 billion. In addition to the $5 billion opioid settlement, the company has ceased sales of all of its prescription painkillers in the United States since 2020, effectively cutting off future liabilities from any pain-related lawsuits. Investors can anticipate a massive improvement in JNJ’s future finances and possibly future valuations after the controversial divestment. In the end, we see this as a strategic move to separate the high-performing Pharmaceuticals segment from talc-related litigation from the Consumer Healthcare segment.

This article will focus on the settlement of JNJ’s opioid and talc claims.

The bankruptcy plan was drawn up earlier to save JNJ from litigation ruin

To date, JNJ has paid a total of $7.4 billion in litigation settlements for talc, Risperdal and opioid claims in 2020 and 2021, with $5.5 billion in talc-related settlements and $0.8 billion in opioid-related settlements. Additionally, the company agreed to pay an additional $2 billion and $5 billion in future settlements of talc and opioid-related liabilities, respectively. Ultimately, JNJ is looking at at least $13.3 billion in “losses” due to these litigation issues, which is huge considering it easily accounts for 90% of the company’s 14-year net profit. $.7 billion in fiscal 2020 or 63.7% of $20.87 billion in fiscal 2021. Further, we doubt JNJ earned anywhere near that amount for its opioid therapeutics , NUCYNTA, and its talc products since its launch.

In October 2021, JNJ decided to implement a corporate restructuring, which will separate its talc-related responsibilities from the parent company. By filing a voluntary bankruptcy petition, JNJ can then end all pending litigation against the company. In November 2021, the strategy worked and a temporary restraining order was put in place. It’s no wonder JNJ is seeking to “eliminate festering tumors” by spun off its Consumer Health segment (including its talc-related products) and then filing for bankruptcy in 2022, aided by a bankruptcy court judge in New Jersey. This policy move will limit the amount of money that plaintiffs could seek from JNJ for talc-related claims. Additionally, the company had stopped selling its talc-related products in the United States and Canada by 2020, likely to mitigate future similar lawsuits.

By now, with only $2 billion in an established trust to resolve any future talc claims, JNJ had managed to save itself from a potential settlement nightmare worth over $4 billion or more. It is in JNJ’s interest that a limitation be imposed, since Complainants’ companies would have the right to 40% of final payment, which would easily amount to $800 million based on a $2 billion trust. Attorney fees would have easily doubled, assuming the original settlement was worth more than $4 billion. Given the vested interest, “plaintiffs’ law firms reportedly spent more than $100 million on advertising, including infomercials that look like news programs, to recruit people willing to sue.” Otherwise, the sky would have been the limit, had the ongoing prosecutions since 2018 gone to jury trials.

The opioid litigation has been going on even longer, since 2014, when in 2015 JNJ chose to divest its US license fees for related opioid treatments, NUCYNTA to Depomed, now known as Therapeutic assertion. At that time, the case was worth $1.05 billion. Due to similar legal issues, in 2018 Assertio also chose to sell the franchise to Collegium Pharmaceutical for an even lesser sum of around $550 million. After years of unresolved legal issues regarding opioid claims, JNJ has elected to “discontinue all prescription pain relievers in the United States by 2020” to avoid all future liabilities associated with therapeutic pain claims. .

Given that its consumer healthcare segment also underperformed in terms of revenue growth compared to the pharmaceutical segment, we believe that JNJ made the right choice to spin it off and stop further losses going forward. . Additionally, by opting for a $5 billion nationwide claim, the company also made up for its losses for opioid claims. Without the burden of these two major litigations, JNJ would be in a better position to fund its future growth and expansion with strong free cash flow.

JNJ saw record annual growth in fiscal 2021

JNJ Revenue and Net Income

JNJ Revenue and Net Income

S&P Capital IQ

JNJ’s revenue has grown at a CAGR of 5.46% over the past five years. In fiscal 2021, the company reported revenue of $93.77 billion, an impressive 13.5% year-over-year increase, partly attributed to its COVID-19 vaccine at 1.6 billion dollars in sales. Refreshing its COVID-19 vaccines, JNJ’s annual growth would still be impressive at 11.6% year-over-year. The company was able to regain the growth it had lost during the height of the pandemic in fiscal 2020, when JNJ only posted revenue growth of 1.3% year-on-year compared to the 2019 financial year.

For FQ4’21, JNJ recorded revenue of $24.8 billion, representing excellent increases of 10.3% YoY and 19.5% from FQ4’19 levels. These are mainly attributed to robust demand for its pharmaceuticals segment with growth of 9.9% quarter-on-quarter and 16.4% year-on-year, accounting for 57.6% of its FQ4’21 revenue. The segment also contributed $18.2 billion to operating profit, with an impressive margin of 35.1%. In its latest earnings call, JNJ also guided the pharmaceutical segment to reach $60 billion in sales by 2025, with 14 new FDA approvals by then, nine potentially exceeding $1 billion in revenue and 5 exceeding $5 billion. Compared to JNJ’s other two segments, its pharmaceutical segment is definitely the money-making and profit-making machine, which is constantly dragged down by the underperforming consumer healthcare and medical device segment.

JNJ revenue and EBIT by segment

JNJ revenue and EBIT by segment

S&P Capital IQ

For fiscal 2021, JNJ’s consumer healthcare and medical device revenues grew only 5% and 4.2% from fiscal 2019 levels, with a contribution of 8 .9% and 16.2% to its operating margin in fiscal 2021. As a result, in order for the business to remain competitive and profitable, we suspect JNJ may eventually spin off its medical device segment as well. in the future. It would be a decision similar to the sale by Pfizer (PFE) of its Segment Upjohn and Novartis (NVS) Sandoz segment. These strategic maneuvers have created smaller but more efficient pharmaceutical companies, with stronger margins and potentially accelerated growth. However, these are purely speculative and we don’t know if JNJ will actually implement them.

So, is JNJ Stock a buysell or keep?

JNJ forecast revenue

JNJ forecast revenue

S&P Capital IQ

We expect the spin-off to be completed by 2023, based on its most recent FQ4’21 earnings call. Given JNJ’s consensus revenue estimates and the current growth trajectory of its Consumer Health segment, we expect the company to report post-divestiture revenue of $89 billion in fiscal year 2024. For In fiscal 2022, JNJ guided revenues between $100.3 billion and $101.8 billion, representing excellent year-over-year growth of 7% to 8.5%.

Given that its medical segment is not generating much growth, we expect JNJ’s revenue growth to be primarily attributed to its pharmaceutical segment, at a CAGR of 2.84% over the next four years. Assuming JNJ’s forecast for FY2022 growth, a decent revaluation of its earnings is entirely possible. This would certainly improve its valuations and market position in the future.

Despite the deceleration in consensus earnings growth estimates, a streamlined company profile makes JNJ stock more attractive, given its improved profitability going forward. By dropping its contentious talc-related litigation, investors can also expect less risk to JNJ’s future financial statements and, therefore, future valuations. Therefore, we encourage investors to take advantage of this opportunity to add more positions to their portfolios.

Therefore, we rate the JNJ stock as a buy.

Anne G. Cash