Johnson & Johnson: Taking The Bull By The Horns?

Key Points

• Johnson & Johnson preps for the future with a new shelf offering. 
• The company aims to raise capital to help with operations including acquisitions. 
• Acquisitions may be the best option to avoid a fast-approaching patent cliff. 

Johnson & Johnson NYSE: JNJ recently filed a shelf registration with the SEC, suggesting it is preparing for the future. The filing is for debt securities, not shares, to be sold on an ongoing basis at a future date that could be as soon as the filing was received. The offering aims to raise capital for general corporate purposes, servicing/restructuring debt, repurchasing shares, CAP EX or acquisitions. Given the recent Fitch Solutions report, CAP EX and acquisitions may be on the minds of Johnson & Johnson executives. 

A Patent Cliff Is Approaching For Pharma Companies

Fitch outlines how companies from AstraZeneca NYSE: AZN to AbbVie NYSE: ABBV, already facing patent-related pressure, are approaching a patent cliff and Johnson & Johnson is not immune. A patent cliff is when patents on blockbuster drugs like AbbVie’s Humira expire and open the door to competition. This means generic manufacturers will be flooding the market with biosimilar compounds, which is a big hit on the top and bottom lines for the world’s leading pharma companies. 

In the case of Johnson & Johnson, its blockbuster Stellara loses patent protection this year and another major contributor, Simponi, loses its protection in 2024. Between them, they account for more than 20% of Pharma segment incomes which is the company’s core business. The company must replace these products and having the capital to invest is crucial. 

As far as the pipeline goes, Johnson & Johnson has about 40 compounds in Phase 3 trials but many of those are for approvals for additional indications for existing medicines like Stellara and Simponi. In this light, it is unclear how much potential the pipeline has for the company.

Additionally, JNJ was recently reported to be “quietly” overhauling the pharma segment. According to the report, the overhaul includes the consolidation of sub-segments, thousands of layoffs, and discontinuation of non-productive pipeline candidates. 

Are Acquisitions On Tap For 2023? 

The assumption is that Johnson & Johnson is searching for a takeover candidate with either a promising pipeline or a drug already on the market. Estimates for 2023 takeover activity are $250 billion for the industry, so J&J is not the only big pharma name to watch. Among the top candidates for takeover are Ascendis Pharma NASDAQ: ASND and Athira Pharma NASDAQ: ATHA. Ascendis Pharma is a young but established pharma with hopes of joining the big players, while Athira Pharma focuses on Alzheimer’s treatments. 

Johnson & Johnson’s Dividend Is Safe Enough For Now 

While you can never completely rule out a dividend cut or suspension, it is doubtful that Johnson & Johnson will do so anytime soon. The company has a solid balance sheet despite its use of debt, and healthy cash flows, and pays out only a small amount of its earnings. The payout ratio is 43% which is low for regular stock and JNJ stock is a Dividend King with 60 years of consecutive increases. That’s a lot of history to throw away, which is not something JNJ execs will do lightly. 

Looking at the chart, the fear of the patent cliff is opening an opportunity. The price action in JNJ is retreating to support near the long-term uptrend line where the market is likely to step in and support prices. The stock price may fall below the trend line and even enter a trading range. If so, Johnson & Johnson is still at least a Hold for its 2.8% yield and buyable when it confirms support at accepted technical targets.