J&J's run to record highs hasn't reached the finish line yet. Here are the key drivers
Jim Cramer agrees with UBS: The rally in Johnson & Johnson shares to new highs still has room to run.
In a note to clients Wednesday, analysts at UBS raised their price target on the healthcare giant to $320 per share from $280.
Their bullish view is based on three factors: (1) Top-line growth inflecting from a historical 4%-6% compound annual growth rate (CAGR) to a higher-growth period of 8%-plus for the rest of the decade; (2) potential for multiple expansion as J & J transitions back to a growth stock and is rerated on the Street; and (3) a shift toward more higher-margin products.
Investors like the story too. J & J shares finished at a record close above $275, extending their winning streak to seven straight sessions. Defensive stocks have been on a roll as the AI trade has hit turbulence. Year to date, J & J is up 33%, compared to the S & P 500 's 12% gain.
Over the past month, healthcare has been the second-best sector in the market behind energy. Jim said, "The drug group has taken on a momentum of its own." Like Jim, UBS sees J & J as one of the best, given its superior growth profile and earnings quality among healthcare stocks.
"We like J & J from a fundamental perspective as one of the cleanest stories in large-cap pharma, with no major near-term patent cliffs or binary risks," the analysts wrote. The reference to "no major near-term patent cliffs" is big because one of the biggest risks facing any pharmaceutical company is the loss of exclusivity, or the pharmaceutical term for when a drug loses patent protection.
Once that protection ends, other companies can supply the market with lower-priced generic alternatives and drastically cut sales of the original drug. "You don't want the loss of exclusivity, or LOE," Jim said on Tuesday's Morning Meeting . Johnson & Johnson's portfolio winners include cancer Darzalex, which doesn't lose U.S. patent exclusivity until 2029.
Even then, UBS argued that it should be more of a patent "hill" than a cliff. The analysts said they "anticipate a gradual erosion curve that allows Darzalex to remain a meaningful revenue contributor well into the next decade." UBS said that J & J's blockbuster drug remains the "dominant standard of care" as a first-line treatment for multiple myeloma.
UBS expects Darzalex's penetration to approach 80%, supporting $22 billion to $23 billion peak annual sales. The drug was, in fact, the largest product of J & J's Oncology division, delivering sales of more than $4 billion, growing close to 18% in the company's second quarter. More attention on J & J's oncology unit is important to Jim, who said that its "cancer business is not talked about enough."
Outside of oncology, the analysts also mentioned J & J's immunology franchise, including Tremfya and Icotyde, as growth drivers too. Tremfya is J & J's injectable targeting the IL-23 inhibitor aimed at treating moderate to severe plaque psoriasis, psoriatic arthritis, ulcerative colitis, and Crohn's disease.
According to J & J, Tremfya is the quickest-growing advanced therapy in both Crohn's disease and ulcerative colitis. In J & J's most recent second quarter, the drug saw overall sales growth of 71%. As for Icotyde, J & J expects the new oral IL-23 inhibitor for plaque psoriasis, which was approved by the FDA in mid-March, to potentially become one of its next big hits .
"Our thesis relies in part on a successful Icotyde launch, which we view as a potential $10B+ peak sales opportunity," wrote analysts. UBS also mentioned Ottava, J & J's newly authorized robotic surgery system, which analysts believe could help surgery revenue exceed expectations if the platform captures meaningful market share faster than anticipated.
However, benefits from Ottava won't come overnight, as adoption for these kinds of complex machines takes time, especially in a market dominated by Intuitive Surgical 's da Vinci system. (Jim Cramer's Charitable Trust is long JNJ. See here for a full list of the stocks.)
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