Will Johnson & Johnson Become the Next Teva?


Aug. 27 2019, Updated 10:33 a.m. ET

On Monday, an Oklahoma judge fined Johnson & Johnson (JNJ) $572 million for its part in fueling the opioid crises in the state.

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Johnson & Johnson fined in Oklahoma lawsuit

The ruling is the first of its kind in the US. The court held the company responsible for downplaying the risks associated with opioid addiction. The landmark ruling will likely pave the way for the thousands of pending opioid-related lawsuits in Oklahoma.

The fine of $572 million pales compared to Oklahoma’s state attorney general’s $17.0 billion demand in the lawsuit. According to Evercore ISI analyst Elizabeth Anderson, the fine was expected to be $500 million–$5.0 billion. According to Jefferies healthcare strategist, Jared Holz, the fine was expected to be $1.5 billion–$2.0 billion. To learn more about the company’s litigation risks, read Litigation Looms in the Wake of JNJ’s Solid Q2 Earnings.

However, the company plans to appeal the verdict. Johnson & Johnson decided to move for a stay on enforcing the verdict until the appeal is resolved.

Share price movements

Investors seem to have been pleasantly surprised about the smaller-than-anticipated liability for the company. Ironically, Johnson & Johnson stock closed at $127.80 on Monday—0.80% higher than the previous close. The stock rose 2.31% and closed at $130.75 in the after-market trading session. The company’s share price has fallen 0.97% YTD (year-to-date) in 2019.

The state of Oklahoma has also launched lawsuits against Teva Pharmaceutical (TEVA) and Endo International (ENDP) for their alleged role in extending the opioid crises in the state. In the aftermath of the Johnson & Johnson ruling, Teva’s share price closed at $7.42 on Monday. The share price is 5.25% higher than the previous close. Endo International closed at $2.91, which was 0.34% higher than its previous close. However, Charley Gran, a Wall Street Journal analyst, warned against reading too much positive in the verdict, especially in relation to other accused companies.

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Opioid crises impact pharmaceutical companies

Teva Pharmaceutical has been one of the hardest-hit pharmaceutical companies since the beginning of 2018. The company is facing a myriad of lawsuits ranging from its participation in price collusion activities to its role in the opioid addiction epidemic. Teva Pharmaceutical’s share price has fallen 51.88% YTD in 2019. The decline has been even more dramatic since the beginning of 2018. The company’s share price has fallen 61.17% from $19.11 on January 2, 2018, to $7.42 on August 26. To learn more, read Teva Pharmaceutical Is Walking a Difficult Path in July.

However, the pharmaceutical industry might face heavier blows associated with opioid crises in coming quarters. According to a report by the The Washington Post, Endo Pharmaceutical’s subsidiary, Par Pharmaceutical, Mallinckrodt’s subsidiary, SpecGx, and Actavis accounted for 88% of the 76 billion opioid pills marketed in the US from 2006 to 2012.

On August 20, Endo International reached a settlement with the County of Cuyahoga and the County of Summit in Ohio regarding an opioid-related case. The company agreed to pay $10 million and an additional $1.0 million worth of Vasostrict and Adrenalin products for no charge to the plaintiff counties.

Endo International’s share price has fallen 60.14% YTD in 2019. The company’s share price has fallen 64.07% from $8.10 on January 2, 2018, to $2.91 on August 26.

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Johnson & Johnson might not follow Teva  

All of the pharmaceutical companies involved in litigations related to opioid crises could get slapped with huge fines. Investors have been concerned about Johnson & Johnson’s future growth prospects. The company faces a slew of lawsuits alleging the presence of carcinogenic asbestos in its baby powder. To learn more, read Johnson & Johnson and the Baby Powder Litigations.

The concerns about the company are aggravated by the ongoing generic erosion of its blockbuster drugs Remicade and Zytiga. Investors might be drawing parallels to the rapid erosion of Teva Pharmaceuticals’ Copaxone franchise.

However, the fears seem far-fetched considering that Johnson & Johnson has a much broader revenue base. The company has a diversified pharmaceutical portfolio. The company has a presence across multiple therapeutic areas and geographies. Stelara, Darzalex, Imbruvica, and Invega continue to be key assets in the company’s pharmaceutical portfolio. The company also has a solid presence in the medical devices and consumer healthcare areas.

In contrast, Teva Pharmaceutical has always been excessively dependent on its Copaxone franchise. Recently, the company launched a migraine drug, Ajovy, and tardive dyskinesia drug, Austedo. However, the new drugs haven’t offset the negative impact of Copaxone’s generic erosion.

At the end of the second quarter, Johnson & Johnson had cash worth $15.28 billion and total debt of $30.43 billion on its balance sheet. The company’s net operating cash flow was $22.01 billion. The company had a debt-to-free cash flow ratio of 1.32x.

Teva Pharmaceutical had cash worth $2.17 billion and total debt of $29.27 billion on its balance sheet at the end of the second quarter. The company’s net operating cash flow was only $673.0 million. Finally, the company’s debt-to-free cash flow ratio was 11.84x.

Johnson & Johnson’s valuation

Currently, the company is trading at a forward PE ratio of 13.99x. The multiple is significantly higher than other big pharmaceutical companies like Pfizer and GlaxoSmithKline. However, the multiple is lower than Merck, Eli Lilly, and AstraZeneca.

Among the 19 analysts tracking the company, they have an average target price of $149.35 on the stock. The target price indicates a potential upside of 16.86% in the next 12 months.


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