Financial Analysis

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Financial Analysis Fiscal Year 2005 and up to
November 27, 2006 ECP 5705 Managerial
Economics Dr. Dinopoulos
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Introduction
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Corporate Overview

• Johnson Johnson
• 115,700 employees
• 230 companies
• 57 countries.
• Annual sales of over 50 billion dollars
• A leading Multinational Enterprise (MNE)

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Corporate Mission

• Johnson Johnsons credo
• Unifies their employees, focuses their broad
  corporate vision, and defines their
  responsibilities to
• Customers
• Employees
• Communities
• Stockholders

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Corporate Positioning

• The Consumer Segment
• Baby and child care, skin care, oral care, wound
  care, women's health, supplements,
  non-prescription drugs
• The Pharmaceutical Segment
• Anti-fungal, anti-infective, cardiovascular,
  contraceptive, dermatology, gastrointestinal,
  hematology, immunology, neurology, oncology, pain
  management, psychotropic, urology
• The Medical Devices and Diagnostics
• Wholesalers, hospitals, retailers, physicians,
  nurses, therapists, hospitals, diagnostic
  laboratories, clinics

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Corporate ExposureAdvertising

• Advertising Campaigns
• 9 advertiser in the world at 1.9B in 2004
• Johnson Johnsons Media Futures Group,
  Universal McCann, and ABCs Enhanced TV Group
  launched an interactive advertising campaign
• PC, Set-top box (STB), and short message service
  (SMS) for 15 brands during The View His/Her Body
  Test
• America's Nurses They Dare to Care
• Having a Baby Changes Everything
• The Johnson Johnson Spotlight Presentation SM
  series

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Corporate ExposurePublicity

• Working Mothers Magazines
• top 100 best place for mothers to work
• IndustryWeek Magazine
• Jaurez, Mexico plant named top 10 Best Plants in
  North America
• Barrons 2006 survey
• Most Respected Company in, 2 in 2005
• Sixth most admired company in America
• First in Pharmaceuticals category, five
  consecutive years 
• The Human Rights Campaign Foundation
• Best Places for workplace equality
• The Ron Brown Award for Corporate Leadership
• The only U.S. presidential award for companies
  with exemplary relationships with employees and
  communities

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Market AnalysisPorters Five-Forces of Competition
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Porter AnalysisInternal Rivalry

• The major drug industry
• Intensely competitive in 2006
• Highly regulated
• Increase in generic drugs
• Competitors Differentiation by
• Safety, cost, efficacy, and ease of use
• Value perception primary driver
• RD Budgets
• Large budgets (13.3 ), JJ (12.5)
• Operational Effectiveness
• Direct-to-Consumer
• Increased from 2000 to 2006
• Medical Research Grants
• Increased from 2000 to 2006

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Porter AnalysisNew Entrants

• Drug Industry
• Global expansion and global competitors on the
  rise
• New Generic Drug Manufacturers
• Major drug makers tried to counter
• Minor alterations to old formulas
• Similar products with new patents
• Animal Health Segment

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Porter AnalysisSubstitutes and Compliments

• Generic Medicines
• The largest segment of substitutes
• Major Retailers
• Private label or house brand non-prescription
  products
• Homeopathic Alternatives
• Aging baby-boomers

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Porter AnalysisSupply Power

• Raw Materials
• Many global sources in 2006
• Abundant supply in 2006
• No anticipation of scarcity
• The industry enjoyed limited supplier power

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Porter AnalysisBuying Power

• Managed Care Organizations (MCO) Consolidation
• Pooling of the patient population
• Medical insurance companies, health maintenance
  organizations (HMO), medical administrators,
  hospital alliances, and physicians organizations
• JJ and Network Effect
• Cost pressures, managed care continued to push
  generic medicines and alternate therapies
• Control of government medication programs
• JJs Aggressive Price Policy
• Competing for Government and Managed Care Programs

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SWOT AnalysisStrengths

• Prudential Equity
• Analysts upgraded JJ in 2006 to a buy due to
  improved diversification strategies across its
  business units
• The Pharmaceuticals
• Improved earnings forecast 3rd quarter
• Pfizer Consumer Division Acquisition
• Strong shift into the consumer segment for JJ

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SWOT AnalysisWeaknesses

• Product Innovation
• JJ suffers from lackluster innovation
• Current product lines are stagnate
• Competitors
• Abbott/Guidant and Conor Medsystems penetration
  of Japan, Europe, and the United States
• JJ could see declines as high as 73 percent,
  21.5 percent, and 21.9 percent respectively in
  these markets

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SWOT AnalysisOpportunities

• The Center for Disease Control (CDC)
• The CDC estimate that a third of HIV patients in
  2006 do not receive treatment
• New guidelines for HIV diagnostics
• New Product Launch
• Prezista, an HIV protease in fall of 2006
• Credit Suisse analysts project a five percent
  growth rate compounded annually from 2005 to 2010

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SWOT AnalysisThreats

• Patent Expirations
• Losing Risperdal in 2008, a leading schizophrenia
  medication
• Credit Suisse analysts remain optimistic that JJ
  can protect its category lead
• Drug-eluting Stents
• Stent industry under litigation attack
• Prudential Equity analysts say JJ in November,
  2006 already reflect a risk discount

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Competitive Positioning
High Revenue
Procter Gamble Co
JNJ
Pfizer Inc
Glaxosmithkline PLC
Unilever
3M Company
Low CAP
High CAP
Bayer AG
Colgate-Palmolive Company
Boston Scientific Corp.
Alcon
Low Revenue
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Corporate Strategy

• At the core of their successful strategy is
• their four guiding principals

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DecentralizedManagement
Group Operating Committee
Global Franchise Committee
38 Major Industry Units
230 Autonomous Companies
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Offense and Defense

• Capture market share across a broad selection of
  human health care products
• Defensively, they market heavily on brand
  recognition
• Established deep relationships with core
  customers and continue to extend popular brand
  segments
• According to Reuters Financial, Johnson
  Johnson is in the top three
• consumer health
• personal care
• medical devices
• pharmaceuticals industries.

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Firm Analysis
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Historical Growth
JNJ 10 yr Snapshot

• JJ has 21 straight years of double digit sales
• Total return to shareholders, including
  dividends, has grown at a compounded rate of more
  than 18 per year since their stock was first
  traded publicly in 1944

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Growth Innovation

• JJ has a structure 3 step formula for the future
  
• Aggressive investment in research and development
• RD spending in 2005 rose 21 to 6.3B. Roughly,
  13 of sales are funneled to R D
• Extensive collaboration and strategic alliances
• Breakthroughs and successful management
  strategies are passed on to sister segments.
  Strategic alliances and outsourcing technologies
  or operations to external partners
• Selective licensing and acquisition
• JJ searches for innovations from outside its
  organizations. They regularly seek companies or
  ideas that can add value to any one of its
  segments

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Developing Markets

• International sales currently 44
• In 2006, international growth is outpacing
  domestic growth 18.5 to 6.3
• Growth from
• product marketing,
• innovative manufacturing
• product development
• leadership development
• Long term growth
• developing underserved international markets

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Financial OverviewProfitability

• JJs profit foundation stability, broad base
  and cash management. They should surpass 15B in
  profits by the end of 2006
• Cash 12B in cash reserves coupled with minimal
  debt of 2.2B (5.3) debt translate into brute
  financial strength
• Broad base No single company accounts for even
  10 of JJs sales

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Financial OverviewRatios

• JJs has stable returns, intrinsic profitability
• Inventory turnover is consistent with the other
  competing segments
• Outstanding capital investment returns to
  compliment modest sales returns
• JJ is on track to average a 20 return while the
  Industry Peer average is -7.4

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Financial Overview JJ vs. Industry
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Financial OverviewDebt

• JJ is one of only six AAA credit-rated companies
  in America
• Long Term Debt to Equity Ratio about 5.3,
  significantly lower than the other segment
  averages (less volatile)
• It can also means that JJ has underleveraged
  available assets

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FCF Valuation
JnJs Intrinsic Value
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Discount Rate
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10 yr Forecast
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Intrinsic Value
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FCF Valuation
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Key Investment Factors

• Third Quarter Earnings up 0.95 vs. 0.85
  expected
• Third Quarter Sales Revenue up 7.9 vs. 6.7
  expected
• EPS up 10 and expected to continue through 2007
• JJ 16B deal to buy Pfizer Inc.'s consumer unit.
  Expect 7.5 increase in pharmaceutical sales
  annually
• JJ agreed to acquire cardiac-device maker Conor
  Med Systems Inc. for about 1.4 billion. Expected
  return, 700M/year
• FDA supports JJs injunction to block a generic
  version of Risperdal and Topamax (1.7 billion
  annual sales) until late 2007
• JJs Beta is .31 which shows increased stability
  and decreased price volatility

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Stock Analysis
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Stock Performance

• Our buy order for JJ executed on October 2, 2006
  at 900am at 65.00 NASDAQ opened at 2,237.60
• Our sell order was fill on November 27, 2006 at
  415pm at 65.65 NASDAQ closed at 2405.92.
• Gain through stock divdend was 0.38 per share
  for a total dividend payment of 585.20
• JJ adjusted gain 1.5 NASDAQ net gain 7.5
• The firm has low debt, a strong asset base, and
  healthy cash flows. In light of these positive
  factors, the firm is currently undervalued with
  an estimated intrinsic value around 78.22.
  Furthermore, with an 55-day yield of 1.6852
  would provide a 11.1 yield annually. Therefore,
  Johnson Johnson is currently a good value buy
  for the long term

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• Questions?