Johnson & Johnson Q3: Strengthening Cardiovascular Device Portfolio

Summary:

• I reiterate a “Buy” rating for Johnson & Johnson, driven by their robust cardiovascular device portfolio and recent acquisitions, with a fair value of $195 per share.
• The acquisition of V-Wave enhances Johnson & Johnson’s MedTech business, opening new opportunities in the high-growth heart failure device market.
• Johnson & Johnson’s Q3 results exceeded expectations, with 26.5% year-over-year growth in the cardiovascular market and a 5.4% adjusted operational revenue growth.
• Despite headwinds in China, Johnson & Johnson’s decentralization strategy and ongoing acquisitions are expected to drive organic revenue growth and margin expansion.

I assigned a “Buy” rating to Johnson & Johnson (NYSE:JNJ) stock in July 2024, highlighting their strong product pipeline and the acquisition of Shockwave Medical. Johnson & Johnson delivered a solid financial result for Q3, beating the market expectations. With the recent acquisitions, Johnson & Johnson has built a solid cardiovascular device portfolio, which is growing at double-digit. I reiterate “Buy” rating with a fair value of $195 per share.

Acquisition of V-Wave

On October 9^th, Johnson & Johnson completed the acquisition of V-Wave, a private company focused on developing innovative treatment options for patients with heart failure, for $1.7 billion. I think the acquisition could benefit Johnson & Johnson in several ways:

• V-Wave could strengthen Johnson & Johnson’s MedTech business in cardiovascular disease. V-Wave’s technology could help Johnson & Johnson open new opportunities in the heart failure device market, a high-growth end-market.
• V-Wave’s device received the FDA’s breakthrough device designation in 2019 and Europe’s CE mark in 2020. As such, Johnson & Johnson could immediately utilize their global distribution channels to expand V-Wave Ventura Interatrial Shunt product worldwide.
• Johnson & Johnson has been building up their cardiovascular device portfolio recently. They acquired Abiomed for $16.6 billion in 2022, and purchased Shockwave Medical for $13.1 billion in 2024, as discussed in my previous article. With the acquisition of V-Wave, Johnson & Johnson now has a substantial portfolio in the cardiovascular device market. As communicated by the management, the cardiovascular device is a very attractive growth market with a total addressable market of $60 billion, growing at 8%+ annually.

Recent Result, Outlook, and Valuation

The company released their Q3 result on October 15^th before the market opened, beating the market expectations. As depicted in the chart below, Johnson & Johnson delivered 5.4% adjusted operational revenue growth with strong growth in their innovative medicine segment. My key takeaway from the quarter is their business strength in the cardiovascular market, which posted a 26.5% year-over-year in operational sales.

Due to the recent acquisition of V-Wave, the company adjusted their full-year guidance as follows:

For normalized business growth, I am considering the followings:

• MedTech: I think their cardiovascular business will continue to drive Johnson & Johnson’s MedTech segment. As discussed previously, the cardiovascular device market has been growing at 8%+ driven by increasing numbers of procedures. Johnson & Johnson has consistently delivered double-digit revenue growth in the cardiovascular device business. I calculate that Johnson & Johnson’s MedTech business will grow by 7%, with 4% growth from cardiovascular, 2% from the Vision business, and 1% from other business including orthopedics and surgery.
• Innovative Medicine: As a pharmaceutical business, the revenue growth will be volatile, as the business is largely driven by new drug developments. Johnson & Johnson has built a comprehensive portfolio across oncology, neuroscience, infectious diseases and immunology. Future Market Insights predicts the global pharmaceutical market will grow at a CAGR of 6.4% from 2023 to 2033. I assume Johnson & Johnson will grow in line with the overall market.

As such, I calculate Johnson & Johnson will deliver 6.4% organic revenue growth in the near future. I continue to assume the company will allocate 5% of revenue towards M&A, contributing an additional 130bps to the topline growth.

Johnson & Johnson is in the process of decentralizing their operations, aiming to improve productivity among sales/marketing, R&D as well as global manufacturing. I think their ongoing decentralization strategy will generate margin upside over time. I continue to project 20bps annual margin expansion, driven by 10bps from new product launches and 10bps from decentralization efforts.

The WACC is calculated to be 8.9% assuming: risk-free rate 3.6%; beta 0.8; cost of debt 5%; debt balance $29 billion; equity $388 billion; tax rate 16%; equity risk premium 7%.

The discounted cash flow (“DCF”) summary can be found as follows:

Discounting all the future FCF, the fair value is estimated to be $195 per share, according to my DCF model.

Key Risks

China represents 5% of total Johnson & Johnson’s revenue. The management indicated that the headwinds from China are expected to persist into FY25, as China’s Volume-Based Procurement (VBP) has been impacted by the ongoing anticorruption program. The anticorruption campaign in China has impacted Johnson & Johnson’s ability to engage with physicians, creating growth hurdles for their medical device marketing activities. The management lacks any visibilities regarding the timing of a market recovery in China.

Conclusion

With the acquisition of Abiomed, Shockwave Medical and V-Wave, I think Johnson & Johnson could potentially accelerate their organic growth in the cardiovascular device market. I reiterate “Buy” rating with a fair value of $195 per share.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of JNJ either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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