NEW YORK -- Goldman Sachs downgraded Johnson & Johnson, saying Tuesday that the current share price has captured all the potential for improved growth.
Based in New Brunswick, N.J., J&J is emerging from a cycle of multiple blockbuster drugs getting generic competition, and it's announced about three dozen recalls since 2009 of nonprescription and prescription drugs, faulty contact lenses and hip implants. Still, the company's share price was barely dinged by the recalls and since May has climbed from almost $62 to nearly $70.
However, Goldman analyst Jami Rubin wrote that Johnson & Johnson comes up short in the two areas she sees as likely to boost stock prices, new prescription drugs and capital allocation. She downgraded her rating from neutral to sell.
"We have been strong believers in (Johnson & Johnson's) pharma story, but recent new launches have quickly been overtaken (or have the potential to be overtaken) by newer and better competitive agents," wrote Rubin, who has a 12-month price target of $72 for J&J.
She noted that J&J's prostate cancer drug Zytiga now competes with Medivation Inc.'s Xtandi, which was approved in the U.S. six weeks ago. Johnson & Johnson's hepatitis C drug Incivo has competition from Merck & Co.'s Victrellis, and other companies are developing treatment regimens for the tough-to-cure virus.
Shares fell $1.24, or 1.8 percent, to $68.20 in midday trading Tuesday.
Rubin noted J&J's anticlotting drug Xarelto, for preventing strokes and heart attacks, likely will be pressured by the introduction of Eliquis, jointly developed by Pfizer Inc. and Bristol-Myers Squibb Co. The Food and Drug Administration is expected to decide by mid-March whether to approve Eliquis, which would be the third and possibly strongest entrant in a new generation of blood thinners that each could post sales over $1 billion a year. Xarelto already has competition from Pradaxa, from Germany's Boehringer Ingelheim.
Rubin wrote that discussions with Johnson & Johnson management indicate "limited appetite for significant changes to capital allocation." The company traditionally has poured most of its excess capital into purchases of companies or products. It just recently concluded its biggest acquisition ever, paying $19.7 billion in June for Synthes, which makes surgical trauma equipment and orthopedic implants.
Goldman Sachs has been advocating that J&J sell off parts of the company, arguing in a May 30 note titled "The case for breaking up J&J" that that would unlock significant shareholder value. Some rivals have been doing or are planning to do sthat including Pfizer, Abbott Laboratories and Covidien PLC, Rubin noted.
J&J currently has a dividend yield of about 4 percent, but Rubin expects its 12-month total return, which includes share appreciation, to be only 7 percent. She forecasts the other four top U.S.-based drugmakers _Pfizer, Merck, Eli Lilly and Co. and Bristol-Myers _ will have 12-month total returns of 9 percent to 23 percent.