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Johnson & Johnson's fair value intact despite talc powder risks

Lex Hall  |  19 Dec 2018Text size  Decrease  Increase  |  
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The diversity of its operations and a pipeline of blockbuster products will help US healthcare giant Johnson & Johnson withstand a baby powder scandal that has buffeted its share price, says Morningstar.

J&J, the world's largest healthcare products maker, is facing more than 6000 cases related to the use of its talcum powder causing personal injury, in many instances cancer, says Morningstar US analyst Damien Conover.

While close to half these verdicts have gone against J&J, Conover says the company has established a fighting fund in anticipation of further litigation.

Johnson & Johnson healthcare talcum powder

Johnson & Johnson's shares fell 1.3 per cent on news of the settlement

Despite a 10 per cent fall in its share price in the wake of the latest case, its biggest fall since 2002, J&J retains its fair value estimate and wide moat, Conover says.

He was speaking a few days before the latest case in which J&J and its talc supplier Imerys reportedly agreed to pay a $1.5 million settlement to a 78-year-old Manhattan woman, who had claimed the well-known product caused asbestos cancer.

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In the New York case, set to go on trial early next month in state court, J&J's lawyers will argue that Ann Zoas contracted mesothelioma from smoking, not baby powder, Bloomberg reported.

J&J's shares fell 1.3 per cent on news of the settlement. It's currently trading at $130.42, in line with Morningstar's $130 fair value estimate.

J&J has steadfastly denied its baby powder contains asbestos.

In his 15 December note, Conover said the bulk of the asbestos-related cases were motivated by trying to link an unrelated disease to talc powder use, in a bid to gain a settlement from J&J.

"We believe J&J's rigorous testing over the years will provide legal protection against the majority of these case," he said.

"By litigating these cases one by one, we expect J&J will wear down the plaintiff group, ending with a settlement that does not cause a major impact to the company’s stock price." 

Conover notes that J&J has previously withstood settlements when it faced lawsuits over its metal-on-metal prosthetic hips.

In a note earlier this year, Conover said J&J had one of the widest moats – a measure of sustainable competitive advantage – in the healthcare sector.

This is supported by intellectual property in its drug group, switching costs in the device segment, and strong brand power.

The company's research and development efforts are also leading to "next-generation" products, which is boosted by strong cash flow, Conover said.

"The pharmaceutical group has recently launched several new blockbusters. However, relative to the company's size, J&J needs to increase the number of meaningful drugs in late-stage development to support long-term growth," he said in April.

"The company has also created new medical devices, including innovative contact lenses and minimally invasive surgical tools.

"These multiple businesses generate substantial cash flow. J&J's healthy free cash flow is over 20 per cent of sales. Strong cash generation has enabled the firm to increase its dividend for over the past half century, and we expect this to continue."


is senior editor for Morningstar Australia

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