Is Johnson & Johnson stock a buy?

Johnson & Johnson (JNJ 1.10%) is one of the largest and most important players in healthcare. The pharmaceutical leader has a long and impressive track record of innovation, financial results and stock market performance. However, Johnson & Johnson has faced problems in recent years that, for some investors, raise serious questions about its ability to deliver the same results it has in the past. One of those difficulties relates to the Inflation Reduction Act (IRA), a relatively new law in the US that gives Medicare the power to negotiate the price of some pharmaceutical drugs. The first round of negotiations is now over, and we’re starting to see the impact this law could have on some of Johnson & Johnson’s drugs.

Should investors still consider the stock?

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Three of the Johnson & Johnson drugs targeted

IRA price negotiations are about the drugs Medicare spends the most on. The first 10 drugs the US Centers for Medicare and Medicaid Services chose to go through the trial include Johnson & Johnson’s blood thinner Xarelto, the immunosuppressant Stelara and the cancer drug Imbruvica. Johnson & Johnson co-markets Xarelto and Imbruvica with Bayer and AbbVierespectively. The monthly price reductions for all three within the IRA will be massive. Xarelto’s cost will drop to $197, a 62% drop from the comparable monthly price in 2023.

Imbruvica’s price will be reduced by 38% to $9,139, while Stelara will experience a 66% drop to $4,695. Johnson & Johnson is the only company with multiple drugs on the IRA price negotiation list, so it will be particularly hard hit compared to its peers that are also targeted. These new prices will not take effect until 2026. Xarelto, Stelara and Imbruvica accounted for 19% of Johnson & Johnson’s total revenue in the second quarter.

Stelara was the only one of the three whose sales increased from year to year. The treatment for plaque psoriasis posted revenue of $2.9 billion, up 3.1% from the year-ago period. Imbruvica sales fell to $770 million, down 8.5 percent from the year-ago quarter. Xarelto sales of $587 million were down 7.9% year over year. Johnson & Johnson blamed Xarelto’s decline on an unfavorable patient mix, while pointing to stiff competition as the reason why Imbruvica sales are moving in the wrong direction. Both also saw their revenues fall year-over-year in 2023.

Ditto for Imbruvica in 2022; although Xarelto revenue increased that year, it was only 1.4%. So Xarelto and Imbruvica haven’t been growth drivers for Johnson & Johnson recently. If this trend continues, they will represent an even smaller share of the top line until the negotiated prices take effect. Meanwhile, Stelara, the only one of the three that has consistently contributed significantly to top-line growth, could start facing biosimilar competition in the U.S. by next year.

In other words, none of Johnson & Johnson’s three drugs targeted by the IRA figure in the company’s long-term plans.

The long-term vision

This first round of negotiations with the IRA should be somewhat manageable for Johnson & Johnson. But what about the next round, which will select up to 15 more drugs? And the one after that, which will select up to 15 more drugs? The number will then rise to 20. Some of Johnson & Johnson’s other drugs could be targeted. So far, legal challenges to the IRA have been unsuccessful, but there are several ways Johnson & Johnson could escape this challenge.

The company could redirect its research and development to therapies that could avoid these price negotiations because they target only those that Medicare spends the most on, meaning those widely used among the elderly. A drug maker developing therapies for rare pediatric diseases won’t have to worry about this problem. Johnson & Johnson doesn’t have to completely change its ways. For a company with such a vast portfolio, substantial funds and a large workforce, relatively minor tweaks to its typical approach could go a long way.

Of course, this is just one of many solutions that Johnson & Johnson could implement. It could also devote more time and research to its medical technology segment. The bottom line, however, is that Johnson & Johnson has survived for over 100 years, a period that includes significant legal and regulatory changes. In my opinion, the pharmaceutical giant is more than capable of thriving under the IRA. And of course, Johnson & Johnson remains a top stock for dividend investors.

Johnson & Johnson has increased its payout for 62 consecutive years. Despite the IRA, investors can still trust the company to deliver consistent results and dividend growth over the long term.