JNJ is a massive company with many products stretching across its three segments: Pharmaceutical, Consumer, and Medical Devices. 

- The Pharmaceutical segment is the key to the bull and bear thesis, as it represents a majority of revenue and operating income. A number of drugs will face generic competition in 2019, and investors are watching to see if the pipeline is robust enough to fend off revenue erosion

- Consumer and Medical Devices have lagged Pharmaceuticals growth, but management outlined a robust plan to turn the businesses around over the next several years at a recent Investor Day on May 16. These segments may become a bigger part of the story should Pharmaceutical segment growth slow, and is essential for JNJ's multiple to recover

Pharmaceutical Segment to Likely Face Elevated Generic Competition in 2019

The Pharmaceutical segment represents ~50% of sales and 66% of operating income, and therefore is key to the bull and bear thesis around Johnson and Johnson.  The segment has seen high-single to low-double digits organic growth over the last several years.

However, investors fear that growth may begin to slow in 2019 as generics and biosimilars eat away at blockbuster drugs. In particular, investors are watching two drugs: Remicade and Zytiga. 

Remicade is a drug that can be used to reduce signs and symptoms for a number of indications, including Colitis, Arthritis, and Crohn's Disease. Worldwide revenue began to decline in 2015 after the expiration of the EU patent, and then US revenue declined further in late 2016 after Inflectra (a Remicade biosimilar) launched. Today, many analysts believe current stock levels price in steep declines in Remicade revenue. Consensus estimates place Remicade revenues at $5.3 billion in 2018 and $4.6 billion in 2019.

Zytiga is used with Prednisone to treat mCRPC, an advanced form of metastatic prostate cancer. The drug faces generic competition that is thought to be 6-12 months away by most investors. Of note, Sun Pharma also recently received approval of its branded Yonsa drug, which is a new formulation of Zytiga. The approval was a surprise to many investors as Johnson and Johnson still holds onto a method of use patent on Zytiga. However, Yonsa is not a substitute for Zytiga, and is there expected to face an uphill battle in convincing doctors to write for Yonsa over Zytiga. As a result, investors remain focused on the expected generic competition in 2019. Consensus expects Zytiga revenue to drop from $3.1 billion in 2018 to $2.4 billion in 2019. 

On the flip side, many of these same analysts also believe that not enough credit is being given to Johnson and Johnson's pipeline of drugs. They cite management's goal of filing 10 new products (each expected to drive $1B+ in revenue) and 50 line extensions (11 with at least $500M potential) by 2021 as evidence of the company's efforts to offset potential blockbuster declines. 

Within the pipeline, investors are particularly excited about Tremfya, Erleada, and Esketamine. Esketamine recently received strong top line phase 3 data for treatment-resistant depression (TRD), which should support management's goal of a 2018 filing.  Esketamine has received breakthrough therapy designations for TRD as well as for suicidal ideation. The addressable market is significant, as there are an estimated 6 million TRD patients in the US alone. Beyond the pipeline, investors are also watching for strength in Xarelto, Darzalex, and Imbruvica. 

Key is whether the company's pipeline can offset erosion from competition

To summarize, investors are closely watching JNJ's Pharmaceutical segment for 1) Remicade and Zytiga sales erosion, especially as generics and biosimilars enter, and 2) the company's ability to offset erosion with new drugs and line extensions. 

Consumer and Medical Devices are Show-Me Stories

The Consumer and Medical Device segments represent the remainder of the 33% in operating income and have been a drag on overall growth at Johnson and Johnson. In mid-May, Johnson and Johnson held an Investor Day to present the plan to turn around the businesses. These turnaround plans will be key in reviving JNJ's multiple and in de-risking financials should the Pharmaceutical segment slow.

Consumer Segment Focused on Becoming More Nimble and Relevant

The Consumer segment saw solid, above-market organic growth of about ~3% between 2014 and 2016. However, the company experienced hiccups in 2017 as organic growth slowed to 1% driven by new entrants into the space.

Going forward, management expects the segment to grow at 1-2% above market growth between 2016 and 2020. They expect to achieve these goals through a number of organizational changes, including:

- Taking on more startup qualities while holding onto the benefits that come from a global brand with enormous scale

- Emphasis on e-commerce channel, which they expect to grow significantly

- Tailored messaging that will be more local and consumer-relevant

- The company continues to expect that the majority of revenue growth will be driven by its 12 megabrands. Specifically, watch for the relaunch of Baby and Oral Care, as these relaunches will be important indicators of whether the company's strategy will be effective.

Medical Devices Turnaround Expected to be Driven by Investments and New Product Launches

Medical Devices has underperformed for some time, but management believes the segment is now positioned to return to above market growth by 2020 driven by a number of factors:

- Management has invested heavily in the segment, with $5 billion in 2017 and $500 million year-to-date in 2018. Management believes the market outlook is bright as an aging population, increased urbanization, and growing access to healthcare globally drives market growth

- These investments will go towards 15-20 new product launches in 2018 and 20-25 product launches in 2019

- Robotic surgery (Verb Surgery) commercialization is expected in 2020

Turnaround Plan Encouraging, but Need to See Results

While analysts appear encouraged by the detailed plan put forth by management, the majority seem to be waiting for results to demonstrate traction within the Consumer and Medical Devices segments. As a result, investors will be watching in the coming quarters for signs that their strategy is bearing fruit.