In one of the first state opioid cases, an Oklahoma judge ruled against Johnson & Johnson, awarding the state $572 million, well below the over $17 billion the state was seeking in damages. The amount is lower than many had expected, and J&J still plans to appeal the case. We expect the appeals process to take several years, and on appeal, we believe the amount will fall lower as we believe J&J largely provided appropriate marketing support around its opioid drug sales. Overall, we don't expect any change to our fair value estimate or moat rating for the company based on the ruling, and we continue to model in $1 billion in total opioid litigation costs for J&J.
The next steps in the opioid litigation process include other state cases and a likely long appeals process. Following the Oklahoma ruling, we expect an Ohio case will represent the next important step in determining the magnitude of the overall opioid litigation. The lack of early settlements by opioid drugmakers in Ohio (like Purdue's settlement in Oklahoma) suggest this state could be less sympathetic to the plaintiffs. Also, regardless of the outcome in Ohio, we expect the ruling will be similarly appealed, setting up a process that will likely take several years to complete.
The strong balance sheet at J&J likely entices many plaintiffs to target the firm. Within the opioid litigation landscape, plaintiffs are targeting several industries and firms for potentially causing addiction and overdoses of these powerful drugs. However, J&J holds one of the strongest balance sheets and most robust streams of cash flows, which makes it a larger target than many of the smaller specialty drug firms that carry much weaker financial positions. Even though J&J's opioid sales represent a small fraction of the overall prescriptions of opioid sales (less than 1% of state paid opioid prescriptions), we believe the deep pockets of J&J have made the firm a larger target than its opioid sales would suggest.
Johnson & Johnson stands alone as a leader across the major healthcare industries. The company maintains a diverse revenue base, a developing research pipeline, and exceptional cash flow generation that together create a wide economic moat.
J&J holds a leadership role in diverse healthcare segments, including medical devices, over-the-counter products, and several pharmaceutical markets. Contributing close to 50% of total revenue, the pharmaceutical division boasts several industry-leading drugs, including immunology drug Remicade and psoriasis drug Stelara. The medical device group brings in almost one third of sales, with the company holding controlling positions in many areas, including orthopedics and Ethicon Endo-Surgery's surgical devices. The consumer division largely rounds out the remaining business lines, and despite manufacturing issues over the past several years, the group still holds many brands with strong pricing power.
Research and development efforts are resulting in next-generation products. 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. 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 (operating cash flow less capital expenditures) is over 20% 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. It also allows J&J to take advantage of acquisition opportunities that will augment growth.
Diverse operating segments coupled with expected new products insulate the company more from patent losses relative to other Big Pharma firms. Further, in contrast to most of its peers, J&J faces the majority of its near-term patent losses on hard-to-make complex drugs, which should likely slow generic competition.
We believe Johnson & Johnson carries one of the widest moats in the healthcare sector, supported by intellectual property in the drug group, switching costs in the device segment, and strong brand power from the consumer group. The company's diverse revenue base, strong pipeline, and robust cash flow generation create a very wide economic moat. An extensive salesforce makes J&J a powerful candidate for a smaller biotechnology company looking to partner on a new drug, which strengthens Johnson & Johnson's ability to bring new products to market.
Johnson & Johnson's diverse operations are a major pillar supporting the wide moat. The company holds a leadership role in a number of segments, including medical devices, OTC medicines, and several drug markets. Further, the company is not overly dependent on one particular operating segment; the pharmaceutical business, medical device group, and consumer products represent 50%, 33%, and 17% of total sales, respectively. Additionally, within each segment no one product dominates sales, as Pfizer's Lipitor did. Despite carrying some lower-margin divisions, J&J maintains strong pricing power and has posted gross margins above 69% during the past five years, validating its strong competitive position.
Johnson & Johnson's R&D efforts support its robust revenue base. In pharmaceuticals, the company recently launched several new blockbusters, which should allow Johnson & Johnson to escape largely unscathed from upcoming patent expirations. Its efforts in medical devices, including minimally invasive surgical tools, should help maintain leadership in several medical device areas as well as support strong pricing power. Further, switching costs remain high with several of the device products. (For example, physicians switching vendors for hip and knee devices could take weeks if not months to learn the new products, which keeps physicians tied to the company's products.) On the consumer side, new product advancements combined with a solid brand power (reinforced by marketing campaigns) should sustain solid pricing power.
We are increasing our fair value estimate to $134 from $130 per share based on increased projections for recently highlighted late-stage pipeline drugs, especially new cancer drugs that hold strong pricing power and typically can reach the market with shorter development times. Overall, within the core drivers of cash flow, new immunology and oncology drugs are driving growth. Including the Actelion acquisition, we expect annual earnings per share growth will average 5% during the next five years, as strong growth in new pipeline drugs should offset some patent losses in the pharmaceutical division. We expect relatively flat operating margins over the next several years as waning cost-remediation efforts in the consumer group and increasing cost-containment efforts throughout the firm help offset margin pressure due to the loss of patent protection on several high-margin drugs, including immunology drug Remicade. Also, following 2019, we expect J&J to reduce its dependence on asset sales that the firm uses occasionally to boost overall earnings.
Johnson & Johnson needs to overcome several roadblocks, including remaining litigation surrounding central nervous system drug Risperdal, talcum powder, surgical mesh products, and metal-on-metal hip and knee implants and several product recalls that could damage its sterling reputation. Over the longer term, the company faces typical healthcare risks such as reduced pricing power from both governments and pharmacy benefit managers, regulatory delays, and nonapprovals as well as increasingly aggressive generic competition for both small-molecule drugs and biologics. In particular, the biosimilar risk to Remicade is increasing, with several biosimilars working to gain more market share.
Overall, we view the stewardship at Johnson & Johnson as relatively Standard. While the firm has a good record of making sound capital deployment decisions and consistently generating returns on invested capital above the cost of capital, major recalls, the recent potential overpayment for Actelion and poor turnaround time in addressing manufacturing problems at certain key divisions lead us to a more balanced view of the company's leadership.
Industry veteran Alex Gorsky replaced longtime CEO Bill Weldon, who stepped down from the top position in 2012 after leading Johnson & Johnson since 2002. Given Weldon's age and the rigorous process to find his successor, we didn't see the change in leadership as a red flag. Gorsky brings a strong record of industry experience dating back to 1988, when he began in the industry as a pharmaceutical sales representative for Johnson & Johnson. His subsequent advancement through many management positions in the drug and device divisions at Johnson & Johnson along with a managerial post at Novartis gives him the broad experience needed to run the massive health conglomerate. The first major test of Gorsky's leadership was the $21 billion acquisition of orthopedic device firm Synthes, which was largely driven by Gorsky as head of Johnson & Johnson's device unit. While we believe that acquisition added important exposure to emerging markets and trauma devices, it appears to have had only a small impact on valuation, as the price paid for Synthes largely accounts for incremental benefits gained from the acquisition. The second major test for Gorsky is the recently completed Actelion deal, which we are skeptical will be able to create much value for shareholders due to the high acquisition price relative to our fair value.
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