Olayemi BamisileRena Huynh

Luciana Vallejo

Executive SummaryTo add value to Johnson & Johnson we are considering

acquiring Incyte Corporation.

JNJ Products & Segments• Products/Services: Pharmaceutical Company• Segments:• Consumer Products• Pharmaceutical Products• Medical Devices & Diagnostics

JNJ’s Unprincipled Leadership• Strategy: Decentralized Management• Issues: Scandals surrounding products in medical devices

& diagnostics segments

Costs of Unprincipled Leadership

• $8M in damages per customer• Over 10,000 potential cases• Up to $80B in damages

Leading JNJ into Becoming an Ethical

Company• Managers need to lead the

company into becoming a socially responsible company• Coordinate & influence

modifications in operations, engineering, logistics, product design, and financing

JNJ’s Cash Flows

• 2012 Acquisition of Synthes, Inc.: $20B• Products: Manufactures orthopedic devices• Premium: 37%

Cash Flows 2012 2011

Operating Activities $15B $14B

Investing Activities $(5)B $(5)B

Payment Method Dollar Amount

Cash $7B

Stock $13B

JNJ’s Cost of Capital: 9%

Critical Assumptions Rate

% of Funding by Debt 10%

% of Funding by Equity 90%

New Debt 4%

Shareholders Expected Return 10%

Tax Rate 22%

JNJ is Under Valued

• Terminal Value: $490B• SGR: 7%

Assumptions 2012 Ratios Forecasted Ratios

Sales Growth Rate 3% 7%

Cost of Good Sold as %Sales 32% 33%

Growth in Long-Term Debt - 11% 11%

R&D Expenses as %Sales 13% 15%

Payments Made to Suppliers 98 days 124 days

*Source: Yahoo Finance

Estimated Value per Share$135

Value per Share with Damages$103

*Stock Price$86

Incyte’s Leading Product

1st and only FDA approved drug to treats intermediate to high-risk myelofibrosis (bone marrow disorder)

Incyte’s Business Strategy• Develop, and commercialize compounds independently

in 2 core disease areas such as oncology and inflammation

• Collaborations with:

Incyte’s Cash FlowsCash Flows 2012 2011

Operating Activities Cash Flow $(95)M $(162)M

Investing Activities Cash Flow $(2)M $(3)M

Financing Activities Cash Flow $48M $19M

Incyte’s Cost of Capital: 14%

Critical Assumptions Rate

% of Funding by Debt 30%

% of Funding by Equity 70%

Rate Paid on Debt 2%

Shareholders Expected Return 18%

Tax Rate 16%

Incyte is Over Valued

*Source: Yahoo Finance

Estimated Value per Share$20

*Stock Price$22

Critical Assumptions 2012 Ratios Forecasted Ratios

Terminal growth rate - 1%

Product Sales Growth Rate 6659% 68%

Royalty Sales Growth Rate N/A 10%

Contract Sales Growth Rate 70% 45%

Total Cost as %Sales 71% 51%

Incyte’s New Drug Adds Value of $300M• Waiting time for FDA approval: 3 years• 2 Dosages Available: 250mg & 500mg• Each dosage comes in 30-days supply

Cash Outflow Dollar Amount

R&D (Development & Clinical Trials) for Year 1 – 3 $50M

Marketing Expense Starting Year 4 $25M

Equipment Required to Store the Drug in Year 3(10 years useful life)

$750,000

Incyte’s New Drug Adds Value of $300M

Put dosage• Payback Period: 4.5 years• Project’s Expected Return: 82%

Critical Assumptions 250mg 500mg

Price per 30-days Supply $210 $410

Variable Cost per 30-days Supply 56% 56%

Number of Patients in 4th Year 1 million 1 million

Increase in Patients per year 4% 5%

Recommendations

• JNJ will not acquire Incyte• Insufficient Operating Cash Flows• Finance company for future cash flows• Company is overvalued

• JNJ should focus on fixing house issues related to defective products and unprincipled leadership

• Incyte should implement our project

References• Ingram-Albright. (2007). Interpreting Cash Flows. In S.

Oblinger (Ed.), Financial Accounting Information for Decisions (pp. 184-187) Dewey, Rob.

• Nielsen, R. P. (1989). Changing Unethical Organizational Behavior. Academy Of Management Executive (08963789), 3(2), 123-130. doi:10.5465/AME.1989.4274762

• When J&J learned of Implant Problems. Wall Street Journal, Torello, A. (2013, January 31, 2013). EU sends anti-trust complaint to J&J, Novartis. Wall Street Journal

Questions?