While other healthcare companies including Covidien (NYSE:COV) and Abbott (NYSE:ABT) have seen fit to split their drug and device businesses, it's perhaps lucky for Johnson & Johnson (NYSE:JNJ) shareholders that their company has not gone the same route. While it wasn't really so long ago that JNJ's drug business was struggling, now it's the consumer and device business that need the pick-me-up. Even with the strength of the drug business and the wider healthcare sector, though, it's hard to see a lot of surplus value in the shares at these prices.

SEE: Healthcare Sector: Play Or Stay Away?

Very Respectable, But Uneven, Results In Q1
Johnson & Johnson logged a basically in-line revenue number for the first quarter, as sales grew nearly 10% on an “operational” basis, but a bit above 3% on an organic basis. Growth was led by the pharmaceutical business, which saw sales jump 11%. While JNJ certainly benefited from a Medicaid rebate reversal and some Stelara stocking orders, sales in general were quite good, with products like Zytiga selling quite well.

It's lucky for JNJ shareholders that the company's pharmaceutical graduating classes of 2011 and 2012 are doing so well. While the consumer business is picking up with product reintroductions and fading memories of the company's product recalls and quality control problems, growth here was still only about 3%. Devices, though, have become an ongoing source of disappointment – there was barely any organic growth at all this quarter, and nearly every business was weak.

JNJ's margin situation is a little shaky as well. Gross margin fell more than a point and missed expectations by a similar amount. Operating income improved 8%, though, and the company did spend less on SG&A and R&D than expected.

SEE: Zooming In On Net Operating Income

The Device Business Is Struggling
Johnson & Johnson still has plenty of work to do to get its device business back on a growth trajectory. Now it's certainly true that this is not completely the company's fault – procedure volumes haven't been great and hospitals and payers (insurance companies and national health agencies) are pushing back hard on price.

That said, the atrial fibrillation segment within cardio looks like about the only JNJ business growing at a double-digit clip, and I'm not sure if JNJ will hold that sort of growth indefinitely with Medtronic (NYSE:MDT) and St. Jude (NYSE:STJ) both hungry for growth as well). Surgery is not doing too well (general surgery down 5%, specialty up 1%), with competition from Covidien and perhaps Intuitive Surgical (Nasdaq:ISRG) and Stryker (NYSE:SYK) taking a bite.

Ortho, diagnostics, and diabetes are all also pretty weak. Diabetes was down about 10%, though Roche's (OTC:RHHBY) results indicate this is an industry-wide problem (largely due to reimbursement). Diagnostics is down about 5%, and the company's stated willingness to sell this business could be making matters worse. Last and not at all least, orthopedics (which is about one-third of the device business) is at best flat, though I'm not sure Zimmer (NYSE:ZMH) or Stryker are really making much headway either as this is another market with bruising reimbursement pressures.

Will Pharma Keep The Momentum Up?
On a longer-term basis, I don't see why the device business can't or won't recover. Core markets like surgery, orthopedics, cardiology and diabetes should all grow at rates at least in the low-mid single digits, with even more growth possible in emerging markets. The big question for JNJ is whether management has the discipline to continue reinvesting in R&D even while shareholders want ever-higher dividends and share buybacks.

SEE: Buying Into Corporate Research & Development (R&D)

In the meantime, shareholders will look for the drug business to keep the sales growth going. Major new drugs like Zytiga and Xarelto should deliver, but the jury is still out on whether the company's efforts in diabetes (Invokana was recently approved), hepatitis C, and neurology/psychology will pay off as expected. If competition (or reimbursement) prove more damaging than expected, there would definitely be some downside risk – risk that probably cannot be offset in the near term by the Consumer or Device businesses.

The Bottom Line
Johnson & Johnson has rarely been a favorite pick of mine in the healthcare space. I've liked companies like Sanofi (NYSE:SNY) and Roche (which I own) better in the drug space, and they've out-performed JNJ. Likewise, I think Stryker and Covidien are better picks in devices, even though JNJ has outperformed them in the stock market over the past year. Still, JNJ does offer a rare mix of pharmaceutical, OTC, and device exposure, and perhaps some turnaround upside within the device sector.

If JNJ can grow its free cash flow (FCF) at a long-term rate of nearly 7% (above the historical growth rate of about 5%), these shares seem worth about $87 today. That's not great potential relative to the current price, but there's a decent dividend and the prospect of higher estimates if management can continue the margin improvements and deliver a full turnaround in Consumer and Devices.

At the time of writing, Stephen D. Simpson owned shares of Roche.