Johnson & Johnson (JNJ) beat expectations yet again with second-quarter 2013 earnings (excluding special items) coming in at $1.48 per share, well above the Zacks Consensus Estimate of $1.39 per share and 13.8% above the year-ago earnings of $1.30 per share.
Despite the negative impact of currency fluctuation, Johnson & Johnson recorded growth on the back of strong product sales, the restoration of supply of several over-the-counter (:OTC) products and the Synthes acquisition.
Johnson & Johnson’s second quarter sales increased 8.5% year-over-year to $17.9 billion, above the Zacks Consensus Estimate of $17.7 billion. While operational factors favorably impacted sales by 10%, currency fluctuations had a negative impact of 1.5%.
Including one-time items, Johnson & Johnson reported second quarter earnings of $1.33 per share, well above the year-ago earnings of 50 cents. Results were boosted by the impact of the sale of Johnson & Johnson’s equity interest in Elan Corporation, plc (ELN).
The Quarter in Details
Second quarter sales increased 8% in the domestic market. Meanwhile, international sales grew 9%, consisting of 11.8% operational growth and 2.8% negative currency impact. All segments recorded growth during the reported quarter.
The Medical Devices & Diagnostics segment posted sales of $7.2 billion, up 9.6% year-over year. While operational factors positively impacted Medical Devices & Diagnostics segment sales by 12%, foreign exchange movement negatively impacted sales by 2.4%.
Sales in the domestic market increased 9.8% year-over year to $3.2 billion; international market sales increased 9.4% year over year to $4 billion. Results included the impact of the Synthes acquisition.
Major growth drivers included orthopedic sales from Synthes products, Biosense Webster's electrophysiology business, Vision Care’s 1-Day Acuvue Trueye and 1-Day Acuvue Moist disposable contact lenses and some Specialty Surgery products among others. Orthopedics sales increased 46.5% to $2.4 billion thanks to the Synthes acquisition.
Several Medical Devices & Diagnostics markets have been facing challenges in the form of European austerity measures, pricing pressure and a slowdown in elective surgeries, which have all contributed to more tempered growth rates.
Pharmaceutical segment sales increased 11.7% year-over-year to $7 billion (operational growth of 12.9% and negative currency impact of 1.2%). Sales in the domestic market increased 9.1% to $3.4 billion whereas international sales increased 14.1% to $3.6 billion.
New products like Zytiga, Stelara, Xarelto, Simponi and Invega Sustenna continued to perform well. Other growth drivers included Prezista, Remicade and Velcade. Second quarter Zytiga sales were $395 million, up 70.3% year-over-year.
We note that Johnson & Johnson is looking to strengthen its prostate cancer portfolio (especially once Zytiga loses exclusivity) through the acquisition of Aragon Pharmaceuticals, Inc.
The Consumer segment recorded revenues of $3.7 billion in the reported quarter, up 1.1% from the second quarter of 2012. Foreign currency movement negatively impacted sales in the segment by 0.6%.
Sales in the domestic market grew 1% year-over-year to $1.3 billion, whereas the international market recorded year-over-year growth of 1.1%. OTC sales increased 17.4% in the US with some key products being re-launched. Johnson & Johnson intends to re-launch several of the off-market products by year end.
Ups Earnings Guidance
With Johnson & Johnson’s second quarter earnings surpassing expectations, the company raised its 2013 earnings guidance to $5.40 - $5.47 per share. The company was previously expecting earnings of $5.35 to $5.45 per share. The Zacks Consensus Estimate currently stands at $5.41 towards the lower end of the new guidance range. Shares were up in pre-market trading.
Johnson & Johnson currently carries a Zacks Rank #3 (Hold). The company has been trying to offset the declining sales of some of its important products by bringing in new products through in-licensing deals and acquisitions. We believe the diversity and strength of the company’s underlying businesses will continue to provide strong growth in future. The Synthes deal should continue driving results.
While we expect Johnson & Johnson to continue facing headwinds in the form of EU pricing pressure, manufacturing issues and US healthcare reform, we believe Johnson & Johnson’s diversified business model, lack of cyclicality and strong financial position will continue helping the company pave its way through tough situations.
Currently, in the broader pharma/biopharma space, companies like Jazz Pharmaceuticals (JAZZ) and Auxilium Pharmaceuticals (AUXL) look well-positioned. While Jazz Pharma is a Zacks Rank #1 (Strong Buy) stock, Auxilium Pharma is a Zacks Rank #2 (Buy) stock.
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