Johnson & Johnson’s JNJ second-quarter 2019 results were better-than-expected. While adjusted earnings of $2.58 per share increased 22.9%, sales of $20.56 billion declined 1.3% from the year-ago period. Organically, excluding the impact of acquisitions and divestitures, sales increased 3.7% on an operational basis as the company delivered growth across the three segments - Pharmaceuticals, Medical Devices and Consumer.
J&J’s senior managers also discussed the guidance for 2019. The full-year sales view was raised on continued strength of the business while the same for earnings was reiterated.
The stock has increased 2.2% this year so far against a decrease of 1.1% recorded by the industry.
Here are the key takeaways from J&J’s second-quarter earnings conference call.
Pharma Unit Outperforms Despite Generic Headwinds
Excluding the impact of all acquisitions and divestitures, on an operational basis, worldwide sales of J&J’s Pharmaceutical unit rose 4.4%, which was less than 7.9% increase in the previous quarter. Nonetheless, it was better than most analysts’ expectations and also outdid the Zacks Consensus Estimate of $10.28 billion.
The strong performance was led by the company’s oncology drugs, Imbruvica and Darzalex as well as psoriasis treatment, Stelara. J&J markets Imbruvica in partnership with AbbVie, Inc. ABBV. Other core products like Stelara, Simponi/Simponi Aria and Invega Sustenna and new immunology medicines like Tremfya also contributed to growth.
It is noteworthy that the better-than-expected performance came despite currency headwinds and the impact of biosimilar and generic competition on sales of some key drugs like Remicade and Zytiga. J&J markets Remicade in partnership with Merck MRK.
J&J is witnessing significant generic/biosimilar headwinds in the Pharma unit. Continued biosimilar competition for Remicade and Procrit and generic competition for Velcade, Tracleer and Zytiga in the United States are expected to hurt revenues between $2.5 billion to $3 billion in 2019. We remind investors that Teva Pharmaceutical Industries Ltd. TEVA launched a generic version of Tracleer in the United States in June.
However, J&J sounded quite confident of sales and earnings growth accelerating in 2020, supported by contribution from new drugs like Tremfya, Erleada and Spravato and successful label expansion of Imbruvica, Darzalex and Stelara.
Higher R&D Spend Expected in 2H
On the conference call, management said they expect higher R&D costs in the second half of the year due to potentially accelerated investments in the pipeline. Also the full-year tax rate guidance was raised to 17.5% - 18.5% from 17% - 18% previously.
Expectations for higher R&D costs and tax rate led management to lower its pre-tax operating margin guidance provided on the first-quarter conference call in April. J&J now expects pre-tax operating margin to slightly decline year over year compared to prior expectations of a slight improvement
Talc/Opioid Litigations Are Manageable
On the call, J&J’s chief financial officer Joe Wolk threw light on the talc and opioid litigation issue. He said that the talc litigation issue is overblown and the company is on “very firm ground” with respect to the facts. He sounded confident of prevailing through the appeals process even though the initial jury verdicts were against J&J.
J&J faces more than 14,000 lawsuits for its talc-based products, primarily its baby powders. The lawsuits allege that its talc products contain asbestos, which caused many women to develop ovarian cancer.
In August 2018, J&J was ordered by a Missouri court to pay $4.7 billion in damages to 22 women who made such allegations, affirming a St. Louis court jury’s verdict in July. J&J intends to appeal the case. In December 2018, J&J stock lost significant value after a Reuters article said that the company knew for decades that its baby powders contained asbestos. More recently, shares fell amid reports that the company is facing criminal investigation by the U.S. Department of Justice related to its talc-based products.
J&J has time and again said that its talc/baby products do not contain asbestos and this fact has been demonstrated in thousands of tests and studies conducted over decades. Nonetheless, the issue has been weighing on stock price for some time now.
Meanwhile, the state of Oklahoma has demanded $17 billion from J&J in a lawsuit, which claims that the latter was one of the several companies responsible for fueling the state’s opioid epidemic. This issue is also an overhang on J&J’s stock.
For the Oklahoma opioid litigation, Joe Wolk said that the “state’s claims don’t align with the facts” and that they were not the cause of the epidemic.
Overall, we believe that though the stock may witness volatility due to the litigations, the company’s fundamentals are strong. Revenues are expected to accelerate in 2020. Share buybacks and restructuring initiatives should provide bottom-line support. J&J is also making rapid progress with its pipeline and line extensions. It has already gained FDA approval for two new drugs in 2019, Balversa and Spravato, both with blockbuster potential.
J&J currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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