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J&J (JNJ) Beats on Q2 Earnings, Ups 2019 Sales Growth View

Zacks Equity Research

Johnson & Johnson’s JNJ second-quarter 2019 earnings came in at $2.58 per share, which beat the Zacks Consensus Estimate of $2.42 and increased 22.9% from the year-ago period.

Adjusted earnings exclude gain from the divesture of Advanced Sterilization Products business in April, after-tax intangible amortization expense and some special items. Including these items, J&J reported second-quarter earnings of $2.08 per share, up 43.4% from the year-ago quarter.

Sales of the drug and consumer products giant came in at $20.56 billion, which beat the Zacks Consensus Estimate of $20.32 billion. Sales declined 1.3% from the year-ago quarter, reflecting an operational increase of 1.6%, which was offset by an unfavorable currency impact of 2.9%.

Organically, excluding the impact of acquisitions and divestitures, sales increased 3.7% on an operational basis, less than 5.5% increase seen in the previous quarter.

However, sales growth in the Pharmaceutical segment and an improvement in the Consumer unit offset a deceleration in sales in the Medical Devices unit to support the decent sales performance in the quarter.

Second-quarter sales declined 2.2% in the domestic market to $10.40 billion and 0.3% in international markets to $10.16 billion. However, international sales reflected 5.5% operational growth and 5.8% negative currency impact.

Segment Details

Pharmaceutical segment sales rose 1.7% year over year to $10.53 billion, reflecting 4.4% operational growth and 2.7% negative currency impact. Excluding the impact of all acquisitions and divestitures, on an operational basis, worldwide sales increased 4.4%, less than 7.9% increase in the previous quarter.

The decent sales performance was led by the company’s oncology drugs Imbruvica and Darzalex as well as psoriasis treatment, Stelara.

Worldwide sales of J&J’s oncology drugs rose 9.8% in the quarter to $2.7 billion. Other core products like Stelara, Simponi/Simponi Aria and Invega Sustenna and new immunology medicines like Tremfya also contributed to growth. However, sales of some other key drugs like Xarelto declined in the quarter. Sales of others like Zytiga, Remicade, Procrit/Eprex declined due to the impact of generic/biosimilar competition.

Darzalex sales rose 51.6% to $774 million in the quarter. Stelara sales rose 16.1% to $1.56 billion in the quarter. Imbruvica sales rose 34.1% to $831 million in the quarter. Please note that J&J markets Imbruvica in partnership with AbbVie, Inc. ABBV. Invega Sustenna sales rose 13.6% to $818 million in the quarter.

In the quarter, J&J recorded pulmonary arterial hypertension revenues of $690 million, up 3.8% year over year. Strong demand for Uptravi and Opsumit was partially offset by a decline in Tracleer sales. We remind investors that Teva Pharmaceutical Industries Limited TEVA launched a generic version of Tracleer in the United States in June.

Simponi/Simponi Aria sales rose 2.7% to $563 million in the quarter. Newly launched Tremfya recorded sales of $235 million in the quarter compared with $217 million in the first quarter.

Zytiga sales declined 23.3% to $698 million in the quarter. Several generic versions of key prostate cancer drug Zytiga have entered the market. J&J received unfavorable rulings in district court cases related to generic versions of Zytiga, which opened doors for an earlier-than-expected generic launch in late 2018.

Sales of Invokana/Invokamet declined 17.9% to $177 million. Xarelto sales declined 19.2% in the quarter to $549 million. Sales of Procrit/Eprex declined 22.7% to $183 million in the quarter. Sales of Remicade were down 16.2% in the quarter to $1.11 billion. Please note that J&J markets Remicade in partnership with Merck MRK.

Medical Devices segment sales came in at $6.49 billion, down 6.9% from the year-ago period, reflecting an operational decrease of 4.1% and negative currency movement of 2.8%.

Excluding the impact of all acquisitions and divestitures, on an operational basis, worldwide sales increased 3.2%, less than 4.3% in the previous quarter.

The Consumer segment recorded revenues of $3.54 billion in the reported quarter, up 1.2% year over year. On an operational basis, Consumer segment sales increased 4.6%, partially offset by unfavorable foreign currency movement of 3.4%.

Excluding the impact of acquisitions and divestitures, adjusted operational sales growth was 2.3% worldwide, a significant improvement from 0.7% the previous quarter.

2019 Outlook

J&J maintained its 2019 adjusted earnings per share guidance in a range of $8.53-$8.63. The guidance range indicates growth of 4.3-5.5%. On an operational, constant currency basis, adjusted earnings per share are expected to grow in the range of 6.7-7.9%.

Revenues are expected in the range of $80.8-$81.6 billion, up from the previous range of $80.4-$81.2 billion, including currency impact.

Operational constant currency sales growth is expected to be in the range of 1-2%, better than 0.5-1.5%, expected previously. Adjusted operational sales growth, (excluding currency impact, acquisitions/divestitures) is expected to be in the range of 3.2% to 3.7%, higher than 2.5% to 3.5% expected previously.

Our Take

J&J beat estimates for both earnings and sales in the second quarter of 2019. J&J’s Pharma segment continued to perform well despite currency headwinds and the impact of biosimilar and generic competition on sales of some key drugs like Remicade and Zytiga.

J&J also raised its operational sales growth forecast for the year, which pushed its shares up around 1% in pre-market trading, on continued strength of its business.

The stock has increased 4.4% this year so far against a decrease of 1.5% recorded by the industry.

In 2019, J&J is witnessing significant generic/biosimilar headwinds in the Pharma unit. However, the company expects its sales and earnings growth to accelerate in 2020, supported by contribution from new drugs like Tremfya, Erleada and Spravato and successful label expansion of cancer drugs like Imbruvica and Darzalex and immunology drug, Stelara.

J&J is also making rapid progress with its pipeline and line extensions. It expects its Pharmaceutical unit to deliver above-market growth through 2023 and expects to launch or file for approval of more than 10 new products with blockbuster potential between 2019 and 2023. The company is also targeting more than 40 line extensions of existing and new drugs through 2023, 10 of which have more than $500 million of opportunity.

However, allegations that its talc products contain asbestos, which caused users to develop ovarian cancer, continue to be an overhang on the stock. Earlier this week, shares of J&J declined amid reports of a criminal investigation by the U.S. Department of Justice related to its talc-based products.

J&J is already facing more than 14,000 lawsuits, which allege that its baby powders cause its users to develop cancer. 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.

J&J currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Johnson & Johnson Price, Consensus and EPS Surprise

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