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J&J (JNJ) to Begin Pharma Q1 Earnings: What's in Store?

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We expect Johnson & Johnson JNJ, a healthcare bellwether, to beat expectations when it reports first-quarter 2018 results on April 17, before market opens. Last quarter, the company delivered a positive earnings surprise of 1.16%.

J&J’s performance has been pretty impressive, with the company exceeding earnings expectations in all the trailing four quarters. The average positive earnings surprise over the last four quarters is 3.09%

The J&J stock has depreciated 6.6% this year so far, which compares unfavorably with a decline of 1.0% recorded by the industry.

Factors to Consider

J&J’s sales growth accelerated in the second half of 2017, backed by higher sales in the Pharmaceutical segment and improving performance in Medical Devices.In 2018, J&J expects the Pharmaceutical segment to remain strong, while the Consumer and Medical Device segments will likely continue to improve.

We believe new products in all segments, label expansion of drugs like Imbruvica, Xarelto, Stelara and Darzalex, and meaningful contribution from Swiss biotech — Actelion — which J&J bought in June last year, will support the top line. The Zacks Consensus Estimate for sales from the Pharmaceutical segment in Q1 is $9.5 billion.

However, in the fourth quarter of 2017, revenues from pulmonary arterial hypertension (PAH) products — added from the Actelion acquistion —declined sequentially. It is to be seen if PAH revenues improve in Q1.

Meanwhile, biosimilar competition is expected to continue to hurt sales of the key arthritis drug — Remicade — outside the United States.

However, J&J does not expect any biosimilar entrants for Zytiga, Prezista, Risperdal Consta, or Invega Sustenna in the United States this year.

Regarding the newly-launched Tremfya, J&J noted at the Q4 conference call that the uptake of the product has been decent. The drug recorded sales of $47 million in Q4 which is expected to be higher in the to-be reported quarter. Meanwhile, we expect J&J to discuss commercialization plans for Erleada, its newly-approved prostate cancer drug, at the Q1 conference call. Also, J&J will discuss the initial sales uptake of Juluca— the first dual treatment for HIV developed in partnership with GlaxoSmithKline GSK —  which received the FDA approval in November last year. Juluca is under review in the EU.

In the Medical Devices segment, sales are expected to continue to rise in the Vision Care and Cardiovascular units. Diabetes Care unit will continue to remain weak. The Zacks Consensus Estimate for sales from the Medical Devices segment in Q1 is $6.7 billion.

In the Consumer segment, global consumer category slowdown across many of the company’s markets will continue to hurt sales. However, recent acquisitions as well as new products will likely provide some support. The Zacks Consensus Estimate for sales from the Consumer segment in Q1 is $3.35 billion.

Meanwhile, higher investments behind the new product launches will continue to thwart profits.

Earnings Whispers

Our proven model shows that J&J is likely to beat estimates this quarter because it has the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for a likely positive surprise.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate ($2.03 per share) and the Zacks Consensus Estimate ($2.01 per share), is +1.16%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: J&J has a Zacks Rank #2. The combination of J&J’s Zacks Rank #2 and positive ESP makes us confident of an earnings beat in the upcoming release.

Sell-rated stocks (Zacks Rank #4 or 5), on the other hand, should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Other Stocks to Consider

Here are some other large drug/biotech stocks that have the right combination of elements to beat on earnings this time around:

Amgen, Inc. AMGN with an Earnings ESP of +1.15% and a Zacks Rank #2. The company is scheduled to release results on Apr 26. You can see the complete list of today’s Zacks #1 Rank stocks here.

AbbVie, Inc. ABBV has an Earnings ESP of +0.47% and a Zacks Rank #3. The company is slated to release results on Apr 26.

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