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

Zacks Equity Research

Johnson & Johnson JNJ will report first-quarter 2019 results on Apr 6, before market open. In the last reported quarter, the company delivered a positive earnings surprise of 1.03%.

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 1.61%

Johnson & Johnson Price and EPS Surprise


Johnson & Johnson Price and EPS Surprise | Johnson & Johnson Quote

J&J’s stock has risen 5.1% this year so far compared with an increase of 3.9% recorded by the industry.



Factors to Consider

J&J’s sales growth accelerated in 2018 backed by above-market sales growth in the Pharmaceutical segment and improved performance of the Medical Devices unit. However, on the fourth-quarter conference call, J&J said that 2019 sales are likely to be hurt by generic/biosimilar headwinds in the Pharma unit.

The strong performance of the Pharmaceuticals segment was driven by its oncology portfolio, a trend expected to remain unchanged in the first quarter of 2019. J&J’s cancer drugs like Imbruvica and Darzalex should continue to perform well. In the first quarter, J&J gained line-extension approvals for a split-dosing regimen of Darzalex in the United States and EU and for Imbruvica in the United States in combination with Roche’s RHHBY Gazyva (obinutuzumab) for the treatment of first-line chronic lymphocytic leukemia/small lymphocytic lymphoma (CLL/SLL). The label expansions will contribute to these drugs’ sales in the quarter.

Other core products like Stelara and Invega Sustenna should also contribute to growth. However, sales of some other key drugs like Simponi/Simponi Aria and Xarelto declined in the fourth quarter. It remains to be seen if these drugs’ sales improve in the first quarter. The FDA approval of Xarelto for a new 2.5 milligram vascular dose for the CAD/PAD indication in October has significantly expanded the drug’s eligible patient population, which may improve sales of the drug in the first quarter.

Also, new drugs like Erleada and Tremfya should perform well. Regarding newly launched Tremfya, J&J said on the Q4 call that the product is seeing strong demand trends and has captured 6.6% share of the psoriasis market in the United States.

In the pulmonary arterial hypertension (PAH)category, strong demand for Uptravi and Opsumit is likely to be partially offset by a decline in Tracleer due to increased use of Opsumit as well as generic competition in Europe.

Continued biosimilar competition for Remicade and Procrit and generic competition for Velcade, Tracleer and Zytiga in the United States are expected to hurt revenues in 2019. Other than that, pricing pressure will continue to hurt sales

Several generic versions of key prostate cancer drug Zytiga have entered the market. J&J received an unfavorable ruling in district court cases related to generic versions of Zytiga, which opened doors for an earlier-than-expected generic launch in 2018. Sales of Zytiga slowed down significantly in the fourth quarter due to the impact of generic competition in the United States, a negative trend expected to continue in the first quarter.

While the Consumer unit will grow slightly above the market in 2019 supported by innovation and improved go-to-market models, the Medical Devices segment is expected to improve driven by better execution and product introductions.

The Zacks Consensus Estimate for J&J’s Pharmaceuticals, Consumer and Medical Device segments is $9.8 billion, $3.4 billion and $6.4 billion, respectively.

Investor focus on the call will be on the launch plans for J&J’s newly approved nasal spray Spravato (esketamine) for treatment-resistant depression (TRD) in adults. Spravato was approved by the FDA last month.

Earnings Whispers

Our proven model does not conclusively show that J&J is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: Its Earnings ESP is -2.52% as the Most Accurate Estimate stands at $1.99 per share while the Zacks Consensus Estimate is pegged higher at $2.04. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: J&J’s Zacks Rank #2 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings beat.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

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

AbbVie, Inc. ABBV with an Earnings ESP of +0.89% and a Zacks Rank #3. The company is expected to release results on Apr 25. You can see the complete list of today’s Zacks #1 Rank stocks here.

AstraZeneca, plc AZN has an Earnings ESP of +9.52% and a Zacks Rank #2. The company is expected to release results on Apr 26.

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