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J&J (JNJ) to Set the Ball Rolling for Pharma Q3 Earnings

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J&J (JNJ) to Set the Ball Rolling for Pharma Q3 Earnings

The positive trend seen in J&J's (JNJ) pharma segment sales is likely to continue in the third quarter.

We expect Johnson & Johnson JNJ, a healthcare bellwether, to beat expectations when it reports third-quarter 2018 results on Oct 16, before market open. In the last reported quarter, the company delivered a positive earnings surprise of 1.94%.

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 2.79%

Johnson & Johnson Price and EPS Surprise



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

The stock has depreciated 1.4% this year so far against an increase of 7.2% recorded by the industry.



Factors to Consider

J&J’s sales growth has accelerated since the second half of 2017 backed by higher sales in the Pharmaceutical segment and improving performance in Medical Devices segment. The positive sales trend is expected to continue in the third quarter. J&J is quite confident that its Pharma segment will continue to perform better than the market this year despite the impact of biosimilars on Remicade sales. Core products like Imbruvica, Darzalex Stelara, Xarelto, Zytiga, Simponi/Simponi Aria and Invega Sustenna should contribute to the Pharma segment’s growth.

The Zacks Consensus Estimate for J&J’s Pharmaceuticals, Consumer and Medical Device segments is $10.0 billion, $6.6 billion and $3.34 billion, respectively.

J&J’s strong performance in Pharmaceuticals is being led by its oncology portfolio, a trend expected to remain unchanged in the third quarter.

Revenues from pulmonary arterial hypertension (PAH) products – added from the June 2017 Actelion acquisition –improved in the second quarter from a weak performance in the previous two quarters. Strong demand for Uptravi and Opsumit was partially offset by the expected decline of Tracleer outside the United States due to generic competition. It is to be seen if the improving PAH revenue trend continues in the soon-to-be reported quarter.

Meanwhile, biosimilar competition is expected to hurt key arthritis drug Remicade sales outside the United States. J&J markets Remicade in partnership with Merck MRK.

J&J does not expect any biosimilar entrants for Zytiga, Prezista, Risperdal Consta, or Invega Sustenna in the United States in 2018. However, the company is confident that it can absorb the impact of any potential Zytiga headwind should there be an earlier-than-expected generic launch in 2018.

Regarding newly launched Tremfya, on the second-quarter conference call, J&J said that the product is seeing strong demand trends. We expect the drug to generate higher sales in the third quarter than the previous two quarters.

Meanwhile, we expect J&J to discuss initial sales numbers for Erleada, its newly approved prostate cancer drug, on the third-quarter conference call. Also, Symtuza, a darunavir-based once-daily single-tablet regimen for the treatment of HIV, was approved in the United States in July. We expect management to discuss launch plans for the HIV medicine.

However, on the second-quarter conference call, management had stated that in the second half acceleration is expected in the Consumer and Medical Device businesses while the Pharmaceuticals segment is not expected to grow. The Pharmaceuticals segment will witness difficult comparisons (as the segment began seeing improving trends from the second half of 2017) and a slightly more pronounced effect of generic launches for Procrit and Tracleer in the second half. An improvement in the Consumer segment is expected to be buoyed by strong underlying consumption data and potential sales growth from baby care products re-launch.

Higher investments for product launches will however hurt 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 ($2.06 per share) and the Zacks Consensus Estimate ($2.03 per share), is +1.04%. 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 also have the right combination of elements to beat on earnings this time around:

Vertex Pharmaceuticals Incorporated VRTX with an Earnings ESP of +2.86% and a Zacks Rank #3. The company is expected to release results on Oct 24. You can see the complete list of today’s Zacks #1 Rank stocks here.

Amgen, Inc. AMGN has an Earnings ESP of +0.11% and a Zacks Rank #2. The company is slated to release results on Oct 30.

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