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Will J&J (JNJ) Witness Deceleration in 2018 Sales Growth?

J&J (JNJ) has a history of issuing a cautious outlook, especially at the beginning of the year. However, there are several tailwinds, which can coax it to improve the 2018 projection.

Johnson & Johnson’s JNJ fourth-quarter 2017 results were mixed as it beat estimates for earnings while missing the same for sales. J&J announced its fourth-quarter results on Jan 23 before markets opened.

As expected, J&J’s sales growth accelerated in the second half of the year backed by higher sales in the Pharmaceutical segment and improving performance in Medical Devices. Organically, excluding the impact of acquisitions and divestitures, sales increased 4.2% on an operational basis in the fourth quarter, better than 3.8% increase seen in the third quarter and 2.4% in the first half.

Meanwhile, the acceleration in underlying sales growth in J&J’s Pharma segment seen in the third quarter continued in the fourth quarter.  Pharmaceutical segment sales rose 17.6% year over year in the fourth quarter to $9.7 billion. Also the drug and medical device giant issued a bullish profit outlook for 2018. J&J estimated 2018 adjusted earnings per share in the range of $8.00 - $8.20, reflecting an operational growth rate between 6.8% and 9.6%. The company’s guidance exceeded the then Zacks Consensus Estimate of $7.86 per share.

Despite all these positive factors, shares of J&J have declined since the earnings release on what seems to be investor disappointment with the 2018 revenue guidance.

In 2018, J&J expects revenues in the range of $80.6 billion to $81.4 billion, reflecting operational constant currency sales growth in the range of 3.5% to 4.5%. However, the sales guidance fell slightly short of the then Zacks Consensus Estimate of $81.55 billion. Organic sales growth, excluding the impact of acquisitions and divestitures, is expected to be in the range of 2.5%-3.5%, which, though slightly higher than 2.4% seen in 2017, is short of 4.2% recorded in the fourth quarter. The organic sales growth outlook fell short of investor expectation, which resulted in the share price drop.

We understand investors’ concern with the projected decline in revenue growth in 2018. However, we do believe that this outlook is conservative, considering that J&J has a history of issuing a cautious outlook, especially at the beginning of the year. We believe that there are several tailwinds this year, which can coax it to improve the projection as the year progresses. 

Two new drugs were approved last year - Guselkumab/Tremfya in the United States as well as in the EU for plaque psoriasis and the first dual treatment for HIV, Juluca (dolutegravir + rilpivirine) in partnership with GlaxoSmithKline GSK in the United States. Juluca is under review in the EU.

J&J also gained FDA approval for several line extensions -  a lower dose of Xarelto, two new indications of Simponi Aria, use in adolescents for Stelara, combination use of Darzalex with Celgene’s CELG multiple myeloma drug, Pomalyst and the sixth indication for Imbruvica, among others. Please note that J&J markets Imbruvica in partnership with AbbVie, Inc. ABBV.

The line extensions can expand the eligible patient populations of these drugs and drive sales higher in 2018. The newly approved products will also contribute to sales in 2018.

In 2017, J&J also submitted regulatory applications for label expansion of key drugs including Darzalex (in first-line setting for multiple myeloma), Xarelto (for chronic coronary artery disease and/or peripheral artery disease), Invokana (to include the cardiovascular indication), Zytiga (for earlier stages of metastatic prostate cancer). It might get FDA nod for these line extensions this year, which can provide top-line support, if launched.

This year J&J expects to file for approval of depression candidate, esketamine while apalutamide for pre-metastatic prostate cancer and Symtuza, a darunavir-based once-daily single-tablet regimen for HIV, could be approved by the FDA. Also, several pivotal data readouts and regulatory milestones are expected in 2018.

Meanwhile, J&J’s Pharma segment sales accelerated in the second half from a weak first half and management seemed confident that the positive trend will continue in 2018. J&J also said on the call that the Consumer and Medical Device segments will continue to improve in 2018.

We believe that new products in all segments, label expansion of drugs like Imbruvica and Darzalex and contribution from acquisitions, mainly Actelion, will support top-line growth.

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