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Johnson & Johnson (JNJ) Down 0.1% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Johnson & Johnson (JNJ). Shares have lost about 0.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Johnson & Johnson due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

J&J Q4 Earnings Surpass Estimates, Sales Fall Short

J&J’s fourth-quarter results were mixed as it beat estimates for earnings but missed the same for sales.

Fourth-quarter adjusted earnings came in at $1.88 per share, which beat the Zacks Consensus Estimate of $1.86. Earnings, however, declined 4.6% from the year-ago period.

Adjusted earnings exclude after-tax intangible amortization expense and some special items. Including these items, J&J reported fourth-quarter earnings of $1.50 per share, up 33.9% from the year-ago quarter.

Sales came in at $20.75 billion, which missed the Zacks Consensus Estimate of $20.79 billion. Sales rose 1.7% from the year-ago quarter, reflecting an operational increase of 2.6%, which offset an unfavorable currency impact of 0.9%.

Organically, excluding the impact of acquisitions and divestitures, sales increased 3.4% on an operational basis, less than 5.2% increase seen in the previous quarter.

Sales declined sequentially in Pharmaceutical and Medical Devices segments on an organic basis but improved slightly in the Consumer unit.

Fourth-quarter sales rose 1.4% in the domestic market to $10.77 billion and 2.1% in international markets to $9.97 billion. However, international sales reflected 4% operational growth, which was offset by 1.9% negative currency impact. Excluding the impact of all acquisitions and divestitures, on an adjusted operational basis, international sales rose 4.1% in the quarter.

Segment Details

The Pharma segment performed above-market despite currency headwinds and the impact of biosimilar and generic competition on sales of some key drugs like Remicade and Zytiga.

Pharmaceutical segment sales rose 3.5% year over year to $10.55 billion, reflecting 4.4% operational growth, which was offset by 0.9% negative currency impact. Sales in the domestic market rose 3.9% to $6.17 billion. International sales grew 5.1% to $4.38 billion (operational increase of 5.1%). Excluding the impact of all acquisitions and divestitures, on an operational basis, worldwide sales increased 4.5%, declining from 6.4% increase in the previous quarter.

The sales increase was led by the company’s oncology drugs Imbruvica and Darzalex as well as psoriasis treatment, Stelara. However, sales of Imbruvica and Stelara were slightly less than the consensus estimates.

Worldwide sales of J&J’s oncology drugs rose 9.1% in the quarter to $2.72 billion. Other core products like Stelara, Simponi/Simponi Aria and Invega Sustenna also contributed to growth. Sales of new immunology medicine, Tremfya, declined sequentially in the quarter. Moreover, sales of some other key drugs like Xarelto were soft in the quarter. Sales of others like Zytiga, Remicade, Tracleer, Procrit/Eprex declined due to the impact of generic/biosimilar competition.

Imbruvica sales rose 24.5% to $875 million in the quarter driven by market share gains and strong market growth primarily in the CLL indication in the United States and solid uptake in outside U.S. markets.

Darzalex sales rose 42.1% year over year to $830 million in the quarter. In the United States, strong growth across all lines of therapy driven by the new frontline indication for multiple myeloma transplant-ineligible population drove sales. In outside U.S. markets, increased penetration and share gains drove sales growth.

Stelara sales rose 17.7% to $1.7 billion in the quarter driven primarily by the Crohn's disease indication.

PAH revenues of $623 million declined 6.7% year over year. Strong share growth for Uptravi and Opsumit was offset by a decline in Tracleer sales, which were hurt by continued generic competition in Europe and rapid generic erosion in the United States.

Simponi/Simponi Aria sales rose 6.6% to $515 million in the quarter. Prezista sales rose 9.9% to $544 million in the quarter.  Invega Sustenna sales rose 14.2% to $871 million in the quarter.

Tremfya recorded sales of $270 million in the quarter compared with $290 million in the third quarter. The drug captured 8.3% share of the psoriasis market in the United States, up 2 points from the year-ago quarter.

J&J is encouraged by the early sales uptake of new drug Erleada in the United States as well as launch progress in Europe. The drug generated sales of $116 million in the fourth quarter. J&J said that Erleada gained over 2 points of market share in the United States for the non-metastatic castration-resistant prostate cancer in the quarter.

Regarding Spravato, J&J said that patient demand is building and new patient starts continue to steadily increase each month

Zytiga sales declined 13.8% to $677 million in the quarter as growth outside the United States was offset by sales decline in the United States due to generic competition.

Sales of Procrit/Eprex declined 17% to $183 million in the quarter due to biosimilar competition.

Xarelto sales rose 0.4% in the quarter to $609 million as prescription growth was offset by increased discounts and rebates. Sales of Invokana/Invokamet declined 22.2% to $177 million.

Sales of Remicade were down 16.4% in the quarter to $1.04 billion due to increased discounts and share loss to biosimilars in the United States. While U.S. sales declined 10.4%, U.S. exports went down 25%. Remicade sales declined 30.4% in international markets.

Medical Devices segment sales came in at $6.63 billion, down 0.5% from the year-ago period, reflecting an operational increase of 0.2% and negative currency movement of 0.7%.

Excluding the impact of all acquisitions and divestitures, on an operational basis, worldwide sales increased 2.7%, less than 5.3% in the previous quarter.

Sales in the quarter were hurt by around 70 basis points due to some forward buying in the third quarter ahead of the consumption tax change in Japan in the Vision business.

Operational growth was driven by continued strong performance of the electrophysiology business in Interventional Solutions, energy and endocutters in Advanced Surgery and contact lenses in Vision, which partially offset softer growth in the orthopedics portfolio due to pricing pressure. However, J&J’s orthopedics portfolio is showing improving trends supported by innovation and execution of commercial strategies. In orthopedics portfolio, while sales of knees, hips and trauma products rose, sales of spine products declined due to loss of market share and unfavorable comparison from the fourth quarter of 2018.

Domestic market sales declined 2.4% year over year to $3.14 billion. International market sales rose 1.3% year over year to $3.5 billion. On an operational basis, international sales increased 2.7%.

The Consumer segment recorded revenues of $3.57 billion in the reported quarter, up 0.9% year over year. On an operational basis, Consumer segment sales increased 2.1%, partially offset by unfavorable foreign currency movement of 1.2%.

Excluding the impact of acquisitions and divestitures, adjusted operational sales growth was 1.4% worldwide, a slight improvement from 1.3% in the previous quarter.

Growth in beauty and over-the-counter products due to innovation was offset by lower baby care products due to prior year re-launch activities and continued competitive pressure.

Sales in the domestic market declined 0.6% from the year-ago period to $1.47 billion. Meanwhile, the international segment rose 2% to $2.1 billion. An operational increase of 4% was offset by negative currency impact of 2% in the quarter.

2019 Results

Full-year 2019 sales rose 0.6% to $82.06 billion, missing the Zacks Consensus Estimate of $82.17 billion. However, sales were within the guided range of $81.8-$82.3 billion.

Adjusted earnings for 2019 were $8.68 per share, above the Zacks Consensus Estimate of $8.67 and up 6.1% year over year. Earnings were slightly more than the guided range of $8.62 - $8.67 per share.

2020 Guidance

J&J announced guidance for 2020.

Adjusted earnings per share in 2020 are expected in the range of $8.95 - $9.10. The guidance range indicates growth of 3.1%-4.8%. On an operational, constant currency basis, adjusted earnings per share are expected to grow in the range of 3.7%-5.4%.  

Revenues are expected in the range of $85.4-$86.2 billion, indicating year-over-year growth of 4. Operational constant currency sales growth is expected to be in the range of 4.5%-5.5%. Adjusted operational sales growth, (excluding currency impact, acquisitions/divestitures) is expected to be in the range of 5% to 6%. The 2020 sales guidance includes the benefit of an additional 2 to 3 shipping days associated with the 53rd week in the 2020 fiscal calendar, which will be partially offset by a SKU rationalization program in  Consumer segment.

J&J expects its Pharmaceutical business to continue to deliver growth above market in 2020 while the sale momentum in its Medical Device unit will continue. It also plans to improve the profitability of its Consumer unit while continuing to optimize its portfolio for competitive growth. J&J expects the Pharma unit growth in 2020 to be supported by strong performance of key products such as Darzalex, Imbruvica, Tremfya, Stelara and Erleada due to increased penetration and new indications.

J&J expects an operating margin improvement of approximately 100 basis points in 2020.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -5.86% due to these changes.

VGM Scores

At this time, Johnson & Johnson has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Johnson & Johnson has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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