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Here Are the Key Takeaways From J&J's Q1 Earnings Report

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Johnson & Johnson JNJ kick started the earnings season for the pharma players. The company’s share price has risen 1.5% since it reported better-than-expected first-quarter 2019 results on Apr 16. Let’s delve into some of the key aspects of this pharma giant’s first-quarter results.

The stock has rallied 7.3% this year so far compared with an increase of 0.3% recorded by the industry.



The Quarter in a Gist

The drug and consumer giant beat estimates for both earnings and sales in the quarter. Higher sales of its drugs led to the impressive top-line performance. J&J also raised its 2019 expectations for organic sales growth.

Higher revenues and other income led the company to post earnings of $2.10 per share in the first quarter of the year, up 1.9% from the year-ago period.

Sales came in at $20.02 billion. Organically, excluding the impact of acquisitions and divestitures, sales increased 5.5% on an operational basis, better than 5.3% increase seen in the previous quarter. Continued strong sales performance in the Pharmaceutical segment and continued improvement in Medical Devices unit offset a softer performance in the Consumer unit.

Other than the top and bottom-line numbers, J&J’s chief financial officer Joe Wolk, also discussed J&J’s outlook for 2019. The segment leaders discussed the performance of their respective segments.

Pharma Segment Impresses: Pharma segment performed well despite currency headwinds and the impact of biosimilar and generic competition on sales of some key drugs like Remicade and Zytiga. Excluding the impact of all acquisitions and divestitures, on an operational basis, organic sales increased 7.9%, better than 7.2% in the previous quarter. Strong performance of oncology drugs Darzalex and Imbruvica and psoriasis treatment, Stelara and solid commercial execution related to product launches (such as that of Tremfya and Erleada) and line extensions contributed to growth. Please note that J&J markets Imbruvica in partnership with AbbVie, Inc. ABBV and Remicade with Merck MRK.

Consumer Segment Soft: Consumer segment revenues of $3.32 billion declined year over year. Excluding the impact of acquisitions and divestitures, adjusted operational sales growth was 0.7% worldwide, a significant deceleration from 3.8% the previous quarter. Growth in beauty and over-the-counter products was offset by lower baby care sales in the United States. Broad end-market softness also hurt the performance of the Consumer segment. 

Also, allegations that its talc/baby powders contain asbestos, which causes users to develop ovarian cancer, continue to be an overhang on the stock.

Better Expectations for 2019 Than Before: In spite of increased negative impact of translational currency, J&J raised its adjusted sales and earnings growth forecast for 2019 based on strong first-quarter performance. Overall, management appeared quite confident about the balance of 2019 compared with the time of announcing fourth-quarter 2018 results in January.

In 2019, J&J is expected to witness significant generic/biosimilar headwinds in the Pharma unit. Continued biosimilar competition for Remicade and Procrit and generic competition for Velcade, Tracleer and Zytiga in the United States will hurt revenues by $3 billion in 2019. Several generic versions of Zytiga have already entered the market while a biosimilar version of Procrit was launched by Pfizer PFE in November

However, contribution from new drugs like Tremfya, Erleada and Spravato and successful label expansion of cancer drugs like Imbruvica and Darzalex and immunology drug, Stelara should provide top-line support. Meanwhile, share buybacks and restructuring initiatives should provide bottom-line support.

Moreover, growth in the Medical Devices segment is expected to continue to improve driven by better execution and product introductions.

Second Quarter Headwinds: Sales in the second quarter are expected to be hurt by divestiture of minimal Advanced Sterilization Products unit, currency headwinds, difficult year-over-year comparison, potentially accelerated generic erosion of Zytiga and biosimilar erosion of Procrit in the United States from the first quarter.

J&J currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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