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Why Is Johnson & Johnson (JNJ) Down 1.2% Since Last Earnings Report?

Zacks Equity Research
Dollar General (DG) possesses the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.

It has been about a month since the last earnings report for Johnson & Johnson (JNJ). Shares have lost about 1.2% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important drivers.

J&J Beats on Q1 Earnings, Ups 2019 Sales Growth View

J&J beat estimates for both earnings and sales in the first quarter of 2019. First-quarter 2019 earnings came in at $2.10 per share, which surpassed the Zacks Consensus Estimate of $2.03 and increased 1.9% from the year-ago period driven by higher revenues and other income.

Adjusted earnings exclude after-tax intangible amortization expense and some special items. Including these items, J&J reported first-quarter earnings of $1.39 per share, down 13.1% from the year-ago quarter.

Sales came in at $20.02 billion, which beat the Zacks Consensus Estimate of $19.63 billion. Sales increased 0.1% from the year-ago quarter, reflecting an operational increase of 3.9% and an unfavorable currency impact of 3.8%.

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.

First-quarter sales grew 1.8% in the domestic market to $10.13 billion but declined 1.7% in international markets to $9.89 billion, reflecting 6% operational growth and 7.7% negative currency impact.

Segment Details

J&J’s Pharma segment delivered an above-market performance globally 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 4.1% year over year to $10.24 billion, reflecting 7.9% operational growth and 3.8% negative currency impact as sales rose in both domestic and international markets. Sales in the domestic market rose 4.3% to $5.58 billion. International sales grew 3.9% to $4.66 billion (operational increase of 12.2%). Excluding the impact of all acquisitions and divestitures, on an operational basis, worldwide sales increased 7.9%, better than 7.2% in the previous quarter.

Organic sales growth in the Pharma segment  benefited by approximately 200 bps of pricing adjustments in the prior period.

The strong performance was led by the company’s oncology drug Darzalex as well as psoriasis treatment, Stelara.

Worldwide sales of J&J’s cancer drugs like Imbruvica and Darzalex rose 9% in the quarter to $2.52 billion. Other core products like Stelara, Simponi/Simponi Aria and Invega Sustenna and new immunology medicines like Tremfya also contributed to growth. However, sales of some other key drugs like Xarelto and Invokana declined in the quarter. Sales of Zytiga declined sharply due to the impact of generic competition in the United States.

Imbruvica sales rose 33.5% to $784 million in the quarter driven by market share gains and strong market growth across multiple indications in the United States and strong uptake in the European and Asia Pacific markets.

Darzalex sales rose 45.5% to $629 million in the quarter. In United States, market growth and market share gains drove sales. In outside U.S. markets, increased penetration and share gains drove sales growth.

Stelara sales rose 32.4% to $1.41 billion in the quarter driven primarily by the Crohn's disease indication.

PAH revenues of $656 million rose 12.1% year over year as strong demand for Uptravi and Opsumit was partially offset by a decline in Tracleer sales, which were hurt by increased use of Opsumit as well as generic competition in Europe.

Simponi/Simponi Aria sales recovered in the quarter, rising 1% to $524 million in the quarter. Prezista sales rose 9.5% to $523 million in the quarter.

Newly launched Tremfya recorded sales of $217 million in the quarter compared with $175 million in the fourth quarter. J&J said that the product is seeing strong demand trends with more than 31,000 patients now on therapy and the drug capturing 6.9% share of the psoriasis market in the United States, up 4 points from the previous quarter.

Regarding Spravato, which was approved and launched in the first quarter, J&J said that the drug is off to a very strong start and could prove to be an important growth driver for the company.

Zytiga sales declined 19.6% to $679 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 18% to $226 million in the quarter.

Xarelto sales declined 6.3% in the quarter to $542 million as prescription growth was offset by increased discounts and rebates.

The October 2018 FDA approval of Xarelto for a new 2.5 milligram vascular dose for the CAD/PAD indication significantly expands the drug’s eligible patient population, which can improve sales of the drug in the future quarters. Regarding this label expansion, management said on the call that it has seen positive response to the 2.5 milligram vascular dose and it could be a significant contributor to Xarelto’s sales in the future quarters. Also, if J&J’s sNDA to include data from MARINER and MAGELLAN studies on Xarelto’s label is approved and launched in 2019, it will create an incremental growth opportunity.

Sales of Invokana/Invokamet declined 18.4% to $202 million.

Sales of Remicade were down 20.6% in the quarter to $1.10 billion due to increased discounts and share loss to biosimilars. While U.S. sales declined 15.5%, U.S. exports went down 46.4%. Remicade sales rose 23.6% in international markets.

Medical Devices segment sales came in at $6.46 billion, down 4.6% from the year-ago period. It included an operational decrease of 1% and negative currency movement of 3.6%.

Excluding the impact of all acquisitions and divestitures, on an operational basis, worldwide sales increased 4.3%, better than 3.3% in the previous quarter.

Operational growth was driven by continued strong performance in Interventional Solutions, Advanced Surgery and Vision, which partially offset softer growth in the orthopedics portfolio due to pricing pressure. However, J&J’s orthopedics portfolio is showing improving trends and has delivered five straight quarters of sequential improvement.

Domestic market sales declined 1.6% year over year to $3.11 billion. International market sales decreased 7.1% (operational decrease of 0.3%) year over year to $3.35 billion.

The Consumer segment recorded revenues of $3.32 billion in the reported quarter, down 2.4% year over year. On an operational basis, Consumer segment sales increased 2.2%, which was offset by unfavorable foreign currency movement of 4.6%.

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

Softer end-markets also hurt the performance of the Consumer segment.  On the call, the company said that overall market growth in its categories slowed to slightly more than 1% in the quarter.

Sales in the domestic market rose 0.2% from the year-ago period to $1.44 billion. Meanwhile, the international segment recorded a decline of 4.2% to $1.88 billion. An operational increase of 3.7% was offset by negative currency impact 7.9% in the quarter.

2019 Outlook

Despite, increased negative impact of translational currency, J&J raised its adjusted sales and earnings growth forecast for 2019 based on strong first-quarter performance.

J&J tightened its 2019 adjusted earnings per share guidance from a range of $8.50 - $8.65 to $8.53 - $8.63. The guidance range, however, indicates a growth rate of 4.3% - 5.5%, higher than 3.9% - 5.8% expected previously. Currency is expected to negatively impact EPS by 20 cents per share higher than 5 cents expected previously.

On an operational, constant currency basis, adjusted earnings per share are expected to grow in the range of 6.7% - 7.9% versus 5.7% - 7.6% expected previously.  

Revenues are still expected in the range of $80.4 to $81.2 billion, including currency impact.

Operational constant currency sales growth is expected to be in the range of 0.5% - 1.5%, better than 0% to 1% expected previously. Adjusted operational sales growth, (excluding currency impact, acquisitions/divestitures) is expected to be in the range of 2.5% to 3.5%, higher than 2% to 3% expected previously.

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. However, J&J’s sales and earnings growth is expected to accelerate in 2020 supported by contribution from new drugs like Tremfya, Erleada and Spravato and successful label expansion of cancer drugs like Imbruvica and Darzalex and immunology drug, Stelara.

Meanwhile, the Medical Devices segment is expected to continue to improve driven by improved execution and new product introductions.

Second Quarter Outlook

Sales in the second quarter are expected to be hurt by divestiture of minimal Advanced Sterilization Products unit, currency headwinds, difficult comparison from a strong sales performance in the second quarter of 2018, potentially accelerated generic erosion of Zytiga and biosimilar erosion of Procrit in the United States from the first quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Johnson & Johnson has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. 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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