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Why Is Johnson & Johnson (JNJ) Down 2.9% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Johnson & Johnson (JNJ). Shares have lost about 2.9% 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 its most recent earnings report in order to get a better handle on the important drivers.

J&J Q3 Earnings and Sales Beat Estimates

J&J beat third-quarter estimates for both earnings and sales and raised its financial outlook for the year.

Third-quarter adjusted earnings came in at $2.12 per share, which beat the Zacks Consensus Estimate of $2.00 and increased 3.4% from the year-ago period.

Adjusted earnings exclude after-tax intangible amortization expense and some special items. Including these items, J&J reported third-quarter earnings of $1.81 per share, up 25.7% from the year-ago quarter.

Sales of $20.73 billion beat the Zacks Consensus Estimate of $20.08 billion. Sales rose 1.9% from the year-ago quarter, reflecting an operational increase of 3.2%, which offset an unfavorable currency impact of 1.3%. Organically, excluding the impact of acquisitions and divestitures, sales increased 5.2% on an operational basis, higher than 3.7% increase seen in the previous quarter.

Sales rose in all the three segments on an organic basis. It accelerated in the Medical Device and Pharma units but decelerated in the Consumer unit on a sequential basis.

Third-quarter sales rose 1.2% in the domestic market to $10.79 billion and 2.6% in international markets to $9.94 billion. However, international sales reflected 5.4% operational growth, which was offset by 2.8% negative currency impact. Excluding the impact of all acquisitions and divestitures, on an adjusted operational basis, international sales rose 7.3% 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.

At the call, the company said that it is seeing about $2 billion of incremental negative impact from biosimilar and generics which was lower than its guided range of being around $3 billion. This may have contributed to the above-market sales growth in the Pharma unit.

Pharmaceutical segment sales rose 5.1% year over year to $10.88 billion, reflecting 6.4% operational growth, which was offset by 1.3% negative currency impact. Sales in the domestic market rose 4% to $6.34 billion. International sales grew 6.8% to $4.54 billion (operational increase of 10.0%). Excluding the impact of all acquisitions and divestitures, on an operational basis, worldwide sales increased 6.4%, improving from 4.4% 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.

Worldwide sales of J&J’s oncology drugs rose 6.7% in the quarter to $2.76 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 were soft in the quarter. Sales of others like Zytiga, Remicade, Procrit/Eprex declined due to the impact of generic/biosimilar competition.

Imbruvica sales rose 30.6% to $921 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 the European, Asia-Pacific, and Latin America markets.

Darzalex sales rose 53.5% year over year to $765 million in the quarter. In the United States, market growth and market share gains across all lines of therapy drove sales. In outside U.S. markets, increased penetration and share gains drove sales growth.

Stelara sales rose 29.6% to $1.7 billion in the quarter driven primarily by the Crohn's disease indication.

PAH revenues of $654 million declined 0.3% year over year as strong demand for Uptravi and Opsumit was partially offset by a decline in Tracleer sales, which were hurt by continued generic competition in Europe and recent generic launch in the United States.

Simponi/Simponi Aria sales rose 9.6% to $586 million in the quarter. Prezista sales rose 3.7% to $508 million in the quarter.  Invega portfolio’s sales rose 13.7% to $851 million.

Tremfya recorded sales of $290 million in the quarter compared with $235 million in the second quarter. J&J said that the product is seeing strong demand trends with the drug capturing 8.1% share of the psoriasis market in the United States, up 2.5 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. J&J said that Erleada gained almost 3 points of market share in the United States.

Regarding Spravato, which was approved and launched in the first quarter, J&J said that the drug is off to a strong start and patient demand is strong.

Zytiga sales declined 22.7% to $741 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 22.4% to $198 million in the quarter due to biosimilar competition.

Xarelto sales were almost flat in the quarter at $613 million as prescription growth was offset by increased discounts and rebates. Sales of Invokana/Invokamet declined 5.8% to $179 million.

Sales of Remicade were down 17.6% in the quarter to $1.14 billion due to increased discounts and share loss to biosimilars in the United States. While U.S. sales declined 24.1%, U.S. exports went down 12%. Remicade sales rose 2.5% in international markets.

Medical Devices segment sales came in at $6.38 billion, down 3.1% from the year-ago period, reflecting an operational decrease of 2% and negative currency movement of 1.1%.

Excluding the impact of all acquisitions and divestitures primarily the divestitures of LifeScan and ASP, on an operational basis, worldwide sales increased 5.3%, better than 3.2% in the previous quarter. Sales in the quarter benefitted by around 80 basis points due to some forward buying 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, international energy products 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 innovations 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.

Domestic market sales declined 4.4% year over year to $3.06 billion. International market sales decreased 1.9% year over year to $3.33 billion. On an operational basis, international sales increased 0.3%.

The Consumer segment recorded revenues of $3.47 billion in the reported quarter, up 1.6% year over year. On an operational basis, Consumer segment sales increased 3.3%, partially offset by unfavorable foreign currency movement of 1.7%.

Excluding the impact of acquisitions and divestitures, adjusted operational sales growth was 1.3% worldwide, a deceleration from 2.3% 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 .

Sales in the domestic market rose 1.7% from the year-ago period to $1.39 billion. Meanwhile, the international segment rose 1.4% to $2.08 billion. An operational increase of 4.3% was offset by negative currency impact of 2.9% in the quarter.

2019 Guidance

J&J raised its full-year earnings and sales view on strong third quarter results.

Adjusted earnings per share in 2019 are expected in the range of $8.62 - $8.67, up from the prior range of $8.53 - $8.63. The guidance range indicates growth of 5.4-6% (previously 4.3-5.5%). On an operational, constant currency basis, adjusted earnings per share are expected to grow in the range of 8.1 - 8.7%, up from the prior expectation of 6.7-7.9%.  

Revenues are expected in the range of $81.8-$82.3 billion, up from the previous range of $80.8-$81.6 billion, including currency impact. Currency impact is expected to negatively hurt sales by 230 basis points, higher than the  previous estimate of 200 basis points. Operational constant currency sales growth is expected to be in the range of 2.5, better than 1 expected previously. Adjusted operational sales growth, (excluding currency impact, acquisitions/divestitures) is expected to be in the range of 4.5% to 5%, higher than 3.2% to 3.7% expected previously.

J&J expects higher R&D costs in the fourth quarter due to potentially increased investment in the pipeline. Fourth-quarter earnings in 2018 had benefited from $800 million of adjusted other income primarily due to the LifeScan divestiture, which would not be reported in the fourth quarter of 2019.

Also the full-year tax rate guidance was tightened from 17.5% - 18.5% to 18% - 18.5%.

Preliminary 2020 Outlook

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.

Update on Talc/Opioid Litigations

In relation to the Philadelphia jury verdict, Joseph Wolk, the company’s chief financial officer said that J&J is confident that it will be overturned and the amount will be significantly reduced. Regarding, the talc litigations, he said that plaintiff’s attorneys have developed big business with class-action lawsuits like these. He said that J&J will continue the product, which the company knows is safe and does not cause cancer. With respect to opioids, it took two divergent approaches. In Oklahoma, it could not find a reasonable settlement approach and decided to fight it by appealing. In Ohio, the company saw a reasonable amount in proportion to other companies that were involved as defendants. So, it decided to enter into a settlement under appropriate terms.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

At this time, Johnson & Johnson has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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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