It has been about a month since the last earnings report for Johnson & Johnson (JNJ Quick QuoteJNJ - Free Report) . 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 catalysts.

J&J Beats on Q2 Earnings, Ups 2019 Sales Growth View

J&J beat estimates for both earnings and sales in the second quarter of 2019. Second-quarter adjusted earnings came in at $2.58 per share, which beat the Zacks Consensus Estimate of $2.42 and increased 22.9% from the year-ago period.

Adjusted earnings exclude a pre-tax gain from the divesture of Advanced Sterilization Products business in April, after-tax intangible amortization expense and some special items. Including these items, second-quarter earnings were $2.08 per share, up 43.4% from the year-ago quarter.

Sales came in at $20.56 billion, which beat the Zacks Consensus Estimate of $20.32 billion. Sales declined 1.3% from the year-ago quarter, reflecting an operational increase of 1.6%, which was offset by an unfavorable currency impact of 2.9%.

Organically, excluding the impact of acquisitions and divestitures, sales increased 3.7% on an operational basis, less than 5.5% increase seen in the previous quarter. The sales deceleration from the first quarter was primarily due to the impact of generic and biosimilar competition in the Pharmaceutical unit.

Though sales rose in all the three segments on an organic basis, it accelerated in Consumer unit but decelerated in the Medical Device and Pharma units on a sequential basis due to supply issues and generic/biosimilar headwinds, respectively.

Second-quarter sales declined 2.2% in the domestic market to $10.40 billion and 0.3% in international markets to $10.16 billion. However, international sales reflected 5.5% operational growth and 5.8% negative currency impact. Excluding the impact of all acquisitions and divestitures, on an adjusted operational basis, international sales rose 7.6% in the quarter.

Segment Details

The Pharma segment continued to perform well 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 1.7% year over year to $10.53 billion, reflecting 4.4% operational growth and 2.7% negative currency impact. Sales in the domestic market declined 2% to $5.78 billion mainly due to generic competition for Zytiga. International sales grew 6.5% to $4.75 billion (operational increase of 12.9%). Excluding the impact of all acquisitions and divestitures, on an operational basis, worldwide sales increased 4.4%, less than 7.9% increase in the previous quarter.

The strong performance 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 9.8% in the quarter to $2.7 billion.

Other core products like Stelara, Simponi/Simponi Aria and Invega Sustenna and new immunology medicine Tremfya also contributed to growth. However, sales of some other key drugs like Xarelto declined in the quarter. Sales of others like Zytiga, Remicade, Procrit/Eprex declined due to the impact of generic/biosimilar competition.

Imbruvica sales rose 34.1% to $831 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 51.6% to $774 million in the quarter. In the United States, market growth and market share gains drove sales. In outside U.S. markets, increased penetration and share gains drove sales growth. Sales in the quarter also benefited from a favorable one-time adjustment.

Stelara sales rose 16.1% to $1.56 billion in the quarter driven primarily by the Crohn's disease indication.

PAH revenues of $690 million rose 3.8% year over year as strong demand for Uptravi and Opsumit was partially offset by a decline in Tracleer sales, which were hurt by generic competition in Europe and recent generic launch in the United States.

Simponi/Simponi Aria sales rose 2.7% to $563 million in the quarter. Prezista sales rose 8.7% to $535 million in the quarter.  Invega portfolio’s sales rose 13.6% to $818 million.

Tremfya recorded sales of $235 million in the quarter compared with $217 million in the first quarter. J&J said that the product is seeing strong demand trends with more than 35,000 patients now on therapy and the drug capturing 7.6% share of the psoriasis market in the United States, up 3 points from the year-ago quarter.

J&J is encouraged by the early launch of other new drugs like Erleada and Balversa.

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

Zytiga sales declined 23.3% to $698 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 22.7% to $183 million in the quarter due to biosimilar competition.

Xarelto sales declined 19.2% in the quarter to $549 million as prescription growth was offset by increased discounts and rebates. Sales of Invokana/Invokamet declined 17.9% to $177 million.

Sales of Remicade were down 16.2% in the quarter to $1.11 billion due to increased discounts and share loss to biosimilars in the United States. While U.S. sales declined 12.7%, U.S. exports went down 40.3%. Remicade sales declined 18.5% in international markets.

Medical Devices segment sales came in at $6.49 billion, down 6.9% from the year-ago period, reflecting an operational decrease of 4.1% and negative currency movement of 2.8%.

Excluding the impact of all acquisitions and divestitures mainly LifeScan and ASP, on an operational basis, worldwide sales increased 3.2%, less than 4.3% in the previous quarter. Sales in the quarter were hurt by around 100 basis points due to some supply disruptions.

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 and management expects improved growth in the second half supported by innovations.

Domestic market sales declined 5.6% year over year to $3.08 billion. International market sales decreased 8.1% (operational decrease of 2.9%) year over year to $3.41 billion.

The Consumer segment recorded revenues of $3.54 billion in the reported quarter, up 1.2% year over year. On an operational basis, Consumer segment sales increased 4.6%, partially offset by unfavorable foreign currency movement of 3.4%.

Excluding the impact of acquisitions and divestitures, adjusted operational sales growth was 2.3% worldwide, a significant improvement from 0.7% the previous quarter.

Growth in beauty and over-the-counter products, improved baby care sales and contributions from newly acquired businesses was offset by one-time impacts related to seasonality and inventory levels.

Sales in the domestic market rose 4.1% from the year-ago period to $1.54 billion due to strong performance of the beauty franchise. Meanwhile, the international segment recorded a decline of 1% to $2.0 billion. An operational increase of 4.9% was offset by negative currency impact of 5.9% in the quarter.

2019 Outlook

J&J raised its full-year sales outlook on continued strength of its business. However, J&J maintained its earnings per share guidance for the year due to expectations of higher R&D investments and tax rate in the second half of the year.

2019 adjusted earnings per share are expected in the range of $8.53 - $8.63. The guidance range indicates growth of 4.3-5.5%. On an operational, constant currency basis, adjusted earnings per share are expected to grow in the range of 6.7-7.9%.  

Revenues are expected in the range of $80.8-$81.6 billion, up from the previous range of $80.4-$81.2 billion, including currency impact. Currency impact is expected to negatively hurt sales by 200 basis points, same as previous estimate.

Operational constant currency sales growth is expected to be in the range of 1-2%, better than 0.5-1.5%, expected previously. Adjusted operational sales growth, (excluding currency impact, acquisitions/divestitures mainly ASP and LifeScan) is expected to be in the range of 3.2% to 3.7%, higher than 2.5% to 3.5% 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 between $2.5 billion to $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.

However, J&J expects pretax operating margin to slightly decline year over year compared to prior expectations of a slight improvement because of management’s plans to increase R&D spend in the second half of the year.

J&J expects higher R&D costs in the second half of the year due to potentially increased investment in the pipeline.

Also the full-year tax rate guidance was raised to 17.5% - 18.5% from 17% - 18% previously.

Third Quarter Outlook

Sales in the third quarter are expected to be hurt by currency headwinds and difficult comparison from a strong sales performance in the third quarter of 2018, which was the highest sales growth quarter of the year. Also, potentially accelerated generic/biosimilar erosion of Zytiga, Procrit and Tracleer in the United States and Velcade outside the United States, due to generic entries in new markets and additional competitors, is also expected to put pressure on the top line.

Update on Talc/Opioid Litigations

On the call, J&J’s chief financial officer Joe Wolk said that the talc litigation issue is overblown and the company is on “very firm ground” with respect to the facts. He sounded confident of prevailing through the appeals process even though the initial jury verdicts were against J&J. For the Oklahoma opioids litigation, he said that the “state’s claims don’t align with the facts” and that they were not the cause of the epidemic.
 

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

Currently, Johnson & Johnson has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. 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 A. 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.