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Johnson & Johnson (JNJ) Down 0.2% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Johnson & Johnson (JNJ - Free Report) . Shares have lost about 0.2% 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 drivers.

J&J Beats on Q3 Earnings & Sales, Ups 2020 Guidance

J&J beat third-quarter estimates for earnings as well as sales. Third-quarter 2020 earnings came in at $2.20 per share, which beat the Zacks Consensus Estimate of $1.99. Earnings rose 3.8% from the year-ago period.

Adjusted earnings exclude intangible amortization, restructuring and acquisition-related expenses and some other special items. Including these items, J&J reported third-quarter earnings of $1.33 per share, up 101.5% from the year-ago quarter.

Sales came in at $21.08 billion, which beat the Zacks Consensus Estimate of $20.53 billion. Sales rose 1.7% from the year-ago quarter, reflecting an operational increase of 1.7% and no impact of currency.

Organically, excluding the impact of acquisitions and divestitures, sales rose 2.0% on an operational basis in contrast to an 8.8% decrease seen in the second quarter.

Each of J&J’s segments performed well despite the negative impact of COVID-19. Its Pharmaceuticals unit continued to outperform the market as the company witnessed improved trends in prescription volumes and physician office visits. Meanwhile, increasing demand for its Consumer Health products and a better-than-expected procedure recovery in Medical Devices unit provided top-line support.

Third-quarter sales in the domestic market rose 2.7% to $11.09 billion. International sales rose 0.6%, both on a reported and operational basis, to $10 billion. Excluding the impact of all acquisitions and divestitures, on an adjusted operational basis, international sales rose 1.1% in the quarter.

Segment Details

Pharmaceutical segment sales rose 5.0% year over year to $11.42 billion, reflecting 4.6% operational growth and 0.4% positive currency impact. Excluding the impact of all acquisitions and divestitures, on an operational basis, worldwide sales increased 4.7%, higher than the 3.9% increase in the second quarter.

Sales in the domestic market rose 1.5% to $6.44 billion. International sales however rose 9.7% to $4.98 billion (operational increase of 8.8%).

The sales increase was led by higher penetration and new indications across key products, such as Darzalex, Imbruvica and Stelara. Other core products like Invega Sustenna, PAH drugs and new drug Erleada contributed significantly to sales growth.

Moreover, sales of some other key drugs like Xarelto and Invokana/Invokamet have improved after declining in the past few quarters. The sales growth was hurt by generic/biosimilar competition to drugs like Zytiga and Remicade and delayed diagnosis and slower new patient starts for some drugs amid the pandemic.

The products most impacted by COVID-19 were Stelara, Tremfya, Invega Sustenna and PAH medicines. However, the negative impact of COVID-19 was less than Q2 as office visit and prescription trends improved in the quarter.

Imbruvica sales rose 11.9% to $1.03 billion driven by market share gains and strong market growth primarily in the CLL indication in the United States and increased penetration and share gains in Europe. However, difficult comparisons to the third quarter of last year hurt sales in the quarter.

Darzalex sales rose 43.8% year over year to $1.1 billion in the quarter driven by share uptake in first and second line of therapy.

Stelara sales grew 14.7% to $1.95 billion in the quarter driven primarily by the Crohn's disease indication and growth from the recently approved ulcerative colitis indication despite the negative impact of COVID-19 related delayed diagnosis.

PAH revenues of $749 million rose 14.5% year over year driven by increased market penetration and share growth for Uptravi and Opsumit.

Invega Sustenna sales rose 8.8% to $926 million in the quarter. Simponi/Simponi Aria sales grew 0.9% to $592 million and Prezista sales increased 3.5% to $526 million.  

Xarelto sales rose 2.9% in the quarter to $630.0 million, while sales of Invokana/Invokamet improved 24.7% to $224.0 million.

Among the new medicines, Erleada generated sales of $206 million in the quarter compared with $170 million in the previous quarter driven by strong share growth, especially in the metastatic indication. Tremfya recorded sales of $327 million in the quarter compared down from $342 million in the previous quarter due to negative impact of COVID-19 and investments in rebates offered to enhance access.
 
Zytiga sales declined 20.4% to $590 million in the quarter due to generic competition. Sales of Procrit/Eprex declined 33.3% to $132 million in the quarter due to biosimilar competition. Sales of Remicade were down 18.9% in the quarter to $921 million due to biosimilar competition. While U.S. sales declined 15.4%, sales in international markets declined 30.1%.

J&J continues to expect its Pharmaceutical business to deliver above-market growth in 2021.

Medical Devices segment sales came in at $6.15 billion, down 3.6% from the year-ago period, reflecting an operational decrease of 3.9% and a positive currency movement of 0.3%. The pandemic hit this segment the hardest due to a widespread decline in elective surgical procedures and the redeployment of hospital resources to address patients affected by COVID-19. However, the segment was much less affected in the third quarter due to better-than-expected market recovery as medical procedures are ramping faster-than-expected. In the third quarter, J&J expected the Medical Devices unit to decline in the range of 10-25%.

Excluding the impact of all acquisitions and divestitures, on an operational basis, worldwide sales decreased 3.3% compared with a decline of 32.5% in the previous quarter.  

The sequential improvement in the third quarter occurred across all segments of the business. The Interventional Solutions business returned to growth in the third quarter led by electrophysiology products.

Domestic market sales rose 1.2% year over year to $3.09 billion. International market sales declined 8.1% year over year to $3.06 billion. On an operational basis, international sales decreased 8.5%.

In the fourth quarter, J&J expects continued procedure stabilization in the Medical Devices unit which is slightly ahead of its previous expectations. In the fourth quarter, sales are expected to decline in the range of flat to down 10% versus flat to down 15% expected previously.

In 2021, J&J expects the Medical Devices unit to witness a continued increase in procedures associated with pandemic recovery and deliver robust double-digit operational growth in the year. Management indicated that 2021 Medical Device sales would grow over 2019 levels

The Consumer segment recorded revenues of $3.51 billion in the reported quarter, up 1.3% year over year. On an operational basis, Consumer segment sales rose 3%. Unfavorable foreign currency movement hurt sales by 1.7%.

Excluding the impact of acquisitions and divestitures, adjusted operational sales increase was 3.1% worldwide against a 3.4% decline seen in the previous quarter.

Higher sales of OTC products in the United States like Tylenol, oral care product Listerine mouthwash, OGX in skin health/beauty products, wound care products, primarily Band-Aid bandage and digestive health products were offset by the negative impact of the COVID-19 pandemic on international OTC and skin health/beauty businesses.

Sales in the domestic market rose 11.6% from the year-ago period to $1.56 billion. Meanwhile, the international segment declined 5.6% to $1.96 billion which included an operational decrease of 2.7% and a negative currency impact of 2.9% in the quarter.

In Consumer Health unit, J&J’s expects to grow competitively with the market, driven by strong growth in e-commerce and continued demand for some leading brands. However, it expects headwinds like continued fluctuation in consumer demand due to the pandemic, potential pantry loading behaviors or lower incidence of conditions like cold and flu in 2021.

2020 Guidance

J&J raised its earnings and sales guidance for the second time this year on better-than-expected Medical Devices sales trends. Adjusted earnings per share expectations were raised from a range of $7.75-$7.95 to $7.95 - $8.05. The guidance range now indicates a decline of 7.3-8.4% versus the prior expectation of a decline of 8.4-10.7%. On an operational, constant-currency basis, ad./justed earnings per share are expected to decline 7.3-8.4%. The prior expectation was a decline in the range of 7.3-9.6%.

Revenues are now expected to remain flat or decline 1% to $81.2-$82.0 billion. Previous expectation for revenues was in the range of $79.9-$81.4 billion, indicating a year-over-year decline of 0.8-2.6%.

Operational constant-currency sales are expected to be flat to up 1% compared with the prior expectation of an increase of 0.5% to a decline of 1.3%. Adjusted operational sales, (excluding currency impact, acquisitions/divestitures) are expected to be up 0.5-1.5% (previous expectation was down 0.8% to up 1%). J&J expects operating margin to decline by 100 basis points in 2020.

Initial 2021 Outlook

In 2021, J&J expects to deliver double digit sales growth. Meanwhile, operating margin is expected to be in the range of 2019 levels. R&D costs are anticipated to be approximately 14% of sales, consistent with prior years.



 

How Have Estimates Been Moving Since Then?

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

VGM Scores

At this time, Johnson & Johnson has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, 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 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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