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Arpita Dutt

What to Expect from J&J's (JNJ) Pharmaceutical Segment in Q3?

BMY PFE NVS JNJ

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Healthcare giant, Johnson & Johnson (JNJ - Free Report) will be reporting third quarter results tomorrow before the market opens. The company has a pretty good earnings track record having surpassed expectations in each of the last four quarters.

While J&J has three segments – Consumer, Pharmaceutical and Medical Devices – it is the Pharmaceutical segment that has been performing well over the last couple of quarters and will remain a key area of focus this quarter as well.

Will the Pharmaceutical Segment Deliver in Q3?

J&J’s Pharmaceutical segment, which accounted for more than 46% of total sales in the first half of 2016, recorded year-over-year growth of 7.4% during this period. The segment comprises Immunology, Infectious Diseases, Neuroscience, Oncology and Cardiovascular/Metabolism/Other.

New as well as core growth products have been driving sales of the Pharmaceutical segment and should continue doing so. Key performers include immunology products Remicade, Stelara, and Simponi, Simponi Aria, oncology products Imbruvica and Darzalex and cardiovascular metabolic products Xarelto and Invokana.

While Simponi Aria and Stelara should benefit from increased penetration; access across managed care and a strong clinical profile should drive type II diabetes treatment, Invokana, which was the number one SGLT2 inhibitor in the U.S. both in new and total scrips in the second quarter, as per the company. Xarelto should continue growing despite the presence of competition in the market.

Imbruvica, which delivered sales of $556 million in the first half of 2016, looks well-positioned for growth thanks to new indications, approvals, increased patient uptake and efficacy data. Recently launched Darzalex’s initial uptake looks good with strong underlying demand. Sales should pick up with the product being launched in certain European countries. Approval for additional indications will drive long-term growth for this product.  

On the flip side, J&J’s hepatitis C virus product sales will continue being impacted by competition while Invega sales will be impacted by generic competition.  

Meanwhile, a key area of focus this quarter will be blockbuster drug Remicade’s performance as well as an update on potential biosimilar competition. The FDA had approved Celltrion’s Inflectra, a biosimilar version of Remicade, across all eligible indications in Apr 2016.

In August this year, the District of Massachusetts Federal Court had found the ‘471 Remicade patent to be invalid -- while J&J said that it would appeal the decision, the company could face biosimilar competition any time after Oct 3, 2016, if Celltrion and its U.S. commercialization partner, Pfizer, Inc. (PFE - Free Report) decide to go ahead with the launch. Remicade sales were $3.6 billion in the first half of 2016. On the second quarter call, J&J had said that about 70% of the approximately 2.4 million patients on Remicade get a positive response from the therapy and are therefore unlikely to be switched. More color on the biosimilar situation should be available on the third quarter call.

Earnings Beat on the Cards?

Our proven model shows that J&J has the right combination of two key ingredients for an earnings beat in the third quarter -- the company has a positive Earnings ESP of +4.24% and a Zacks Rank #3 (Hold).

JOHNSON & JOHNS Price, Consensus and EPS Surprise

A couple of other large cap pharma stocks that have the right combination for an earnings beat this quarter are Bristol-Myers Squibb Company (BMY - Free Report) and Swiss healthcare giant Novartis AG (NVS - Free Report) . While Bristol-Myers has a positive ESP of +4.69%, Novartis has a positive ESP of +0.84% -- both are Zacks Rank #3 stocks.  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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