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Why Is Johnson & Johnson (JNJ) Down 4.1% Since its Last Earnings Report?

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A month has gone by since the last earnings report for Johnson & Johnson (JNJ - Free Report) . Shares have lost about 4.1% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is JNJ 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 Tops First-Quarter Earnings Estimates, Raises Sales Guidance

J&J’s first-quarter 2018 earnings came in at $2.06 per share, beating the Zacks Consensus Estimate of $2.01 and increasing 12.6% from the year-ago period.

Adjusted earnings excluded amortization expense and some special items. Including these items, J&J reported first-quarter earnings of $1.60 per share compared with earnings of $1.61 in the year-ago period.

Sales came in at $20 billion, beating the Zacks Consensus Estimate of $19.48 billion. Sales also increased 12.6% from the year-ago quarter, reflecting an operational increase of 8.4% and a positive currency impact of 4.2%.

Organically, excluding the impact of acquisitions and divestitures, sales increased 4.3% on an operational basis, better than 2.4% increase seen in 2017. This is because the Pharmaceutical segment continued the positive momentum seen in the second half of 2017 and the Consumer segment sales improved.

First-quarter sales grew 6.1% in the domestic market to $9.95 billion and 19.9% in international markets to $10 billion, reflecting 10.9% operational growth and 9% positive currency impact.

Segment Details

Pharmaceutical segment sales rose 19.4% year over year to $9.84 billion, reflecting 15.1% operational growth and 4.3% positive currency impact as sales rose in both domestic and international markets.

Sales in the domestic market rose 9.9% to $5.35 billion while international sales grew 33.1% to $4.49 billion (operational increase of 22.5%).

New products like Imbruvica and Darzalex continued to perform well. Core products like Stelara, Zytiga, Simponi/Simponi Aria and Invega Sustenna also contributed to growth.

Organically, excluding the impact of acquisitions and divestitures, sales increased 7.5% on an operational basis, slightly less than 7.6% growth seen in the previous quarter. The strong performance was led by the company’s oncology portfolio.

Imbruvica sales rose 43.5% to $587 million in the quarter driven largely by higher market share across all lines of therapy and market growth in the Unites States.

Stelara sales rose 28.9% to $1.06 billion in the quarter. Stelara gained market share in the quarter driven by share gains in the psoriasis market as well as in the newer Crohn's disease market. Simponi / Simponi Aria sales rose 21% to $518 million in the quarter

Darzalex sales rose 69.4% to $432 million in the quarter. Darzalex enjoyed increased penetration in outside U.S. markets and market growth in the United States. With an approval in first-line setting expected this year, it is expected to be a driver of Darzalex sales, going forward.

Xarelto sales rose 12.7% to $578 million in the quarter. Sales were softer than the previous quarter due to some inventory build and seasonality issues. However, the company said the drug continued to witness market share gains.

Zytiga sales rose 61.6% to $845 million in the quarter due to improved market share in a growing metastatic castration-resistant prostate cancer market. Zytiga was approved in the first-line setting in February, which was a key driver of Zytiga’s strong performance in the first quarter. Invega Sustenna sales rose 15.2% to $696 million.

In the quarter, J&J recorded pulmonary arterial hypertension (PAH) revenues of $585 million, less than $610 million in the previous quarter. Strong demand for Uptravi and Opsumit was partially offset by the expected decline of Tracleer outside the United States due to generic competition and the transition of patient assistance foundations. The Actelion acquisition added 7.6% to sales growth in the first quarter.

Invokana/Invokamet sales declined 12.7% to $248 million due to higher managed care discounting.

Sales of Remicade declined 16.9% in the quarter to $1.4 billion with U.S. sales declining 22.5% due to some rebate adjustment. However, international sales rose 1.8% despite biosimilar competition.

Regarding newly launched Tremfya, J&J said that the uptake of the product has been strong. Tremfya recorded sales of $72 million in the first quarter compared with $47 million in the previous quarter.

J&J is quite confident that its Pharma segment will continue to perform better than the market this year despite the impact of biosimilars on Remicade sales.

Medical Devices segment sales came in at $6.77 billion, up 7.5% from the year-ago period. It included an operational increase of 3.2% and positive currency movement of 4.3%.

Excluding the impact of all acquisitions and divestitures, on an operational basis, worldwide sales increased 1.1%.

Operational growth was driven by continued strong performance in vision care, electrophysiology as well as the advanced surgery business, which made up for a weaker sales performance in the diabetes care and orthopedics, particularly US Hips, Knees, and Spine.

Domestic market sales rose 2.2% year over year to $3.16 billion. International market sales increased 12.7% (operational increase of 4.2%) year over year to $3.61 billion.

The Consumer segment recorded revenues of $3.4 billion in the reported quarter, up 5.3% year over year (operational increase of 1.3%). Foreign currency movement positively impacted sales in the segment by 4%. Excluding the impact of acquisitions and divestitures, adjusted operational sales growth was 2% worldwide, an acceleration from the fourth quarter of 2017. Slower growth in domestic baby care products due to competitive pressure was offset by growth in beauty and over-the-counter products.

Sales in the domestic market rose 1.6% from the year-ago period to $1.44 billion.

Meanwhile, the international segment recorded an increase of 8.2% to 1.96 billion, reflecting an operational increase of 1.2% and a positive currency impact of 7%.

Margins Discussion

Cost of goods sold, as a percentage of sales, declined 140 basis points mostly due to favorable product mix. Selling, marketing and administrative expenses were down 50 bps year over year to 26.3% of sales despite investment behind new products. This was due to lower cost relative to sales growth in the Pharmaceutical unit. Research and Development costs, as a percentage of sales, rose 30 bps over the prior-year quarter to 12%.

2018 Sales Outlook Raised

J&J maintained the previously issued earnings guidance for 2018 while increasing the sales range.

J&J still expects 2018 adjusted earnings per share in the range of $8.00 - $8.20, reflecting an operational growth rate between 6.8% and 9.6%. Currency fluctuations are expected to favorably impact earnings per share by 20 cents.
 
However, revenues are expected in the range of $81.0 to $81.8 billion, higher than $80.6 billion to $81.4 billion, reflecting operational constant currency sales growth rate in the range of 4% to 5% (previously 3.5% to 4.5%).

Organic sales growth, excluding the impact of acquisitions and divestitures, is expected to be in the range of 3 versus 2.5%-3.5% previously.

Currency fluctuations are expected to favorably impact sales by 200 basis points.

Adjusted pre-tax operating margins are expected to increase by approximately 150 basis points (previously 100 bps) in 2018 despite expectations for increased R&D investments.

Adjusted tax rate guidance is in the range of 16.5.

The company does not expect any biosimilar entrants for Zytiga, Prezista, Risperdal Consta, or Invega Sustenna in the United States in 2018. However, the company is confident that it can absorb the impact of any potential Zytiga headwind should there be an earlier-than-expected generics launch in 2018.

However, the 2018 guidance includes the impact of generics for Procrit and Tracleer as well as Remicade biosimilars.

New Cost Savings Initiative

J&J announced some global supply chain initiatives, which will annually save approximately $600 million to $800 million in pre-tax costs that will be substantially delivered by 2022. Discussions regarding specific future actions are ongoing.

J&J said that the company will invest more than $30 billion in R&D and capital investments in the United States over the next four years (2018-2021), representing an increase over the prior four years of more than 15%. The new tax laws will leave some extra cash in the hands of large pharma companies like J&J, allowing them to invest in innovation and capital building.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. There have been two revisions higher for the current quarter compared to four lower.

Johnson & Johnson Price and Consensus

VGM Scores

At this time, JNJ has a strong Growth Score of A, though it is lagging a bit on the momentum 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.

Based on our scores, the stock is primarily suitable for growth investors while also being suitable for those looking for momentum and to a lesser degree value.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, JNJ has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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