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Johnson & Johnson (JNJ) Up 3.4% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Johnson & Johnson (JNJ - Free Report) . Shares have added about 3.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Johnson & Johnson due for a pullback? 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 catalysts.

J&J Tops on Third Quarter Earnings & Sales, Ups View

J&J’s third-quarter 2018 earnings came in at $2.05 per share, beating the Zacks Consensus Estimate of $2.03 and increasing 7.9% from the year-ago period driven by higher revenues and better operating margins.

Adjusted earnings excluded amortization expense and a charge for some after-tax special items. Including these items, J&J reported third-quarter earnings of $1.44 per share, up 5.1% year over year.

Sales came in at $20.3 billion, beating the Zacks Consensus Estimate of $19.91 billion. Sales increased 3.6% from the year-ago quarter, reflecting an operational increase of 5.5% and an unfavorable currency impact of 1.9%.

Organically, excluding the impact of acquisitions and divestitures, sales increased 6.1% on an operational basis, slightly less than 6.3% increase seen in the previous quarter. Continued above market growth in the Pharmaceutical segment and improved organic sales growth in the Medical Devices and the Consumer segments led to strong performance in the quarter.

Third-quarter sales grew 3.6% in the domestic market to $10.66 billion and 3.5% in international markets to $9.68 billion, reflecting 7.5% operational growth and 4% negative currency impact.

Segment Details

J&J’s Pharma segment is performing better than the market in 2018 despite the impact of biosimilars on Remicade sales.

Pharmaceutical segment sales rose 6.7% year over year to $10.3 billion, reflecting 8.2% operational growth and 1.5% negative currency impact as sales rose in both domestic and international markets. Sales in the domestic market rose 4.8% to $6.1 billion. International sales grew 9.5% to $4.25 billion (operational increase of 13.2%). The strong performance was led by the company’s oncology portfolio. Worldwide sales of J&J’s cancer drugs rose 36.4% in the quarter. Acquisitions and divestitures had a negligible impact to sales growth in the quarter.

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

Imbruvica sales rose 37.7% to $705 million in the quarter driven largely by share gains across all lines of therapy.

Darzalex sales rose 57.1% to $498 million in the quarter. In United States, market growth and strong launch uptake in the first-line setting, for which approval was received in May, drove sales. In outside U.S. markets, increased penetration and share gains drove sales growth.

Zytiga sales rose 43.2% to $958 million in the quarter due to continued strong market growth and share gains. Zytiga was approved in the first-line setting in February, which has been a key driver of Zytiga’s strong performance in the past three quarters.

Stelara sales rose 16.5% to $1.31 billion in the quarter. Stelara has witnessed a strong uptake in its new indication for Crohn's disease, experiencing share gains in the third quarter. Simponi/Simponi Aria sales rose 12.6% to $536 million in the quarter. Invega Sustenna sales rose 16.5% to $749 million in the quarter.

In the quarter, J&J recorded pulmonary arterial hypertension (PAH) revenues of $656 million, up 3.8% year over year. Strong demand for Uptravi and Opsumit was partially offset by the expected decline of Tracleer outside the United States due to generic competition. The Actelion acquisition added 3.8% to sales growth in the third quarter compared with 6.6% in the second quarter.

Sales of Invokana/Invokamet declined 28.3% to $190 million due to higher managed care discounting and market share decline due to competitive pressure.

Xarelto sales declined 3.6% in the quarter to $612 million with continued share gains being offset by increased rebates and a negative impact from prior quarter adjustments. Excluding these adjustments, the drug’s underlying growth would have been approximately 2.5%. The October FDA approval of Xarelto for a new 2.5 milligram vascular dose for the CAD/PAD indication significantly expands the drug’s eligible patient population, which can drive sales of the drug in future quarters.

Sales of Remicade were down 16.3% in the quarter to $1.38 billion due to competition from biosimilars.  While U.S. sales declined 18.2%, U.S. exports went down 35.9%. Remicade sales rose 2.5% in international markets.

Regarding newly launched Tremfya, J&J said that the product is seeing strong demand trends with more than 25,000 patients now on therapy and the drug capturing 5.8% share of the psoriasis market in the United States. Tremfya recorded sales of $171 million in the quarter compared with $126 million in the second quarter.

Medical Devices segment sales came in at $6.59 billion, down 0.2% from the year-ago period. It included an operational increase of 1.7% and negative currency movement of 1.9%.

Excluding the impact of all acquisitions and divestitures, on an operational basis, worldwide sales increased 2.9%, same as in the second quarter.

Operational growth was driven by continued strong performance in vision care and electrophysiology and improving performance in spine and keens and the orthopedics portfolio, which made up for a weaker sales performance in the diabetes care .

Domestic market sales rose 0.3% year over year to $3.2 billion. International market sales decreased 0.6% (operational increase of 3%) year over year to $3.4 billion.

The Consumer segment recorded revenues of $3.4 billion in the reported quarter, up 1.8% year over year. Moreover, on an operational basis, Consumer segment sales increased 4.9%, partially offset by unfavorable foreign currency movement of 3.1%.

Excluding the impact of acquisitions and divestitures, adjusted operational sales growth was 6.1% worldwide, a significant acceleration from the second quarter. The improved performance was driven by growth in beauty and over-the-counter products and the benefit of re-stocking of retail inventory to support the re-launch of the Johnson’s baby care brand in August.

Regarding the baby care brand re-launch, management informed that they launched in the United States, China and India during the third quarter, and plan to continue the full global rollout into 2019.

Sales in the domestic market rose 6.6% from the year-ago period to $1.4 billion. Meanwhile, the international segment recorded a decline of 1.3% to $2.04 billion. The operational increase of 3.7% was offset by negative currency impact of 5% in the quarter.

2018 Outlook Trimmed

J&J raised its previously issued earnings and sales guidance for 2018.

J&J expects 2018 adjusted earnings per share in the range of $8.13 - $8.18 compared with $8.07 - $8.17 expected previously. The guidance range reflects an operational growth rate between 9.3% and 10% (previously 8.5% and 9.9%). Currency fluctuations are expected to favorably impact EPS by approximately 15 cents, which remains unchanged from the prior guidance.

Revenues are expected in the range of $81 to $81.4 billion, higher than the previously expected $80.5 to $81.3 billion, reflecting operational constant currency sales growth rate in the range of 5.5% to 6% (previously 4.5% to 5.5%).

Organic sales growth, excluding the impact of acquisitions and divestitures, is expected to be in the range of 4.5, higher than 3.5%-4.5% previously. J&J has raised its full-year organic sales growth expectations thrice this year

Currency fluctuations are expected to favorably impact sales by 50 basis points, lower than 80 basis points, previously.

In the fourth quarter, while the Consumer and Medical Device businesses should continue to improve, the Pharmaceuticals segment might see slower growth. The Pharmaceuticals segment is facing difficult comparisons in second half of 2018, which coupled with expected biosimilar and generic competition to Tracleer and Procrit later this year, may put pressure on the segment’s growth in the fourth quarter.
 
Adjusted pre-tax operating margin is expected to increase at least 150 basis points in 2018 (previously approximately150 basis points). Although a stronger-than-expected year-to-date performance would have resulted in higher margins, increased R&D investments in the fourth quarter will offset some of the  benefit.

Adjusted tax rate is guided in the range of 17.5% -18% (17 previously).

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.
 

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

At this time, Johnson & Johnson has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Johnson & Johnson has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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