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Johnson & Johnson (JNJ) Down 0.4% 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 0.4% 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 its most recent earnings report in order to get a better handle on the important catalysts.

J&J Beats on Q1 Earnings, Cuts View on Coronavirus Impact

J&J’s first-quarter results were strong as it beat estimates for earnings as well as sales

First-quarter 2020 earnings came in at $2.30 per share, which beat the Zacks Consensus Estimate of $2.03. Earnings rose 9.5% from the year-ago period.

Adjusted earnings exclude after-tax intangible amortization expense and some special items. Including these items, J&J reported first-quarter earnings of $2.17 per share, up 56.1% from the year-ago quarter.

Sales came in at $20.69 billion, which beat the Zacks Consensus Estimate of $19.25 billion. Sales rose 3.3% from the year-ago quarter, reflecting an operational increase of 4.8%, which offset an unfavorable currency impact of 1.5%.

Higher sales of its pharmaceutical and consumer healthcare products led to higher-than-expected sales in the quarter. However, COVID-19 negatively impacted worldwide sales by about 80 basis points as the negative impact on the Medical Devices unit was partially offset by a net positive sales lift in the consumer health and pharmaceutical business segments.

Organically, excluding the impact of acquisitions and divestitures, sales increased 5.6% on an operational basis, higher than 3.4% increase seen in the previous quarter.

Sales improved sequentially in Pharmaceutical and Consumer Health segments on an organic basis but declined in the Medical Devices unit.

First-quarter sales in the domestic market rose 5.6% to $10.7 billion. International sales grew 1% to $9.99 billion (operational increase of 4.0%). Excluding the impact of all acquisitions and divestitures, on an adjusted operational basis, international sales rose 4.5% in the quarter.

Segment Details

The Pharma segment performed above-market despite currency headwinds and the impact of biosimilar and generic competition on sales of some key drugs like Remicade and Procrit. Meanwhile, incremental COVID-19 demand benefited sales of Imbruvica, Xarelto, Stelara, the PAH portfolio and HIV products in the quarter.

Pharmaceutical segment sales rose 8.7% year over year to $11.1 billion, reflecting 10.1% operational growth, which was offset by 1.4% negative currency impact. Sales in the domestic market rose 8.6% to $6.06 billion. International sales grew 8.8% to $5.07 billion (operational increase of 12.0%). Excluding the impact of all acquisitions and divestitures, on an operational basis, worldwide sales increased 10.2%, higher than 4.5% increase in the previous quarter. The operational sales growth included approximately 100 bps favorable impact from COVID-19.

The sales increase 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 19.7% in the quarter to $3.01 billion. Other core products like Stelara, Simponi/Simponi Aria and Invega Sustenna also contributed to growth. Sales of new immunology medicine, Tremfya and prostate cancer drug, Erleada brought in additional sales.

Moreover, sales of some other key drugs like Xarelto declined in the quarter. Sales of others like Zytiga (United States), Remicade, Velcade (internationally) and Procrit/Eprex declined due to the impact of generic/biosimilar competition.

Imbruvica sales rose 31.6% to $1.03 billion in the quarter driven by market share gains and strong market growth primarily in the CLL indication in the United States and solid uptake in outside U.S. markets.

Darzalex sales rose 49% year over year to $937 million in the quarter. In the United States, strong growth across all lines of therapy driven by the new frontline indication for multiple myeloma transplant-ineligible population drove sales. In outside U.S. markets, increased penetration and share gains drove sales growth.

Stelara sales rose 29.5% to $1.82 billion in the quarter driven primarily by the Crohn's disease indication.

PAH revenues of $745 million rose 13.7% year over year driven by strong growth for Uptravi and Opsumit, which offset a decline in Tracleer sales that were hurt by continued generic competition.

Simponi/Simponi Aria sales rose 1.1% to $529 million in the quarter. Prezista sales rose 10.8% to $579 million in the quarter. Invega Sustenna sales rose 11.7% to $883 million in the quarter.

Tremfya recorded sales of $296 million in the quarter compared with $270 million in the previous quarter. The drug captured 9% share of the psoriasis market in the United States, up 2.5 points from the year-ago quarter.

Erleada generated sales of $143 million in the quarter compared with $116 million in the previous quarter.
 
Regarding Spravato, J&J said that patient demand is building and new patient starts continue to steadily increase each month

Zytiga sales rose 1.6% to $690 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 31.6% to $155 million in the quarter due to biosimilar competition. Velcade sales declined 59% in the quarter to $108 million.

Xarelto sales declined 2.7% in the quarter to $527 million as prescription growth was offset by increased discounts and rebates. Sales of Invokana/Invokamet declined 13.5% to $175 million.

Sales of Remicade were down 10.2% in the quarter to $990 million due to increased discounts and share loss to biosimilars in the United States. While U.S. sales declined 19.3%, U.S. exports rose 44.3%. Remicade sales rose 1.5% in international markets.

Medical Devices segment sales came in at $5.93 billion, down 8.2% from the year-ago period, reflecting an operational decrease of 6.9% and negative currency movement of 1.3%.

Excluding the impact of all acquisitions and divestitures, on an operational basis, worldwide sales decreased 4.8%, less than an increase of 2.7% in the previous quarter. Deferral of elective surgical procedures and redeployment of hospital resources to address patients affected by the pandemic led to a decline in sales of the Medical Devices unit. The pandemic hurt this segment’s sales by approximately 750 to 800 basis points across its Surgery, Orthopedics, Interventional Solutions, and Vision businesses.

Domestic market sales declined 6.8% year over year to $2.9 billion. International market sales declined 9.4% year over year to $3.03 billion. On an operational basis, international sales decreased 6.9%.

The Consumer segment recorded revenues of $3.63 billion in the reported quarter, up 9.2% year over year. On an operational basis, Consumer segment sales increased 11.3%, partially offset by unfavorable foreign currency movement of 2.1%.

Excluding the impact of acquisitions and divestitures, adjusted operational sales growth was 11% worldwide, a significant improvement from 1.4% in the previous quarter. Operational sales growth included approximately 700 bps favorable impact from COVID-19

Higher sales of over-the-counter products like Tylenol and Zyrtec, oral care product Listerine mouthwash, beauty products Neutrogena and Aveeno and Stayfree in international women’s health led to the the increased sales in the Consumer segment. Consumers stocked up these basic medicines and consumer products due to the global shutdown.

Sales in the domestic market rose 21% from the year-ago period to $1.74 billion. Meanwhile, the international segment rose 0.3% to $1.89 billion. An operational increase of 3.9% was offset by negative currency impact of 3.6% in the quarter.

In the Consumer Health segment, the first-quarter surge due to pantry loading is not expected to continue for the rest of the year. J&J expects some negative impact in certain categories like skin care, as a result of reduced store traffic and social distancing. However, J&J believes that the upside opportunities will offset downside risks. J&J is confident that it can achieve its prior outlook for 2020 for Consumer segment.
 
2020 Guidance

J&J lowered its financial guidance for 2020 to include the impact of the uncertainty surrounding the COVID-19 pandemic and costs related to investments that the company is making to combat the disease.
 
Overall, its guidance was lowered mainly due to the estimated procedure delays in the Medical Device unit. J&J expects a negative procedure delay-driven sales impact of approximately $4 billion - $7 billion in the Medical Devices unit in 2020.

Adjusted earnings per share expectations were lowered from a range of $8.95 - $9.10 to $7.50 to $7.90. The guidance range now indicates a decline in the range of 9%-13.6% versus prior expectation of growth of 3.1%-4.8%. On an operational, constant currency basis, adjusted earnings per share are expected to decline in the range of 7.3%-11.9%. The prior expectation was of growth in the range of 3.7%-5.4%.  

Revenues are now expected in the range of $77.5-$80.5 billion, indicating year-over-year decline of 2%-5.5%. Previous expectation for revenues was in the range of $85.4-$86.2 billion, indicating year-over-year growth of 4.

Operational constant currency sales are expected to be flat to down 3.5% compared with the prior expectation of growth in the range of 4.5%-5.5%. Adjusted operational sales, (excluding currency impact, acquisitions/divestitures) are expected to be down 3% to up 0.5% (previous expectation of growth of 5% to 6%).

On its call, J&J briefed about the impact of the COVID-19 crisis on its near-term financial performance. The company’s chief financial officer, Joe Wolk said the company believes the relative shape of the COVID-19 curve is more of an acute shorter-term impact rather than a prolonged impact. He went on to say that the global economy will improve coming out of the second quarter with lower unemployment, better insurance coverage and higher procedure capacity. J&J also said that its guidance assumes that the virus does not return with the same intensity in the fall.

J&J expects some of the coronavirus related benefits seen in the Consumer Health segment, mainly its over-the-counter medicines, to reverse in the remaining quarters of 2020. While the negative impact seen in the Medical Devices unit is expected to be most significant in the second quarter, J&J believes that elective procedures will recover in the third quarter and improve in the fourth quarter. Meanwhile, it expects sales in its Pharmaceutical segments to remain strong and continue to grow above market though it expects a small level of disruption associated with delayed diagnosis and new patient starts.

The company said that its major regulatory filings and approvals planned for 2020 are on track and no delay is expected for the pandemic.

J&J expects operating margin to decline by 100 basis points compared to prior expectation of improving by 100 basis points in 2020. J&J expects higher manufacturing costs related to COVID-19 sales impact to be partially offset by spending reductions.

Efforts to Combat Coronavirus

J&J has identified a lead vaccine candidate for COVID-19 and expects to begin phase I human clinical studies on the same in the United States and Europe by September. J&J plans to begin production at risk imminently and its goal is to supply more than 1 billion doses of the vaccine globally. J&J looks confident of having the first batch of COVID-19 vaccine available for emergency use authorization, on a not-for-profit basis, by early 2021. It has established a new U.S. vaccine manufacturing facility and is in discussions with other potential partners to expand manufacturing capacity in Europe and Asia.

J&J committed to invest more than $1 billion in partnership with BARDA to co-fund vaccine research, development, and clinical testing.

In addition to the vaccine development efforts, J&J is also working in partnership with the Rega Institute at the University of Leuven in Belgium to screen Janssen's compounds with antiviral activity to identify potential treatments against coronavirus. Meanwhile, J&J is exploring immunomodulators to protect against Acute Respiratory Distress Syndrome or ARDS in COVID-19.


 

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -12% due to these changes.

VGM Scores

Currently, Johnson & Johnson has an average Growth Score of C, however its Momentum Score is doing a bit better 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 C. 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 this revision 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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