J&J (JNJ) Q1 Earnings Beat Estimates, Pharma Sales Slow Down

Johnson & Johnson (NYSE:JNJ) reported mixed first-quarter 2017 results. While earnings beat expectations, sales missed the same due to a slowdown in pharmaceutical product sales. The drug and consumer products giant raised its 2017 sales and earnings outlook though only to include the impact of the pending $30 billion acquisition of Swiss biotechnology company Actelion Ltd. (OTC:ALIOF) .

Shares declined 1.4% in pre-market trading.

This year so far, J&J’s share price is up 9.8%. This compares favorably with the 6.8% increase witnessed by the Zacks classified Large-Cap Pharma industry.

Earnings Beat

J&J’s first-quarter 2017 earnings came in at $1.83 per share, beating the Zacks Consensus Estimate of $1.77 and increasing 5.8% from the year-ago period.

Including one-time items, J&J reported first-quarter earnings of $1.61 per share, up 1.3% from the year-ago period.

Sales Miss

Sales came in at $17.77 billion, missing the Zacks Consensus Estimate of $18.0 billion by 1.3%. Sales increased 1.6% from the year-ago quarter, reflecting an operational increase of 2% and a negative currency impact of 0.4%.

First-quarter sales grew 0.6% in the domestic market to $9.38 billion and 2.8% in international markets to $8.39 billion, reflecting 3.6% operational growth, partially offset by a 0.8% negative currency impact.

Sales in Details

Pharmaceutical segment sales grew 0.8% year over year to $8.25 billion, reflecting 1.4% operational growth and a 0.6% negative currency impact.

Sales in the domestic market declined 1.3% to $4.87 billion, while international sales grew 4.1% to $3.37 billion.

New products like Imbruvica (cancer) and Darzalex (multiple myeloma) continued to perform well. Other growth drivers were Stelara, Invega Sustenna and Simponi.

However, sales of Xarelto declined 9.5% in the quarter. Invokana/Invokamet sales declined 12.6%, Concerta declined 9.5% while Zytiga sales fell 6.3%.

Importantly, sales of the blockbuster rheumatoid arthritis drug Remicade, marketed in partnership with Merck & Co., Inc. (NYSE:MRK) , declined 6% in the quarter with U.S. sales declining 2.4% and international sales declining 3% due to biosimilar competition. In this regard, we would like to mention that Pfizer Inc. (NYSE:PFE) launched its Inflectra injection, a biosimilar version of Remicade in the U.S. late last November, which did not have any significant impact on Remicade sales in the fourth quarter of 2016. Management is expected to comment on the impact of the biosimilar on first-quarter sales at the conference call.

J&J’s Pharma segment achieved some clinical milestones during the quarter including label expansion for Imbruvica and positive late-stage data for psoriasis candidate guselkumab. Meanwhile, J&J announced the deal to buy Actelion in January this year with the transaction expected to close in the second quarter.

Medical Devices segment sales came in at $6.29 billion, up 3% from the year-ago period. It included an operational increase of 3.4% and negative currency movement of 0.4%.

Sales in the domestic market rose 2.2% year over year to $3.09 billion. International market sales inched up 3.8% (operational increase of 4.7%) year over year to $3.2 billion.

Operational growth was driven by endocutters in the Advanced Surgery business; electrophysiology products in the Cardiovascular business and Acuvue contact lenses in the Vision Care business, which made up for a weaker sales performance in the Diabetes Care unit

The Consumer segment recorded revenues of $3.23 billion in the reported quarter, up 1% year over year (operational increase of 0.8%). Foreign currency movement positively impacted sales in the segment by 0.2%. Sales in the domestic market grew 4.1% from the year-ago period to $1.41 billion.

Slower growth in Listerine oral care, baby care and wound care products was partially offset by growth in over-the-counter products.

Meanwhile, the international segment recorded a decline of 1.3% to $1.81 billion, reflecting an operational decline of 1.6% and a positive currency impact of 0.3%.

2017 Guidance Raised

J&J raised its sales and earnings guidance for 2017 to include the impact of the Actelion deal.

J&J expects adjusted earnings per share in the range of $7.00 - $7.15 for 2017 compared with $6.93 to $7.08 expected previously.

The revenue guidance is in the range of $75.4 billion to $76.1 billion compared with $74.1 billion to $74.8 billion expected previously.

The Zacks Consensus Estimate for sales and earnings are pegged at $75.02 billion and $7.03 per share, respectively for 2017.

The company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Our Take

This was the second consecutive sales miss for J&J. While sales in the Medical Device segment are picking up, as expected, the Pharma segment saw softer growth in the quarter. In 2017, growth in J&J’s Pharma segment is expected to be slower as key growth drivers have slowed down due to competition. Quite a few products in its portfolio like Remicade and Concerta are facing generic competition. However, the deal with Actelion, though expensive, will diversify J&J’s revenues to the pulmonary arterial hypertension (PAH) category and bolster its long-term growth.

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