Johnson & Johnson (JNJ - Free J&J Stock Report), the largest producer of health care products and a member of the Dow 30, reported first-quarter adjusted-shares earnings of $2.10, versus the Wall Street estimate of $2.03. Total sales were basically flat, however, as the top line inched only 0.1% higher. Eliminating the impact caused by the strong U.S. dollar and acquisitions and divestitures, the picture brightens considerably, as sales rose a healthy 5.5%. Much of this was due to international operations; adjusted-operational sales rose a solid 7.9%. On the domestic side, sales in this category increased at a more modest 3.1%. Based on GAAP standards, share earnings dropped 13.1% due to costs related to R&D and litigation.
The main pharmaceutical business, which is now responsible for over 50% of total revenues, performed well, as constant-currency sales rose 7.9% before foreign exchange translations reduced the number by 3.8%. Leading the way in this segment were drugs such as STELARA (inflammatory diseases), IMBRUVICA (certain B-cell malignancies), TREMFYA (psoriasis), DARZALEX (myeloma), and INVEGA (antipsychotic). Some of these gains were offset by declines in demand for REMICADE and ZYTIGA (both prostate cancer drugs) that are facing competition from new generic drugs and biosimilars.
Results in the Medical Devices segment was somewhat disappointment. On an operational basis, domestic sales declined 1.6%, while international sales decreased 0.3%. When currency translations are taken into account, foreign sales were off a meaningful 6.8%. On the positive side, growth in the sales of electrophysiology products remained strong as did activity in the ACUVUE contact lens business.
J&J's famed Consumer sector, which had been showing signs of life lately, was also impacted by the strong U.S. dollar as constant-currency sales increased only 0.7%. Probably due to the talc lawsuits (more below), Baby Care products apparently didn't do well. This was partially offset by higher sales of TYLENOL and NEUTROGENA.
Management lifted the guidance for 2019 slightly, as adjusted operational sales are now expected to increase 2.5% to 3.5%, versus the 2.0% to 3.0% estimate made in January. Constant-currency sales were also marginally increased to 0.5%-1.5%, versus the previous 0.0%-1.0% forecast. The picture is not as bright when the negative impact of currency translations are factored in. The top line is expected to decline 0.5%-1.5% to a range of $80.4 billion to $81.2 billion. Adjusted- share earnings were basically left unchanged at $8.53 to $8.63.
Overall, investors had a positive reaction to J&J's earnings release and guidance, as the stock rose more than the Dow Jones Industrial Average. The price of JNJ has recovered partially following a news report by Reuters last December that accused the company of knowingly allowing asbestos in its talc products. Management continues to strenuously deny this claim and appears to be more effectively presenting its argument to the public. Nonetheless, a jury awarded $4.7 billion to plaintiffs last July. As a large pharmaceutical company, J&J has the infrastructure to fight expensive legal battles going forward. Still, jury awards are known for being unpredictable, but the company has a history of successfully getting judgments lowered on appeal. All told, we think the company has solid prospects mostly due to its promising drug pipeline. However, very conservative investors may not feel as safe holding JNJ now as in the past, as it is vulnerable to sell offs based on talc-related jury verdicts.
About The Company: Johnson & Johnson manufactures and sells health care products. Its major lines consist of numerous household products. The company operates in a diverse number of segments, including Consumer (baby care, nonprescription drugs, sanitary protection, and skin care), Medical Device & Diagnostics (wound closures, minimally invasive surgical instruments, diagnostics, orthopedics, and contact lenses), and Pharmaceutical (contraceptives, psychiatric, anti-infective, and dermatological drugs).
- James Flood
