Johnson & Johnson (JNJ – Free Johnson & Johnson Stock Report), the world's largest maker of health care products and a Dow-30 member, has reported second-quarter GAAP share earnings of $1.40, versus last year's $1.48, and our $1.62 estimate. On an adjusted basis, which excludes restructuring costs, amortization, and expenses related to the recently completed $30 billion Actelion acquisition, share net was $1.83, compared to the prior year's same period's $1.74. Once again, revenues were below expectations coming in at $18.8 billion, or 1.6% above 2016's June-interim's number, and $150 million short of our estimate. Operational sales rose 2.9%, but were reduced by 1.0% when currency translations are taken into account. The good news was that the top line performed much better outside of the U.S. as operational sales rose 6.7% in Europe and 4.9%, in Asia-Pacific, Africa. The only region that really encountered problems was the Western Hemisphere (excluding the United States), which declined 2.7%.
The key Pharmaceutical segment, which accounted for almost 45% of the sales in the quarter, posted another mixed performance. Domestic sales fell 2.6%, while foreign sales rose a healthy 6.1% before currency adjustments. Digging deeper into the numbers reveals that of the segment's five categories (not including the newly added Pulmonary Hypertension), four had negative operation growth. The top line was down 7.0% in Neuroscience; 5.5% in Cardiovascular/Metabolism/ Other; 3.4% in Infectious Diseases; and 1.9% in Immunology. A very strong showing in Oncology (+19.2%), was sufficient to push the total Pharma group's operational sales up a modest 1%. Helped by a wider launch in the E.U., DARZALEX witnessed strong demand. Another cancer drug, IMBRUVICA, also turned in a strong showing. Immune-related drugs STELARA and SIMPONI, saw steady growth, while REMICADE was hurt by the introduction of a biosimilar into the market. A generic entry in the Neuroscience sector had a negative impact on CONCERTA sales, while the therapy for heart illnesses, INVOKANA, fell due to an increase in contracting discounts, higher utilization of Medicaid, and market share loss.
At first glance, The Worldwide Medical Device business was the most successful part of the company during the quarter, as its top line increased 6.1% in the U.S. and 5.8% internationally. When the effect of acquisitions are deducted, however, these figures fall to 0.8% and 1.4% respectively. Moreover, growth in the two largest sectors Orthopedics and Surgery, experienced operational gains of less than 1%. On the positive side, sales advance by double digits in the Cardiac (THERMOCOOL SMARTTOUCH) and Contact Lens businesses.
The company's Consumer segment, which includes many well-known brands continued to struggle. Although the Beauty Care (NEUTRAGENA) posted an 11% gain, and sales rose 2.1% for OTC products (TYLENOL), Oral Care (LISTERINE), Baby Care, and the Women's Health sectors all had sales declines. As of now, we are still not sure if this is a temporary slump, or if consumers are shifting to less-expensive store brands.
Citing higher expected margins and growth resulting from the Actelion acquisition, management raised 2017's guidance for adjusted share earnings from a range of $7.00-$7.15, to $7.12-$7.22. The company maintained its expectation of $76.1 billion as the high range of revenues while increasing the lower end from $75.4 billion to $75.8 billion. To reflect these developments, we are lowering our GAAP earnings per share estimate for the year to $6.35, from $6.45.
After initially trading higher in the premarket following the release, these shares have declined slightly in early morning trading. We think the price action could have been worse, but the equity has already traded off almost 4% since peaking in late June. Although JNJ remains one of the safest and bluest of the blue chips, some conservative investors with a long-term view may want to take a step back to see whether the higher-margined growth expected from the Actelion purchase materializes.
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).
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
