It has been about a month since the last earnings report for Johnson & Johnson (JNJ). Shares have lost about 0.7% 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 drivers.
J&J Beats on Q2 Earnings & Sales, Ups 2020 Guidance
J&J beat second-quarter estimates for earnings as well as sales.
Second-quarter 2020 earnings came in at 1.67 per share, which beat the Zacks Consensus Estimate of $1.50. Earnings however declined 35.3% from the year-ago period.
Adjusted earnings exclude after-tax intangible amortization expense and some special items. Including these items, J&J reported second-quarter earnings of $1.36 per share, down 34.6% from the year-ago quarter.
Sales came in at $18.3 billion, which beat the Zacks Consensus Estimate of $17.57 billion. Sales however declined 10.8% from the year-ago quarter, reflecting an operational decrease of 9% and an unfavorable currency impact of 1.8%.
Organically, excluding the impact of acquisitions and divestitures, sales decreased 8.8% on an operational basis in contrast to 5.6% increase seen in the first quarter mainly due to the negative impact of the coronavirus pandemic.
Its Pharmaceuticals unit continued to do well despite the coronavirus crisis. However, the pandemic hurt sales in its Medical Devices segment across its Surgery, Orthopedics, Interventional Solutions, and Vision businesses.
Second-quarter sales in the domestic market declined 8.3% to $9.54 billion. International sales declined 13.4% to $8.8 billion (operational decrease of 9.6%). Excluding the impact of all acquisitions and divestitures, on an adjusted operational basis, international sales declined 9.4% in the quarter.
Segment Details
Pharmaceutical segment sales rose 2.1% year over year to $10.75 billion, reflecting 3.9% operational growth, which was offset by 1.8% negative currency impact. Sales in the domestic market rose 5.8% to $6.12 billion. International sales however declined 2.4% to $4.63 billion (operational increase of 1.4%). Excluding the impact of all acquisitions and divestitures, on an operational basis, worldwide sales increased 3.9%, lower than 10.2% increase in the first quarter.
The sales increase was led by the company’s oncology drugs, Imbruvica and Darzalex as well as psoriasis treatment, Stelara, which offset the impact of biosimilar and generic competition on some drugs and the negative impact of COVID-19. Delayed diagnosis and slower new patient starts due to reduced patient interactions with health care providers amid the COVID-19 pandemic hurt sales of some physician-administered drugs in the quarter. The products most impacted by COVID-19 were Darzalex, Imbruvica, Stelara, Tremfya, Invega Sustenna and PAH medicines.
Worldwide sales of J&J’s oncology drugs rose 3.5% in the quarter to $2.79 billion. Other core products like Invega Sustenna, J&J’s PAH drugs, and new drugs, Tremfya and Erleada contributed significantly to sales growth.
Moreover, sales of some other key drugs like Xarelto and Invokana/Invokamet improved in the quarter after declining in the past few quarters. Sales of others like Zytiga, Remicade, Velcade (internationally) and Procrit/Eprex declined due to the impact of generic/biosimilar competition.
Imbruvica sales rose 14.1% to $941 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. However, delayed diagnosis and the reversal of Q1 stocking related to COVID-19 hurt sales, to an extent, in the quarter.
Darzalex sales rose 16.3% year over year to $901 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.
Stelara sales rose 8.9% to $1.7 billion in the quarter driven primarily by the Crohn’s disease indication and growth from the recently approved ulcerative colitis indication.
PAH revenues of $789 million rose 14.2% year over year driven by increased market penetration and share growth for Uptravi and Opsumit.
Invega Sustenna sales rose 7.5% to $879 million in the quarter. Simponi/Simponi Aria sales declined 3% to $546 million in the quarter. Prezista sales declined 4.78% to $510 million in the quarter.
Tremfya recorded sales of $342 million in the quarter compared with $296 million in the previous quarter.
Erleada generated sales of $170 million in the quarter compared with $143 million in the first quarter.
Zytiga sales declined 18.6% to $568 million in the quarter due to generic competition.
Sales of Procrit/Eprex declined 25.6% to $136 million in the quarter due to biosimilar competition. Velcade sales declined 56.1% in the quarter to $98.0 million.
Xarelto sales rose 1.7% in the quarter to $559 million. Sales of Invokana/Invokamet rose 1.6% to $179 million.
Sales of Remicade were down 15.5% in the quarter to $935 million due to increased discounts and share loss to biosimilars in the United States. While U.S. sales declined 25.8%, sales in international markets declined 14.5%.
J&J continues to expect its Pharmaceutical business to deliver above-market growth in 2020 despite the negative impact of the COVID-19 pandemic. The sales increase will be led by increased penetration and new indications across key products such as Darzalex, Imbruvica, Tremfya, Stelara and Erleada.
Medical Devices segment sales came in at $4.29 billion, down 33.9% from the year-ago period, reflecting an operational decrease of 32.7% and negative currency movement of 1.2%. The pandemic has hit this segment of J&J the hardest due to widespread decline in elective surgical procedures and redeployment of hospital resources to address patients affected by COVID-19. An additional selling day benefitted sales in the segment by about 50 basis points.
However, the segment witnessed less steeper than expected decline in the second quarter and the company now looks for a lower-than-previously expected decline for the second half of the year. In the third quarter, J&J expects the Medical Devices unit to decline in the range of 10-25% (previously 20-60%) while in the fourth quarter, the range is a decline of 15% to 0%, both less than that anticipated in April.
Excluding the impact of all acquisitions and divestitures, on an operational basis, worldwide sales decreased 32.5%, much steeper than a decrease of 4.8% in the previous quarter.
Domestic market sales declined 39.6% year over year to $1.86 billion. International market sales declined 28.8% year over year to $2.43 billion. On an operational basis, international sales decreased 26.4%.
The Consumer segment recorded revenues of $3.3 billion in the reported quarter, down 7% year over year. On an operational basis, Consumer segment sales decreased 3.6%. Unfavorable foreign currency movement hurt sales by 3.4%.
Excluding the impact of acquisitions and divestitures, adjusted operational sales decline was 3.4% worldwide against 11% growth seen in the previous quarter. As expected, the massive coronavirus related stockpiling benefit seen in the Consumer Health segment in the first quarter reversed in the second quarter due to lockdown-related lower consumption.
Higher sales of OTC products like Tylenol and Zyrtec, oral care product Listerine mouthwash and digestive health products were offset by the negative impact of the COVID-19 pandemic on certain categories like skin care and beauty care products in the second quarter. Sales in the skin care and beauty care categories were hurt as a result of reduced store traffic and reduced consumption due to government lockdowns. On the contrary, OTC and Oral Care businesses were positively impacted by increased COVID-19 demand. Sales in the women’s health care products and international baby care products categories were also hurt by the pandemic. Overall, COVID-19 had a negative estimated impact of 700 basis points on Consumer Health segment sales.
Sales in the domestic market rose 1.3% from the year-ago period to $1.56 billion. Meanwhile, the international segment declined 13.4% to $1.74 billion which included an operational decrease of 7.4% and a negative currency impact of 6.0% in the quarter.
In Consumer Health unit, J&J’s focus will be on delivering growth in core product categories including OTC and skin health, as well as ongoing e-commerce channel expansion
2020 Guidance
J&J raised its financial outlook for the year due faster-than-expected recovery in sales of the Medical Devices unit as economies around the world began opening sooner than anticipated. J&J now expects a negative procedure delay-driven sales impact of approximately $3.8 billion-$5.3 billion in the Medical Devices unit in 2020 versus $4 billion – $7 billion expected earlier. J&J also expects continued strength in Pharma and improving growth across Consumer health unit.
Adjusted earnings per share expectations were raised from a range of $7.50 – $7.90 to $7.75-$7.95. The guidance range now indicates a decline in the range of 8.4%-10.7% versus the prior expectation of decline of 9%-13.6%. On an operational, constant currency basis, adjusted earnings per share are expected to decline in the range of 7.3%-9.6%. The prior expectation was of a decline in the range of 7.3%-11.9%.
Revenues are now expected in the range of $79.9-$81.4 billion, indicating year-over-year decline of 0.8%-2.6%. Previous expectation for revenues was in the range of $77.5-$80.5 billion, indicating year-over-year decline of 2%-5.5%.
Operational constant currency sales are expected to be up 0.5% to down 1.3% compared with the prior expectation of flat to down 3.5%. Adjusted operational sales, (excluding currency impact, acquisitions/divestitures) are expected to be down 0.8% to up 1% (previous expectation was down 3% to up 0.5%).
On its call, J&J said that it saw improving demand trends throughout the quarter as countries and states began to reopen. Joseph Wolk, J&J’s chief financial officer, said that though visits to doctor’s office were still declining, the decline was less steep than in the earlier stages of the pandemic in mid-April. He also said that category trends are improving in the Consumer Health unit.
When asked about a possible second wave of coronavirus cases, management sounded positive and said that the healthcare system should be better able to manage through a possible second wave, with better testing capabilities, better isolation and other preventative measures and adequate supply of necessary medical equipment.
J&J expects operating margin to decline 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.
Progress in Coronavirus Vaccine Efforts
J&J plans to initiate a phase I/II human clinical study on its vaccine candidate for COVID-19 in late July, rather than September as announced earlier. The phase I/II study will be conducted in 1045 healthy adults aged 18 to 55 years, plus adults aged 65 years and older and will be initiated in the United States and Belgium. The study in Belgium will begin on July 22 while that in the United States will begin in the following week. J&J is holding talks with the National Institutes of Allergy and Infectious Diseases to begin pivotal phase III studies on the candidate sooner than planned, potentially in late September, if data from the phase I/II study is positive.
J&J’s goal is to supply more than 1 billion doses of the vaccine globally by end of 2021 if it proves to be safe and effective.
Meanwhile. J&J has formed collaborations with Emergent BioSolutions and Catalent Biologics to support commercial manufacturing of the vaccine.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
VGM Scores
At this time, Johnson & Johnson has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren’t focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions 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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