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Did you blink? If you did, you probably missed the kickoff to earnings season for the third quarter. Although earnings season never officially ends, the vast majority of S&P 500 companies report their results within a matter of six weeks each quarter, which is traditionally understood by Wall Street to be "earnings season."
In the healthcare sector, conglomerate Johnson & Johnson (NYSE: JNJ), the largest publicly traded company in healthcare, has the pleasure of leading things offeach quarter.
Slated to report its Q3 results before the opening bell on Tuesday, Oct. 18, Johnson & Johnson is projected by Wall Street to earn $1.65 per share on $17.7 billion in sales. For reference, J&J has surpassed Wall Street's profit projections in every quarter over the past three years. Though the past is no guarantee of the future, history suggests an earnings beat is likely.
However, when all is said and done, Wall Street and investors are unlikely to be laser-focused on the headline figures. They're going to be more interested, and for good reason, in how J&J achieved its numbers. When J&J releases its Q3 figures and conducts its conference call with Wall Street analysts, here are three figures you'd be wise to pay close attention to.
1. Pharmaceuticals growth rate
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Johnson & Johnson may be made up of three operating segments (pharmaceuticals, medical devices, and consumer health), but it's the company's pharmaceuticals unit that packs the biggest punch.
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Consumer health products are mostly inelastic, leading to strong pricing power. However, growth in consumer health products is usually in the low to mid single digits, and margins tend to be tight. A similar tale can be told of medical devices, which are often the victim of tough competition that weighs on device prices and margins. Pharmaceuticals, on the other hand, can regularly have margins in the neighborhood of 70%, if not higher. Inherent advantages in the U.S. healthcare system also allow Johnson & Johnson to increase the price of its branded and specialty therapies at a rate far above that of inflation. Long story short, growth in pharmaceuticals is extremely important for J&J.
Last year Johnson & Johnson outlined a plan to file for new drug approvals for 10 potential blockbusters by 2019. This follows bringing 14 novel therapies to market between 2009 and mid-2014, and having half of those generate $1 billion or more in annual sales, the definition of a blockbuster drug. Wall Street and investors will be looking to see if J&J can continue delivering operating sales growth of around 9% or more (as it's done through the first half of 2016) in Q3. Growth in type 2 diabetes drug Invokana, anti-inflammatory Stelara, and cancer drugs Imbruvica and Darzalex should help, but only time will tell if J&J can keep pace with its recent growth trends in pharmaceuticals.
2. Medical-devices growth rate
Second, Wall Street and investors should be mighty interested to see how well J&J's medical-devices segment performed.
As mentioned above, growth in this unit has been subpar in recent years by J&J's standards -- the company is one of the largest device makers in the world. Part of the blame can be attributed to weaker growth in the U.S. and Europe; part can be ascribed to increased competition; and part is probably due (in the U.S.) to the implementation of the Affordable Care Act. The ACA, or Obamacare, as it's more commonly known, created an uncertain expense environment following its rollout, which in turn caused some hospitals to reduce their spending and prompted patients to wait on nonurgent procedures.
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But during the past few years J&J has been able to realign its medical-device business. It's jettisoned underperforming subsidiaries, such as Cordis, which it sold to Cardinal Health for nearly $2 billion, and Ortho-Clinical Diagnostics, which was divested to the Carlyle Group for roughly $4 billion. It's also been simultaneously emphasizing higher-growth device segments, such as trauma, as well as hip and knee replacements.
More recently, J&J announced the acquisition of Abbott Laboratories' (NYSE: ABT) eye-surgery-equipment unit, Abbott Medical Optics, for $4.33 billion. The deal perfectly complements J&J's established Acuvue contact lens brand and expands its ophthalmologic surgical-equipment offerings, while, most importantly, providing immediate profit accretion to the company's bottom line. Abbott didn't fare too badly either, netting a $1.5 billion gain since its 2009 purchase of its Medical Optics unit, and divesting a noncore asset based on two upcoming mergers that'll realign its business focus.
In short, Wall Street is probably expecting medical-device growth that excludes divestitures and acquisitions of better than 2.5% in the U.S. (J&J reported 1.9% U.S. device sales growth in Q2 2016 sans acquisitions and divestitures), and perhaps up to 5% operating sales growth worldwide. Can J&J deliver? We'll find out next week.
3. Remicade sales forecast
There is no shortage of important medications to pay attention to when J&J reports its Q3 results. A few (Imbruvica, Stelara, Invokana) were mentioned above. But if there's one therapy that should jump to the top of the list, it's anti-inflammatory Remicade, which is used to treat rheumatoid arthritis, plaque psoriasis, ulcerative colitis, Crohn's disease, and a few other ailments.
Image source: Johnson & Johnson.
Remicade is a big deal for J&J. Through the first six months of the year, Remicade sales have tallied $3.56 billion worldwide, a 10.5% increase from the prior-year period on a currency-neutral basis. Remicade is J&J's best-selling drug, and it's accounted for 21% of its pharmaceutical-product sales in the first half of the year.
However, Remicade's sales trajectory could soon be altered. In August, J&J lost its final court battle to block the entrance of biosimilar versions of Remicade. South Korean biopharmaCelltrion and Pfizer (NYSE: PFE), Celltrion's licensing partner, are ready and raring to launch their copycat drug, known as Inflectra, following an April approval from the Food and Drug Administration. Biosimilar drugs are expected to price anywhere from 10% to 50% below the cost of brand-name drugs, but with no precedence of a U.S. launch, no one is exactly sure what to expect. Thus, we may learn a lot about the growing biosimilar market and how branded therapies will react to biosimilar competition by listening closely to what J&J has to say about Remicade's Q3 sales and its future sales forecast in the company's press release and during its conference call.
Tuesday, Oct. 18, is the big day, so circle it on your calendars.
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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.
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