Johnson & Johnson's 2017 Guidance Disappoints -- Could This Be the Issue?

By Sean Williams Markets Fool.com


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Before the opening bell on Tuesday morning, healthcare conglomerate Johnson & Johnson (NYSE: JNJ) kicked off earnings season for the sector by reporting its fourth-quarter and full-year results for fiscal 2016. Often known for being a source of stability in the healthcare sector, Johnson & Johnson left Wall Street and investors somewhat disappointed.

Johnson & Johnson's guidance misses the mark

For the fourth quarter, Johnson & Johnson reported $18.1 billion in sales, representing a 2.3% increase in operating sales, excluding a 0.6% adverse impact from currency movements. In all, domestic sales improved 2.6%, while international sales struggled and increased by just 0.6%. Excluding the impact of a number of one-time events, such as divestitures, acquisitions, the rapid rise and fall of hepatitis C drug Olysio, and Venezuela's wild currency fluctuations, worldwide sales of its ongoing businesses increased a healthy 7.6% on an operations basis. Comparatively, Wall Street had been looking for around $200 million more in quarterly revenue.

Profit-wise, J&J reported an adjusted profit of $1.58 per share, representing a nearly 10% increase from the prior-year period. As has often been the case with J&J over the past couple of years, it surpassed Wall Street's profit expectations by $0.02 per share.

The disappointment came in Johnson & Johnson's somewhat conservative guidance for fiscal 2017. J&J guided Wall Street and investors to expect revenue of between $74.1 billion and $74.8 billion with adjusted EPS of $6.93 to $7.08. Wall Street's consensus had been for $75.1 billion in sales and an adjusted profit of $7.11 per share. In particular, J&J focused on slowing growth in its pharmaceutical segment for its more conservative guidance.

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This is what's not to blame

What can be suggested with some certainty is that a number of J&J's core drugs weren't to blame for the company's conservative guidance. For example, blood cancer drug Imbruvica continued to pile on the sales, reporting year-over-year operational sales growth of 50% to $346 million on a worldwide basis. Even though J&J just receives a percentage of Imbruvica's sales, the opportunity for label expansion could push J&J's share of Imbruvica's annual sales possibly higher than $2.5 billion.

Sticking within oncology, multiple myeloma drug Darzalex wasn't an issue, either. Sales of Darzalex grew to $200 million in the fourth quarter from just $20 million following its fourth quarter launch in the previous year. This would imply that Darzalex is already on track for $800 million in extrapolated annual sales.

Top-selling drug Remicade, which is now facing biosimilar competition from Celltrion's Inflectra, also generated sales that were in-line with expectations. Inflectra, which is licensed to Pfizerand is being sold at a 15% discount to Remicade's list price, was expected to eat into Remicade's sales. However, worldwide sales wound up dipping only 3.2% on an operating basis to $1.62 billion, including a less than 2% decline in the United States. This was about as good a scenario as J&J could have hoped for. Understandably, Inflectra was only launched in November, so it could take time to see how the data shakes out, but J&J's Q4 results would suggest, initially, that physicians and consumers are mostly sticking with J&J's brand-name anti-inflammatory product.


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These two factors could be at fault

On the other hand, two specifics within J&J's report could signal why the company's 2017 guidance failed to meet the mark.

To begin with, sales of Invokana actually fell ever-so-slightly on a year-over-year basis to $371 million from $372 million. Invokana is the company's next-generation type 2 diabetes SGLT-2 inhibitor that in clinical trials also led to the welcome side effects of weight loss and lower systolic blood pressure. After multiple years and quarters of strong growth, Invokana's march higher came to a crashing halt in Q4, especially in the U.S., where sales fell 4%.

The big question is whether this sales slowdown in the U.S. is tied to physicians and consumers waiting for J&J's long-term cardiovascular results tied to Invokana, which are due out relatively soon, or if they're switching off to Eli Lilly's (NYSE: LLY) and Boehringer Ingelheim's Jardiance, which demonstrated superiority in its long-term cardiovascular study known as EMPA-REG OUTCOME. We may know more when Eli Lilly reported its own quarterly results, but the sudden slowdown in growth for a critical drug in J&J's pipeline is a bit concerning.

The other issue that could be dragging on J&J's guidance is its desire to be more transparent in its pricing practices. Even though Johnson & Johnson hasn't been called out by consumers or regulators for its pricing practices, it's taking the proactive step to be transparent in an effort to win over the consumer and help both consumers and regulators understand why it prices products the way it does.

While being transparent is a good thing, it could also backfire on J&J in the near-term (which is why its guidance may not be up to snuff). Showing its cards could mean that J&J's ability to increase prices could come under added scrutiny. Although a majority of J&J's pharmaceutical sales growth has come from the volume side of the equation and not price hikes, which is a good thing, weaker pricing power could still adversely impact J&J's top- and bottom-line.


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As steady as they come

Probably the biggest question mark in 2017 is what J&J will do from a divestment and acquisition basis.

Among the moves discussed by the company include divesting its diabetes care business, not including its top-selling diabetes drugs. The actual diabetes device business saw sales fall by nearly 6% on an operating basis for the full year, and 3% during the fourth quarter. On the flipside, J&J is also in discussions with Swiss-based drugmaker Actelionto potentially acquire all or parts of the company for a reported price tag of between $27 billion and $32 billion. This Fool is personally not a fan of J&J attempting to gobble up a company the size of Actelion considering its storied history of finding small-cap and mid-cap winning acquisitions.

Despite falling more than $2 per share after releasing its quarterly report, Johnson & Johnson still looks as strong as ever. Assuming J&J increases its dividend in 2017, it'll mark the 55th consecutive year it's done so. Just a small handful of publicly traded companies have a longer streak. J&J is also just one of two remaining companies to bear the "AAA" credit rating from Standard & Poor's, suggesting the credit agency has the utmost confidence in J&J to repay its debts. Financially speaking, J&J is as steady a stock as they come, and for that reason it remains a top stock to consider adding to income-oriented and retirement portfolios.

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Sean Williams has no position in any stocks mentioned. The Motley Fool recommends Johnson and Johnson. The Motley Fool has a disclosure policy.