It's that time again, folks: Earnings season is kicking into full swing. And with that comes healthcare conglomerate Johnson & Johnson's (NYSE: JNJ) quarterly report, which often sets the tone for the pharmaceutical industry.
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Johnson & Johnson is set to report its second-quarter operating results before the opening bell on Tuesday, July 18. According to the consensus on Wall Street, J&J is expected to produce $18.97 billion in sales, which would represent 2.6% growth over the prior-year period, and $1.80 in earnings per share. Last year, J&J turned in a profit per share of $1.74. While past performance is no guarantee of future results, J&J has topped Wall Street's consensus EPS figure in each of the past 12 quarters, although it's fallen short of Wall Street's consensus sales estimate on more than a few occasions.
Ignore the white nose: Here's what really matters
Considering that J&J has pretty handily outperformed the S&P 500 over the trailing five-year period, the company's top-line figures will largely be in focus by Wall Street. But there's so much more to pay attention to than just a single sales and profit-per-share figure. Instead, here are four things that really matter when J&J reports its quarterly results.
1. Is the Actelion integration on track?
Probably the biggest question on the minds of investors is what the early stages of the Actelion integration are looking like. For those who many not have been closely following J&J, it acquired Actelion, a Swiss-based drugmaker that specializes in drugs to treat pulmonary arterial hypertension (PAH), for $30 billion in cash. The deal officially closed on June 16. It's expected to boost J&J's sales by $1.3 billion this year and add $0.07 in EPS. Following a full year of integration, J&J's management team sees $0.35 to $0.40 in EPS accretion from the deal, as well as a boost in its long-term EPS growth rate of 1.5% to 2%.
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These figures sound great on paper, but J&J paid an exceptionally high premium (about six times the peak sales of Actelion's PAH portfolio) to acquire Actelion, and it'll need a flawless buildup in sales for Opsumit and Uptravi in order to reach $2 billion in estimated annual sales for each PAH drug. Look for the company to add some color on how the early stages of integration are going.
2. Is there something wrong with Invokana?
Johnson & Johnson is perceived to be one of the safest healthcare stocks an investor can buy, but it's not impervious to issues. During the first quarter, we witnessed sales of type 2 diabetes drug Invokana, an SGLT-2 inhibitor, plunge 12.6% from the prior-year period to $284 million worldwide. More specifically, sales in the U.S. fell nearly 17% to $247 million. J&J's management team provided very little context in the first quarter as to why Invokana sales dropped off, so it'll be particularly interesting to see how the drug performed in the second quarter, especially following two major events.
In May, the company released clinical data showing that Invokana led to a higher risk of foot and leg amputations in patients compared to the placebo in two trials. This required J&J to begin adding a boxed warning to its product packaging, which could adversely impact sales.
Conversely, in June, J&J announced top-line results from its CANVAS and CANVAS-R studies, which were long-term looks at how Invokana impacted patients' cardiovascular (CV) system. Invokana generated an aggregate reduction in CV risks of 14%, which matched Eli Lilly's and Boehringer Ingelheim's SGLT-2 inhibitor Jardiance. However, it also reduced the risk of nonfatal myocardial infarction (heart attack) by 15% and nonfatal stroke by 10%, which was more impressive than Jardiance.
What's more important: long-term CV results or a boxed warning? We'll soon find out.
3. Is domestic medical device growth reaccelerating?
Though J&J has significantly increased its exposure to pharmaceuticals over the past five years, it's still reliant on its medical device segment to boost its long-term growth rate.
A number of factors have been weighing on the company's medical device segment in recent years, including an increase in competition, as well as the Affordable Care Act, which slowed the rate of optional procedures in its early days. In fact, excluding the impact of acquisitions and divestitures, domestic medical device sales fell 0.2% during first-quarter 2017. If not for 3.7% growth in international markets, J&J may very well have reported another subpar quarter of medical device growth.
In the second quarter, investors are going to be looking for a return to growth in domestic medical device sales, as well as the expectation that growth will accelerate over the intermediate term. Remember, this is a company that acquired Abbott Medical Optics, a leader in ophthalmic surgery, for $4.3 billion in the first quarter. Acquisitions like these should help reinvigorate stagnant domestic sales, but we'll need to see clear-cut evidence of this in the company's second-quarter results and outlook.
4. What about future acquisitions?
Finally, pay very close attention to what management has to say about future acquisition potential. Johnson & Johnson traditionally favors small- and mid-cap acquisitions, but the Actelion acquisition at $30 billion could alter its appetite in the near term. This isn't to say the company doesn't have cash at the ready or access to credit. However, J&J is unlikely to jeopardize its highly coveted AAA-credit rating from Standard & Poor's by gobbling up another large company without first rebuilding its cash pile. It's one of just two publicly traded companies with Standard & Poor's highest credit mark.
For those of you who follow J&J pretty closely, you may have also noticed that the company increased its dividend this year by "just" 5%, which is its smallest percentage increase this decade. My instincts tell me that it likely did this to retain as much of its operating cash as possible to fund future acquisitions, many of which I expect to be in pharmaceuticals.
Circle your calendars and set your alarms, because important questions are about to be answered.
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