Johnson & Johnson (NYSE: JNJ) reported anemic overall sales growth in the first half of 2017. The big healthcare company even saw a decline in year-over-year earnings during the period. Perhaps the most surprising disappointment of all was that pharmaceutical segment revenue was flat compared with the first half of last year.
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Does all of this portend dark days ahead for J&J? Not at all. In fact, the stock has risen faster than the S&P 500 so far this year. Why? Probably because smart investors recognize that the near-term future for Johnson & Johnson looks pretty bright. Here are 10 rock-solid reasons that's the case.
1. Easier year-over-year comparisons
Year-over-year comparisons in the first half of 2017 were weighed down in large part because of some one-time factors. Johnson & Johnson CFO Dominic Caruso explained at the Morgan Stanley healthcare conference Wednesday that adjustments to rebate reserves in the first two quarters of 2016 gave the company a bump that negatively affected year-over-year comparisons by 3%. This won't be an issue in the future.
2. Slower-than-expected erosion of Remicade sales
Caruso said J&J had initially projected that competition from biosimilars would reduce Remicade sales by 10% to 15%. So far, the actual impact has been closer to 5%. One reason is that the company has been able to effectively negotiate contracts in advance that boost Remicade sales. Another is that rivals Merck and Pfizer haven't slashed their prices for biosimilars enough to be a huge incentive for payers to switch. Also, Pfizer's data only showed clinical benefit in rheumatoid arthritis, but half of Remicade's revenue stems from gastrointestinal indications. All of this combined means more gradual and slower sales erosion than expected.
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3. Fewer fears about radical drug-pricing changes
President Trump's public comments and tweets caused turmoil for pharmaceutical stocks earlier this year. However, Caruso noted in his comments at the Morgan Stanley conference that "the rhetoric has died down quite a bit." He said that there is now a greater understanding of the complexity of the pharmaceutical market. While Caruso acknowledged that "pressure is still there," fears about drastic actions by the White House are markedly lower than in the first half of 2017. That's good news for big pharma stocks like J&J.
4. Huge opportunity for Stelara in Crohn's disease
Stelara is on track to rake in $3.6 billion in 2017. Caruso thinks that the trajectory for the drug is going to get even better. He said clinical data for Stelara in treating Crohn's disease was "remarkable" and so good that J&J believes the drug will be an even bigger winner in Crohn's disease than Remicade has been.
5. Potential to double patients for Xarelto
Johnson & Johnson hopes to win FDA approval for an additional indication for Xarelto in treating coronary and peripheral artery disease in mid-2018. Caruso said the company thinks the patient population for Xarelto could be two to three times larger if the approval is obtained -- which seems likely. That could be huge for a drug that's already on pace to generate more than $2 billion this year.
6. Tremendous growth for Imbruvica
Sales for cancer drug Imbruvica soared nearly 55% in the first half of 2017. Caruso noted that continued growth for Imbruvica is a something investors should watch in the days ahead. Market research firm projects that Imbruvica will generate annual revenue of $7.5 billion by 2022, ranking it as the No. 4 top-selling cancer drug in the world. While J&J and partner AbbVie split the revenue, sustained momentum for Imbruvica looks to be a solid tailwind for both companies in the years to come.
7. Even greater growth for Darzalex
As great as sales growth for Imbruvica is, growth for Darzalex is even better. The multiple myeloma drug is well on its way to blockbuster sales status, with revenue of more than $550 million in the first half of this year, compared with a little over $209 million in the prior-year period.
8. Pruning lower-growth medical-device assets
What about J&J's medical-device business? Caruso acknowledged that uncertainty over the outcome of Obamacare, "consternation over the new healthcare bill," and the effect of patients postponing procedures until later in the year because of high-deductible plans contributed to some sluggishness for the company's medical-device segment earlier in 2017. However, those issues shouldn't be problematic in the second half of the year. More important, Caruso said that J&J was "pruning lower-growth assets" in the medical-devices unit, a move that bodes well for the future.
9. Only a temporary lull in the consumer business
Caruso also stated that there has been a "lull" for J&J's consumer business, but he said it would only be temporary. He noted that there were some significant headwinds for the consumer unit in China and India this year that wouldn't be factors in 2018. He also admitted that online shopping was taking a toll on many in the industry, including J&J. However, he said that the company is adapting and that "it's only a matter of time" before the outlook improves.
10. More acquisitions could be coming
Perhaps the easiest way for Johnson & Johnson to turbocharge its consumer business would be through an acquisition. Caruso said the consumer unit of a larger corporation could be "a logical choice" for J&J to buy. While he said there weren't too many of these units left, Germany-based Merck KGaA (not to be confused with the U.S.-based Merck) has publicly stated that it's considering selling its consumer healthcare business. Johnson & Johnson wouldn't wait for U.S. corporate tax reform to make a deal if a good one were to be found, Caruso said. While it's not a certainty that J&J will make a big acquisition soon, the company is in excellent financial position to do so.
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