Johnson & Johnson Takes a Currency Hit Despite Pharma Growth

Source: Johnson & Johnson.

The strong U.S. dollar has had a huge negative impact on multinational corporations, and healthcare giant Johnson & Johnson has a global footprint that leaves it vulnerable to weaker foreign currencies. Coming into Tuesday morning's first-quarter financial report, J&J investors were nervous about just how much the dollar would hurt the company's overall results. Yet even though the expected foreign-exchange effects did in fact push sales and earnings downward from year-ago levels, J&J still managed to do better than most of those following the stock had expected, as the company's pharmaceutical division continued to grow. Let's take a closer look at how Johnson & Johnson did this quarter and what it sees for the remainder of the year.

How the dollar punished J&JJohnson & Johnson's results certainly looked weak from a high-level perspective. Revenue fell 4.1% to $17.37 billion, and even after adjusting for one-time items and amortization expenses, earnings of $1.56 per share reflected a nearly 6% drop in adjusted net income.

Yet several things helped J&J investors feel better about the quarter. First, most people had expected the company to take an even larger hit, as sales were about $60 million higher than the consensus estimate among those following the stock, and earnings per share gave traders a $0.02 beat. More importantly, though, Johnson & Johnson's operational results were solid, with 3.1% growth before factoring in the 7.2% hit from currency impacts.

Driving Johnson & Johnson forward was its pharmaceutical segment, which has been the key component of the company's overall growth for quite a while now. Sales of pharmaceuticals soared almost 17% in the U.S., and worldwide gains of 3% included double-digit percentage operational gains that wiped out a currency-related headwind of more than 7%. The consumer segment also did reasonably well, although there, currency effects of 8.1% wiped out the company's 3.4% operational gain in revenue. The worst news, though, came from medical devices. Even before considering the strong dollar, sales of medical devices fell 4.6%, leading to a more than 11% hit to the segment overall.

Geographically, the U.S. and the rest of the Western Hemisphere gave Johnson & Johnson the best performance, with the nearly 6% growth rate in domestic sales making up an important part of what held off the double-digit percentage drops in international revenue. Europe was flat even before considering the euro's plunge, and the Asia-Pacific and Africa segment saw sales fall 3% even before adding in the impact of the dollar's gains.

CEO Alex Gorsky. Image: Johnson & Johnson.

CEO Alex Gorsky called out the performance of both of J&J's winning divisions, noting "the continued robust growth of the Pharmaceutical business and the solid performance of our Consumer brands." In particular, newer products like diabetes treatment Invokana and anticoagulant Xarelto led the gains for pharma sales, along with core products like psoriasis drug Stelara and the Concerta treatment for ADHD.

Why further hits could be aheadNevertheless, the dollar will likely continue to hold back Johnson & Johnson's growth throughout 2015. The company reduced its earnings guidance for the full year by $0.08 per share, now projecting a range of $6.04 to $6.19 per share.

Perhaps the best news, though, came from the consumer segment. There, sales of Tylenol and Motrin improved dramatically in the U.S., along with skin-care products from Neutrogena and Aveeno and various baby-care products. The currency headwinds also masked strong operational performance for oral-care products overseas.

Also, keep in mind that a substantial part of the drop in the medical-device segment came from Johnson & Johnson's sale of its Ortho diagnostics business last year to a private equity group. That division represented $443 million in revenue in the first quarter of 2014, and adding back in the domestic component of Ortho's sales would have left the medical device segment with almost flat revenue year-over-year.

Traders didn't react strongly to the news, with shares rising just a fraction of a percent in the first hour of pre-market trading following the announcement. For the most part, Johnson & Johnson's currency-related troubles came as no big surprise to the investing community, but long-term investors should take some comfort from the fact that the healthcare giant continues to move forward with its pharma efforts to try to make the most of its most lucrative opportunities for sustainable growth.

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