5 Signs of Life in Johnson & Johnson's Second-Quarter Earnings Report
Getting the world's largest healthcare company to grow even larger isn't easy, but Johnson & Johnson (NYSE: JNJ) has pulled it off with legendary consistency. Earlier this year, enormous pressure from a loss of exclusivity for a couple of key pharmaceutical brands had investors worried 2019 might be the first year in decades without bottom-line growth.
When J&J reported second-quarter results, exceptional performance from younger products in the pipeline encouraged the company to raise its full-year outlook. Unfortunately, investors weren't able to focus on the numbers thanks to mounting legal expenses.
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During J&J's second-quarter earnings call, management did its best to soothe litigation concerns by directing attention to impressive sales growth for a handful of younger products in the company's lineup. In case you missed them, here are five takeaways from the latest earnings report that suggests Johnson & Johnson can continue growing at a steady pace.
1. Medical device sales are growing
Medical device sales grew 3.2% on an adjusted operational basis that strips away the effects of currency movements, acquisitions, and divestitures. In the U.S., adjusted operational sales grew just 1.6%, while ex-U.S. sales gained 4.7% compared to the previous-year period.
International sales growth wasn't the only bright point in the segment's second-quarter results. Year-to-year sales of J&J's medical devices used in atrial fibrillation procedures soared 15.6% on an operational basis to $750 million.
2. Managing the decline of key brands
In 2017, sales of Zytiga, Velcade, and Remicade reached a combined $9.9 billion, which worked out to 13% of total sales that year. By the second quarter of 2019, sales of the same three drugs fell to an annualized $8.1 billion.
Losing $1.9 billion in sales over such a short time will punch a big hole through an income statement that most companies couldn't keep filled, but J&J isn't having much trouble. Pharmaceutical segment sales reached an annualized $42.1 billion in the second quarter, a 16% gain over the same period in 2017.
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3. Blood cancer products are soaring
Imbruvica sales have been rocketing higher since a few years ago, when it became the first chemo-free treatment option for people newly diagnosed with the most common form of leukemia. Johnson & Johnson's share of Imbruvica sales gained 34% in the second quarter compared to a year earlier to an annualized $3.3 billion.
The company's multiple myeloma treatment, Darzalex, has been even more successful for J&J than Imbruvica. Sales of the CD38-directed antibody didn't get started until two years after Imbruvica launched and it's already on an annualized run rate of $3.1 billion.
4. Immunology's still moving forward
Second-quarter sales of J&J's rheumatoid arthritis blockbuster, Remicade, slid by 15.1% to $1.1 billion. Despite losses for the company's leading immunology drug, sales from the company's immunology segment as a whole rose by 5.7% to $3.5 billion thanks to impressive performances from Stelara and Tremfya.
Johnson & Johnson's psoriasis injection Stelara earned a label expansion to treat Crohn's disease in 2016, and it's quickly becoming a top treatment for people with the inflammatory bowel disorder. Although the psoriasis market is becoming crowded, Tremfya has already achieved a 7.6% share of the U.S. psoriasis market since its launch in 2017, and 2019 sales will probably pass the $1 billion threshold.
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5. Lots of iron in the fire
Johnson & Johnson's top line may be stagnating, but its best days are still in front of it. During the second-quarter earnings call, Chief Scientific Officer Paul Stoffels said the company's late-stage pipeline contains 14 medicines that can generate annualized sales above $1 billion by 2023.
There's also a good chance that Stelara won't be the only drug expanding to new indications. Stoffels also expects 40 line extensions for already-approved therapies, each of which could add another $500 million to the top line.
Not out of the woods yet
While there are plenty of reasons to expect J&J's top line to continue expanding into the long run, the bottom line could get hit by legal expenses. Despite a lack of evidence linking cancer risk to use of J&J's Baby Powder brand of talcum powder, judges have been awarding large sums to plaintiffs in recent years.
While there's a good chance unfavorable talc rulings will be overturned, J&J's ancillary role in the opioid epidemic is coming back to haunt the company's reputation. A lot of attention has focused on marketing tactics used to launch a transdermal fentanyl patch called Duragesic that involved targeting doctors who prescribed the most OxyContin, as well as patients most likely to have an OxyContin addiction.
Johnson & Johnson can claim Duragesic was considered a safer alternative to OxyContin, but there's nothing it can do to distance itself from Purdue Pharma. While J&J-branded drugs were responsible for just a sliver of opioid overdoses, a subsidiary, Noramco, fueled America's opioid epidemic with raw materials that Purdue and its peers needed to manufacture opioid-based painkillers. While the courts will probably find that Johnson & Johnson hasn't broken any laws, legal fees and negative publicity will serve as a significant penalty on their own.
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Cory Renauer owns shares of Johnson & Johnson. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.
