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What to expect from Johnson & Johnson earnings
MARKETWATCH 2:55 PM ET 10/14/2016
Symbol Last Price Change
JNJ 117.9 -0.36 (-0.3%)
QUOTES AS OF 03:53:30 PM ET 10/14/2016
Pharmaceutical business should drive another strong quarter

Wall Street analysts are expecting another strong quarter from Johnson & Johnson(JNJ), with the company scheduled to report third-quarter earnings Tuesday before the open.

This year, Johnson & Johnson(JNJ) has generally performed favorably compared with 2015, when revenue growth decelerated in the face of competition for its hepatitis C drug and earnings declined, according to J.P. Morgan analyst Michael Weinstein.

The company took several steps to reverse those trends, including cutting down its portfolio, Weinstein said, predicting an improvement in organic sales growth this year.

The company raised guidance for the year after beating both first (http://www.marketwatch.com/story/johnson-johnson- beats-views-boosts-guidance-2016-04-19)and second-quarter earnings (http://www.marketwatch.com/story/johnson-johnson- raises-outlook-after-beat-2016-07-19) expectations, with pharmaceutical business growth playing a role both quarters.

See: What to expect from Johnson & Johnson(JNJ) second-quarter earnings (http://www.marketwatch.com/story/what-to-expect- from-johnson-johnson-earnings-2016-07-18)

RBC Capital Markets analyst Glenn Novarro was bullish on the stock, raising his price target by 15% to $133 and maintaining an "outperform" rating in an Oct. 7 note.

Concerns about competition for the company's blockbuster drug and the general pharmaceutical pricing debate are " manageable/overblown, and have created a buying opportunity ahead of what we expect will be another strong quarter, driven by the pharmaceutical segment," Novarro said.

Given the political climate around price increases, Johnson & Johnson(JNJ), along with other companies in the therapeutic space, may choose to highlight limited price increases when reporting earnings, according to Height Securities analysts Sumesh Sood and Spencer Perlman. Public scrutiny has resulted in a "downstream effect from manufacturers foregoing significant increases for the rest of this year," they said.

And, though Wall Street analysts have been keeping a close eye on impending competition for Johnson & Johnson's(JNJ)$6.6 billion blockbuster autoimmune disease drug Remicade, a competitor hasn't come to market--yet.

Here's what to expect:

Earnings: Analysts expect Johnson & Johnson(JNJ) to report third-quarter earnings of $1.65 per share, according to FactSet, up from $1.49 per share in the year-earlier period. The software platform Estimize, which crowdsources estimates from buy-side and sell-side analysts, hedge funds, academics and others, has Johnson & Johnson(JNJ) earning a whisper more, at $ 1.66 per share. Johnson & Johnson(JNJ) beat the FactSet consensus in every quarter over the past five years.

(https://sw.graphiq.com/w/ktfQgeVj77v)

Revenue: FactSet analysts expect Johnson & Johnson(JNJ) to report revenue of $17.74 billion, up from $17.10 billion in the same period last year. Estimize contributors are also forecasting revenue of $17.74 billion. Johnson & Johnson(JNJ) beat Wall Street revenue expectations last quarter, but missed the three consecutive quarters before that.

(https://sw.graphiq.com/w/1AcrsSFlTYp)

Stock reaction: Johnson & Johnson's(JNJ) stock largely stands to be affected by the market's choice of health care stocks for either defensive or offensive investing, the company's deployment of its $37 billion in capital, a limited amount of clinical trial results and the timeline of a competitor for Remicade, according to J.P. Morgan's Weinstein.

Shares of Johnson & Johnson(JNJ) have declined 3.9% over the last three months, compared with a 1.1% decline in the S&P 500 , which RBC Capital Markets' Novarro attributed to various factors, including risk of Remicade competition and "the pharma pricing debate."

The company's average analyst rating is overweight, with a $1.57 price target, according to FactSet, with nearly all of the 21 analysts surveyed by FactSet rating Johnson & Johnson(JNJ) at "buy" or "hold."

(https://sw.graphiq.com/w/9PcNyDzUL3v)

What to watch for: U.S. competition is coming for Johnson & Johnson's(JNJ) Remicade, which makes up nearly 10% of the company's revenue--it's just a question of when.

Pfizer's (PFE) cheaper biosimilar drug, which could be the first of several competitors, survived a court challenge earlier this year (http://www.marketwatch.com/story/pfizer-doesnt-infringe-jj-remicade-patent-court-2016-08-17) but has not yet made it to market. Depending on when the two companies reach a settlement, an entry is expected anywhere between Nov. 16 and March to April 2017, according to Bernstein analyst Ronny Gal.

Read more: These drugs could cut American health costs by $250 billion (if only we could take them) (http:// www.marketwatch.com/story/these-new-drugs-might-never-get-a-chance-to-save-the-us-250-billion-2016-07-20)

Pfizer would benefit greatly from early entry, with only a low risk of damages, Gal said, given the court win and only a fairly weak patent protecting Remicade.

RBC's Novarro agreed, noting that Pfizer could launch at-risk "any day now," but he said the risk to Johnson & Johnson(JNJ) was "manageable."

"The growth trajectory of major pharmaceutical brands is such that it can more than offset Remicade sales erosion," Novarro said. "Recent acquisitions (Vogue International, Abbott (ABT) Medical Optics) add $1.6 billion in annual revenues."

See: Johnson & Johnson(JNJ) buys hair-care company Vogue (http://www.marketwatch.com/story/johnson-johnson-buys-hair-care- company-vogue-2016-06-02) and Johnson & Johnson(JNJ) to buy Abbott Labs medical optics subsidiary for $4.3bln (http:// www.marketwatch.com/story/johnson-johnson-to-buy-abbott-labs-medical-optics-subsidiary-for-43bln-2016-09-16)

In the case of continued market volatility, there could be an upswing in Johnson & Johnson's(JNJ) mergers and acquisitions activity, Novarro added.

The company's medical-device business, which represents about a third of its revenue, has recently faced challenges, spurring the company to cut about 3,000 jobs earlier this year.

The division may have turned around, though, managing growth of nearly 1% last quarter (http://www.marketwatch.com/ story/johnson-johnson-raises-outlook-after-beat-2016-07-19). Novarro predicted that medical-device revenue would beat expectations, with the U.S. business recovering, though inventory reduction in China has hurt global sales.

See more: What hackers know about your medical device could kill you (http://www.marketwatch.com/story/the-very-thing- making-our-medical-products-better-is-opening-them-up-to-hackers-2016-10-06)

That medical-devices division drew attention recently for another reason: Johnson & Johson warned that one of its insulin pumps could be hacked (http://www.marketwatch.com/story/jj-warns-insulin-pump-vulnerable-to-cyber-hacking-2016- 10-05), though it characterized the risk as "extremely, extremely low."

-Emma Court; 415-439-6400; [e-mail]


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