Johnson & Johnson (JNJ – Free Johnson & Johnson Stock Report), a medical devices, pharmaceuticals, and consumer packaged goods manufacturer, recently reported better-than-expected second-quarter results, as its new Hepatitis C drug contributed nicely. Sales were $19.5 billion in the period, an increase of 9% compared with a year earlier. This easily trumped our target of $18.7 billion. Looking to the bottom line, GAAP share earnings came in at $1.51, and the adjusted number, which strips out litigation expenses and acquisition-related costs, was $1.66. Again, the adjusted figure easily beat the $1.53 we were expecting.
The lion's share of the growth was generated by the Pharmaceutical group, which reported a worldwide sales advance of 21%, to $8.5 billion. (Domestic sales were up 37%; international sales rose 7%.) The strong top-line results were primarily driven by new products, including OLYSIO/SOVRIAD, a combination treatment for chronic hepatitis C in adults. Indeed, sales of the new drug reached $831 million worldwide in the second quarter, compared with $354 million in the March period. Other new products that boosted overall revenues were XARELTO, an anticoagulant; ZYTIGA, which combines with prednisone to treat metastatic, castration-resistant prostate cancer; INVOKANA, a treatment for adults with type-2 diabetes; and IMBRUVICA, a kinase inhibitor for the treatment of mantle cell lymphoma. Other drugs also contributed to operational sales growth, like STELARA, REMICADE, INVEGA, and PREZISTA among others, while the loss of exclusivity for ACIPHEX and CONCERTA hurt results. Finally, management reported that the pipeline remains strong, and there are lots of new drugs and treatment indications in the works.
The Consumer segment had a decent period, with worldwide sales expanding 2%, to $3.7 billion. Here, domestic revenues slipped a bit, owing to the divestiture of the sanitary-protection business, while international revenues grew 4% after the negative impact of currency translation. The group's slow and steady march continues to be underpinned by brands like TYLENOL, MOTRIN, NEUTROGENA, AVEENO, and LISTERINE.
Finally, Medical Devices & Diagnostics revenues inched 1% higher, to $7.2 billion, with domestic sales slipping 1% and foreign sales advancing 2%. Primary contributors to the group's overall growth were hip and trauma products in the orthopedics line and Biosense Webster's electrophysiology products in the cardiovascular care business, while price declines associated with the implementation of Medicare competitive bidding in both mail order and retail hurt the diabetes care arm.
Investors were slow to react to Johnson & Johnson's positive June-quarter showing. In fact, JNJ shares edged slightly lower after the announcement. We think the price dip was likely due to a variety of other factors. First, the stock was already trading just shy of its 52-week high, and the Dow component edged even closer to that peak ahead of Fed Chairwoman Janet Yellen's testimony, before dipping back thereafter. Second, and probably more important, J&J's management only slightly raised the GAAP share-earnings guidance (from $5.80-$5.90 to $5.85-$5.92), despite the impressive second-quarter beat. This means that investors likely fear that growth may slow in the back half of 2014.
We have ratcheted up our top- and bottom-line estimates, and now expect the New Jersey-based healthcare giant to earn and $6.00 a share this year on an adjusted basis (up from our previous estimate of $5.90 and compared with 2013's $5.52). We like that J&J is looking to shed slow-growing products and businesses and striving to lower costs, which should help boost overall growth and aid comparisons down the road.
Our investment advice remains the same. We think this blue chip would make a solid cornerstone for just about any portfolio, thanks to its stability and above-average dividend yield. That said, the handsome share-price gains experienced over the past year or so have led to some high valuations and hurt total-return prospects out to 2017-2019.
About The Company: Johnson & Johnson manufactures and sells health care products. Its major lines consist of numerous household products. The company operates in a
diverse number of segments, including Consumer (baby care, nonprescription drugs, sanitary protection, and skin care), Medical Device & Diagnostics (wound closures, minimally invasive surgical instruments, diagnostics, orthopedics, and contact lenses), and Pharmaceutical (contraceptives, psychiatric, anti-infective, and dermatological drugs).