Johnson & Johnson (NYSE:JNJ) shareholders are waking up with a shrug today. JNJ stock is slightly off after the thinnest of earnings beats, with the save coming from the company’s pharmaceutical business.
For the quarter ended in September, JNJ earned $4.68 billion, or $1.68 per share, on revenues of $17.82 billion. The consensus estimate had been for earnings of $1.65 per share, with a “whisper number” of $1.66. Analysts expected $17.74 billion in revenues.
Moreover, Johnson & Johnson maintained sales guidance for full-year 2016 of $71.5 billion to $72.2 billion, though it increased its adjusted earnings guidance for full-year 2016 to $6.68 to $6.73 per share.
Johnson & Johnson stock, however, was unfazed. Analysts had become accustomed to JNJ beating earnings estimates, and this upside surprise was the smallest since last December.
Though it is twice the company’s newly raised dividend of 80 cents per share.
Humira in Its Sights
In its earnings release, Johnson & Johnson acknowledged that pharmaceutical products are the star of its show, with sales up 9.2% over a year ago. Cancer drugs and medicines heavily advertised on TV — such as Xarelto, an anti-coagulant whose ads starred the late Arnold Palmer, and Stelara, an immunosuppressant currently advertised for treatment of psoriasis, but recently approved for treatment of Crohn’s Disease — helped the cause.
The FDA approval on Crohn’s disease is likely to hike the ad budget for Stelara. It will now compete more directly with Humira from AbbVie Inc (NYSE:ABBV), which generated $14 billion in sales in 2015 as a treatment for Crohn’s and rheumatoid arthritis.
Johnson & Johnson also has another rheumatoid arthritis drug, sirukumab, going through the regulatory process.
In addition to being heavily advertised, drugs to cure autoimmune diseases like Crohn’s, psoriasis and rheumatoid arthritis continue to be a key focus of research. So a business risk is that they will be replaced by better drugs before their patents expire.
Thus immunosuppressant drugs such as Humira, Stelara and Otezla from Celgene Corporation (NASDAQ:CELG) are in heavy ad rotation to generate sales quickly, despite the fact that since the drugs can be approved for treatment of several conditions, there is considerable market confusion. The conditions they treat are often more implied than stated, since it’s possible they could be used to treatment other conditions that consumers may see as unrelated.
This confusion demonstrates another risk for these drugs: the possibility that a new Clinton Administration may push either to instill greater price competition or controls on advertising to lower costs.
Without Drugs, JNJ Stock Offers No Growth
Outside the pharmaceutical business, JNJ stock is a slow-growth or no-growth prospect. Its popular consumer brands — products like baby powder and shampoo — of $3.3 billion were down 1.6% against the prior year, and sales of its medical devices, $6.6 billion, increased just 1.1%.
The purchase of Abbott Medical Optics from Abbott Laboratories (NYSE:ABT), for $4.325 billion, completed during the quarter, will help device sales going forward. That company recently launched a balloon dilation treatment for expanding the eustachion tube that runs between the ear and the mouth.
JNJ stock advanced over 15% in price so far this year, despite the fact that most analysts have it rated only as a hold, due to its single-digit growth.
This is the kind of company that investors can buy and hold if they don’t care to read stories like this one.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
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