Johnson & Johnson (NYSE:JNJ) is set to announce its Q2 earnings for 2012 on July 17. We expect the earnings to get a boost mainly on continued strong performance by the pharmaceutical franchise and the company’s acquisition of Swiss medical device maker Synthes. The strengthening of U.S. dollar will negatively impact the earnings to some extent. For the quarter, we expect margins to improve slightly following the company’s cost reducing efforts.
We have a price estimate for JNJ at $74, implying a premium of nearly 10% to the current market price. We will soon be updating our model to reflect the recent developments.
Pharmaceutical: Key to Growth
Medical Devices & Diagnostics to Get a Boost from Synthes
JNJ has completed its acquisition of medical devices company Synthes in the second quarter. Accordingly, the division will now include the sales of the acquired business. However, excluding the Synthes deal, we expect the division to show relatively mute growth. Stents sales will be impacted by the company’s decision to exit the drug-eluting stent market last year. Further, the Ehicon franchise will be hurt as the company is phasing out its surgical mesh products following a flurry of lawsuits. The company is also facing trouble due to its hip implant lawsuits. Diabetes and Vision care, however, will continue to add to earnings.
Long Term Outlook Strong
In the short term, the global economic slowdown and pricing pressure following healthcare reforms continue to pose a concern for the company. Further, several product recalls including hip implant and potential liability related to its drug Risperdal also remain a headache. But the longer term outlook for JNJ is still sound, and we expect an upside to the shares if the company can have more commercially successful drugs in the future. Further, the Synthes acquisition will lend support to the company’s efforts to tap growth opportunities in the orthopedics market while bringing vast exposure to the fast-growing emerging countries such as China, India and Russia.