Johnson & Johnson (NYSE:JNJ) announced its quarterly earnings for Q2 2012 on July 17, in which it reported less than expected $16.47 billion in sales, a slight decline of 0.7% y-o-y. The strengthening of the U.S. Dollar weighed heavily on the earnings even as sales across divisions grew marginally excluding the currency impact, in-line with our expectations. Pharmaceutical franchise continued to lend support, while medical devices and diagnostics got a boost from the acquisition of Swiss medical device maker Synthes. Despite a drop in revenues, net earnings (adjusted for non-recurring items) grew 2.7% to $3.6 billion following the company’s cost-cutting efforts.
As expected, immunology drugs Remicade, Simponi and Stelara and oncology drug Zytiga were the major growth drivers for the Pharmaceuticals division. The patent loss of anti-infective Levaquin/Floxin in June last year outweighed the gains seen by other anti-infective drug, Prezista. While the international market sales surpassed that of the U.S., unfavorable currency movements caused the growth to remain nearly flat.
The Synthes acquisition helped the Medical Devices & Diagnostics division as the company suffered a decline in sales from drug-eluting stent. Excluding the currency impact, specialty surgery, diabetes and vision care continued to add to the earnings. Operational growth in international markets offset losses in the U.S. market.
The Consumer Healthcare division saw an improvement in OTC products and nutritional while witnessing a decline in women’s healthcare primarily due to divestitures of certain brands. The currency movement affected this division the most as close to two-third sales are from the international markets.
Long Term Outlook Strong
A strong outlook for the U.S. dollar amid a global economic slowdown and pricing pressure following healthcare reforms continue to pose a concern for the company in the short term. Further, several product recalls including hip implant and the potential liability related to its drug Risperdal remain a headache.
But, the longer term outlook for JNJ is 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 its 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. We believe the consumer segment revenues from international markets are still subdued and a planned strategy to capture key emerging markets could prove rewarding for JNJ.
We are in process of updating our price estimate for JNJ to reflect the earnings and recent developments.