Johnson & Johnson (NYSE:JNJ) is set to announce its Q3 earnings for 2012 on Tuesday, October 16. 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. For the quarter, we expect overall EBITDA margins to improve slightly following the company’s cost reducing efforts. While the U.S. dollar has corrected in third quarter, it is still trading higher than the same period last year. This will negatively impact the earnings to some extent.
We currently have a $74 price estimate for JNJ, implying a premium of nearly 10% to the current market price.
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Pharmaceutical Sales To Grow
We expect the pharmaceutical business to continue with its stellar performance on the back of immunology drugs Remicade, Simponi and Stelara and oncology drug Zytiga. The company got approval for extended use of many of these drugs during the past one year. The patent loss of anti-infective Levaquin/Floxin will offset some of the sales growth even as other anti-infective Prezista’s sales may continue to surge. Invega also lost its patent protection in April 2012.
The international market, especially emerging markets, may continue to show strong growth, excluding currency movements.
Mute Show For Medical Devices & Diagnostics and OTC
JNJ has completed its acquisition of medical devices company Synthes in the second quarter. The Synthes acquisition could help the Medical Devices & Diagnostics division post muted growth as stents sales will be impacted by the company’s decision to exit the drug-eluting stent market last year. The company is also facing trouble due to its hip implant lawsuits. Further, the Ehicon franchise will be hurt as the company is phasing out its surgical mesh products following a flurry of lawsuits. Diabetes and Vision care, however, will exhibit strong growth.
The Consumer Healthcare division may see an improvement in OTC products and nutritional. It, however, could continue to witness a decline in women’s healthcare primarily due to divestitures of certain brands. The currency movement affects this division the most as close to two-third sales are from the international markets.
Long Term Outlook Strong
In the short term, the global economic slowdown and pricing pressure following healthcare reforms continue to pose concerns for the company. J&J, like any other major pharmaceutical giant, has been battling revenue losses due to patent headaches in recent years. It lost its patents on Concerta, Levaquin and Invega in the last year while Aciphex is losing patent exclusivity in 2013. Further, several product recalls including hip implant also remain a headache for the company.
But the longer term outlook for JNJ is still sound. Over the 2012-2015 period, the company plans to file more than 10 new drugs and over 30 line extensions in its pharmaceutical franchise. 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. It will be interesting to see, if the company announces any plans to revive its OTC business.