Johnson & Johnson (NYSE:JNJ) announced its quarterly earnings for Q3 2012 on October 16, in which it reported more than expected $17 billion in sales, an increase of 6.5% y-o-y. The growth would have been impressive 10.8%, if we were to exclude the currency impact. As expected its pharmaceutical franchise continued to perform well while medical devices and diagnostics got a boost from the acquisition of Swiss medical device maker Synthes. The company’s gross margins declined mainly due to a strong a U.S. dollar even as gross profit increased marginally to $11.5 billion. 
The stock has rallied more than 5% after the results and is moving towards our $74 price estimate for JNJ. We will soon be updating our price estimate to reflect the latest results.
The pharmaceuticals division clocked in with $6.4 billion in revenues with high-single digit growth on back of immunology drugs Remicade, Simponi and Stelara and oncology drug Zytiga. The patent loss of anti-infective Levaquin/Floxin in June last year was more than offset by the gains seen by other anti-infective drug, Prezista. While the U.S. market sales surpassed that of international market riding mid-double digit growth, unfavorable currency movements (-8.3%) caused the international market growth to remain nearly flat.
The recent acquisition of Synthes has started to pay-off as global revenues from orthopedics jumped more than 65% to $2.3 billion. The company continued to see a decline in sales from its cardiovascular unit after its decision to exit drug-eluting stents. Excluding the currency impact, specialty surgery and vision care continued to add to earnings. As opposed to our expectations, sales from diabetes care declined as a slowdown in developed markets and currency impacts more than offset growth from emerging markets.
Excluding currency impacts, the Consumer Healthcare division saw an improvement in OTC products and nutritional while witnessing a decline in women’s healthcare primarily due to the divestitures of certain brands. A strong U.S. dollar, however, provided headwinds as two third of sales in Consumer Healthcare come from international market.
The company’s cost cutting efforts were visible in a decline in its selling, marketing and administrative costs as % of revenues. The company’s focus on developing new products was evidenced by the fact that its overall R&D expense was nearly 11% of total sales in Q3.
Long Term Outlook Strong
The global economic slowdown and pricing pressure following healthcare reforms have kept the company’s stock price under pressure. JNJ, 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. Remicade, its biggest blockbuster biologic with sales of more than $5 billion in 2011, will also lose patent protection in 2014, affecting its sales in immunology drugs segment. Further, several product recalls including hip implant and OTC medicines 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. The company is also upgrading its consumer healthcare plants in the U.S. after the quality control lapses and is on track to restore many brands to store shelves by the early next year. With the recent movement in its its stock price, it seems that the market has realized the growth potential of the company.Notes:
- Johnson & Johnson Reports 2012 Third-Quarter Results, JNJ Press Release [↩]