Johnson & Johnson (NYSE:JNJ) announced its quarterly earnings for Q4 2012 on January 22 and reported over $17.5 billion in sales, an increase of 8% year-over-year. The growth was an impressive 9.3%, if we 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. Its consumer business, however, remained weak due to stiff competition. JNJ’s adjusted net earnings (excluding one time items) also improved following management’s cost cutting initiatives. 
We are updating our current $75 price estimate for JNJ to reflect the latest results and trends.
- J&J’s Stock Gain Following Q1 2016 Earnings Reaffirms Our Bullish Stance
- Here Is Why J&J Could See Growth As It Reports Its Q1 2016 Results
- Three Things To Watch Out For J&J This Year
- Why We Are Slightly Bullish On J&J?
- Despite The Revenue Fall, J&J’s Business Has A Silver Lining
- What To Expect From J&J’s Full Year 2015 Earnings Announcement?
The pharmaceuticals division clocked $6.5 billion in revenues with high-single digit growth riding mainly oncology drugs Zytiga and Velcade that were approved for additional indications. Immunology drugs including Remicade, Simponi and Stelara also witnessed decent growth due to growing market. Revenues from HIV drug Prezista grew due to continued uptake in demand. One surprise was the unexpected growth that came from mental disorder (CNS) drug Invega. While the drug’s patent expired in mid-2012, the lack of generics may have lent support to its growth.
A decline in another CNS drug Concerta, which lost its patent in 2011, offset the growth. Despite being dragged down by unfavorable currency movements (-2.6%), international market significantly outpaced the U.S. market growth with near double-digit growth against the latter’s mid-single digit growth.
Medical Devices & Diagnostics And OTC Businesses
The acquisition of Synthes was reflected in the Medical Devices & Diagnostics division’s performance as Q4 revenues jumped over 13%. Global revenues from orthopedics (Synthes’ business was merged into this segment) jumped close to 65% to $2.4 billion. This was despite the fact that JNJ had to divest its own trauma business as a prerequisite to get a regulatory nod of approval to complete the acquisition.
The company continued to see a decline in sales from its cardiovascular unit after its decision to exit drug-eluting stents and weak endovascular sales. Excluding the currency impact, specialty surgery and vision care continued to add to earnings. As expected, the sales from diabetes care declined as intense competition, lower prices and currency impacts more than offset growth from emerging markets.
Factors and Trends impacting the Consumer Healthcare division are below:
- The division continues to struggle with intense competition. Excluding currency impacts, it saw a marginal improvement in OTC products and nutritional as it continues to recover from supply constraints of OTC drugs.
- Nutritional products grappled with competition.
- The women’s healthcare segment grew moderately as international growth offset divestitures of certain brands in the U.S.
- The sales of skin care products declined due to intense competition in the segment.
- Sales in oral care slightly increased due to mouthwash Listerine’s persistent demand in international market.
- A strong U.S. dollar 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.
Reviewing Options For Ortho Clinical Diagnostics Business
With the earnings announcement, the healthcare conglomerate also disclosed that it is actively looking at various options including selling or spinning off its diagnostics unit for blood and cholesterol tests.  The market is highly competitive and JNJ’s is not a market leader, which is against the company’s prime objective. The business generates about $2 billion in revenues even as revenues have contracted almost 5% during 2012. JNJ would rather focus on molecular / genetic screening that will complement its current drugs and pipeline. We will discuss this in a separate article in next few days.
Growth Momentum To Remain In 2013
The below factors support our growth expectations for the coming year:
- Despite patent expiries, we expect the company’s pharmaceutical franchise to perform relatively well due to some potential blockbuster drugs like Canagliflozin. The drug, which will be the company’s first treatment in the fast growing diabetes drug market, should be approved this year.
- Further, Xarelto should also be able to get the FDA’s nod for broader usage in 2013.
- In addition, an early approval for Bedaquilinean, a drug for the treatment of tuberculosis (TB) will also help grow revenues.
- The healthcare company has also filed for label extensions for auto-immune drug Simponi to other indications and we expect it to receive approvals for these additional indications this year, which should drive sustained growth going forward.
- In its medical devices business, Synthes will continue to 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 early this year.
- Johnson & Johnson Reports 2012 Fourth-Quarter and Full-Year Results, JNJ Press Release, Jan 22 2013 [↩]
- Johnson & Johnson Presents Growth Strategies for Medical Devices & Diagnostics Segment, JNJ, Jan 22 2013 [↩]