Johnson & Johnson (NYSE:JNJ) will release its Q1 2013 financial results on April 16. We expect the company to report growth due to better performance of its pharmaceutical division and the inclusion of Synthes’ business in its medical devices & diagnostics segment.
On a broader level, the company will benefit from its focus on growing market for immunology and oncology drugs, broad portfolio of products for orthopedics market and improvement in consumer healthcare segment, which has suffered with manufacturing issues in the past. Last quarter, J&J reported over $17.5 billion in sales, an increase of 8% year-over-year.
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Pharmaceutical Sales Could Continue To Grow
We expect Johnson & Johnson’s (J&J) pharmaceuticals business to continue to benefit from oncology drugs Zytiga and Velcade that were approved for additional indications. Velcade’s sales stood at $1.5 billion in 2012, and we expect the figure to continue to grow till 2014, when the drug loses its patent. In addition to this, the company’s immunology drugs have been experiencing moderate growth due to the growing addressable market. Oncology and immunology are growth areas for the company and for the pharmaceutical industry in general.  Primary care areas such as cardiovascular and allergy are already flooded with products, and therefore the focus on oncology and immunology could help the company command a better pricing.
J&J’s mental disorder (CNS) drug Invega’s patent expired in mid-2012. However, the drug’s sales continued to grow in the fourth quarter of 2012, and the lack of generics may have lent to that support, but that may not be the case this quarter. Additionally, CNS drug Concerta, which lost its patent in 2011, could continue to offset some of the growth.
Medical Devices & Diagnostics Getting Strengthened With Sythes
The medical devices & diagnostics division will show revenue the impact of J&J’s acquisition of Synthes last year, which is the world’s largest maker of implants to cure bone fracture as well as produces surgical power tools and biomaterials. J&J paid an acquisition price of close to $20 billion for the orthopedics giant and expects that the combination of the two companies would increase the growth rate of J&J’s revenues and operating profits. The global trauma fixation devices market is expected to reach $6.7 billion by 2017, growing at a compounded annual growth rate of 6%.  This growth will be driven by the aging population in countries such as the U.S., Europe, Japan and China. The combined J&J/Synthes orthopedic division has the broadest orthopedic portfolio globally, and therefore, the company can leverage the growth in the market better than its competitors.
What Can We Expect Beyond The Earnings?
Diabetes Drug: J&J received a major boost recently as its blockbuster potential type 2 diabetes drug, Invokana (commonly known as Canagliflozin), was granted FDA approval. With obesity on the rise, diabetes is affecting more people globally. In the U.S. alone, roughly 26 million people suffer from the condition.  Owing to these factors, the global diabetes drug market has seen rapid growth rate in the last couple of years. According to GBI Research, a leading business intelligence provider, the type 2 diabetes drug market, which constitutes a significant chunk of the total diabetes drug market is expected to grow from $26 billion in 2011 to $50 billion in 2021, in developed markets including the U.S., Japan and Europe. 
Other Drugs: An early approval for Bedaquilinean, a drug for the treatment of tuberculosis (TB) will also help the revenue growth. 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 them this year.
Synthes: 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’s consumer business is doing better now with product recall and manufacturing issues becoming a thing of the past. However, this division constitutes less than 2% to the company’s value and shouldn’t be the focus for investors.
Our price estimate for Johnson & Johnson stands at $81, implying a slight discount to the market priceNotes:
- Oncology, Neurology And Immunology Are Areas For Growth In Large Pharma, Says Editor Of Morningstar Healthcare Observer; Exclusive Interview Reveals His Top Picks In This Space, Yahoo News, Nov 17 2012 [↩]
- Research and Markets: Trauma Fixation Devices – Global Pipeline Analysis, Competitive Landscape and Market Forecasts to 2017, Business Wire, March 18 2011 [↩]
- National Diabetes Fact Sheet, 2011, CDC [↩]
- The Type 2 Diabetes Drug Market Will Almost Double Over The Next Decade, Increasing From $26 Billion In 2011 To Nearly $50 Billion In 2021, Decision Resources, Oct 15, 2012 [↩]