Johnson & Johnson’s Earnings Suggest A Softer Year Ahead

Johnson & Johnson‘s (NYSE:JNJ) stock went down following its Q4 2014 earnings announcement primarily due to a weaker outlook and disappointing performance from Olysio. Although J&J’s U.S. business did reasonably well, international sales suffered due to currency effects and the soft economic environment in Europe. The existing and new products have done well, but some of them are likely to lose steam soon due to patent expiry. The problem is that J&J doesn’t seem to have a viable drug to replace them soon and investors may need to wait a little longer for the next phase of fast growth. Even though medical devices business is still big, it appears that the incremental growth is small and the company may need to infuse more money into its R&D unit to take a quantum leap.

Our current price estimate for Johnson & Johnson stands at $101, which is at par with the market price. We are in the process of reviewing our price estimate in the light of recent earnings and will have an update ready soon.

See our complete analysis for Johnson & Johnson

International Growth Was Slow, And May Remain So

Johnson & Johnson’s international growth has suffered over the last year primarily due to a slowdown in Europe. The situation remained the same in Q4 2014. The company’s international revenues declined by 6.7% in the fourth quarter reflecting the impact of divestitures in the medical devices business and the strengthening of U.S. dollar against most currencies. This may continue to be the case for the full year and weigh on Johnson & Johnson’s sales. Additionally, the possibility of austerity measures could further hamper pharmaceutical sales growth, unless ECB’s quantitative easing plan re-ignites the economy.

Besides the economic slowdown, the competition for some drugs is affecting Johnson & Johnson’s international growth. Zytiga, an oncology drug, is seeing strong growth but there is a new potent rival Xtandi, which was approved for the treatment of chemo-naive patients suffering from prostate cancer in September 2014. The drug was previously being administered to those who had already received some form of chemotherapy, and thus did not directly compete with Zytiga. Considering Xtandi’s impressive trial results, Johnson & Johnson’s fastest growing cancer drug could lose its steam. This was visible in the fourth quarter when the drug’s revenue growth stood at 26% as compared to 33% for the full year (excluding the impact of exchange rates). Additionally, J&J’s biggest drug Remicade is expected to lose patent protection in Europe in 2015. Remicade accounts for roughly 25% of J&J’s pharmaceutical revenues.

Olysio’s Sales Dropped Massively Sequentially Amid Higher Competition

The trend in Olysio’s sales once again disappointed investors. The drug was supposed to be the new hope for Johnson & Johnson’s pharmaceutical segment amid growing competitive pressure, but the results from the last two quarters suggest otherwise. The company received the approval for its this Hepatitis C drug in the U.S. in November 2013 and in Europe in May 2014. ^[1] Olysio’s sales doubled sequentially in the second quarter of 2014, amounting to $831 million. However the sales slightly declined sequentially in the third quarter. In Q4 2014, the figure dropped substantially amounting to just $321 million. Overall, this year is not looking too good for the company’s pharmaceutical business when compared to last year, and the pressure on topline is only going to intensify.

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1. Johnson & Johnson’s R&D Pipeline [↩]