Key Takeaways From Johnson & Johnson’s Q3’16 Earnings

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Johnson & Johnson (NYSE: JNJ) announced its Q3 earnings  on October 18th. It reported revenue growth of 4.2%, in line with consensus. Overall, the theme was on expected lines with pharma products driving the growth. However, consumer products segment disappointed as the company failed to maintain the Q2 momentum and posted a slight decline in revenue on an operating basis. Overall going forward, we expect similar trends to continue with revenue growth in low- to mid-single digits for Q4’16. The table below presents key performance metrics for the company:

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Our price estimate of $118 for Johnson & Johnson is slightly above its current market price.

Pharma Products To Lead Growth But Remicade Faces Risk 

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The Pharma business reported a revenue increase of 9% on a constant currency basis. The growth was led by the strong performance of the Immunology & Oncology portfolio. Remicade posted another strong quarter, with sales growing by 10.5% for Q3 on year-over-year basis. However, going forward we expect this drug to face pressure as Pfizer starts to ship the bio-similar Inflectra in late November of this year. For Q4 we expect its effect to be largely muted, but going into fiscal 2017 and onward, we expect Remicade’s sales and margins to come under pressure. Remicade accounts for over 20% of the total pharma segment’s revenue. It is worth noting that for Q3’16 the Remicade’s revenue in international constant currency basis.

Other products are under less pressure.  Imbruvica continued to pick up pace and the company has high hopes from this product. Darzlaex also showed strong uptake in Q3. We expect the drug to cross $1 billion in revenue in next fiscal year.

Mild Revival In Medical Devices Business Is a Silver Lining

As expected there was muted growth in medical device business of about 3% excluding divestitures and currency effects. Vision care posted an constant currency growth of 5.5%. We expect this business to post impressive growth in FY’17, boosted by acquisition of Abbott Medical Optics .  Further, market expansion in Orthopaedics and Advanced Surgery will also keep on adding incrementally to the segments revenue growth.

Consumer Products Segment Disappoints But Shouldn’t Really Concern Investors

Consumer products business had posted positive revenue growth on a constant currency basis in Q2’16. We earlier expected the trend to hold in Q3, but the company reported almost flat revenue. The decline is spread across different product lines, with oral care and skin care products being the only exceptions. In skin care, the main reason for uptick is acquisition of Vogue and NeoStrata. Baby care segment is a cause of concern as the company appears to be losing market share globally. While poor performance is unpleasant, Investors should not be too worried. According to our estimates, the division contributes less than 10% to J&J’s value.

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