JNJ Q4 Earnings Preview: Pharma Business And Synthes Impact In Focus

Johnson & Johnson (NYSE:JNJ) is set to announce its Q4 earnings for 2012 on January 22. We expect earnings to get a boost mainly on continued strong performance by the pharmaceutical franchise. JNJ’s acquisition of Swiss medical device maker Synthes in Q2, will also boost growth over a year ago period. For the quarter, we expect overall EBITDA margins to improve slightly following the company’s cost cutting efforts. However, the U.S. dollar is still firm against other major currencies and this could negatively impact the earnings to some extent.

See our complete analysis for Johnson & Johnson

Pharmaceutical Sales To Grow

We expect the pharmaceutical business to continue with its stellar performance on the back of immunology drugs Remicade, Simponi and Stelara and oncology drug Zytiga. The company got approval for extended use of many of these drugs during the past one year. The patent loss of anti-infective Levaquin/Floxin in late 2011, will also weigh on growth even as other anti-infective Prezista’s sales may continue to surge. The international market, especially emerging markets, will continue to show strong growth, excluding currency movements.

Trends In Medical Devices & Diagnostics And OTC Businesses

JNJ completed its acquisition of medical devices company Synthes in the second quarter and the earnings of it are incorporated from the third quarter onwards. This should boost the orthopedics business on a year-over-year basis. This, however, will be offset by a decline in sales from its cardiovascular unit after its decision to exit drug-eluting stents. The company is also facing trouble due to its hip implant lawsuits. Further, the Ehicon franchise will be hurt as the company is phasing out its surgical mesh products following a flurry of lawsuits.

Excluding the currency impact, specialty surgery and vision care may continue to add to earnings. The sales from diabetes care are expected to decline as a slowdown in developed markets and currency movements more than offset growth from emerging markets.

The consumer healthcare division may see an improvement in OTC products and nutritional. However, it could continue to witness a decline in women’s healthcare, primarily due to divestitures of certain brands. The currency movement affects this division the most, as close to two-third sales are from the international markets.

The company’s cost cutting efforts should be visible in a decline in its selling, marketing and administrative costs as % of revenues, which should improve the margins. However, a firm U.S. dollar could play a spoilsport.

We will be closely watching the earnings for any clues on its acquisition plans. The healthcare conglomerate is said to be taking interest in eye-care major Bausch & Lomb. (Read Merck, Abbott And JNJ Show Interest In Bausch & Lomb) Further, there were other rumors of acquisitions, especially in China. (Read Johnson & Johnson’s CEO Looks To Bolster Cardiology Devices Segment Through Acquisitions and Johnson & Johnson Mulls Acquisition of Baby Product Manufacturer in China).

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