Don’t Expect Any Surprises From Johnson & Johnson’s Q3 Earnings

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Johnsons & Johnson (NYSE: JNJ) will report its Q3 fiscal 2016 earnings on October 18th. FOr the second quarter, the healthcare company posted revenue growth of 4.0% over the same period of last fiscal year. We expect Q3 results to reflect the continuation of this trend. J&J has been working towards improving its profitability to boost earnings and compensate for the  low rate of revenue growth. The company posted higher operating margins on an adjusted year-over-year basis in both Q1 and Q2 of this fiscal year. The majority of the improvement has been on account of a higher gross margin and lower SG&A. We expect Q3 to be somewhat similar in this regard. Over the recent quarters, the pharma business has been the main driver of the company’s growth and we don’t expect anything to change on this front.

Our price estimate for Johnson & Johnson is $118, which is roughly where it now trades.

The Table below compares consensus analysts’ estimate for Q3 of fiscal 2016 with its actual results in previous quarter:

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Recurrent Theme In The Pharma Business

Immunology and Oncology products are expected to post strong results, as has been the case in recent past. The Anti-infective segment has taken a beating, mainly because of the poor performance of Olysio (a Hepatitis-C therapy) on account of competitive pressure. Sales for this drug fell by about 85% in the first half this year over the same period in prior year. In Immunology, Remicade will face competition from bio-similar drug Inflectra but we do not expect any effect on its Q3 performance. It is worth noting that Remicade accounts for over 20% of the total pharma segment’s revenue. In the Oncology segment, we expect Imbruvica to post another strong quarter According to our estimates, the drug will contribute about 20% to Oncology and 4% to total pharma revenue for the fiscal 2016. At present, we are modeling J&J to get peak sales from Imbruvica of around $3.8 billion.

Improved Performance In Consumer Products Expected

In the last quarter, the Consumer Products business posted positive revenue growth on operational basis. The company appears to be aggressively managing its product portfolio in this segment. Its recent acquisitions include HIPOGLOS, NeoStrata and Vogue. We expect the division to post an increase in revenue of about $90 million on account of Vogue. Furthermore, Listerine (an oral care product), analgesics (over the counter products) and Neutrogena (a skin care product) are expected to drive revenue growth for this segment.

Weakness In Medical Devices To Continue

We expect revenue growth in Medical Devices to be flat on a year-over-year basis. Vision Care and Orthopedics products are expected to post growth at a mid-single digit rate. Recently, the company entered into a definitive agreement with Abbott to acquire its Medical Optics division. This will add about $1.1 billion in annual revenue on pro-forma basis. But the impact will be realized only from next fiscal year once the deal is closed. (Read- J&J’s Recent Move: A Visionary Acquisition Or An Optical Illusion?)

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