Johnson & Johnson Q2 Earnings: Growth Likely To Remain Subdued

by Trefis Team
Johnson & Johnson
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Johnson & Johnson (NYSE:JNJ) will report its Q2 2017 earnings on July 18. The company’s pharmaceutical business disappointed investors in the first quarter as growth stalled due to pricing issues and competitive pressure. We expect these challenges to keep growth in check in the second quarter as well. The remainder of the year, however, can be a slightly different story if J&J gets new drug approvals and reports promising clinical trial data. As far as the second quarter is concerned, there are a few things to watch out for. These include the revenue trajectory of rheumatoid arthritis drug Remicade, an update on pricing problems observed in the first quarter for Xarelto and Invokana, growth in oncology drugs, and the performance of the orthopedics segment.

Our price estimate of $119 for Johnson & Johnson is slightly below the market.

Investors Will Continue To Watch Remicade Closely

J&J’s Remicade sales touched nearly $7 billion last year, accounting for more than 20% of the company’s pharma revenue. Investors have taken comfort in the fact that its first U.S. competitor – biosimilar Inflectra – has not dented the drug’s sales as much as expected. In fact, most of the decline in Remicade’s sales in Q1 2017 came from lower exports, and the drug seems to be holding its ground in the U.S. We expect this to continue. However, a higher than expected decline can certainly weigh on the stock.

Pfizer’s Inflectra has its work cut out for it. With just a 15% advantage in price, it needs to convince physicians and healthcare providers that switching from Remicade to Inflectra is worth it. We note that the FDA has granted approval to another Remicade biosimilar – Renflexis – developed by Samsung Bioepis and Merck. This may make things interesting in the U.S. rheumatoid arthritis market, but the drug will not hit the market until Q3 2017, and will therefore have no impact on J&J’s second quarter results.

Pricing Issues With Invokana And Xarelto

J&J also faced some top line pressure for its drugs Invokana and Xarelto in the first quarter due to higher discounts for managed care contracting, and an increased proportion of Medicaid channel sales. This was especially significant for Xarelto which, despite increasing its prescription share, saw its sales decline meaningfully. It is unlikely that we’ll see any meaningful sales rebound as the comparison to last year’s sales will remain difficult.

Slight Optimism For Remainder Of The Year

The second half of the year is likely to be better than the first, especially with the Actelion acquisition and the possibility of J&J getting new drug approvals. We believe that the company will need to look into at least 1-2 new major avenues for growth in order to have any opportunity to add significant value. This is where Actelion comes in, with its focus on rare diseases which tend to have more price protection and fewer competitors. Additionally, the acquisition has boosted J&J’s cardiovascular portfolio, which doesn’t have much except blood thinning drug Xarelto. Additionally, J&J plans to launch 11 blockbusters by 2021. It has a couple of new immunology drugs under FDA review, which may get approval in late 2017 or early 2018.

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