J&J Earnings: Cautious Optimisim

Johnson & Johnson‘s (NYSE:JNJ) stock has increased by 3% following its Q2 2017 earnings announcement earlier this week, effectively adding $10 billion in market cap. There are reasons to remain cautious amid the enthusiasm about new acquisitions and drug launches. While J&J’s R&D efforts and strategic acquisitions should help it offset the decline in legacy drugs, most of these drugs have lower sales potential compared many of its competitors’ drugs. Additionally, J&J is facing pricing pressure in its managed care contracting and Medicaid sales channel, which has led to a decline in sales of its once fast-growing drugs Invokana and Xarelto. The medical devices segment hasn’t seen a meaningful trigger, and continues to drag along at a very slow pace. We don’t expect a lot from the consumer business in the near term, as it is facing strong competition from both big brands and private labels.

Our price estimate of $126 for Johnson & Johnson is nearly 10% below the market.

Here are few key takeaways from J&J’s second quarter earnings: First Imbruvica and Darzalex, which are J&J’s pharma business’ best bets for near term growth, are expected accelerate their ramp up in the second half of the year. This prompted J&J to raise its full year outlook slightly. Second, Remicade is still holding its ground against Inflectra. Physicians still seem to have a strong preference for the drug compared to its biosimilar, and this appears to have comforted investors. Third, J&J stated that it will keep its annual drug price increases below 10%, below those of its competitors. However, it is fairly unusual for J&J to talk about drug prices during its earnings, which suggest looming pricing concerns and the role that the new U.S. government may play in it. This could have an industry-wide impact.

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