What Factors Will Drive Johnson & Johnson’s Q3 Earnings?

by Trefis Team
-9.12%
Downside
138
Market
125
Trefis
JNJ
Johnson & Johnson
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Johnson & Johnson (NYSE:JNJ) will report its Q3 2017 earnings on October 17, and we expect the company to post solid numbers, owing to three primary factors – a ramp up in key oncology drug sales, the Actelion acquisition, and forex gains.

Firstly, the company expects a ramp up of sales in the second half for its key oncology drugs – Imbruvica and Darzalex – which we believe are J&J’s pharma business’ best bets for near term growth. In the first half of 2017, these two drugs reported sales of $1.4 billion, representing an 85% jump compared to the prior year period. We expect the full year sales for these two drugs to be north of $3.2 billion. It should be noted that J&J shares Imbruvica’s marketing rights with AbbVie, which is highly optimistic about Imbruvica’s prospects and expects overall peak sales to reach $11 billion. This implies that J&J’s share of peak sales could hit $4-5 billion. Similarly, Darzalex is estimated to have peak sales potential of as much as $7 billion. You can read why we believe that these drugs are important for J&J’s near term growth in a previous note, Imbruvica And Darzalex Are of Key Importance For J&J’s Future Growth.

Secondly, J&J completed the $30 billion acquisition of Swiss biotech Actelion in June. With Actelion, J&J now has access to some high-margin medicines. Actelion focuses on rare diseases which tend to have more price protection and fewer competitors. The acquisition has boosted J&J’s cardiovascular portfolio, which doesn’t have much except Xarelto and Invokana. While Xarelto is holding its ground for J&J, Invokana has been under competitive pressure and has seen sales drop by 18% in the first half of 2017, compared to the prior year period.

Lastly, J&J saw solid gains from foreign exchange fluctuations, given the company’s global footprint. The company reported a $1.2 billion gain from currency exchange in the first half of 2017 and we believe this trend will likely continue in the third quarter as well.

While we remain optimistic about J&J’s performance, pricing issues and competitive pressure may keep growth in check in the third quarter. It should be noted that J&J, in its previous earnings call, stated that it will keep its annual drug price increases below 10%, below those of its competitors, which likely suggests looming pricing concerns.

Our price estimate of $126 for Johnson & Johnson is slightly below the current market price.

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