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It surprises many investors to discover that the consumer products division of Johnson & Johnson (JNJ -0.69%) isn't its most important business segment. Indeed, recently, consumer products have been the laggard for the healthcare conglomerate, and strength in the pharmaceutical business has been the key driver of overall growth for J&J. Coming into Tuesday's third-quarter financial report, J&J investors fully expected that those trends would continue, creating modest sales growth that would translate into bottom-line success. Johnson & Johnson's results were even stronger than anticipated, giving shareholders comfort that the healthcare giant is still moving forward. Let's take a closer look at Johnson & Johnson's latest results and what lies ahead for the company.
J&J rides the pharma train higher
Johnson & Johnson's third-quarter financials continued to build positive momentum for the healthcare conglomerate. Revenue climbed 4.3% to $17.82 billion, accelerating from last quarter's growth pace and topping the consensus forecast among investors. Adjusted net income rose 12% to $4.68 billion, and that produced adjusted earnings of $1.68 per share, beating what those following the stock had expected by $0.03 per share.
As we've seen in several past quarters, the strength of Johnson & Johnson's overall business was concentrated in the pharmaceutical division. Pharma sales jumped 9% to $8.4 billion, rapidly approaching the 50% mark in terms of its total contribution to J&J's top line. Gains for medical devices were much smaller, rising 1.1% from year-ago levels, and the consumer division actually lost ground on the sales front with a 1.6% decline.
One reason for the weakness in consumer sales was the strong U.S. dollar, which hit the division more strongly than the other two segments and reversed what would have been a slight 0.1% gain in currency-neutral revenue. Interestingly, both pharma and medical devices reported small boosts to sales from currency impacts. Domestic growth continued to be the biggest influence on Johnson & Johnson's sales, picking up 6.7% compared to a 1.5% rise for international revenue.
Looking more closely at Johnson & Johnson's product lines, the company said that Listerine oral care and Aveeno skin care products were among the biggest positive contributors on the consumer front, although lower inventory levels in the U.S. held back growth. In pharma, new products like cancer-fighters Imbruvica and Darzalex showed strong growth, and existing treatments like psoriasis and arthritis drug Stelara and anti-inflammatories Simponi and Remicade also helped J&J grow. For the medical products segment, electrophysiology cardiovascular products, endocutters for advanced surgery, and Acuvue contact lenses in vision care were strong contributors to growth.
Can Johnson & Johnson keep growing?
CEO Alex Gorsky concentrated on the impact that pharma had on the company and its role in future success. "With a number of regulatory approvals, several new drug application submissions, and new breakthrough therapy designations from the FDA," Gorsky said, "we are increasingly confident in our pipeline expectation of filing 10 new pharmaceutical products between 2015 and 2019, each with revenue potential over $1 billion."
Reflecting on its success, Johnson & Johnson also made some upward adjustments to its guidance for the year. The healthcare giant kept its sales projections stable at between $71.5 billion to $72.2 billion. However, it boosted the lower end of its previous earnings range by $0.05 per share, making its new guidance between $6.68 and $6.73 per share.
One thing that could change pharma's dominance at the company is J&J's recent purchase of Abbott Medical Optics. Johnson & Johnson paid Abbott Laboratories (ABT -0.65%) $4.325 billion in cash for the division, and investors expect the acquisition to boost earnings modestly within the first year after the deal closes. Given how well Acuvue has done for the medical device division at J&J, investors hope that the purchase will further leverage the power of that brand.
Investors didn't respond very much to Johnson & Johnson's results, with the stock trading on either side of unchanged in pre-market trading after the announcement. In the long run, though, it's important that J&J continue to emphasize not only that its pharmaceutical division still has room to grow but also that it isn't neglecting the potential of its other businesses.
