Johnson & Johnson's Q4 Earnings: What You Need to Know

This week, healthcare giant Johnson & Johnson (JNJ -0.69%) kicked off healthcare earnings by reporting a quarter that was mostly in line with expectations. However, a closer look at the report offers investors some important clues as to what could be on tap in 2017.

In this clip from The Motley Fool's Industry Focus: Healthcare podcast, the team breaks through the headline numbers to highlight key takeaways every investor ought to know.

A full transcript follows the video.

This podcast was recorded on Jan. 25, 2017.

Kristine Harjes: Let's move on and touch back on Johnson & Johnson earnings, which we did a preview of last week. Todd, what was the report like?

Todd Campbell: Last week, we had talked about a couple different things. One of the things that had jumped out to us, or, one of the things we wanted to make sure everyone was aware of was the potential threat to Johnson & Johnson's best-selling drug Remicade, which is used to treat rheumatoid arthritis. That drug has lost patent protection, and it's now facing a biosimilar that works similarly to it that launched in November. So, we were very curious to see what's going to happen with Remicade's sales. And, sure enough, Johnson & Johnson went from growing almost 10% year over year in the U.S. for Remicade in the third quarter to actually losing ground on Remicade year over year in the fourth quarter. Sales fell 1.7% in the U.S. for Remicade to $1.17 billion, where in Q3, they rose 9.4% to $1.22 billion.

Harjes: Yeah. Before you specified in the U.S., I was actually going to ask you for that clarification, just because there is a good amount of difference here regarding this drug between what's going on internationally versus in the United States. Internationally, the biosimilar has been on the markets in Europe for a while, a long enough time that, as they put it in the earnings report itself, they are continuing to see the impact of biosimilar competition. But, it's in the U.S. that we just recently, at the end of last year, saw the biosimilar come to be approved by the FDA. It was interesting to me, the discrepancy between the numbers that you just reported, where you saw that decline, versus the quote from the earnings call where management said, "We have not observed any significant impact to date," and that was referring to the impact of the biosimilar, Inflectra, on Remicade. 

Campbell: Right. And I think they can probably make that argument by saying, "We haven't necessarily lost any market share." But, remember, in order to protect their market share, they're having to cut the price and offer greater discounts, which, of course, is going to weigh on their ability to generate out sales growth. And even with competing heavily on price, if you go in and listen to that conference call and get all the way to the question and answer section, management did sort of tip their hand and say they could perhaps lose 10-15% in the first year of market share. So, Remicade being Johnson & Johnson's biggest drug, a drug with $4.4 billion run rate in the United States alone, losing market share is going to create a headwind that could keep its sales depressed in 2017. It's not a disaster by any sort. I still think they can grow sales and profit by 3% this year. But 3% is probably not going to get too many people overly excited about this company.

Harjes: Right. And interestingly, the pharmaceutical segment has historically been what drives this company forward, but in this past quarter, the consumer products segment, that's your Listerine and Band-Aids and things you would buy at CVS, that actually led the way. Their sales were up 3.4%, particularly when you look domestically, sales were up 13% in that unit. 

Campbell: I look at it over the course of a trailing 12-month period for consumer goods, because you just don't know what's happening with people building up wholesale inventories and that type of thing. If you're looking for the full year, sales have declined 1.5% from 2015. So, I think what we'll need to do is watch and see how that plays out over the course of the next few quarters, and see if they're still delivering that kind of growth. If they are, great, that's awesome news. But I think, again, as we talked about, they get the majority of their revenue from the pharmaceutical area. And while they have some intriguing stuff that could help offset some of those headwinds to Remicade, this is going to be an evolving story for 2017, no question.

Harjes: For sure. Anything else that you want to touch on with J&J earnings before we move on to our last story of the day?

Campbell: There was one bright spot that I want to call out, that I think investors should be aware of, and that was the performance of Darzalex, which is their new multiple myeloma drug. That launched back in late 2015 for use in the fourth line setting. So, pretty far back in patient treatment. But, as we moved in toward the end of the year, that's won approval now for use alongside Revlimid in the second line setting. Revlimid, of course, is the granddaddy in multiple myeloma with $8 billion in projected sales this year. Darzalex sales in the fourth quarter were $200 million. That gives it an $800 million run rate. That's not bad for a drug that only launched a year and a couple months ago. It certainly could indicate that this is their next billion-dollar blockbuster drug.

Harjes: This drug definitely has some momentum. Overall, Johnson & Johnson did deliver right around expectations. The one area they fell a little bit short was in their 2017 guidance. Right now, we're looking at anticipated sales of $74.1 [billion to] $74.8 billion, which, I believe you mentioned a little bit earlier, is about 4%-5% growth. They had been expecting $75.1 billion going into the report. But there's still a lot to shake out in 2017, and that's not a huge miss right there.