Johnson & Johnson (NYSE:JNJ) traded higher marginally after earnings on Tuesday, but the results were truly fantastic. However, after a 30% gain in 2013, is J&J still a buy, and will it suffer the same fate as its peers in a patent cliff environment?
A look at the headline numbers
If you glance at J&J's quarter, you'll likely see that both revenue and EPS beat expectations. The company posted overall revenue of $17.6 billion, creating year-over-year growth of 3.1%, and an EPS of $1.36, growth of 8.8% compared to last year.
J&J continues to improve margins, is seeing rapid international growth, and is well diversified in its three segments. With that said, global consumer sales and global pharmaceutical sales both saw year-over-year growth while worldwide medical devices were essentially flat when adjusted for a negative currency impact. Regardless, it was a great quarter.
What is most impressive?
As a massive non-cyclical company, Johnson & Johnson is often overlooked in the pharmaceutical space. However, pharmaceutical sales is its largest segment, and it's this space that should have investors excited about the company's future.
In the quarter, pharmaceutical sales rose 10.9% to $7 billion, which is simply incredible. J&J accomplished this feat while its peers struggle with cost-cutting measures and desperate acquisitions to replace lost revenue. However, J&J has weathered this storm and appears secure in its future.
Surprisingly, J&J is right in the middle of a patent cliff that has crippled many of the industry's elite, as more than $130 billion in drug revenue has and is expected to be lost between the years of 2011 and 2016 to generic competition. For a clear illustration of how the patent cliff is affecting the industry's elite, simply take a look at the space.
Pfizer (NYSE:PFE) has lost more than $8.5 billion in annual revenue since 2011. The company famously lost its patent protection for Lipitor, the best-selling drug ever. During its most recent quarter, sales of Lipitor declined 55% year-over-year, but the company also saw declining sales from blockbusters Prevnar and Enbrel. Pfizer has been hit hard by the patent cliff and is still far from producing year-over-year sales growth.
Merck (NYSE:MRK) is another Pfizer-like company. In the first six months of 2013, sales have declined 10% while net earnings have declined 29% year-over-year. Most notably, the company's blockbuster Singulair saw an 80% decline in sales during its last quarter to just $281 million. As a result of these declines, Merck recently announced plans to reduce its workforce by 8,500 jobs -- adding to its previously announced cuts of 7,500 -- in an attempt to save money. Granted, Merck does have an anti-PD-1 cancer platform, which was very popular at ASCO, but still, the company continues to struggle with lost patents.
Then, there are some companies like Eli Lilly (NYSE:LLY). While Merck and Pfizer are feeling the pain of a patent cliff now, Eli Lilly's toughest days are still yet to be seen. In the next year alone, Eli Lilly will lose patent protection on Cymbalta ($5 billion per year) and Humalog ($2.5 billion last year). Hence, Eli Lilly will face generic competition on drugs that make up more than 30% of its total sales, significantly affecting its fundamentals.
In the case of J&J, it faces the same problems but has managed to weather the storm, and emerge an even greater company. However, the industry-crippling nature of the patent cliff is what makes J&J's earnings so incredible. This is a company posting double-digit growth while other companies have either lost or are preparing to post double-digit declines.
Is J&J a buy?
One of the primary reasons that J&J has been able to maintain its growth is because it capitalizes on all drug launches. During this last quarter, sales of Stelara and Simponi rose 29% and 47%, respectively. And sales of the closely watched Zytiga were $464 million, a 75% rise over last year. Not to mention, J&J also saw sales of Xarelto triple to $246 million, as it becomes the company's next blockbuster.
As a result, J&J becomes a diamond in a rough pharmaceutical space. The stock does trade at 19 times earnings, but continues to grow with many catalysts over the next few years. J&J has a 50% revenue share of the drug ibrutinib, which has three breakthrough drug designations and peak sales estimates as high as $9 billion annually.
J&J also has continued growth with Zytiga, and several drug launches including simeprevir and the breakthrough designated drug daratumumab. Overall, there's a lot to like, and not much to fear, as this 3% dividend pharmaceutical king looks poised to thrive despite a horrific environment for big pharma.
Brian Nichols owns Johnson & Johnson. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.