Earnings Roundup: Johnson & Johnson Results Are Better Than They Appear

Investors focusing on Johnson and Johnson's (NYSE: JNJ  ) 3.5% top-line revenue growth in the first quarter are likely walking away unimpressed. However, tepid results in the company's medical device and consumer goods business mask much stronger growth in J&J's pharmaceuticals business, which grew more than 10% year over year last quarter.

Since J&J's double-digit growth in its high-margin drug franchise helped boost earnings, let's take a closer look at what's behind the company's first-quarter performance.

JNJ Chart

JNJ data. Source: YCharts.

Weights on a balloon
J&J's medical device and consumer businesses are big and they kick off a lot of free cash, but they couldn't muster much sales growth in the first quarter. The medical device unit's sales grew just 1.8% year over year to $7.1 billion in the quarter. That growth, though, was erased by currency conversion on sales overseas. 

Results for its consumer-care business were worse due to a slower flu season. Global sales of products like Band-Aid, Listerine, and Zyrtec gained 0.6% year over year in the first quarter. However, currency conversion pushed that growth to a -3.2% decline.

Combined, those two businesses totaled more than $10 billion of J&J's $18 billion in quarterly sales. As a result, their anemic results dragged down its red-hot drug business.

Innovating for growth
The company's pharmaceutical sales surged more than 12% year over year to $7.5 billion in the first quarter. And even after subtracting 1.4% for currency, the unit still posted growth near 11%. Sales in the U.S. grew 7.7%, while sales overseas were particularly strong, increasing by 17%, ex-currency.

A number of new, fast-growing compounds were behind the strong quarterly performance. Sales of Stelara, the company's drug for autoimmune disease like psoriasis and psoriatic arthritis, won away scripts from AbbVie's Humira and Amgen and Pfizer's Enbrel. Sales of Stelara grew 32% to $456 million in the quarter.

J&J's once-monthly Invega/Sustenna leveraged its more convenient dosing to capture market share as a treatment for schizophrenia. Prostate cancer drug Zytiga, which has seen its sequential growth shrink in the face of competition from Medivation's Xtandi, posted robust year-over-year growth of 49%, bringing quarterly sales to more than $500 million. And anticoagulant Xarelto, which is challenging warfarin's decade's long dominance in post-op and cardiovascular disease patients, saw its U.S. sales double to nearly $320 million.

The biggest surprise; however, came from J&J's recently launched hepatitis C drug, Olysio. That drug won Food and Drug Administration approval late last year, but its spotlight was stolen by the approval of Gilead's (NASDAQ: GILD  ) highly anticipated Sovaldi in December. Since Olysio's performance in certain patients with a common polymorphism was lackluster, expectations for sales were low. Yet, J&J reported it sold more than $350 million of Olysio in Q1, giving it a billion-dollar blockbuster run rate in its first quarter on the market.

Oysio's success is likely more a reflection of the pent-up demand tied to doctors warehousing hepatitis C patients ahead of new therapies than a sign Olysio is winning scripts away from Gilead. Indeed, a more likely scenario is that Olysio is being dosed alongside Sovaldi rather than instead of it. Either way, Olysio's strong performance should continue, at least until competing therapies from Bristol-Myers and AbbVie get the go-ahead from FDA regulators.

Foolworthy final thoughts
It wasn't all bleak for J&J's slow-growth businesses. It did note that sales climbed for its orthopaedics business as hip and knee procedure demand rebounded alongside the economy. Sales of electrophysiology equipment for cardiovascular care were also solid.

In the consumer business, J&J saw growth in Aveeno skin care products and Zyrtec. And investors should recognize that consumer-goods sales were weighed down by the company's divesting of a key product in its women's health lineup. That divestiture reduced women's health segment sales 18% to $327 million in the quarter.

But it is likely to continue to be the drug business that drives results this year for J&J. In addition to its fast-growing plate of therapies, the FDA also approved Imbruvica, co-developed with Pharmacyclics, for chronic lymphocytic leukemia during the first quarter. Analysts believe Imbruvica sales will someday total more than $1 billion. If pharmaceutical sales keep up this pace through 2014, it will be good news for the bottom line. The pharma business is margin friendly and helped Johnson & Johnson's earnings per share grow 6.9% to $1.54. That was $0.06 better than industry analysts predicted and may suggest investors should boost their full-year 2014 earnings forecast. 

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