3 Quotes From Johnson & Johnson's Conference Call You Need to Read

Using cash from a divestiture, competition from Gilead and AbbVie, and a discussion of biosimilars.

Jul 22, 2014 at 2:00PM

Johnson & Johnson (NYSE:JNJ) held a conference call last week to go over the results of its second-quarter financials and give investors a taste of what's to come. Here are three quotes from the call and some commentary about why they're so important.

Since we will no longer recognize sales or earnings from [Ortho-Clinical Diagnostics] going forward, we plan to buy back shares with the cash proceeds to mitigate the EPS impact on future earnings. -- Dominic Caruso, VP of Finance and CFO

This is classic Johnson & Johnson.

Most health care companies are strictly acquirers of assets, which helps them pad the top and bottom lines. Johnson & Johnson, which recently sold its Ortho-Clinical Diagnostics to The Caryle Group for $4.15 billion, has always been conscious of divesting of underperforming assets where the cash from the sale is more valuable than the profits from the unit.

Johnson & Johnson sold off its KY brand to British consumer goods company Reckitt Benckiser this year. Further back, there was divestures of its Professional Wound Care Business, Ortho Dermatologics, and its Animal Health business, among many others.

The resulting cash can be used to repurchase shares so investors' piece of the smaller profits remains constant. Johnson & Johnson doesn't break out profits by unit, but it's possible investors could come out ahead in the deal, considering there were reportedly multiple bidders for the divested unit.

You could argue that the company should return the cash to investors in the form of a dividend, but since it's a one-time benefit, a share buyback makes more sense.

As you know we are anticipating that Olysio will face significant competition from new hepatitis C products later in the year, the full impact of which is difficult for us to predict at this point. And while we're not providing guidance for 2015, this will certainly pose a headwind next year. -- Caruso

Headwind? That might be the biggest understatement of the year. Try gale-force winds.

Both Gilead Sciences (NASDAQ:GILD) and AbbVie (NYSE:ABBV) are expected to gain Food and Drug Administration approval for their all-oral hepatitis C drug cocktails by the end of the year. Olysio, which produced sales of more than $830 million in the second quarter, has to be taken with an injected drug according to its label.

Doctors have been prescribing Olysio off-label in combination with Gilead Sciences' Sovaldi without the injected drug, which helped sales more than double from $350 million in the first quarter. But it's hard to see how doctors will continue to prescribe the off-label combination when Gilead's and AbbVie's combinations are approved by the FDA. In fact, we might even see a decline in the second half of the year as doctors wait for the approved combination to become available.

So we expect biosimilars to behave as lower cost brands. And from that perspective, biosimilars wouldn't have the type of impacting erosion that you see with generic and small molecules. -- Joaquin Duato, worldwide chairman of pharmaceuticals

Johnson & Johnson's top selling drug, Remicade, will see patent expiration in Europe in February and in the U.S. in September 2018. U.S. sales topped $1 billion in the second quarter and about $800 million in the rest of the world, so we're talking about quite a bit of income at stake. 

Fortunately, as Duato points out, Remicade is a biologic drug, whose generics -- called biosiliars -- won't be identical to the name-brand drug like generics are for small molecule drugs. The biosimilars will capture some of the sales, but we aren't likely to see sales degrade by 90% like is often the case for small molecule drugs. During the call Duato cited Procrit/Eprex, which has seen sales drop since the launch of biosimilars, but the drug remained a leading product in its class.

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Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Gilead Sciences and Johnson & Johnson and owns shares of Gilead Sciences and 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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