5 Things Johnson & Johnson's Management Wants You to Know

With revenue rising 9% and adjusted EPS jumping 12% in Q2 many investors have wondered if this high growth can last. Only one group of people can answer that question: Johnson & Johnson's management team.

Aug 15, 2014 at 10:34AM

Source: Johnson & Johnson.

A month ago today healthcare giant Johnson & Johnson (NYSE:JNJ) reported what looked on the surface to be another stellar quarter of growth.

For its second quarter, Johnson & Johnson saw revenue improve 9.1% to $19.5 billion from the year-ago period. Adjusted profit for the quarter also rose 12.2% to $1.66 per share.

CEO Alex Gorksy attributed Johnson & Johnson's strong results to successful new product and pharmaceutical launches and the company's ability to meet or exceed strategic priorities.

But, the problem with earnings reports is they're often superficial and supply investors with only bits and pieces of why a business is succeeding or failing. You need to be able to dig deeper in order to get a true understanding of what the catalysts behind a business really are.

That's why today's we're going to take a deeper dive into Johnson & Johnson's quarterly conference call, courtesy of S&P Capital IQ, and look at five quotes from J&J's management team that summarize where the company has been and where it's headed next.

Johnson & Johnson's key growth drivers

"When we implemented this strategic framework... we identified 4 growth drivers, which by now all of you should be very familiar with: creating value through innovation, global reach/local focus, excellence in execution, and leading with purpose." – Alex Gorsky, Chief Executive Officer

CEO Alex Gorsky's point that he's attempting to drive home with investors is that Johnson & Johnson intends to:

  • Grow internally through scientific innovation;
  • Utilize its size and deep pockets to move into unmet emerging markets which have greater long-term growth potential than most of its developed markets;
  • Meet or exceed expectations when it comes to bringing innovative new products to market; and
  • Remain focused on hitting therapeutic areas which are within its realm of strength.

Based on its quarterly results, I'd say the company is successfully hitting all four of its growth drivers.

I bet you didn't know this

"[O]ur pharmaceutical business has been exceptionally productive, with 14 new compounds launched since 2009, making it the fastest growing of the top 10 pharmaceutical businesses in the U.S., Europe and Japan... Additionally, we are complementing that investment with smaller-scale acquisitions and early stage licensing agreements surfaced [ph] through our innovation centers." – Alex Gorsky

Many investors think of Johnson and Johnson as a relatively slow-growth healthcare conglomerate. While growth in some of its segments, such as consumer goods, may be dictated by the health of the economy, J&J's pharmaceutical segment is growing like a weed after a warm summer's rain.

Johnson & Johnson Q2 investor presentation. Source: Johnson & Johnson.

Pharmaceutical operations grew by a brisk 21.1% in the second-quarter over the prior year, marking its 17th straight quarter of growth and sixth in a row of double-digit sales growth. As the above quote notes, J&J currently has the fastest growing pharma operations inclusive of the U.S., Europe and Japan among the 10 largest pharmaceutical companies – and it has new product innovation to thank for it.

The 14 new compounds J&J has launched since 2009 by themselves contributed $5.9 billion to sales in the second quarter -- and J&J plans to file 10 new drugs and 25 label expansions between 2013 and 2017.

Johnson & Johnson Q2 investor presentation. Source: Johnson & Johnson.

In addition to internal innovation, Johnson & Johnson, per its CEO, will be looking for ways to boost its chances of success through smaller acquisitions as well as pharmaceutical collaborations.

Our pipeline is huge, and efficient

"Today, we have over 100 projects in discovery and about 50 NMEs in early development.... Our average cycle time from database to submission is about 2 months better than industry median, making us the leader in time to submission." – Paulus Stoffels, Chief Scientific Officer & Worldwide Chairman of Pharmaceuticals

As J&J's Chief Scientific Officer points out, the company's pipeline is extremely deep. What's perhaps notable about this depth is just how much of it comes from external collaborations. Although internal development of J&J's five core therapeutic focus areas – oncology, immunology, neuroscience, infectious disease, and cardiovascular/metabolic disease – will continue to take priority, J&J is clearly not afraid to spend and go after new therapies with big potential.

Johnson & Johnson Q2 investor presentation. Source: Johnson & Johnson.

Yet Stoffels notes that J&J is also a leader in bringing its new therapies to market quicker than its rivals. Because it's been willing to collaborate and leverage its expertise in the drug development process with a number of external experimental therapies, Johnson & Johnson and its partners have been able to get expedited reviews on some of its recently approved compounds, resulting in drugs making it to market faster.

Imbruvica is a great example of this. Imbruvica, a recently approved breakthrough designated drug that treats mantle cell lymphoma and chronic lymphocytic leukemia, was developed by Pharmacyclics. However, J&J saw incredible potential with the drug, so much so that it gave Pharmacyclics an incentive-laden collaborative agreement in 2011. Because of its incredible efficacy in trials it was granted a Breakthrough Drug designation and approved quickly.

Getting experimental drugs to market faster can give J&J an edge over its peers since it's operating in a number of highly competitive therapeutic areas.

No Obamacare benefit as of yet

"But as we're experiencing right now and as we discussed earlier in the discussion, we're seeing hospital utilization rates... remain somewhat subdued, and we've seen this trend for several quarters now. Long-term, of course, we see the offset to that in demographics, increasing middle-class, increasing access to care under the Affordable Care Act as drivers for us." – Alex Gorsky

The Affordable Care Act, better known as Obamacare, may be responsible for insuring more than 8 million people through online insurance exchanges during the 2014 enrollment period, but when it comes to patient follow-through Johnson & Johnson isn't seeing any meaningful effects in its medical device segment, at least as of yet.

The hope for medical device makers and pharmaceutical providers like J&J is that having more people insured will result in higher medical utilization. While Johnson and Johnson hasn't changed its tune for the long term, with an expectation of 3%-5% growth in healthcare as a whole, and it fully expects the ACA to be a positive contributing factor to its growth, it appears evident that ACA-related uncertainty is contributing to an environment of cautious spending on the part of insurers, hospitals, and consumers. Until that cautious tone lifts, J&J's medical device segment growth within the U.S. may underwhelm.

An update on J&J's best-selling drug

"With regard to your question of the U.S. and the patent of REMICADE in the U.S., we feel very strong, our – the strength of our patents and we continue to confirm that our patent, as we see today, will expire in September '18." – Joaquin Duato, Worldwide Chairman of Pharmaceuticals

Lastly, I think it's important to emphasize Duato's reiteration that the company feels confident of maintaining its patent exclusivity on rheumatoid arthritis drug Remicade through September 2018.

Although J&J has a number of rapidly growing drugs that may have the potential to pass Remicade in terms of annual sales, Remicade is responsible for $3.4 billion in worldwide sales for 2014's first half and is on pace to perhaps challenge the $7 billion in annual sales mark this year despite heavy competition.

Losing Remicade is going to sting for J&J, so it's important that investors understand when this loss is going to occur and what steps J&J is taking to replace lost revenue from generic competition. But, based on the $5.9 billion in sales created since 2009 from new pharmaceutical products, I'd say investors are probably in good shape.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of, and recommends 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.

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Jun 12, 2015 at 5:01PM

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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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