3 Healthcare Trends Johnson & Johnson Told Us About This Earnings Season

Healthcare industry stalwart Johnson & Johnson (JNJ 0.67%) reported its Q3 earnings last week, and others in the Big Pharma sector will report soon -- and anyone who owns stock in them should pay attention for clues as to what their companies may discuss on their calls. Here are three things you should be ready to hear about when other stocks report.

Emerging markets are brutal
Anyone who's been watching the stock market over the past couple of months knows that growth in emerging economies is slowing. But a strong dollar is what's really going to hurt drug companies with big international sales, at least in the short term. Johnson & Johnson reported that revenue was up 0.8% operationally year over year in the third quarter, but that currency exchange had a whopping 8.2% negative impact on sales. That's rough, and it does not bode well for pharmas with big international exposure. Pfizer (PFE -0.12%), for example, received 57.9% of its revenue from countries outside of the United States last quarter.

The pain looks likely to continue, at least for now, but it's the cost of doing business. After all, the U.S. is a fairly saturated market, and Europe is likely to continue controlling costs. That means the big growth opportunities are, well, elsewhere. So, even though it weighs on revenue and profitability now, it's a good move for companies to continue driving into emerging markets.

Anticoagulant sales could slow over the short term
Factor Xa inhibitors, a new class of anticoagulants that are forecasted to achieve multibillion peak annual sales, may have had a slightly tougher third quarter across the board. Johnson & Johnson reported -- without giving the precise sales figures -- that its anticoagulant Xarelto had sales slow during the quarter due to patients hitting the Medicare Part D donut hole (a gap in Medicare coverage you can read more about here). J&J CFO Dominic Caruso noted that the slowdown "wouldn't be necessarily just for our product. It would be seen across other products as well" (this and other quotes courtesy of S&P Capital IQ).

That means Pfizer and Bristol-Myers Squibb (BMY 0.96%) may report a slowdown in sales for their competitor anticoagulant, Eliquis. So, if you're an investor in those companies and you're expecting incredible growth out of that particular drug, time to temper expectations for a quarter or two.

Long term, this doesn't really matter. The donut hole is an outside issue, it's something that happens each year, and the Affordable Care Act is gradually reducing the coverage gap over the next several years. And Factor Xa inhibitors have a number of longer-term tailwinds. For one, Eliquis and Xarelto are still in growth mode, with analysts estimating peak sales around 2018 or 2020. Meanwhile, Portola Pharmaceuticals (PTLA) is developing a reversal agent that could actually increase demand for Xarelto and Eliquis over the long haul -- although Portola is also developing its own Factor Xa inhibitor, so there could be a thorn buried in that particular rose. Bottom line: The future looks bright for these drugs, so ignore the short-term numbers and focus on the growth story.

More deals incoming?
Johnson & Johnson has $37 billion in cash and marketable securities on its balance sheet. Execs were upfront with analysts on the call: They see deals (including potential mergers and acquisitions, or M&A) in the near future. Gary Pruden, Chairman of J&J's Global Surgery Group noted that "accelerating our pace of tuck-in deals would be a good opportunity for Medical Device." While the picture wasn't as clear on the pharma side -- J&J has tended to avoid large pharma acquisitions, preferring license deals and bolt-ons -- the same narrative came through very clearly: Management is looking for deals to juice growth.

Will other companies follow along? It's hard to say. Certainly American Big Pharma is sitting on a lot of cash (numbers from Q2, since the other big players haven't reported yet):

Source: S&P Capital IQ.

And after getting pounded over the last couple of months, biotech stocks are undeniably looking cheaper, meaning the opportunity to pick up companies on the cheap is undeniably present.

Focus on what matters
You'll probably hear more about the three issues I've mentioned above on a number of upcoming quarterly calls. While it's important to understand what I've shared above, of the three issues mentioned, the one that matters most long term is the M&A discussion. The other issues are short term, and they shouldn't distract you from the potential for deals. After all, smart capital allocation has a habit of driving tremendous shareholder value.