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The 3 Biggest Stories From Johnson & Johnson's Third-Quarter Report

By Sean Williams – Updated Oct 20, 2016 at 8:04AM

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Forget the headline numbers -- these figures were far more important.

Johnson & Johnson CEO Alex Gorsky. Image source: Johnson & Johnson.

The largest publicly traded healthcare company in the world, Johnson & Johnson (JNJ -0.20%), reported its third-quarter earnings results before the opening bell on Tuesday, Oct. 18. As has become something of a tradition for the health giant, it once again stepped right over Wall Street's earnings projections.

For the quarter, Johnson & Johnson announced $17.82 billion in global sales, a 4.2% increase from the prior-year period, which includes 4.3% operational growth and a negative currency effect of 0.1%. Comparatively, Wall Street had been looking for J&J to deliver sales closer to $17.7 billion.

In the profit column, Johnson & Johnson once again leaned heavily on its pharmaceuticals to push adjusted net earnings up to $4.7 billion, or $1.68 in EPS on an adjusted basis. These figures are 12.2% and 12.8% higher, respectively, than the previous year. Wall Street's consensus had called for J&J to earn just $1.65 in EPS on an adjusted basis.

Looking ahead, J&J stuck to its previous sales forecast of $71.5 billion to $72.2 billion, though it did boost its full-year adjusted EPS, which comes as a surprise to just about no one. For fiscal 2016, J&J now expects to report between $6.68 and $6.73 in EPS, which compares to its prior forecast of $6.63 to $6.73 in full-year EPS that was doled out in its second-quarter press release. In other words, it was very much a traditional J&J report: solid growth and raised full-year profit guidance.

But these headline numbers don't tell the full story. Before J&J released its Q3 report, I took a look at the three figures that mattered most. Now that J&J has released its quarterly figures, let's double back and see how J&J did.

Image source: Getty Images.

1. Pharmaceuticals remain paramount, but one blockbuster stumbled

Far and away the most important figure for Johnson & Johnson is its pharmaceutical growth. J&J is comprised of three major operating segments -- consumer health products, medical devices, and pharmaceuticals -- but it's the company's pharma segment that provides the vast majority of its growth and margins. Considering that J&J opened the year with pharmaceutical sales growth of around 9%, and it remains confident of hitting its goal of filing for the approval of 10 new potential blockbuster drugs by 2019, I opined that J&J would have to hit growth of around 9% to satisfy Wall Street. Thankfully, that's exactly what it did.

For the third quarter, J&J generated operating sales growth of 9% on the dot, with an added 0.2% currency boost, yielding a total of 9.2% year-over-year growth. Sales were particularly strong domestically, with an increase of 11.8%. If acquisitions and divestitures are removed, J&J's pharma segment did even better, with 10.7% worldwide sales growth. Sales of blood cancer drug Imbruvica shone with 92% year-over-year sales growth, while Xarelto, Simpono, and Stelara all grew by a healthy double-digit percentage.

However, there was one major blemish in its pharmaceutical segment: type 2 diabetes drug Invokana. Invokana has been a double-digit growth stalwart, and a leader in the SGLT-2 space since its debut more three years ago. But in Q3 sales of Invokana fell 3.5%, or 3.2% on an operating basis. Though sales came close to doubling overseas, U.S. sales fell 8.7% to $294 million.

It's tough to tell whether Invokana is nearing its saturation point domestically prior to the release of its long-term cardiovascular outcomes study, or if it's feeling the competitive pressures from the likes of Eli Lilly (LLY -1.08%) and Boehringer Ingelheim. This duo developed Jardiance, the only SGLT-2 inhibitor to thus far demonstrate superiority over the current standard of care in terms of reduced risk of death. This clear advantage for Jardiance may be chipping away at Invokana's market share.

J&J shareholders can't be happy with Invokana's sales slowdown and will look for sales growth to reignite in the quarters to come.

Image source: Getty Images.

2. Medical device growth is finally trending in the right direction

Medical device growth has been subpar by J&J's standards for years. Johnson & Johnson has struggled with growing competition within the device field, which has led to some degree of product commoditization and margin pressure. The implementation of the Affordable Care Act has also weighed on J&J since consumers and hospitals have both been less willing to open their wallets for elective procedures and new equipment, respectively.

Before J&J reported its Q3 results, I had said that Wall Street was expecting growth trends to continue heading in the right direction in medical devices, which is exactly what they did. Global medical device sales increased 0.7% on an operating basis (1.1% adjusted for currency), but this doesn't tell the whole story. When we back out J&J's handful of recent divestitures and focus solely on the apples-to-apples comparisons, J&J's worldwide sales grew 3.1%, including 2.3% domestically. That 2.3% domestic growth is 40 basis points higher than the sequential second quarter and a clear step in the right direction.

Looking ahead, J&J expects to realize immediate benefits from its $4.33 billion acquisition of Abbott Laboratories' Medical Optics unit. Aside from the positive earnings accretion buying Abbott Medical Optics provides, it's also a perfect complement to the company's existing Acuvue contact lens product line, and it'll help expand J&J's ophthalmologic device offerings.

Investors should be modestly pleased with the progress being made in the devices segment.

Image source: Johnson & Johnson.

3. Remicade's time may be up

Finally, there was the question of what would happen with Remicade, Johnson & Johnson's top-selling drug. Remicade, one of the top-selling anti-inflammatory medicines on pharmacy shelves, is the target of a new line of drugs known as biosimilars, which are nothing more than copycat versions of biologic drugs. There's a push-pull debate surrounding biosimilars since they could potentially be marked at 10% to 50% below branded-drug pricing, thus helping the consumer. However, there are also patent concerns surrounding their launch.

With particular regard to Remicade, the Food and Drug Administration approved Inflectra, a biosimilar of Remicade developed by Celltrion and licensed by Pfizer (PFE -0.11%), back in April. Investors had been looking to J&J for some answers as to how it might be impacted by a biosimilar launch going forward. During Q3, Johnson & Johnson focused on the expected success of its pharma segment as a whole, essentially minimalizing the effect of a possible biosimilar launch. J&J's management team also countered that it believes patients are unlikely to switch away from Remicade to a biosimilar.

However, Pfizer announced on Tuesday that it planned to launch Inflectra in November at a 15% discount to Remicade's current wholesale price. This could incite J&J to reduce its own price to negate patient switching, or it could take its chances. Some pundits predict sales of J&J's key drug could drop as much as 20% over the next year, which would work out to a loss of well over $1 billion in annual sales. Long story short, Remicade's growth party appears to be nearing an end.

Despite the challenges J&J faced in Q3, the company continues to look as strong as ever. Johnson & Johnson is one of just two remaining AAA credit-rated companies, it has a superior dividend yield, and it has a portfolio of inelastic products that are sold in both good and poor economic environments. There's little reason for your confidence in J&J's long-term strategy to be shaken by its Q3 report.

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

The Motley Fool recommends Johnson and Johnson. 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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