10 Questions That Need to Be Asked Ahead of Johnson & Johnson's Q4 Report

Forget the top-line results and pay attention to these aspects of J&J's business instead.

Sean Williams
Sean Williams
Jan 23, 2017 at 8:31AM
Health Care

Image source: Getty Images.

Though it technically never ends, earnings season is about to kick into high gear. For about a six-week stretch, a vast majority of S&P 500 companies are set to report their performance from the previous quarter. Conglomerate Johnson & Johnson (NYSE:JNJ) has the responsibility of kicking off earnings season within the healthcare sector on Tuesday, Jan. 24.

Among publicly traded companies in the healthcare sector, none even comes close to J&J's size, meaning it's a company that has the potential to set the tone for the entire sector. According to Wall Street, Johnson & Johnson is expected to report $18.3 billion in sales, representing 2.5% year-over-year sales growth, and $1.56 in earnings per share, an 8% increase from the prior-year quarter. Johnson & Johnson has surpassed Wall Street EPS estimates in each of the past 12 quarters, so if history repeats itself, shareholders are probably going to be satisfied with the results.

However, there's far more to J&J's earnings report than its top-line numbers. Here are 10 questions investors and shareholders should be asking ahead of J&J's Q4 report.

1. How did Remicade fare against Inflectra's launch?

Arguably the biggest question on the minds of investors is how well J&J's top-selling drug, Remicade, fared against the launch of biosimilar drug Inflectra, which was developed by Celltrion and launched by licensing partner Pfizer (NYSE:PFE) in November. Inflectra is priced at a 15% discount to Remicade, meaning it presents a conundrum for J&J: lower its own price on Remicade or take its chances that physicians and consumers will stick with a time-tested brand-name anti-inflammatory product. J&J's Q4 report will tell us a lot about how well or poorly biosimilar medicines will be received.

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2. Can Imbruvica pick up Remicade's slack?

On the flip side, Wall Street and investors should be extremely curious to see whether blood cancer drug Imbruvica can pick up the expected slack of Remicade's (presumed) reduced sales. Through the first nine months of 2016, Imbruvica sales grew by 99.3% to $905 million. Wall Street and investors should be looking for sales growth of at least 50% from Imbruvica in 2017 if they hope to counteract the estimated sales loss from Remicade.

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3. Is Invokana retaining its market share?

Another question worth asking is whether SGLT-2 inhibitor Invokana, the dominant next-generation type 2 diabetes treatment, is retaining its market share over its peers. If you recall, Eli Lilly (NYSE:LLY) and Boehringer Ingelheim reported in 2015 via the EMPA-REG OUTCOME long-term cardiovascular study that their SGLT-2 inhibitor, Jardiance, led to a statistically superior reduction in all-cause death compared to the current standard of care. J&J's long-term cardiovascular study on Invokana should be out in the first half of 2017, but in the interim investors should be intrigued as to whether Invokana is holding its own in type 2 diabetes against Jardiance.

4. What's new with Darzalex?

Following its approval in November 2015 as a third-line treatment for multiple myeloma, we haven't heard much from J&J about Darzalex. It'd be nice to get a sales breakout from J&J's management on Darzalex's first full year of sales, as well as an update on a timeline for a potential expansion of its label. Additionally, it'd be interesting to see if Darzalex is chipping away third-line multiple myeloma market share from Amgen's Kyprolis, or if an increase in multiple myeloma diagnoses is pushing sales of both drugs higher.

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5. What are the expectations for guselkumab?

Within Johnson & Johnson's pipeline, there's potentially no more exciting drug than plaque psoriasis drug guselkumab. In phase 3 studies, guselkumab mopped the floor with the placebo at the 16- and 48-week mark, and more impressively also handily topped AbbVie's (NYSE:ABBV) Humira in near-complete skin clearance at the 16- and 48-week mark. AbbVie's Humira is currently the best-selling drug in the world, and it's approved in 10 separate indications. While widely expected to bring in more than $1 billion in peak annual sales, it'd be nice to get some sales and launch guidance from J&J's management team, assuming approval from the Food and Drug Administration.

6. Is Trump a threat to drug pricing?

It has to be asked: Is President Donald Trump a threat to the pricing power of drugmakers? During his campaign, Trump promised to lower drug pricing in America, and more recently he exclaimed that drugmakers were "getting away with murder" when it comes to pricing. Specialty drugs, like cancer and hepatitis C products, would presumably be at the greatest risk of pricing pressure. Thus, investors should be eager to hear from management whether Trump's comments on drug pricing are worth losing sleep over.

7. Is Actelion really the right move?

Another question that should be on the minds of long-term investors is if pursuing Swiss-based drugmaker Actelion (OTC:ALIOF) is a smart move. Actelion's product portfolio tackles the niche disease pulmonary arterial hypertension, which describes a condition of high blood pressure in the arteries between the heart and lungs. As a specialty drugmaker with therapies for all stages of the disease, Actelion has excellent pricing power. However, this Fool's contention has been that J&J could be overpaying for a possible acquisition of Actelion. Look for J&J's management to offer more commentary on a proposed combination during its Q4 conference call.

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8. Is J&J's focus on hip, knee, and trauma devices paying off?

Medical devices have been part of a disappointing growth segment for J&J in recent years as increased competition, and the rollout of the Affordable Care Act in the U.S. has weighed on results. For its part, Johnson & Johnson refocused its device efforts on hip and knee replacements, as well as trauma, which are viewed as higher growth segments. What investors should be looking for is if these focus areas within devices are growing on a year over year and sequential quarterly basis in domestic markets.

9. Is the impact of currency fluctuations dampening?

Though smart investors know better than to take currency fluctuations into account when analyzing the quarterly performance of a stock, it's been difficult to ignore some of the mid- to high-single-digit percentage drops in sales and EPS that J&J has endured in recent years due to currency fluctuations. Look for management to provide insight into the impact of currency fluctuations on J&J's results for the upcoming year.

10. How big of a dividend increase should be expected in 2017?

Finally, investors should be looking for cues as to how big of a dividend increase to expect in 2017. Johnson & Johnson has increased its payout for 54 consecutive years, and with a payout ratio of less than 50%, a 55th year should be the expectation. In recent years, J&J has targeted dividend increases of around 7%-8%, and my personal suspicion is that's what J&J will offer again. The company's fiscal 2017 full-year EPS guidance will probably tell the tale.

Regardless of how J&J answers these questions, it's likely to remain one of the steadiest and most profitable publicly traded companies. It also doesn't hurt that its dividend yield is superior to the average yield of the S&P 500. If you own J&J, or are considering adding J&J to your investment portfolio, the company's Q4 report probably isn't going to change your investment thesis.