It's officially time once again, folks – earnings season is under way! As per the norm, healthcare conglomerate Johnson & Johnson (NYSE:JNJ) is more or less slated to set the tone for the sector by reporting its first-quarter results before the opening bell on Tuesday, April 18.
According to Wall Street's consensus, Johnson & Johnson is expected to report $18.01 billion in sales, which would represent year-over-year sales growth of 3%, and $1.76 in earnings per share (EPS). On an adjusted basis, we're talking about 2% year-over-year growth.
Most investors, and even Wall Street analysts, have a tendency to place their focus on these headline figures. While they certainly can offer a quick summary of how well or poorly a company performed during the previous quarter, headline figures tell us next to nothing about the nuts and bolts of how the underlying operations of a company allowed it to arrive at those figures. As investors, we need to be able to dig deeper.
When Johnson & Johnson reports its quarterly results tomorrow morning, here are five things you should be expecting.
1. It'll beat EPS estimates (again) and miss sales estimates (again)
The first thing investors should practically count on is that Johnson & Johnson will surpass Wall Street's consensus profit expectation. J&J has topped the Street's EPS expectations in every quarter for years now, and there's little reason to believe that, with the company's share repurchases in full swing, it won't be able to beat by a few pennies per share.
On the flipside, we're likely to continue seeing weakness on the sales front. Analysts often have a hard time adjusting for the impact of currency fluctuations around the world, and few healthcare companies have as global a reach as Johnson & Johnson.
The pressing question will be whether we see strong core operating growth (i.e., excluding currency fluctuations). As you'll see in points two and three, two of J&J's blockbuster drugs could be in for a tougher year-over-year comparison than normal.
2. Remicade sales will be noticeably lower from biosimilar competition
In November, Pfizer (NYSE:PFE) announced that it was launching Inflectra, which is a biosimilar medication designed to complete with J&J's top-selling anti-inflammatory drug, Remicade. Pfizer, which licensed Inflectra from developer Celltrion, priced its biosimilar at a 15% discount to Remicade's list price, and the result in the fourth quarter was a nearly 2% decline in Remicade sales.
However, Inflectra's launch only amounted to a few weeks of sales for Pfizer and Celltrion. With a full quarter now in the books and Pfizer having had time to get the word out of its launch to physicians, we could see a notable hit to Remicade sales in Q1. How much? That remains to be seen. But with biosimilars being such a new type of treatment, no one is really sure what to expect at this point, analysts included.
3. Invokana sales will be flat, or perhaps even down, as we wait for CANVAS
What could be the biggest surprise for investors is that it's possible we could see a year-over-year decline in sales of SGLT-2 inhibitor for type 2 diabetes, Invokana.
J&J is expected to deliver solid sales growth from Darzalex, Imbruvica, and a number of already or soon-to-be blockbusters. However, Invokana gave investors signs of weakness in Q4, when its sales fell slightly to $371 million from $372 million in the year-prior quarter.
There are two issues holding Invokana's sales back at this point, and market saturation, despite what analysts suggest, isn't one of them. First, competition in the SGLT-2 space has increased, with around a half-dozen SGLT-2 drugs now on pharmacy shelves. Not to mention that Lexicon Pharmaceuticals and licensing partner Sanofi are readying to move sotagliflozin, an inhibitor of SGLT-1 and SGLT-2, into pivotal phase 3 studies for type 2 diabetes, adding more competitive worries.
Secondly, we're all still waiting for J&J to unveil its CANVAS trial data. CANVAS is examining Invokana's long-term impact on patients' cardiovascular systems. Rivals Eli Lilly and Boehringer Ingelheim have already announced positive results from their EMPA-REG OUTCOME study for Jardiance, so Invokana sales may have stalled as physicians and patients await this data.
4. J&J will be hard-selling the Actelion buyout to investors
Investors should also anticipate that J&J's management team will be reinforcing the importance of its pending $30 billion acquisition of Swiss specialty-drug maker Actelion (NASDAQOTH: ALIOF). For those who may not recall, the acquisition gives J&J access to Actelion's existing product portfolio of pulmonary arterial hypertension drugs, and a 16% stake in the spinoff company that'll contain Actelion's developing therapies.
J&J describes the buyout as a win for both parties, with the deal increasing its long-term EPS growth rate by 1.5% to 2% per year, and the all-cash component being attractive to Actelion's shareholders. J&J also touted its stake in the expected spinoff as a longer-term value creator.
However, this Fool has been highly skeptical of the deal. Actelion's leading drug for years is set to face generic competition this year, and J&J is getting a pretty minimal stake for Actelion's pipeline, even with its option to purchase an additional 16% stake in the future. It's questionable whether J&J will actually recoup its costs from this deal, so expect management to focus on hard-selling this acquisition to investors.
5. U.S. medical-device growth will be above expectations
Finally, investors should be expecting J&J's U.S. medical-device segment to outperform. Growth from this segment has floundered between 1% and 2% for years, but this could be the quarter we begin to see a pick-up in sales growth.
Why? To begin with, President Trump and Republican lawmakers spent much of the first quarter pushing for the repeal of Obamacare and the implementation of a Republican replacement. Even though that repeal effort ended in failure, it may have pushed on-the-fence consumers to get elective surgical procedures that they've been putting off.
Additionally, GDP and wage growth have been improving over the past couple of quarters, and consumer confidence recently hit a 16-year high. This could encourage more consumers to get optional surgical procedures, such as hip and knee replacements.
Mark your calendars, folks, because we're just hours away from the big news.