On Tuesday morning, healthcare conglomerate Johnson & Johnson (NYSE:JNJ) released its much-anticipated first-quarter earnings results. Based on the reaction -- a nearly $4 move lower, which is an exceptionally large move for the low-beta J&J -- investors weren't satisfied with the results.
Johnson & Johnson's Q1, by the numbers
For the quarter, Johnson & Johnson produced $17.8 billion in sales, which was a 2% operating increase from the prior-year quarter, excluding the negative-0.4% impact from currency moves. For its bottom line, J&J delivered $1.83 per share on an adjusted basis, which represents 5.8% year-over-year growth. Comparatively, Wall Street was counting on J&J to earn $1.77 in EPS on $18.02 billion in sales.
The company also lifted its full-year sales and EPS guidance given the expectation of its Actelion (OTC:ALIOF) acquisition closing in the second quarter. J&J's guidance calls for $75.4 billion to $76.1 billion in sales and $7 to $7.15 in EPS.
Not everything in J&J's report was necessarily bad news. For example, medical-device sales began showing signs of life with 3% worldwide growth, including a 2.2% increase in domestic sales. The potential turmoil of repealing and replacing the Affordable Care Act may be responsible for coercing consumers to take the plunge on elective surgeries, which would be an intermediate positive for J&J. It should be noted, however, that J&J also completed its acquisition of Abbott Medical Optics during the quarter, which certainly boosted domestic sales.
Some core therapies within J&J's product portfolio also showed serious growth. Multiple myeloma drug Darzalex increased year-over-year sales by more than 150% to $255 million worldwide, putting it on track to reach blockbuster status in 2017. Blood cancer drug Imbruvica also delivered strong sales results, with operating revenue (excluding currency movements) up 59% to $409 million worldwide.
Even Remicade sales turned out to be a bit of an upside surprise. J&J's top-selling drug is facing biosimilar competition in the U.S. yet saw sales dip by only 2.4%, which was a tad bit higher than the 1.7% sales decline experienced in Q4. In other words, despite a 15% discount to Remicade, Inflectra, the aforementioned biosimilar medicine, isn't having much of an impact on J&J's lead drug.
The healthcare stalwart also topped EPS expectations once again. Johnson & Johnson has been no stranger to repurchasing its own shares and surpassing what's often conservative profit guidance.
Five ways J&J left us disappointed
But when taken as a whole, Johnson & Johnson mostly left investors wanting more. Here are five ways J&J disappointed us with its first-quarter report.
1. Yet another revenue miss
Wall Street and investors have to be getting a bit tired of seeing J&J beat the consensus on an adjusted profit basis while falling flat when it comes to sales.
Part of the blame can be pointed at adverse currency fluctuations, but this is only a minor part of the problem. J&J's weak sales growth implies that consumers are really paring their spending, especially in the United States. When acquisitions and divestitures are removed from the equation, J&J's worldwide sales grew by an even more pedestrian 1.2% on an operating basis in Q1 2017, with U.S. sales falling 0.7%! As you'll see, most of J&J's operating segments struggled during the first quarter.
2. Consumer health struggled mightily
Johnson & Johnson's consumer health segment was never designed to be a rapid-growing division for the company, but its inelastic products and generally strong pricing power typically deliver predictable cash flow and low-double-digit sales growth. That wasn't the case in Q1.
During the quarter, worldwide sales grew 1%, but that includes acquisitions and divestitures. Strip this out to an apples-to-apples comparison and we're left with a 2.3% decline in consumer health sales, including a 2.9% drop in the U.S. and 1.9% internationally.
What's wrong? Practically every segment, save for its over-the-counter medicines and beauty division, saw an operating sales decline in Q1. Women's-health sales were down more than 5%, oral care fell more than 6%, and baby care dipped better than 6%. It's possible that we're still seeing fallout from talcum powder-related ovarian cancer lawsuits and hip-implant lawsuits that keep streaming in against the company. Then again, it could just be exceptionally weak consumer spending, too. Whatever the reason, J&J's normally steady operating segment struggled mightily in Q1, and that's a worry.
3. Pharmaceutical sales growth fell flat
Perhaps a bigger concern is that pharmaceutical sales, which comprise around 46% of the company's total sales and have been its greatest margin and top-line driver in recent years, fell flat on their face in Q1. Although sales increased 1.4% on an operating basis, they've regularly been growing by the upper single digits for multiple quarters, so this was an abrupt pull of the emergency brake for shareholders.
Worse yet, making an apples-to-apples comparison without the impact of acquisitions, divestitures, and currency movements showed modest growth of 6.1% internationally, but a 0.4% decline in the United States. That's incredibly disappointing, considering the strong growth a number of specialty products -- Imbruvica, Darzalex, and Stelara -- have brought to the table. There were also no clear indications from J&J's management that the ship would be righted domestically anytime soon.
4. Invokana sales plunged
Another major shock was the nosedive in sales from blockbuster Type 2 diabetes drug Invokana. The next-generation SGLT-2 inhibitor saw sales grow 32% to $37 million in international markets while they plunged by $50 million to $247 million, or 17%, within the United States. Is this a stocking issue, or could it be something bigger? We'll like know a bit more in the quarters to come. However, it does represent the second consecutive quarter in which sales of Invokana have declined.
Perhaps the bigger worry here is that the SGLT-2 market is getting crowded (there are about a half-dozen approved SGLT-2 inhibitors), and Invokana may be losing market share to its peers. In particular, we may be seeing physicians and consumers making the switch to Eli Lilly's and Boehringer Ingelheim's Jardiance, which in long-term cardiovascular studies led to a statistically significant reduction in the risk of death or having a cardiovascular event. For what it's worth, J&J's long-term Invokana data is expected out this year, and positive results may very well be needed to get Invokana back on track.
5. Actelion may not be the answer
Finally, I believe we're seeing clear worries that the $30 billion acquisition of Actelion may be a bit of an act of desperation, as opposed to a way to complement its pharmaceutical portfolio.
This Fool strongly questioned the $30 billion price tag that J&J laid out to acquire Actelion's drug portfolio focused on treating pulmonary arterial hypertension (PAH). Even with the expectation of solid pricing power from these therapies and notable PAH market share, it could take many years, a decade, or even longer for J&J to realize a return on its large investment. Remember, J&J is typically known for making smaller deals and building upon early and mid-stage drugs in development.
Based on J&J's weak pharmaceutical sales in Q1, It's looking as if the acquisition was very much needed to mask a lack of organic growth, and that's a scary thought for a company that's been exceptionally smart with organic growth throughout the years.
Can J&J turn things around?
The question investors have to ask here is whether the company can put this disappointing quarter in the rearview mirror. My belief is that given enough time it can.
What can't be overlooked is the consistency of J&J's leadership. It's had just nine CEOs in 121 years, which means it has a tendency to stay on track. The company has also increased its dividend for 54 straight years and has regularly been repurchasing its common stock to boost its EPS and make the company more attractive to value and risk-averse investors. Patient long-term investors can collect a healthy dividend while they wait for J&J to return to its steady growing ways.
J&J also has an intriguing long-term growth opportunity in medical devices, given America's aging baby boomer population.
The key, though, will be if J&J can right the ship with its pharmaceutical division. It has a number of partnerships and a focus on specialty indications that should support organic and inorganic growth over the long term. It's likely that Tuesday's drop in J&J's share price will be a mere speed bump in the road.