Johnson & Johnson (NYSE:JNJ) has been a behemoth in the U.S. healthcare space for decades. Yet as a mature company, J&J faces the inevitable challenge of finding ways to keep its growth rates up even as its business gets ever larger. Results from recent quarters had shown signs of potentially slowing increases in sales and profits, and that raised some worries among longtime investors that Johnson & Johnson might have hit peak growth in its core business.
Coming into Tuesday's third-quarter financial report, Johnson & Johnson shareholders wanted reassurances that aggressive moves like the acquisition of Actelion would pay off with better fundamental performance. J&J's report strongly suggested that its long-term strategy is working well, and the company seems more optimistic than ever that its combination of organic growth opportunities and smart acquisitions can help power it forward in the years to come.
Sales, earnings shoot higher at J&J
Johnson & Johnson's third-quarter financial results were a nice break from more sluggish trends in past quarters. Sales jumped more than 10% to $19.65 billion, outpacing the consensus forecast among investors by nearly $400 million. GAAP (generally accepted accounting principles) net income was down from the year-ago period, largely due to special items, but adjusted net income grew 11% to $5.2 billion, which worked out to $1.90 per share. The bottom-line figure was better than the $1.80 per share that most investors had expected.
Taking a closer look at the report, the acquisition of Actelion had a clear and substantial impact on Johnson & Johnson's overall results. Within the pharmaceutical segment, sales jumped 15.4% to $9.7 billion, and the acquisition added almost 8 percentage points to that growth rate. Still, the organic growth rate was 6.7%, which was itself a nice rebound from a weak second quarter in which domestic pharmaceutical sales were actually down. Cancer-fighters Darzalex and Imbruvica continued to add to sales strength, along with other treatments like immune inflammatory treatment Stelara and blood thinner Xarelto.
Medical devices also saw a rebound in sales, climbing more than 7% with particular strength in international markets. Most of that growth came from the acquisition of Abbott Medical Optics, but organic worldwide sales were still up 1.2%, climbing back from an almost 1% drop last quarter.
The consumer segment brought up the rear for Johnson & Johnson, with revenue climbing just 2.9%. Positive currency fluctuations helped offset weaker domestic sales, and acquisitions contributed about half a percentage point of growth in worldwide sales. The best performance came from Tylenol, beauty products with the Neutrogena and OGX brands, and smoking-cessation products.
Can Johnson & Johnson build on this momentum?
Johnson & Johnson was happy with the report. In CEO Alex Gorsky's words, "Johnson & Johnson accelerated growth in the third quarter, driven by the strong performance of our pharmaceutical business and augmented by Actelion and other recent acquisitions across the enterprise that will continue to fuel growth."
As we've seen in several recent quarters, Johnson & Johnson chose to boost its guidance for sales and earnings. J&J now expects that it will bring in between $76.1 billion and $76.5 billion, boosting the upper end of its projection by $400 million. The Band-Aid maker also kicked its adjusted earnings projections higher by roughly 1% to 2%, with a new expectation for between $7.25 and $7.30 per share.
Johnson & Johnson did have a couple of disappointments. The healthcare giant said that it will not pursue global approvals of rheumatoid-arthritis fighter sirukumab, and it chose to end clinical trials for leukemia candidate treatment talacotuzumab. Nevertheless, J&J is generally pleased with the strength of its drug pipeline, and it continues to believe that the pharmaceutical segment holds the key to many lucrative growth opportunities.
Johnson & Johnson investors were ecstatic about the news, and the stock jumped almost 3% at midday following the announcement. If the healthcare giant can manage to keep its sales and profits growing at the rate those figures grew in the third quarter, then J&J could finally have found the secret to juicing its long-term growth one more time.