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What's Powering Johnson & Johnson's Impressive Quarterly Earnings?

By Todd Campbell - Oct 18, 2017 at 6:31AM

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Acquisitions helped increase revenue in the past year, but a slate of fast-growing pharmaceuticals also chipped in.

Johnson & Johnson (JNJ 1.13%) surprised investors with better-than-hoped-for top-line and bottom-line performance in the third quarter, and that news sent shares soaring on Tuesday. The company's revenue and profit growth were supported by acquisitions, but even after factoring out the positive impact of deals, the financial results were still impressive. Here's what's behind J&J's strong quarter and what the future may have in store for this Dividend Aristocrat.

Digging into the details

Johnson & Johnson markets consumer goods, pharmaceuticals, and medical devices, and in the third quarter, sales in each of these segments were higher than Q3 2016.

A businessman drawing a line upward above a chart of ascending columns.


Revenue from consumer-goods brands, including Band-Aid and Aveeno, grew 2.9% year over year to $3.3 billion while medical-device revenue increased 7.1% to $6.6 billion. Pharmaceuticals revenue, which represents nearly 50% of sales, increased 15.4% to $9.7 billion.

Currency tailwinds explain a big chunk of the company's consumer-goods growth. Remove the benefit associated with converting overseas sales back into dollars last quarter, and we end up with 1.6% growth, which is more in line with what investors should expect from J&J's mature product-line up.

Medical-device revenue also enjoyed a small increase because of currency, but most of the increase came from J&J's acquisition of Abbott Medical Optics. After adjusting for that deal, medical-device sales inched up by only 1.2% year over year.

Pharmaceutical revenue also comes with some disclaimers. The segment's performance was heavily influenced by its acquisition of Actelion, which added about 8% to operational sales growth. Back Actelion out of the results, and pharmaceutical sales were up 6.7% year over year.

Contributing to the gains in the pharmaceutical segment were the multiple myeloma drug Darzalex, the blood cancer drug Imbruvica, the prostate-cancer drug Zytiga, and the autoimmune-disease drug Stelara. Those drugs saw demand increase notably over the past year because label expansions increased their addressable markets.

In June, the FDA OK'd Darzalex's use alongside widely used multiple myeloma drugs Pomalyst and dexamethasone in patients who've tried and failed at least two prior therapies. This additional indication helped Darzalex's third-quarter sales improve 94.5% year over year to $317 million.

Imbruvica, which J&J shares with AbbVie (ABBV 0.42%), won FDA approval in the third-quarter for use in chronic graft-versus-host disease, a life-threatening condition that some transplant patients experience. Rising market share in its primary market, chronic lymphocytic leukemia, resulted in J&J's pocketing $512 million from Imbruvica, up 46.7% from Q3 2016.

Zytiga revenue increased in the wake of data suggesting it's effective in earlier inpatient treatment. Trial results showed Zytiga can be used successfully in combination with prednisone and ADT in patients with high-risk metastatic hormone-naive prostate cancer or newly diagnosed, high-risk metastatic hormone-sensitive prostate cancer. J&J filed a supplemental new drug application last quarter, but it appears doctors may already be prescribing Zytiga in these patients. Zytiga sales rose 14.9% in the past year to $669 million last quarter.

As for Stelara, doctors continue to embrace it for use in Crohn's disease patients following approval in that indication last year. Stelara's revenue climbed 38% year over year to $1.1 billion last quarter, and with $4.4 billion in annualized sales, Stelara trails only Remicade in terms of company product revenue.

Speaking of Remicade, investors ought to feel pretty good about its performance last quarter too. Even though the FDA approved two Remicade biosimilars in the past year, Remicade sales slipped by only 7.6% in the past year to $1.6 billion. U.S. Remicade revenue fell by only 1.3% year over year despite the competition.

What's investors' takeaway?

J&J is leveraging sales growth against fixed costs, and that's providing a nice tailwind to earnings. In the quarter, adjusted earnings were $5.2 billion, up 11.2% from one year ago. Because share buybacks reduced its share count, earnings per share grew even more quickly, increasing 13% to $1.90. 

Management's guidance for the rest of the year suggests they're confident this profit-friendly trend will continue. J&J's targeting sales of between $76.1 billion and $76.5 billion and non-GAAP EPS of $7.25 to $7.30 in 2017, up from a previous forecast for sales of between $75.8 billion to $76.1 billion and adjusted EPS of $7.12 to $7.22.

Given the company's solid top- and bottom-line performance, it appears there's plenty of financial flexibility to support its dividend friendly status as a Dividend Aristocrat. The company's upped its dividend payout for more than 50 consecutive years, making it a core stock to own in income portfolios. 

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