Healthcare stocks have performed incredibly well over the past year, and investors are excited about the many opportunities for businesses in the sector. Between traditional pharmaceutical companies, biotechnology specialists, and new niches like medical cannabis, the health of the healthcare sector has never looked better.

Yet to sustain that positive momentum, key stocks in the industry have to perform well. You won't find a more important stock in the healthcare sector than Johnson & Johnson (NYSE:JNJ), whose operations span the entire field with multiple major divisions. After a great year in 2017, J&J hasn't yet been able to convince investors this year that it's still on a path toward long-term growth. Next Tuesday's third-quarter financial report should shed some light on Johnson & Johnson's future, and what it says could send ripples throughout the healthcare industry.

Stats on Johnson & Johnson

 

 

Expected quarterly EPS growth

6.8%

Expected quarterly revenue growth

2%

Forward earnings multiple

15.5

Expected 5-year annualized growth rate

7.5%

Data source: Yahoo! Finance.

Can Johnson & Johnson keep making progress?

Investors have gotten a bit more optimistic about what they're likely to see from Johnson & Johnson's earnings in the near future. They've kept their projections on near-term quarterly earnings unchanged, but they've boosted their full-year expectations for both 2018 and 2019. The stock has also done well, picking up 8% since mid-July.

Johnson & Johnson's second-quarter earnings report helped to get the stock moving in the right direction during the summer months. Revenue jumped nearly 11% to $20.8 billion, and adjusted earnings of $2.10 per share were 15% higher than in the year-ago quarter. International sales growth outpaced J&J's domestic performance, and as we've seen countless times in the past, pharmaceutical revenue was the essential component of overall growth for the company, as segment sales soared 20%.

Johnson & Johnson red J&J logo.

Image source: Johnson & Johnson.

Johnson & Johnson's global brand recognition has been instrumental in its long-term expansion, and the company continues to reap the rewards of its investment in making sure customers around the world know its name. In China, the National Health Insurance Administration added more than a dozen cancer drugs, including J&J's Imbruvica, to its list of treatments eligible for government reimbursement. Imbruvica is on pace to deliver annualized sales of $3.6 billion in 2018 based on the first two quarters of the year, but J&J has hope that the drug could be even more lucrative going forward. Making sure that promising treatments get approved and are eligible for reimbursement in key jurisdictions across the globe is essential for Johnson & Johnson to maximize the profit potential of its successful drugs and other products.

Yet one key question is how J&J expects to build up its business further. The company is among the top three players in its field in terms of how much cash it has available on its balance sheet, and even though the acquisition of biopharmaceutical Actelion last year put a lot of its financial resources to productive use, there's a lot of room for J&J to use its $18 billion in cash to consider further strategic moves.

The news of a licensing agreement with Arrowhead Pharmaceuticals (NASDAQ:ARWR) could put up to $3.7 billion of that cash to work depending on whether its hepatitis B treatment reaches certain milestones. But even given that, along with expected dividend increases in the future, Johnson & Johnson remains a cash-generating machine, and that should present opportunities for smart acquisitions.

Another thing to watch is Johnson & Johnson's pipeline. Good news came earlier this week for the company when it announced favorable results in a phase 3 trial of Stelara for ulcerative colitis patients, with the study attaining primary endpoints of effectively reaching clinical remission in significantly more cases than placebos did. Similar results with other treatments will be essential in order to keep J&J moving higher.

Johnson & Johnson's coming earnings report will say a lot about how the healthcare industry is doing more broadly. If pharmaceutical-segment strength continues to lead the way, then J&J's results could support the strong performance of healthcare stocks for the rest of 2018 and beyond.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of Johnson & Johnson and has the following options: short October 2018 $135 calls on Johnson & Johnson. The Motley Fool has a disclosure policy.