Johnson & Johnson's (NYSE:JNJ) $20.3 billion in revenue in the third quarter was $300 million higher than anticipated, and its $2.05 in adjusted earnings per share in the period was $0.02 better than industry watchers' estimates. The company's top- and bottom-line performance is encouraging because its best-selling drug, Remicade, is facing fierce competition and its consumer goods and medical device businesses are only growing by single digits. Is J&J likely to continue outperforming its naysayers? Here's what you should know about J&J's recent quarterly results and its prospects in the coming year.
No. 1: Consumer goods and medical device headwinds ease
About half of J&J's sales come from consumer goods brands, including Band-Aid, and medical device products, including orthopedics. Sales in those segments haven't made much headway over the past couple years, but that may be changing.
After J&J revamped its baby care product lineup to make it more attractive to millennial shoppers, its consumer revenue climbed 1.8% year over year to $3.42 billion in Q3. Importantly, its U.S. sales increased 6.6%, and if you back out headwinds caused by converting sales in other currencies into U.S. dollars, total segment sales were up a healthy 4.9%.
The medical device segment didn't do as well, but there are signs a turn could be happening there, too. Medical device sales growth has been lackluster because J&J's been shrinking its footprint in diabetes and divesting noncore products. That's hampering revenue, but the negative impact of these changes could disappear next year as year-over-year comparisons get easier. If so, then medical devices may be able to deliver sales growth that's better than the 0.2% decline registered in Q3.
No. 2: Remicade's sales are slipping
Pharmaceuticals account for roughly 50% of J&J's worldwide sales, and historically, Remicade's been the company's best-selling medicine. Unfortunately, the multibillion-dollar-per-year autoimmune disease drug no longer has patent protection, so Pfizer (NYSE:PFE) began chipping away at its market share with its biosimilar, Inflectra, last year.
J&J's been able to control the rate of decline in Remicade demand by cutting prices to maintain market share, but those price cuts have been costly. In Q3, brand-name Remicade had 93% total prescription volume market share, but its sales declined 16.3% year over year because of price discounts. As competition intensifies, Remicade's going to remain a big headwind to segment growth because its sales were still $1.4 billion in the third quarter, despite the year-over-year decline.
No. 3: Oncology's the key to its success
Remicade's struggles would've been a much bigger drag on J&J's financials last quarter if not for soaring sales of J&J's cancer drugs. FDA approvals that are expanding the use of its existing drugs into new markets sparked a 36.4% year-over-year surge in cancer drug revenue to $2.59 billion in Q3.
Two great examples of how label expansions are boosting sales are Darzalex and Imbruvica. Although Darzalex has only been on the market for three years, it's already one of J&J's most important drugs. Initially, it was approved for use in late-line multiple myeloma patients with limited treatment options, but now it's being used much earlier in treatment, and as a result, J&J's third-quarter sales skyrocketed 57% in the past year to $498 million.
Similarly, label expansions have boosted sales of Imbruvica, a blood cancer drug. Its sales jumped 37.7% to $705 million in Q3 following FDA approval of its use in graft-versus-host disease last year and in first-line chronic lymphocytic leukemia in 2016.
No. 4: Zytiga could be a fly in the ointment in 2019
J&J's oncology lineup could suffer a big setback next year, though, if courts fail to delay the entry of generic versions of Zytiga, its top-selling prostate cancer drug.
Earlier this year, courts invalidated a key patent protecting Zytiga, effectively accelerating its patent expiration to this month. Absent a favorable ruling for J&J by the courts later this month, generics could begin competing against Zytiga as early as next year. That wouldn't be good news because Zytiga's sales were $958 million in Q3, up 43% from last year.
Management's Remicade experience shows it knows how to mitigate the damage from losing exclusivity on key products like this, but the prospect of price cuts and market share losses is worrisome nonetheless.
No. 5: New drugs? Yes, please
J&J believes it can digest any threat to Zytiga next year in part because of newly launched drugs and drugs that could win FDA approval soon.
One of those drugs is Erleada, a prostate cancer drug that secured the FDA green light in February. Erleada has been initially approved for use in patients with prostate cancer that hasn't spread but is still growing despite hormone therapy. It's not a huge indication (about 10% of cases are nonmetastatic and 16% are castration-resistant), but it could generate hundreds of millions in sales. The company also launched a new psoriasis drug last year, Tremfya, and its sales were $171 million in Q3.
The company could also secure new FDA approvals for esketamine, a nasal therapy for depression, and erdafitinib, a drug for locally advanced or metastatic urothelial cancer, next year. It's anyone's guess if these drugs will get a nod, but if they do, then they could make it even easier for the company to offset any slowdown in sales caused by Remicade and Zytiga competition.
Todd Campbell owns shares of Pfizer. His clients may have positions in the companies 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.