Johnson & Johnson (NYSE:JNJ) is a healthcare Goliath that generates billions of dollars in revenue from consumer goods, pharmaceuticals, and medical devices. In the third quarter, the company's sales of those products allowed it to outpace analyst estimates. Can J&J continue to reward investors with upside?

In this clip from The Motley Fool's Industry Focus: Healthcare, analyst Shannon Jones and Motley Fool contributor Todd Campbell discuss J&J's impressive performance, how oncology drugs are moving the needle, and the one big risk that could dent sales in 2019.

A full transcript follows the video.

This video was recorded on Oct. 17, 2018.

Shannon Jones: Johnson & Johnson just reported earnings here on Tuesday. This is the dividend aristocrat, the steady-Eddie, all-around good company to buy and hold for the long-term. That's ticker symbol JNJ. The stock was up about 2% off of earnings yesterday, Todd. What can you tell us about what they reported on?

Todd Campbell: It was again a little bit today when I looked earlier on, Shannon. This is a giant among Goliaths. It's just crazy how big this company is, every quarter when I track it. So many of our listeners own it somewhere. Even if you don't think you own it, you probably do, because it's going to be in ETFs and mutual funds.

Revenue in the quarter clocked in at $20.3 billion. Yes, that's with a B, billion. $20.3 billion. That was up 3.6% year over year. For people who are newer to the story, they operate their business in three different segments. They've got a consumer goods segment, they've got a pharmaceutical segment, and they've got a medical devices segment. But by far, Shannon, it's the pharmaceuticals business that drives the car that is J&J.

Jones: Before we get to the pharmaceutical segment, it's interesting, for those that have been following Johnson & Johnson, everybody's probably familiar on the consumer business side. You're thinking about Band-Aids, thinking about Tylenol. Also, their really iconic baby care line has really gotten back into the spotlight as of recent. If you look at, over the past few years, their consumer business segment has actually been declining in sales. A little bit earlier this year, it may have been this quarter, the company decided to relaunch their baby care line. It was really targeting those millennial parents -- getting rid of dyes and sulfates and ingredients that many millennial parents don't want to see. They also did some repackaging. It was really interesting, of the three segments, you actually started to see them turn a corner.

Todd, you mentioned the three segments. Pharmaceuticals really is the revenue driver for them. But, you actually saw on the consumer side, sales of $3.4 billion, which were up about 1.8% year over year.

Todd: Right. And like you said, people aren't going to get overly excited about 2% growth. But compared to what we've seen in the past, this has been a business that basically just cranks out cash flow every quarter and hasn't been overly exciting when it comes to growth rates.

We also saw some strength in the consumer business out of the beauty care products, which I think grew something like 4% year over year. Medical devices, also not a huge growth driver for the company. As a matter of fact, their sales in the quarter year over year were relatively flat. That was because of them getting out of some diabetes businesses last year. Those sales clocked in about $6.6 billion. You've got medical devices giving you $6.6 billion, you've got consumer giving you $3.4 billion. That leaves you about $10 billion more, which of course comes from the pharmaceuticals side of the business.

Jones: Yeah. Really, the focus here is on the pharmaceuticals side, also known as Janssen. Now, pharmaceuticals are about 50% of revenue for the company. What's so interesting, and I know we'll get into this a little bit more, is one of the bigger concerns has been with J&J's drug Remicade. You started to see some big numbers happen with the biosimilar Inflectra that was released earlier. Now, you're starting to see the impact of that. But, on the flip side of that, they actually had some good positive news in their oncology portfolio.

Campbell: Right. Remicade is the big question mark for investors currently. Pfizer launched out their biosimilar back in 2017. Of course, Johnson & Johnson, in a bid to keep their market share, has cut their prices on Remicade. I want to say that during the conference call, J&J's management said that those price cuts have allowed it to maintain about 93% market share when it comes to volume. So, yes, they're providing a lot more in terms of volume that you might expect vs. having this new biosimilar on the market, but it did take a toll on sales. Sales fell 16% year over year. Still clocking in, though, around $1.4 billion. I think that the strategy here has been to mitigate or slow the rate of decline for Remicade by doing these things to hold onto market share. So far, it seems to be working, because, as we already talked about, they were able to deliver top line growth year over year in the quarter, despite that Remicade headwind.

Jones: For our listeners that are not familiar, biosimilars are what you would consider the generic equivalents of some of these brand name pharmaceuticals. Not a true identical comparison, but very close. Oftentimes, there's the interchangeability factor that you want to look at with biosimilars.

Shifting gears, you've got the oncology portfolio. As we talk about big pharma and even big biotech, oncology is still one of the hottest areas in the market to invest in. Saw some really impressive numbers, particularly with their blockbuster Darzalex, and also Imbruvica. I was actually quite impressed with their double-digit growth this past quarter.

Campbell: Something that investors have to pay attention to with J&J is the oncology franchise. Yes, they're involved. They've got some great drugs that treat central nervous system disorders. Stelara has been growing its sales by double digits following a label expansion to include its use in Crohn's disease patients. But really, it's been oncology that's allowed them to offset some of the loss of exclusivity that's associated with patent expiration.

If you look at the oncology sales last quarter, they grew 36% year over year to $2.6 billion. A lot of that growth was because of Darzalex, their multiple myeloma drug. That drug has been winning increased use as trials have allowed it to expand its label into earlier lines of therapy. Obviously, the earlier that it gets used in therapy, the larger addressable patient population, and the greater potential to turn that increasing use into revenue growth. I think they did $498 million. That gives it almost a $2 billion run rate last quarter, and that was up 57% year over year.

You mentioned Imbruvica and I think you may have also mention Zytiga. Those are the other two that you really have to watch here in cancer. Imbruvica is a blood cancer drug. Sales there grew 38% to about $700 million, $2.8 billion run rate. Zytiga, which is their top-selling prostate cancer drug -- we should talk about Zytiga later on when we talk about patent risks. Zytiga sales grew 43% year over year to almost $1 billion, $958 million in the quarter. You're talking about almost a $4 billion drug there.

Jones: Absolutely fascinating. Really impressive growth all across the board for the pharmaceutical segment. Looking ahead, though, there are a few key areas that I think investors do need to be mindful of when it comes to J&J. Great quarter, love to see the growth that's happening. But there are actually some key decisions coming up, one being a potentially new product for depression. Todd, what can you tell us about that?

Campbell: It's a nasal spray, esketamine. They did five phase 3 trials. Three were good, two really weren't great on the primary endpoint. But I think that it has a good shot of getting approved, and that could be a nine-figure drug for the company, hundreds of millions of dollars of potential sales revenue there. They also have an FDA decision for erdafitinib, which is a locally advanced or metastatic urothelial cancer drug. If that gets approved, that would also help their oncology franchise.

It's very important, Shannon, for J&J to win new FDA approvals and continue to grow sales. One of the things I mentioned just a second ago was, Zytiga is a concern. You've got Remicade. They're executing a good strategy to protect the Remicade sales. Zytiga, however, had a patent thrown out early in 2018. As a result, there is the chance that you could get Zytiga generics on the marketplace in 2019. J&J isn't issuing guidance yet. They're going to do that later on this year, probably after the fourth quarter wraps up, maybe at an industry conference in January. But that is a concern, especially since you're talking about $4 billion in sales.

There's a court decision coming up, and you're going to want to pay attention to see how that court decision goes. Then, you're going to want to watch and see what the guidance is for 2019. You'll also want to keep an eye on what happens with Xarelto. Xarelto is an interesting drug. It's a blood thinner, it's very heavily used, but the sales have flattened out. Last quarter, they were $612 million, down about 4%. There's a lot of competition that's emerged in this area. They just got a new approval, however. You're going to want to see whether or not that kick-starts sales, gets it back to growth in 2019.

Then, as far as guidance is concerned, I think they're looking now for $81 billion. [laughs] Just mind-boggling. $81 billion in full-year sales this year, and full-year earnings per share of about $8.13 to $8.18.

Jones: So many good things to watch. Also, this is much further down the line, but also, J&J announced the licensing deal with Arrowhead for gene silencing in hepatitis B. Again, that'll be further down the road, but will be worth watching. That was a deal potentially worth up to $3.7 billion. Hep B, hep C, huge market, competitive market. It'll be really interesting to watch what happens there.

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