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5 Signs of Life in Johnson & Johnson's Second-Quarter Earnings Report

By Cory Renauer - Jul 18, 2019 at 9:41AM

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Investors worried about dwindling sales of key drugs and mounting litigation expenses have at least five reasons to stay calm.

Getting the world's largest healthcare company to grow even larger isn't easy, but Johnson & Johnson ( JNJ 1.38% ) has pulled it off with legendary consistency. Earlier this year, enormous pressure from a loss of exclusivity for a couple of key pharmaceutical brands had investors worried 2019 might be the first year in decades without bottom-line growth.

When J&J reported second-quarter results, exceptional performance from younger products in the pipeline encouraged the company to raise its full-year outlook. Unfortunately, investors weren't able to focus on the numbers thanks to mounting legal expenses. 

EKG reading made out of colorful pills.

Image source: Getty Images.

During J&J's second-quarter earnings call, management did its best to soothe litigation concerns by directing attention to impressive sales growth for a handful of younger products in the company's lineup. In case you missed them, here are five takeaways from the latest earnings report that suggests Johnson & Johnson can continue growing at a steady pace.

1. Medical device sales are growing

Medical device sales grew 3.2% on an adjusted operational basis that strips away the effects of currency movements, acquisitions, and divestitures. In the U.S., adjusted operational sales grew just 1.6%, while ex-U.S. sales gained 4.7% compared to the previous-year period.

International sales growth wasn't the only bright point in the segment's second-quarter results. Year-to-year sales of J&J's medical devices used in atrial fibrillation procedures soared 15.6% on an operational basis to $750 million.

2. Managing the decline of key brands

In 2017, sales of Zytiga, Velcade, and Remicade reached a combined $9.9 billion, which worked out to 13% of total sales that year. By the second quarter of 2019, sales of the same three drugs fell to an annualized $8.1 billion.

Losing $1.9 billion in sales over such a short time will punch a big hole through an income statement that most companies couldn't keep filled, but J&J isn't having much trouble. Pharmaceutical segment sales reached an annualized $42.1 billion in the second quarter, a 16% gain over the same period in 2017.

Man in a lab coat with a clipboard.

Image source: Getty Images.

3. Blood cancer products are soaring

Imbruvica sales have been rocketing higher since a few years ago, when it became the first chemo-free treatment option for people newly diagnosed with the most common form of leukemia. Johnson & Johnson's share of Imbruvica sales gained 34% in the second quarter compared to a year earlier to an annualized $3.3 billion.

The company's multiple myeloma treatment, Darzalex, has been even more successful for J&J than Imbruvica. Sales of the CD38-directed antibody didn't get started until two years after Imbruvica launched and it's already on an annualized run rate of $3.1 billion.

4. Immunology's still moving forward

Second-quarter sales of J&J's rheumatoid arthritis blockbuster, Remicade, slid by 15.1% to $1.1 billion. Despite losses for the company's leading immunology drug, sales from the company's immunology segment as a whole rose by 5.7% to $3.5 billion thanks to impressive performances from Stelara and Tremfya.

Johnson & Johnson's psoriasis injection Stelara earned a label expansion to treat Crohn's disease in 2016, and it's quickly becoming a top treatment for people with the inflammatory bowel disorder. Although the psoriasis market is becoming crowded, Tremfya has already achieved a 7.6% share of the U.S. psoriasis market since its launch in 2017, and 2019 sales will probably pass the $1 billion threshold.

A woman in a lab coat in a lab smiling.

Image source: Getty Images.

5. Lots of iron in the fire

Johnson & Johnson's top line may be stagnating, but its best days are still in front of it. During the second-quarter earnings call, Chief Scientific Officer Paul Stoffels said the company's late-stage pipeline contains 14 medicines that can generate annualized sales above $1 billion by 2023.

There's also a good chance that Stelara won't be the only drug expanding to new indications. Stoffels also expects 40 line extensions for already-approved therapies, each of which could add another $500 million to the top line.

Not out of the woods yet

While there are plenty of reasons to expect J&J's top line to continue expanding into the long run, the bottom line could get hit by legal expenses. Despite a lack of evidence linking cancer risk to use of J&J's Baby Powder brand of talcum powder, judges have been awarding large sums to plaintiffs in recent years.

While there's a good chance unfavorable talc rulings will be overturned, J&J's ancillary role in the opioid epidemic is coming back to haunt the company's reputation. A lot of attention has focused on marketing tactics used to launch a transdermal fentanyl patch called Duragesic that involved targeting doctors who prescribed the most OxyContin, as well as patients most likely to have an OxyContin addiction.

Johnson & Johnson can claim Duragesic was considered a safer alternative to OxyContin, but there's nothing it can do to distance itself from Purdue Pharma. While J&J-branded drugs were responsible for just a sliver of opioid overdoses, a subsidiary, Noramco, fueled America's opioid epidemic with raw materials that Purdue and its peers needed to manufacture opioid-based painkillers. While the courts will probably find that Johnson & Johnson hasn't broken any laws, legal fees and negative publicity will serve as a significant penalty on their own.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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