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Earnings season pushes on as the markets continue their ascent, with the Dow Jones Industrial Average (DJINDICES:^DJI) picking up more than 90 points today as of 2:15 p.m. EDT.
Health care's not making much of a showing today, however. Leading health stock Johnson & Johnson (NYSE:JNJ) has gained only about 0.3% to lead the sector's Dow performance, but this medical blue-chipper has already passed earnings season with flying colors. However, are there hidden dangers awaiting Johnson & Johnson investors?
Will J&J's devices deliver?
Investors can't fault Johnson & Johnson's drug business, which has performed admirably recently to lead this diversified giant's rise. With prescription drug revenue jumping nearly 10% in the third quarter, Johnson & Johnson's not feeling any of the effects of the patent cliff that have slammed sales across big pharma.
Considering the company boasts high-potential drugs like Type-2 diabetes therapy Invokana and fast-rising cancer treatment Zytiga – both of which should reach blockbuster status – along with the cash cow of immunology therapy Remicade, this company's pharmaceutical division looks stellar heading into the future.
However, it's Johnson & Johnson's medical-device division, formerly its largest by sales until this past quarter, that should have investors worried.
Johnson & Johnson's device segment has soared in recent quarters due to the integration of the multibillion-dollar acquisition of orthopedics giant Synthes. However, the company's synergies are winding down, and it showed in the third quarter: Total medical-device sales fell 2% year over year. Johnson & Johnson will need to fuel a fire underneath its largest device branch, its orthopedics business, if it wants to turn around this trend.
Orthopedics are a strong long-term play for investors due to the aging populations in first-world countries and the growing obesity epidemic -- both of which should heighten the demand of knee and hip replacements for years to come. Right now, however, it's an industry suffering from stiff competition and pricing pressures.
One look around the industry this quarter tells the story. Zimmer Holdings (NYSE:ZMH) reported its own third-quarter results today. Zimmer's hip sales grew by only 2%, and while growing knee product sales managed to lift the company's quarterly revenue above expectations, the business hasn't been enough to save Zimmer's earnings from falling due to legal fees and other expenses. It's a similar story at Stryker (NYSE:SYK), another major rival in the orthopedics space. Stryker made a big move recently to purchase robotic orthopedic surgical firm MAKO Surgical to jump-start sales growth, and it'll need the jolt. Stryker's knee business grew revenue by only 2.1% in the third quarter, and while its hip sales managed strong growth, the firm will need its smaller, faster-growing businesses to continue to come through.
Still, Johnson & Johnson has a big advantage over these competitors in its size and diversity. Because the company's drugs are hitting all the right marks, Johnson & Johnson can afford some time to turn around its device division slowly. In the long term, this is still among health care's best-positioned stocks -- even if medical-device revenue has slipped off its prior pace.
Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson and Zimmer Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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