Why Johnson & Johnson Is Outperforming the Dow

J&J has crushed the Dow Jones Industrials so far this year. Can it continue to outperform?

George Budwell
George Budwell
Apr 22, 2014 at 9:30AM
Health Care

After setting record highs in 2013, the Dow Jones Industrials (DJINDICES:^DJI) has largely traded sideways so far in recent months, down just 0.20% in 2014. Given the general weakness among health care stocks of late, you might suspect that pharma companies have been some of the more problematic components of the Dow. But you'd be wrong. As I discussed recently, Merck (NYSE:MRK) is one of the blue-chip index's hottest companies this year, rising almost 14% and standing only behind Caterpillar as the Dow's best-performing stock of 2014. Another health care stock, Johnson & Johnson (NYSE:JNJ), has gained nearly 9% to become the Dow's third best-performing stock this year. Let's look at why J&J stock has been crushing most of its Dow peers and fellow health-care companies of late.

Drug sales power consensus-beating 1Q earnings
J&J last Tuesday posted first-quarter earnings per share of $1.54, which was $0.06 higher than the Wall Street consensus. Revenue also came in over $110 million higher than consensus at $18.1 billion for the quarter. The majority of the year-over-year growth came from the company's pharmaceutical segment: Drug sales increased 10.8% year over year, even though J&J lost exclusivity for its proton pump inhibitor Aciphex.  

Management attributed strong sales in pharmaceuticals to the launch of new products and growth in emerging markets. Stelara, an anti-inflammatory drug used to treat plaque psoriasis, saw global sales increase by 31.8% for the full year. J&J's schizophrenia drug Invega also saw global sales increase by 31.3%, driven primarily by growth in foreign markets. And the company's HIV drug Prezista saw sales climb by 21.3% for the year.

For newly launched products, J&J reported that its hepatitis C combo therapy Olysio is off to a strong start, generating $354 million in global sales in its first quarter on the market. The fact that Olysio is on track to become a blockbuster in its first year on the market is particularly noteworthy in light of the simultaneous launch of Gilead Sciences(NASDAQ:GILD) competing therapy Sovaldi. It appears that some doctors are probably prescribing the two drugs together. J&J's relatively new prostate cancer drug Zytiga also continued to impress, growing global sales by 48.8%  despite facing increased competition from Medivation's Xtandi. 

Can J&J continue to outperform?
Following its earnings beat, J&J promptly raised its full-year guidance for 2014 to $5.80 to $5.90 per share. And there is a chance that the company will even beat this increased guidance. Putting aside more growth from key products such as Zytiga, there is J&J's new leukemia drug Imbruvica, co-developed with Pharmacyclics (UNKNOWN:PCYC.DL). J&J and Pharmacyclics split Imbruvica's sales 50/50. Some experts believe the(UNKNOWN:PCYC.DL)drug could reach blockbuster status in short order, so J&J could be looking at roughly $500 million in potential sales from this single drug going forward. In sum, sales of new drugs and increasing sales in emerging markets are helping to lift J&J shares higher.  

Foolish wrap-up
J&J may sound like a boring name to have in your portfolio, but this stock is battle-tested. The company has been around for nearly 130 years and has outperformed many of the major indices for close to a decade -- despite losing income from top-selling drugs due to the patent cliff. I am particularly impressed with J&J's cadre of new drugs, and their performance last quarter certainly speaks for itself.

Even so, the wolves could be closing in on J&J's growth in the pharmaceutical market. Specifically, keep a close eye on how Gilead's Sovaldi impacts sales of Olysio, as well as threats from hepatitis C drugs from AbbVie and Enanta Pharmaceuticals that are expected to be approved soon. Merck also has an intriguing hepatitis C therapy that looks clinically superior to Olysio, although it is a few years away from a regulatory review. Imbruvica may face competition from Gilead's experimental drug idelalisib before year's end as well. Idelalisib could be approved later this year, where it will directly compete with Imbruvica as a treatment for chronic lymphocytic leukemia.

J&J's Zytiga has faced fierce competition from a handful of other prostate cancer drugs and it has still posted tremendous growth. I believe this is a testament to J&J's ability to market drugs even in highly competitive markets. You should definitely keep tabs on this top-performing Dow stocking.