Earlier this month, healthcare conglomerate Johnson & Johnson (NYSE:JNJ) reported its third-quarter earnings results, and it was once again business as usual. In spite of divesting some of its noncore businesses and experiencing negative currency translation headwinds, Johnson & Johnson managed to grow its revenue by better than 5%, while its EPS improved by 10%.
On the surface it looked like a great report. However, you'll only get pieces of the story by reading a few paragraphs in an earnings report. In order to get the full picture on the health of Johnson & Johnson we have to turn to the source that knows J&J better than anyone else, its management team.
With that in mind, let's have a look at the five most telltale quotes to come out of Johnson & Johnson's third-quarter conference call courtesy of S&P Capital IQ.
Kiss those noncore assets goodbye!
"Excluding the impact of divestitures, underlying operational growth was approximately 9%." --Louise Mehrotra, VP of investor relations
Although acquisitions have been the pride and joy of the pharmaceutical industry of late, Johnson & Johnson has remained committed to shedding noncore assets that don't revolve around its primary focus, which at the moment are high-margin pharmaceuticals.
Johnson & Johnson completed the sale of its Ortho Clinical Diagnostics segment for $1.9 billion to the Carlyle Group at the end of the second quarter and has been, according to Bloomberg, throwing around the idea of divesting its Cordis medical device unit. With more than $17 billion in net cash it's not as if Johnson & Johnson needs the money, but it does allow the company to devote more of its resources to faster-growing, higher-margin businesses, which will be better for it over the long run.
That Obamacare effect will be kicking in soon
"Although modest, we have now seen 2 consecutive quarters of positive momentum in hospital utilization rates, which is in line with recently published analyst reports noting this trend. We continue to remain confident that as economies recover and as healthcare reform continues to gain momentum here in the U.S. and abroad, utilization rates are going to increase." --Dominic Caruso, VP of finance and member of executive committee
It's long been postulated that the Affordable Care Act, known better as Obamacare, was expected to be a boon for the pharmaceutical and medical device industry as it would lower the rate of uninsured people throughout the country and provide these insured people with easier access to medical care. The result should be more preventative care visits and higher medical device and pharmaceutical product usage. According to J&J's Dominic Caruso we may finally be seeing that take shape.
Of course, it's worth noting that Johnson & Johnson's medical device segment really didn't reflect any uptick in hospital utilization rates (a fancy term for how often people with health insurance actually go see the doctor) due to what Caruso described as pricing pressures, weaker women's health and urology sales, and the removal of Morcellex from the market.
In other words, this won't be an overnight boon for J&J, but the fundamentals are shaping up nicely for its medical device segment to strengthen within the U.S.
We're still hungry for acquisitions
"Looking longer term, we continue to make important investments to access early stage innovation." --Dominic Caruso
Johnson & Johnson may be looking to divest its non-core assets, but it remains very committed to acquiring businesses which will enhance its higher-margin growth opportunities, especially its pharmaceutical operations. As Caruso noted, during the quarter J&J announced the acquisition of Covagen, a biopharmaceutical company focused on inflammatory disease therapies, as well as $1.75 billion purchase of privately held Alios BioPharma at the end of September. Alios' primary focus is infectious diseases, which are clearly getting a lot of attention at the moment.
In short, though J&J may not be looking to engulf a multibillion-dollar biotech company, it is on the hunt for innovation.
Olyisio was a huge part of our growth this quarter
"Excluding the impact of the divestiture of Ortho-Clinical Diagnostics, our sales increased nearly 8.5% on an operational basis in the quarter, our hepatitis C products contributed approximately 1/2 of that growth." -- Dominic Caruso
There were some notable gainers within the pharmaceutical segment, including Xarelto's 68% sales increase and Stelara's 47% jump in sales. However, no drug stood out more than hepatitis C therapy Olysio, which has delivered in the neighborhood of $2 billion in sales so far this year.
Hepatitis C drugs have advanced by leaps and bounds over the past couple of years, to the point where we're talking about actual cures for 90% or greater of the infected population in many cases. Olysio's $671 million in sales during the third quarter are evidence to its success. Of course, how long Olysio will remain a success is anyone's guess as you'll see in the final quote below.
But, Olysio's growth prospects will slow next year
"[You] all know that Gilead's compound in this space was just approved Friday. I think we all expected that. So we took the opportunity to invest. I think we're being very transparent with investors on what the impact for this year's earnings are, net of the investments, of course. And yes, we don't expect that, that will continue into next year." -- Dominic Caruso
As Caruso notes, just a little more than a week ago Gilead Sciences (NASDAQ:GILD) received approval for its cocktail drug known as Harvoni, a combination of Food and Drug Administration-approved Sovaldi and ledipasvir. Harvoni is a once-daily tablet for genotype 1 patients that doesn't require interferon or a ribavirin and was extremely effective in curing patients of hepatitis C. In short, Olysio's sales could shrink considerably in 2015 as Harvoni expands.
However, Caruso also notes that Johnson & Johnson is far from giving up on the hepatitis C indication.
"We are committed to hep C. We're continuing to do studies in combination with other products. We think there's important new advances still available in that marketplace. We think the market's substantial and it's worth pursuing, so we're still committed to investment there, and we're doing those clinical trials." -- Dominic Caruso
Johnson & Johnson currently has a study looking at the effect of Olysio and Sovaldi as a combo (if you can't beat them, join them!), as well as other internal hepatitis C candidates at its disposal. Long story short, growth could slow for J&J in 2015 due to Olysio, but the remainder of its pipeline is growing so quickly shareholders may not see a huge impact on the top or bottom line results next year.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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