Overall, investors weren't thrilled with healthcare conglomerate Johnson & Johnson's (NYSE:JNJ) fourth-quarter results and 2015 guidance.
For the quarter, J&J delivered sales of $18.3 billion and EPS of $0.89, both lower than the prior-year period. However, in both instances currency translation and non-apples-to-apples comparisons are what led to the year-over-year drop. As I argued last week, Johnson & Johnson's underlying business still appears to be in fantastic shape.
But, in order to get a more complete idea on how well or poorly a business is doing the best thing you can do as an investor is to only partially rely on a superficial earnings report and instead dig into a company's quarterly conference call. With this in mind, let's take a look at the five things Johnson & Johnson's management team wants you to know following its Q4 report, courtesy of S&P Capital IQ.
Our breakthrough drug is growing steadily
"Net revenue recorded from Imbruvica in the fourth quarter was $92 million worldwide, with $64 million in the U.S. On a full year basis, net revenue was $200 million worldwide, with $144 million in the U.S." -- Louise Mehrotra, Vice President of Investor Relations
Perhaps the most hype in Johnson & Johnson's product portfolio goes to breakthrough blood cancer drug Imbruvica, which was co-developed with Pharmacyclics. Designed to treat chronic lymphocytic leukemia and mantle cell lymphoma, Imbruvica is lined up for what could be around a half-dozen new indications in the coming years.
Based on comments during the conference call it would appear that sales of Imbruvica are advancing nicely, but perhaps slower than analysts would expect of a breakthrough designated drug. Pricing could certainly be an impediment at $130,000 per year, but as new indications are gained and insurance coverage improves, I remain confident that Imbruvica will be every bit the blockbuster drug Wall Street expects.
Diabetes growth is still in its early stages
"Invokana/Invokamet sales were approximately $200 million in the quarter, with over $190 million in the U.S., contributing approximately 3.5% to the U.S. pharmaceutical growth rate. In the U.S. Invokana/Invokamet achieved 4.1% TRx within the defined market of Type 2 diabetes excluding insulin and metformin, up from 3.3% in the third quarter of 2014." -- Louise Mehrotra
As CEO Alex Gorsky alluded later in the conference, J&J still sees plenty of growth in the diabetes market, and that's great news with sales of revolutionary SGLT2 inhibitor Invokana soaring.
After launching in mid-2013, Invokana is already on pace for an $800 million annual run rate and may have a shot at $1 billion in sales in 2015. What makes J&J's drug different from DPP-4 inhibitors and a multitude of other glycemic controls for type 2 diabetes is that it works exclusively in the kidneys to block glucose absorption. This allows patients to remove excess glucose through their urine. Additionally, Invokana presented a very favorable side effect during clinical trials: weight loss. Since a number of type 2 diabetes are overweight or obese, this could give Invokana an edge over its peers.
As noted by Louise Mehrotra, Invokana's market share excluding insulin and metformin jumped to better than 4% of the type 2 diabetes market as of Q4.
Obamacare is making a difference
"Healthcare reform efforts and improving economies are clearly helping more people access affordable quality care, which will certainly help in the fight against cancer, obesity, and heart disease. And here in the U.S., we've seen health care utilization rates increase for the second quarter in a row, both sequentially and versus the prior year." -- Alex Gorsky, Chief Executive Officer
The Affordable Care Act, better known as Obamacare, has been a headache for most healthcare companies, as it's resulted in many holstering their spending until there's better clarity from consumers as to whether or not they'll buy health insurance or go to the doctor. Throughout the first half of 2014, J&J's management commented that it hadn't really seen a boost from Obamacare due to the cautious actions of hospitals and consumers.
However, it would appear that after more than a year Obamacare is beginning to make a bottom-line positive difference for J&J. CEO Alex Gorsky notes that healthcare utilization ratios rose for the second quarter in a row, which is just a fancy way of saying that people who are insured are actually using that coverage to go to the doctor and get surgical procedures performed, as well as get needed prescription medicines.
It's too early to go so far as to call Obamacare a victory, but it's reasonable to assume that J&J's medical device and diagnostic segment, as well as pharmaceutical operations, will benefit from Obamacare's ongoing acceptance and maturity as a law.
Don't overlook our pipeline
"In 2014 we had 20 new line extensions approved and we filed an additional 20. We also started 23 Phase 3 trials and initiated 11 Phase 2 trials. And as currently constituted, our pipeline is poised to yield 10 potential new product filings between 2013 and 2017." -- Alex Gorsky
Some investors forget that in spite of J&J's immense size and nearly $290 billion market valuation, its pharmaceutical business is growing by a double-digit percentage, and it's responsible for the bulk of J&J's current growth and gross margin.
More good news, according to Gorsky, is that Johnson & Johnson isn't planning to let its foot off the gas pedal anytime soon. Per his figures, J&J has 23 drugs in late-stage trials and another 11 in midstage studies. This should yield, by his estimation, 10 new drug approvals between 2013 and 2017, as well as 25 new line extensions (i.e., new label indications). I'd suggest that new label indications are great because physicians prefer to prescribe drugs they are familiar with. If Imbruvica, for example, can gain a half-dozen new indications, it'll extend the patent exclusivity on the drug even longer and could, by brand-name alone, help boost sales.
This isn't to say J&J won't lose other drugs to generic competition at some point, but Johnson & Johnson's pipeline throughout the remainder of the decade looks very strong.
Patent losses are coming, but little to worry about in 2015
"We also do not anticipate generic competition this year for Risperdal Consta or Invega Sustenna. We are however expecting the generic entrant for Invega in the first half of 2015, as well as biosimilar competition for Remicade in Europe in early 2015 and have included the expected impact in our sales guidance." -- Dominic Caruso, Vice President of Finance and CFO
The patent cliff is always a concern for pharmaceutical companies, but it looks as if 2015 is going to be generally kind to J&J, with the exception of a challenged sales environment for rheumatoid arthritis medication Remicade in Europe.
The good news is that Invega and Risperdal Consta only contribute a combined $1.8 billion in worldwide sales anyway, and only half of this total would likely come under immediate generic pressure. Compared to J&J's $32.3 billion in annual pharmaceutical sales for 2014, I'd proclaim that its product portfolio is still very safe from the patent cliff and generic competition.
Steady as she goes
Fundamentally, there are few companies you can buy that offer as much of a financial safety net as Johnson & Johnson. The company is sporting a 31-year streak of adjusted EPS growth, a 52-year streak of annual dividend growth, and it gets just a hair over half of its revenue from overseas markets, so it's almost optimally diversified from a geographic basis. It's a low volatility, high long-term reward stock that should allow pre- and post-retirees to sleep well at night.