Johnson & Johnson (NYSE:JNJ) has the honor of essentially setting the tone for investors by being one of the first healthcare companies each quarter to report its earnings results.
It just so happens that Johnson & Johnson, also known as J&J, is set to report its second-quarter results on Tuesday, July 14.
What should investors expect? The current consensus on Wall Street is that J&J will deliver $1.69 in EPS, which would be slightly lower than the $1.78 it reported in the year-ago quarter, with sales of $17.7 billion, down roughly 9% from the $19.5 billion recorded in Q2 2014.
Investors have a tendency to focus strongly on these top- and bottom-line figures while forgetting to understand the little things that helped or hurt Johnson & Johnson on its way to whatever EPS and sales figure it does eventually report in Q2. With that in mind, here are five figures you'll want to be sure to monitor when J&J does release its results.
1. Year-over-year operational growth
One of the most important figures you as an investor need to keep your eyes on with U.S. multinational companies, such as Johnson & Johnson, is operational growth.
Why operational growth? Operational growth gives you a way of seeing how J&J's business segments are really performing without the fluctuations of foreign currencies or the U.S. dollar getting in the way and skewing the results.
For a little longer than a year the U.S. dollar has been gaining steam against a majority of currencies around the world. For consumers like you and I that's great because it means our purchasing power stretches further in foreign markets. For U.S. companies that have a substantial amount of revenue generated in foreign markets it's not good news. Because J&J reports its results in dollars, it's forced to change revenue received in euros and other overseas currencies back into dollars, losing some percentage of its revenue in the process as the dollar strengthens. Currency movements have a way of masking what could be decent growth.
For instance, in the first quarter, Johnson & Johnson recorded a 4.1% revenue decline, but actually saw its operational sales increase 3.1% sans currency effects. Pay attention to this latter number on July 14 as it's the only one that'll give you a true look into the health of J&J's operations.
2. Medical device and diagnostic sales growth
Narrowing the scope a bit, investors should also keep a close eye on the operational performance of J&J's medical device and diagnostic segment.
This segment should be of particular interest because an increasing amount of competition among device and diagnostic makers, along with the implementation of Obamacare, has generally stymied surgical procedure growth over the past couple of quarters for much of the industry. Even with the recent Supreme Court ruling in favor of protecting the federal government's ability to hand out subsidies on behalf of the nearly three-dozen states that utilize Healthcare.gov, the uncertainty leading up to the King vs. Burwell decision may have done a number on J&J's medical device sales within the United States in Q2.
The good news here is medical devices are more of a long-tail growth driver for J&J with an aging population and increasing access to medical care expected to be what fuels growth for decades to come. Thus, weak medical device and diagnostic results in Q2 won't necessarily be damning for J&J. However, understanding the dynamics of competition within the sector and how Obamacare is affecting procedures thus far is still important and worth closely monitoring.
3. U.S. pharmaceutical sales growth
Johnson & Johnson's overall pharmaceutical sales growth, on the other hand, is an immediate stock price catalyst. Branded pharmaceuticals are responsible for the bulk of J&J's gross margin and growth, therefore it pays to take note of just how rapidly Johnson & Johnson's most important business segment is growing.
To break it down even further, I'd suggest keeping a close eye on J&J's pharmaceutical growth within the United States. The U.S. boasts the highest demand for pharmaceutical products of any country around the world, and it also (unfortunately) has some of the highest costs for drugs. Thus, the U.S. is a critical market for J&J if it's to succeed. Last quarter Johnson & Johnson reported 16.9% year-over-year sales growth in pharmaceuticals. In the upcoming quarter I suspect Wall Street is expecting another round of double-digit sales growth in the United States.
4. Invokana sales on a sequential basis
Among specific pharmaceutical products, I'd take a special interest in next-generation type 2 diabetes drug Invokana this quarter. Invokana is an SGLT-2 inhibitor that works in the kidneys by blocking the absorption of glucose and allowing the patient to excrete excess glucose out through their urine. SGLT-2 inhibitors also had an interesting side effect in clinical trials of weight loss, which is good news since weight control is a common concern among a majority of type 2 diabetics.
Sales of Invokana have been strong. In Q1 2015 Invokana delivered $278 million in worldwide sales, up from $94 million in the year-ago period. In other words, it's officially pacing blockbuster status on an extrapolated basis.
But in May the Food and Drug Administration issued a warning that patients taking SGLT-2 inhibitors should be aware of a possible side effect known as ketoacidosis, which is where the body produces high levels of blood acids that can lead to hospitalization. The FDA's Adverse Events Reporting System recorded 20 cases between March 2013 and June 2014. True, that's not a lot; but it could be enough to shuffle some physicians and consumers back to trusty DPP-4 inhibitors instead -- especially with a possible label change for SGLT-2 inhibitors still on the table.
Keep a close eye on Invokana's sales growth rate this quarter and be concerned if it slows dramatically on a sequential basis.
5. Imbruvica's sequential U.S. sales growth
Finally, pay close attention to sales of purported cancer blockbuster drug Imbruvica, which J&J developed with Pharmacyclics.
Imbruvica's sales grew dramatically in Q1, from $10 million in Q1 2014 to $116 million in Q1 2015. But what stood out was that on a sequential quarterly basis Imbruvica's U.S sales grew by a scant 3% in Q1 2015 to $66 million from the $64 million it reported in Q4 2014. The majority of Imbruvica's growth last quarter came from overseas markets. That's a bit worrisome.
It's possible there could have been a stocking issue or perhaps insurance snafu that held back sales of Imbruvica, but I'd start to be a bit concerned in Q2 2015 if Imbruvica's sales haven't begun to rapidly pick up in the United States.
On a personal note, I do expect another quarterly earnings beat from J&J, but I'm reserving my judgment concerning J&J's upcoming report until I have these five figures in hand.
So, mark your calendars, because July 14 is going to be an important day for investors.
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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