If you ask me, earnings season never really "ends" in the true sense of the word. However, with fall officially here, and the calendar moving into October, we can prepare for the kickoff of the third-quarter earnings season. Although aluminum giant Alcoa and bank stocks are known for kicking off earnings season, it's healthcare conglomerate Johnson & Johnson (NYSE:JNJ) that tends to set the tone for the healthcare sector.
Johnson & Johnson is slated to report its third-quarter earnings results before the opening bell on Tuesday, Oct. 13, 2015, which will be followed by its quarterly conference call. According to Wall Street's current consensus estimate, Johnson & Johnson is expected to report $17.5 billion in revenue, which would be down about $1 billion from the year-ago quarter, and a profit of $1.45 per share, down about 10% from Q3 2014. Something to keep in mind is that J&J has topped Wall Street's profit expectations in each quarter over the past three years.
Regardless of what the headline numbers are for J&J, here are four things that I'll be looking for the company to address in its earnings report and/or conference call.
1. Is Invokana's market share fading?
The diabetes market has been an interesting topic of late for two reasons. First, in May the Food and Drug Administration issued a warning that effectively cautioned physicians and users of SGLT-2 inhibitors to be aware of ketoacidosis, a condition in which a high level of acids builds up in the blood that usually requires hospitalization. J&J's Invokana, being one of the top-selling SGLT-2 inhibitors, was included in the warning.
Secondly, Eli Lilly's and privately held Boehringer Ingelheim's SGLT-2 inhibitor Jardiance stunned everyone in August when its EMPA-REG OUTCOME trial showed that the drug actually reduced deaths from heart complications, hospitalizations due to chronic heart failure, and deaths from any cause by 38%, 35%, and 32%, respectively. Jardiance has potentially been given clearance to take the dominant position among SGLT-2 inhibitors, but had pretty much been an afterthought prior to the EMPA-REG OUTCOME study.
With Invokana's cardiovascular outcomes trial still two years away from yielding data, I'm curious to see how Invokana's sales have held up, and how management expects them to hold up in the near-term.
2. When can we expect medical device growth?
Another question that has to be on the minds of J&J shareholders is when we'll see a genuine turnaround in medical devices.
There are a number of factors that have been working against the medical device industry as a whole, including negative currency translation, increased levels of competition leading to product commoditization, and a rollback in spending among hospitals and consumers, at least in the United States, as everyone adapts to the new laws and cost structures of the Affordable Care Act.
In recent years, J&J hasn't been shy about buying growth in medical devices, such as its Synthes purchase, which set the company up for long-tail emerging market growth. It's also been willing to divest non-essential subsidiaries. I'll be paying close attention to what J&J's strategy is to reignite growth in medical devices. Will it be a watch-and-wait approach, or is the company planning to shake things up with an acquisition or divestment?
3. What's next after daratumumab?
After delivering 14 new molecular entities to pharmacy shelves between 2009 and 2014, and witnessing half of those drugs become blockbusters (i.e., $1 billion or more in annual sales), J&J announced plans earlier this year to file new drug application paperwork with the Food and Drug Administration for 10 NMEs before the end of the decade that it anticipates will become blockbusters.
The first of those is experimental late-stage multiple myeloma therapy daratumumab, which, based on a clinical trial similar to that of Amgen's Kyprolis, appears to have slightly bested the latter in overall response rate. To be clear, the two drugs did not go head to head, so this comparison isn't apples-to-apples. Still, daratumumab looks as if it has a shot at entrenching itself as a formidable foe in multiple myeloma.
What I'm curious about is what's next in line after daratumumab in J&J's vast pipeline. I'll be looking for substantial discussion on daratumumab's sales potential, as well as what development milestones we can expect over the coming two to four quarters for its remaining pipeline.
4. Is drug price reform something to be concerned about?
It's an issue that rears its head from time to time, but with election season kicking into high gear (albeit 13 months before the actual presidential election), and presidential candidate Hillary Clinton unveiling a prescription drug reform plan last week, some credence has to be given to the notion that Congress could attempt to regulate prescription drug cost inflation at some point.
Johnson & Johnson's growth in recent years has been wholly dependent on demand and price growth for its pharmaceutical business. Of concern would be potential blockbuster drug Imbruvica, which is approved to treat mantle cell lymphoma and chronic lymphocytic leukemia. Although it depends on whether a patient has MCL or CLL, Imbruvica's full-year cost ranges between $98,000 (for CLL) and around $130,000 (for MCL). This isn't to say that Imbruvica wasn't head and shoulders above prior-generation therapies in terms of response rates and efficacy, but the idea of "at what cost" could come into play.
I'd like to see management address the potential for price controls in the U.S. pharmaceutical industry, as well as suggest what it's doing to hedge against such a possibility.
Only time will tell
History says that we should expect another market-topping quarter for J&J, and I for one continue to view the company favorably over the long-term given its pristine AAA-credit rating, 53-year streak of increasing its dividend, and 31-year streak of boosting adjusted EPS. But that opinion could shift based on how J&J addresses (or fails to address) the above questions in its third-quarter earnings report.
Circle your calendars folks, because Oct. 13, 2015 promises to be an important day for the healthcare sector and J&J shareholders.