Look around the stock market and you'll probably struggle to find a company that's been able to grow its adjusted earnings per share for 10 consecutive years. It's tough because many companies are cyclical or intricately tied to the health of the U.S. economy. With the U.S. economy dipping into a recession about once or twice every decade, cyclical companies often see their adjusted EPS contract in tandem.
Now, what if it told you there was a company out there that not only has grown its adjusted profits in each of the past 10 years, but it's actually done so for 31 consecutive years! Sounds like an interesting investment opportunity, right?
The mystery company in question is none other than healthcare conglomerate Johnson & Johnson (NYSE:JNJ), which also boasts a 53-year streak of increasing its dividend, as well as a AAA-credit rating. It's one of only three publicly traded companies to boast the highest of all credit ratings from Standard & Poor's -- a rating better than that of the U.S. government.
This 31-year adjusted EPS growth streak is about to end
However, Johnson & Johnson's prestigious earnings streak could be coming to a close in 2015. Based on J&J's full-year adjusted earnings forecast, updated during its Q3 report, the company is on pace for $6.15 to $6.20 in adjusted EPS in 2015, down from the adjusted $6.39 in EPS it reported in 2014.
There are a lot of accounting practices that have allowed J&J's earnings streak to persist throughout the years, including share repurchases, which reduce the number of outstanding shares and can boost EPS. But, what really looks to be the demise of Johnson & Johnson's adjusted earnings streak is the rapid rise and fall of Olysio, its hepatitis C virus (HCV) treatment.
Since 2011, there have been rapid advancements in treating HCV. Prior to Vertex Pharmaceuticals' Incivek in 2011, the combination of IV interferon and a ribavirin led to a cure rate of around 50%. Oral Incivek, in combination with interferon and a ribavirin, pushed the cure rate, known as the sustained virologic response (SVR), to 78% in clinical studies.
The next-generation of therapy to come along was J&J's Olysio, which was an oral medication that pushed SVR rates above 90% in clinical studies, but still required the use of interferon and a ribavirin. Interferon has a propensity to cause flu-like symptoms in patients, whereas a ribavirin can lead to anemia and/or rashes. In short, quality of life during treatment could certainly have been better.
Olysio still managed to rack up $2.3 billion in global sales (Olysio is known as Sovriad in international markets) in 2014, up from a mere $23 million worldwide in 2013.
Olysio gets pushed to the wayside
However, the emergence of Gilead Sciences' (NASDAQ:GILD) Harvoni, a direct competitor to Olysio in the most common form of HCV, genotype 1, ushered in yet another new era for HCV treatment. Gilead's Harvoni is a once-daily pill that isn't required to be taken with interferon or a ribavirin. It also led to comparable or even superior HCV clearance in clinical studies, and did so in a much shorter treatment interval. Long story short, Olysio became obsolete, except in rare cases where consumers and/or physicians wanted to save $28,000 in wholesale costs by going with Olysio.
Within the U.S., Johnson & Johnson noted in its Q3 report that quarterly Olysio sales collapsed 96% to just $26 million, down from $671 million. Year-to-date, sales globally are lower by 71% to $577 million, compared to the $1.98 billion recorded through the first three quarters of 2014. Amazingly, sales overseas are up 37%, but U.S. sales have plunged 90%. This rapid rise in Olysio sales, and its quick, but not unexpected, demise is the prime reason why J&J's adjusted earnings streak is probably going to end at 31 years in 2015.
The streak may be nearing its end, but J&J's business model is still intact
Even though it seems very likely that J&J's impressive adjusted EPS streak will end this year, it doesn't in any way mean that J&J's business model is broken or in trouble. In fact, J&J made it a point in its Q3 report to point out that exclusive of currency movements, divestitures, acquisitions, and its HCV drug Olysio/Sovriad, worldwide sales actually grew by 5.6%, including a 7.7% improvement in domestic sales.
J&J's drug development pipeline looks stronger than ever. Approved therapies like blood cancer drug Imbruvica, next-generation type 2 diabetes drug Invokana, and anti-inflammatory Stelara have been gaining momentum at a rapid pace. Also, Johnson & Johnson announced earlier this year its intent to file for the approval of 10 novel drugs between now and the end of the decade that each could have blockbuster potential (i.e., $1 billion plus in annual sales).
The only real question mark is what J&J might do to usher in growth in medical devices. The conglomerate has been stymied by tight spending and uncertainty associated with the rollout of Obamacare in the U.S., as well as weakened economic growth in Europe. We did see a modest rebound in U.S. medical device growth in the latest quarter which could mark a turning point in consumers and hospital spending habits. Of course, only time will tell if that's the case.
Yet, the remainder of J&J's attractive buy points -- its market-topping 3% dividend yield, a $10 billion announced share buyback, a 53-year history of increasing its dividend, and a well-diversified business model -- remain intact. I wouldn't allow the seemingly disappointing end of J&J's adjusted EPS streak to steer you away from considering J&J for your investment or retirement portfolio. Doing so, I believe, would be a terrible mistake.