For shareholders of healthcare conglomerate Johnson & Johnson (NYSE:JNJ) it may appear to be an uninspiring year. Shares of J&J are down roughly 2% year to date through Dec. 22, more or less matching the performance of the broader market.
Despite the drop, as we examined earlier this month, Johnson & Johnson delivered some stellar headlines that should have investors excited about the future. On the flipside, as evidenced by its ever-so-slight retracement in 2015, Johnson & Johnson also faced its fair share of headwinds. Let's briefly take a look at some of the worst Johnson & Johnson headlines in 2015 that assisted in dragging down its share price.
The dollar boon leads to a profit swoon
Arguably the biggest negative for Johnson & Johnson can be summarized by a headline run by practically every major financial publication at some point this year: "Euro hits 12-year low against dollar."
Consumers absolutely love that the U.S. dollar is gaining steam against the euro and other currencies around the globe, as it means better purchasing power for Americans, and perhaps more incentive to take an overseas vacation. U.S. multinational businesses, on the other hand, very much dislike the strength in the dollar. Because U.S. multinationals like J&J report their results in dollars, the decline in foreign currencies winds up costing J&J on its top and bottom line when converting foreign currencies back into dollars. In just the third quarter alone J&J recorded a 15.8% negative effect from currency translation in international markets.
The solace here for investors is that currency moves can be backed out if they're willing to dig below the surface and examine J&J's businesses on an apples-to-apples operational basis. If they do so, investors will discover that J&J is still growing its top line on an operational basis.
Although this didn't get its very own headline, J&J's profit struggles in 2015 can be traced back to weakness in a solitary innovative drug: Olysio (also known as Sovriad in overseas markets).
Olysio is a hepatitis C therapy approved in November 2013 by the Food and Drug Administration for genotype 1 patients, the most prominent but toughest to treat genotype. Sales of the drug ramped up from practically nothing to $2 billion annually almost overnight. Unfortunately, a superior therapy was in development at the time -- Gilead Sciences (NASDAQ: GILD) Sovaldi and Harvoni. Once Sovaldi and then Harvoni came to market, physicians in the U.S. switched their patients away from J&J's Olysio and into Gilead Sciences more convenient and effective HCV drugs. Gilead's Harvoni, for instance, is a once-daily pill that has a 90%-plus success rate in sustained virologic response. It can also deliver an effective cure for treatment-naive, non-cirrhotic patients in as little as eight weeks.
Being pushed to the wayside meant sales of J&J's HCV blockbuster collapsed almost as quickly as they exploded higher. In the third quarter J&J recorded only $26 million in U.S. sales compared with $671 million last year -- a 96% decline. Operational sales for Sovriad also fell by 50%. To be clear, J&J's management team was extremely transparent, with Wall Street and investors that Olysio sales were expected to drop considerably in 2015, so this shouldn't come as a shock to anyone. Still, there's no sugarcoating that the 90% drop in sales in the U.S. through the first nine months of the year stings.
Congress takes aim at drug developers
This was another headline that wasn't directed specifically at Johnson & Johnson, but it nonetheless could have investors concerned: "Lawmakers, Candidates Target High Drug Prices" -- that one from The Wall Street Journal.
The worries for J&J, and a majority of drugmakers, began in late September when now-former CEO of privately held Turing Pharmaceuticals, Martin Shkreli, announced that the price of toxoplasmosis drug Daraprim was being raised from $13 per pill to more than $700, representing a nearly 5,500% increase overall. Mind you, Daraprim, which Turing had just acquired in the prior month, is a 62-year-old drug, and Turing didn't change the formulating or manufacturing process of the drug. The move put consumers and lawmakers up in arms, and Congress began to take aim at the pricing process of certain drugmakers, such as Valeant Pharmaceuticals.
Why's this important? Even though J&J has remained out of the spotlight when it comes to the out-of-control drug pricing debate, J&J is no stranger to high drug prices. Imbruvica, a breakthrough blood cancer drug developed by Pharmacyclics in collaboration with J&J subsidiary Janssen Pharmaceuticals, can cost in excess of $100,000 annually. Pegged to be a cancer drug that could net $5 billion, or more, in peak annual sales, any Congressional price caps on Imbruvica, or any other drugs in J&J's product portfolio or pipeline for that matter, could be detrimental to its top- and bottom-line growth.
All systems go
Johnson & Johnson may be down for the year, and it's definitely faced some challenges, but all systems look good to go for J&J to keep growing over the long term.
The biggest advantage J&J brings to the table is that all three of its operating segments serve a purpose. Its consumer health products segment may not offer strong growth, but it does deliver predictable cash flow and strong pricing power. Medical devices may currently be challenged by a cost-competitive environment, but an aging population that's expected to drastically increase in size in the coming decades provides a long-tail growth opportunity. Lastly, pharmaceuticals may offer the most volatility and risk because of possible patent expirations, but it also delivers the most robust margins and the highest potential for growth. Tack on a 53-year streak of raising its dividend and its highly coveted "AAA" credit rating, and I believe you have every reason needed to consider this stock for your investment or retirement portfolio.
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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