Turning the calendar to the new year means resolutions are in full swing, and it also means that earnings season is about to kick off for some of America's largest companies. Although healthcare conglomerate Johnson & Johnson (NYSE:JNJ) isn't cutting the ribbon on fourth-quarter earnings reports for the S&P 500, it is one of the first healthcare companies to report, and J&J tends to set the tone for rest of the drugmakers.
Johnson & Johnson readies to report its Q4 results
Expected to deliver its results on Jan. 26, Wall Street's current consensus calls for Johnson & Johnson to produce $17.9 billion in sales, an approximate decline of 2% from the prior-year period, and adjusted EPS of $1.42, a slight improvement from the $1.37 it reported in Q4 2014. Johnson & Johnson has surpassed Wall Street's EPS estimates in each of the past 12 quarters, so if history is any indication Johnson & Johnson will probably top the Street's consensus in Q4.
But there's more to J&J's earnings reports than just its headline numbers. It's far more important to understand how J&J achieved its results and what's going on behind the scenes. As we ready for what's arguably one of the most important healthcare reports from the fourth quarter, here are five things you'll want to pay close attention to when Johnson & Johnson reports its results.
1. What effect is the dollar having on J&J's top- and bottom-line?
One of the big stories of 2015 was the rapid appreciation of the U.S. dollar relative to most other global currencies. A rising U.S. dollar is typically great news for domestic consumers because it means their purchasing power in overseas markets rises. But, for U.S. multinational companies it's been a real hindrance. Because U.S. multinationals report their earnings in dollars, they're required to translate revenue received in foreign currencies back into dollars. If the dollar has appreciated in value relative to foreign currencies, it probably means a reduction in total revenue and profits.
In J&J's third-quarter report, foreign currency translation had a negative impact of 8.2% against its sales. It'll be interesting to see whether or not adverse currency translation issues subsided or worsened during the fourth quarter.
One final point on currency fluctuations: it's imperative that you look past the effect currency has on J&J's sales and analyze J&J's Q4 report on an operational basis. Apples-to-apples operational comparisons are one of the best ways to determine whether or not a company performed well during the quarter.
2. Are Invokana sales still expanding?
Next up, I'd encourage investors to pay close attention to the total sales of type 2 diabetes drug Invokana.
Invokana is part of a new class of diabetes drugs known as SGLT2 inhibitors which work by inhibiting the absorption of glucose in the kidneys. Excess glucose can then be excreted from the body through patients' urine. SGLT2 inhibitors have also exhibited surprising side effects including weight loss and reduced systolic blood pressure. Most type 2 diabetics tend to be overweight, so these are great "side effects."
However, in August and September Eli Lilly (NYSE:LLY) and Boehringer Ingelheim announced that their long-term cardiovascular study for FDA-approved SGLT2 inhibitor Jardiance demonstrated superior efficacy in terms of risk of death compared to the current standard of care. With J&J's Invokana still a little more than a year away from delivering top-line data from its CV outcomes trial, it'll be worth paying attention to whether or not SGLT2 inhibitors as a whole are benefiting from Jardiance's results, or if Eli Lilly's and Boehringer's Jardiance is potentially taking market share away from Invokana.
3. Any early data on Darzalex's launch?
In mid-November, J&J and Genmab announced that Darzalex, a drug designed to treat third-line and higher multiple myeloma, was approved by the FDA. The press release noted at the time that Darzalex would be launched roughly two weeks after its approval.
What investors will want to pay attention to in J&J's Q4 report is how quickly insurers have stepped up coverage on Darzalex. Priced at $135,000 per year, Darzalex isn't cheap, so gaining insurance coverage is no guarantee for the drug. If J&J's press release and conference call suggest that insurance coverage is coming in ahead of schedule, it could positively impact J&J's stock.
Also, it'll be interesting to see whether the company provides any early market share data for Darzalex. Specifically, I'd want to know whether or not it's challenging Amgen's (NASDAQ:AMGN) Kyprolis in the third-line indication for multiple myeloma. When Amgen's Kyprolis was approved in the third-line setting it induced a response in 23% of patients who'd progressed on a median of five prior therapies in clinical trials. Darzalex was approved after a similar study showed a 29% response for patients on a median of five prior therapies. This is not an apples-to-apples comparison by any means, but it could give J&J a heads up on Amgen's Kyprolis (and I'm eager to see the data).
4. Has Obamacare uncertainty been placed in the rearview mirror?
One of the biggest recent drags for J&J has been its medical device segment. Even beyond alleviated concerns over the recently-suspended medical device tax, the universal concern for device makers is that as competition increases, pricing pressure could weigh on margins. Pushing back against commoditization is only countered by remaining as innovative as possible.
In addition to fears of commoditization, the implementation of the Affordable Care Act, which you likely know better as Obamacare, has been a major drag on the medical device industry. Uncertainties surrounding premium inflation and consumer spending habits under Obamacare have caused some consumers to push elective procedures down the road, ultimately hurting the growth potential of device makers like J&J. It's believed that as time passes the outlook for the medical device industry will improve as the expense outlook for consumers and businesses becomes more transparent. However, it remains to be seen if we're at the point where uncertainties surrounding Obamacare are subsiding. Pay close attention to J&J's medical device growth rate in Q4 and its outlook for 2016.
5. Any change in J&J's M&A strategy?
Finally, pay close attention to what J&J's management team has to say about its merger-and-acquisition strategy moving forward.
J&J ended the previous quarter with $37 billion in cash, or about $17 billion in net cash. Asked what it planned to do with its excess cash, J&J was clear that it's seeking out earnings accretive acquisitions, but that it would only jump at a transaction if the price was right. Three months removed from these statements I'd encourage investors to dig deep into J&J's press release and conference call to undercover whether or not its M&A strategy has changed at all. Is J&J still on the hunt for one large acquisition, or is it considering a bolt-on approach? Is it looking to add to its high-margin pharmaceutical pipeline, or could it look to bolster its medical device offerings? These are all questions I'd be looking for the company to address in its Q4 report.
Steady as she goes
However, regardless of the answers to these questions, Johnson & Johnson appears to be on the right path to sustainable profit and dividend growth. It has aspirations of bringing 10 novel blockbuster drugs to market by the end of the decade, it has a long-tail growth opportunity in medical devices which should improve as global access to medical care expands, and it has its consumer health products franchise which is a cash flow safety net. Investors looking for a low volatility, above average yield stock could probably do a lot worse than Johnson & Johnson.
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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