Johnson & Johnson (JNJ) reported first quarter results on April 20. The company also provided an outlook for 2010 and the development status of its pipeline.
First Quarter Highlights
The company reported earnings per share (EPS) of $1.62, which includes an after-tax gain of $910 million arising from litigation. However, excluding this item, the company reported an EPS of $1.29, exceeding the Zacks Consensus Estimate by a couple of cents and $1.26 from the year-ago period.
Although revenues recorded 4% year-over-year growth to $15.6 billion, we note that favorable foreign exchange movement was primarily responsible for the growth. While operational factors brought down sales by 0.1%, foreign exchange movement had a positive impact of 4.1%. Although sales in the domestic market came down by 5%, sales in the international markets increased 14.4%.
(For a full coverage on the earnings, read: J&J Beats but Lowers Outlook)
Agreement of Analysts
Following the release of first quarter results, estimate revision trends among the analysts depict a clear negative bias for the company’s earnings in the forthcoming period. Over the last 30 days, 12 analysts covering the stock have made downward revisions for the next two quarters, with estimates for fiscal 2010 and fiscal 2011 being lowered by 19 and 15 analysts, respectively.
Upward revisions over the last 30 days have been few, with only one analyst increasing the estimates for the upcoming two quarters and fiscal 2010. For fiscal 2011, two analysts have raised their estimates.
There are a number of reasons for the negative sentiment regarding J&J. The company continues to struggle in the Pharmaceutical space. Although many of J&J’s drugs recorded robust growth during the quarter, genericization of some of its products is hampering sales.
Drugs such as Topamax and Risperdal are facing declining sales following the loss of patent exclusivity. The next significant product slated to lose patent exclusivity is Levaquin (December 2010), which accounted for 6.6% ($371 million) of the company’s total pharmaceutical sales in the first quarter. However, a pediatric extension of the drug was granted by the FDA, which extends market exclusivity in the US through June 2011.
Moreover, J&J’s Erythropoiesis-Stimulating Agent (ESA), Procrit (down 4.9% to $523 million) is struggling with lower sales. The US Food and Drug Administration (FDA) has announced a Risk Evaluation and Mitigation Strategy (REMS) for ESAs so that patients taking the drug are aware of the associated risks.
Another factor which might have been a concern for the analysts is the recall of some lots of OTC products following certain manufacturing issues at a plant. Recently, the company decided to suspend production temporarily at its Fort Washington, PA plant.
OTC product sales declined 15% in the first quarter. The plant closure and product recall is likely to hamper this segment in the forthcoming period as well.
In addition, Johnson & Johnson has lowered the guidance for 2010. The company expects EPS in the range of $4.80 - $4.90 compared to the earlier guidance (provided with fiscal 2009 results) of $4.85 - $4.95. This reflects the impact of recent changes in foreign currency exchange rates as well as the health care reform.
Magnitude of Estimate Revisions
The magnitude of revisions is quite significant following the first quarter results. Overall, estimates for the next two quarters have gone down by 3 cents. A similar trend can be seen for 2010 and 2011, with estimates going down by 5 cents ($4.86) and 8 cents ($5.27), respectively, over the last 30 days.
Our Recommendation
Considering the estimate revision trends and the magnitude of revisions, we find that there is a clear negative outlook in the near term. However, we believe Johnson & Johnson’s diversified business model, lack of cyclicality, strong financial position will help the company navigate through tough situations.
The company has been trying to offset the declining sales of some of its important products by bringing in new products through in-licensing deals and acquisitions. We have a Neutral recommendation on the stock, which is supported by its Zacks #3 Rank.
Read the full analyst report on "JNJ"
Zacks Investment Research
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The company reported earnings per share (EPS) of $1.62, which includes an after-tax gain of $910 million arising from litigation. However, excluding this item, the company reported an EPS of $1.29, exceeding the Zacks Consensus Estimate by a couple of cents and $1.26 from the year-ago period.
Although revenues recorded 4% year-over-year growth to $15.6 billion, we note that favorable foreign exchange movement was primarily responsible for the growth. While operational factors brought down sales by 0.1%, foreign exchange movement had a positive impact of 4.1%. Although sales in the domestic market came down by 5%, sales in the international markets increased 14.4%.
(For a full coverage on the earnings, read: J&J Beats but Lowers Outlook)
Agreement of Analysts
Following the release of first quarter results, estimate revision trends among the analysts depict a clear negative bias for the company’s earnings in the forthcoming period. Over the last 30 days, 12 analysts covering the stock have made downward revisions for the next two quarters, with estimates for fiscal 2010 and fiscal 2011 being lowered by 19 and 15 analysts, respectively.
Upward revisions over the last 30 days have been few, with only one analyst increasing the estimates for the upcoming two quarters and fiscal 2010. For fiscal 2011, two analysts have raised their estimates.
There are a number of reasons for the negative sentiment regarding J&J. The company continues to struggle in the Pharmaceutical space. Although many of J&J’s drugs recorded robust growth during the quarter, genericization of some of its products is hampering sales.
Drugs such as Topamax and Risperdal are facing declining sales following the loss of patent exclusivity. The next significant product slated to lose patent exclusivity is Levaquin (December 2010), which accounted for 6.6% ($371 million) of the company’s total pharmaceutical sales in the first quarter. However, a pediatric extension of the drug was granted by the FDA, which extends market exclusivity in the US through June 2011.
Moreover, J&J’s Erythropoiesis-Stimulating Agent (ESA), Procrit (down 4.9% to $523 million) is struggling with lower sales. The US Food and Drug Administration (FDA) has announced a Risk Evaluation and Mitigation Strategy (REMS) for ESAs so that patients taking the drug are aware of the associated risks.
Another factor which might have been a concern for the analysts is the recall of some lots of OTC products following certain manufacturing issues at a plant. Recently, the company decided to suspend production temporarily at its Fort Washington, PA plant.
OTC product sales declined 15% in the first quarter. The plant closure and product recall is likely to hamper this segment in the forthcoming period as well.
In addition, Johnson & Johnson has lowered the guidance for 2010. The company expects EPS in the range of $4.80 - $4.90 compared to the earlier guidance (provided with fiscal 2009 results) of $4.85 - $4.95. This reflects the impact of recent changes in foreign currency exchange rates as well as the health care reform.
Magnitude of Estimate Revisions
The magnitude of revisions is quite significant following the first quarter results. Overall, estimates for the next two quarters have gone down by 3 cents. A similar trend can be seen for 2010 and 2011, with estimates going down by 5 cents ($4.86) and 8 cents ($5.27), respectively, over the last 30 days.
Our Recommendation
Considering the estimate revision trends and the magnitude of revisions, we find that there is a clear negative outlook in the near term. However, we believe Johnson & Johnson’s diversified business model, lack of cyclicality, strong financial position will help the company navigate through tough situations.
The company has been trying to offset the declining sales of some of its important products by bringing in new products through in-licensing deals and acquisitions. We have a Neutral recommendation on the stock, which is supported by its Zacks #3 Rank.
Read the full analyst report on "JNJ"
Zacks Investment Research
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