Johnson & Johnson Earnings: Solid Growth Expected

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Johnson & Johnson (NYSE:JNJ) will release its Q2 2013 earnings on July 16th, and we expect robust growth across all its business segments. The company's stock has done exceedingly well this year, growing by roughly 30%. The pharmaceutical division is showing strength, and the consumer business is doing better due to improvements in supply chain and manufacturing. We believe that Johnson & Johnson is poised for good growth, and has a well diversified business with focus across the pharmaceutical, consumer and medical devices segments.

More specifically, the company is doing well with its immunology and oncology drugs and has shown resilience against the competition from generic drugs in the central nervous system therapeutic area. Its consumer healthcare business saw substantial growth in the U.S. last quarter, driven by the sales of analgesics and upper respiratory products due to a reliable supply chain and a strong flu season. In addition to this, the medical devices & diagnostics segment is benefiting from the Synthes acquisition. Even the cardiovascular division, which has suffered a decline in the past due to the company's exit from drug-eluting stents business is doing well now. Overall, we expect a good quarter from Johnson & Johnson.

Expect Strong Performance From Pharmaceutical Business

Excluding the currency impact, J&J saw its worldwide pharmaceutical sales jump by 10.7% in Q1 2013 driven by the strong performance of its immunology and oncology drugs, which together account for about 25% of its value as per our estimates. We don't expect Q2 to be any different as oncology and immunology continue to be the growth areas for the company and for the pharmaceutical industry in general. As primary care areas such as cardiovascular and allergy are getting flooded with products, the company's focus on oncology and immunology could help it command a better pricing.

Last quarter, J&J's immunology drug sales surged by 16.3% globally. While its biggest immunology drug Remicade showed moderate growth of 5.2%, the sales for Simponi and Stelara grew substantially. It appears that the overall immunology drug market is increasing and international markets present a large growth potential.

Oncology is a smaller segment for J&J but presents substantial growth opportunity. The company's global oncology drug sales grew by 33.2% during Q1 2013. Zytiga and Velcade have been approved for additional indications, and it is likely that we'll continue to see healthy growth in their sales in the near term. Velcade's sales stood at $1.5 billion in 2012, and we expect the figure to continue to grow till 2014, when the drug loses its patent. J&J's commitment towards growing its oncology drug business is visible from the fact that the company recently announced a definitive agreement to acquire Aragon Pharmaceuticals for nearly $1 billion.

J&J wants to take ownership and control of Aragon's androgen receptor antagonist program. Under this program, Aragon is developing a second generation androgen receptor signaling inhibitor, ARN-509, which is currently in phase 2 development stage and could potentially become a very viable drug for treatment of castration resistant prostate cancer. Prostate cancer is the second most common cancer in men worldwide and is among the leading causes of death. While the market opportunity is big, the acquisition can be seen as a strategic move by the company to mitigate the impact of Zytiga losing patent in 2016. Zytiga is J&J's prostate cancer treatment drug that garnered close to $1 billion in sales in 2012.

Orthopedics May See Pricing Pressure, But Cardiovascular Devices Business Is Likely to Do Well

We expect J&J's medical devices & diagnostics division to show a revenue jump due to the acquisition of Synthes last year, which is the world's largest maker of implants to cure bone fracture as well as produces surgical power tools and biomaterials. However, excluding the impact of this acquisition, we may see the impact of pricing pressure resulting from the growing competition in the market.

However, the combined J&J/Synthes orthopedic division has the broadest orthopedic portfolio globally, and therefore, the company can leverage the growth in the market better than its competitors. The global trauma fixation devices market is expected to reach $6.7 billion by 2017, growing at a compounded annual growth rate of 6%. This growth will be driven by the aging population in countries such as the U.S., Europe, Japan and China.

We expect J&J to register growth in the cardiovascular medical devices segment. Excluding the currency impact, the sales were up 8.5% globally last quarter, which came as a surprise as this business has suffered due to the company's gradual exit from the drug-eluting stents business. However, Biosense Webster is gaining market share and J&J's endovascular products are witnessing good growth driven by the re-launch of the S.M.A.R.T. vascular stent system and the EXOSEAL Vascular Closure Device (source: Q1 2013 call transcript). We expect the negative impact from exiting drug-eluting stents business to dilute even more this quarter and the growth in other cardiovascular devices will be more prominent.

Our price estimate for Johnson & Johnson stands at $85, implying a discount of about 5% to the market price.





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