Johnson & Johnson Earnings Preview: Don't Expect Big Surprises

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Summary

Johnson & Johnson will report its Q4 2016 earnings on Tuesday, January 24th.

We expect mild growth driven primarily by the pharma business.

Our price estimate of $115 for Johnson & Johnson is roughly in line with the market.

Johnson & Johnson (NYSE:JNJ) will report its Q4 2016 earnings on Tuesday, January 24th. We expect mild growth driven primarily by the pharma business, which continues to benefit from the growth in its two key franchises: Immunology and Oncology. One of the biggest concerns is how Inflectra's launch will impact Remicade's sales. While there is no doubt that it will eventually cause Remicade's sales to decline, the impact in the fourth quarter will be very limited. Overall, J&J is facing a challenging environment, with multiple drugs nearing maturity and medical business reeling under competitive pressure. Therefore, a lot rides on new product launches and the company's pipeline as far as the next few years are concerned. Our price estimate of $115 for Johnson & Johnson is roughly in line with the market. Here is what we can expect from the company's Q4 2016 earnings.

First. We believe that the key growth drivers will continue to be the same. They include new oncology drugs such as Darzalex and Imbruvica, which have a combined peak sales potential of $10 billion, along with immunology drugs Simponi and Stelara, and blood thinner Xarelto. We note that Xarelto's growth may moderate slightly due to growing competition from Bristol-Myers Squibb and Pfizer's Eliquis.

Second. The impact of Inflectra's launch on Remicade's sales will be very limited in Q4 2016. Inflectra, which is a biosimilar version of Remicade, was launched by Pfizer in late November and therefore had merely 1 month of sales period in the fourth quarter. Additionally, Pfizer is selling Inflectra at a 15% discount to Remicade. Therefore, the economic incentive to switch is not big enough to warrant rapid adoption by patients. Also, as biosimilars tend to be injectables and require a physician to administer them, the inertia to change the medication is higher.

Third. There might be minor positive contribution from additional approvals that J&J's existing drugs received in Q4 2016. These include Invokamet, Stelara and Darzalex.

Fourth. Some specific segments of J&J's medical devices business did relatively well in the third quarter. Going forward, there is some hope from vision care, orthopedics and advanced surgery. Nevertheless, intense competition and pressure from various stakeholders, such as payers and health care providers, is likely to keep the growth in check. China will continue to see above-average market growth but J&J has limited presence in the region.

Fifth. We expect to hear more about the progress of J&J's acquisition talks with Actelion. The companies have reportedly agreed to a tentative acquisition price. With Pfizer's launch of a biosimilar against Remicade (an immunology drug) in the U.S., J&J's reliance on oncology drugs to offset the expected sales slump will increase significantly. This makes it imperative for the company to look at additional growth avenues. Actelion, with its focus on rare diseases which tend to have more price protection and fewer competitors, is one such option.

Disclosure: None

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Tagged: , Drug Manufacturers - Major, Earnings
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