The improvement in the US economy and tailwinds in the global economy have spurred demand in the healthcare industry as more people are utilizing healthcare facilities. This is evidenced in Johnson & Johnson’s (JNJ, Financial) current earnings report wherein the company secured a comfortable beat on the bottom line. However, the shares dropped 2.6 percent on Tuesday, as the company reported a drop of 0.6 percent in sales, and offered a weak outlook for the fiscal 2015.
Decoding the results
The healthcare giant reported a drop of 0.6 percent Y-o-Y in worldwide sales to customers, owing to the negative currency impact of 4.5 percent. On an operational basis, the sales were up by 3.9 percent. Even though J&J failed to achieve an overall growth in worldwide sales figures, owing to a negative currency impact, the company did manage to achieve growth. Because of the headwinds generated by a stronger dollar, the company reported a reasonable 6.7 percent decline in sales from abroad, whereas its domestic sales rose 7.4 percent in the reported quarter. Multinational companies have encountered headwinds from a stronger dollar, which is currently trading at $1.16 against the euro, since sales in other countries translate into fewer dollars back home.
J&J’s net income was $2.5 billion, or 89 cents per share, down from $3.5 billion, or $1.23 per share a year ago. Excluding special items, net income was $1.27 per share, beating Wall Street's estimate of $1.26 per share. For the full year 2014, consolidated sales to customers for the year of 2014 were $74.3 billion, an increase of 4.2% as compared to the same period a year ago. On an annual basis, sales grew 6.1% operationally and currency had a negative impact of 1.9%. Turning to earnings for the full year, 2014 annual net earnings were $16.3 billion and earnings per share were $5.70.
Growth across segments
While the overall growth in domestic sales was definitely a cheerful highlight, a growth of 22.7 percent in the pharmaceutical segment in the US ranks better. A major driver of growth in this segment was J&J’s Hepatitis C product, OLYSIO. Other significant contributors to growth were immunology products and the recently launched IMBRUVICA. Net revenue recorded from IMBRUVICA in the fourth quarter was $92 million worldwide, with $64 million in the U.S. On a full year basis, net revenue was $200 million worldwide, with $144 million in the U.S.
As I mentioned at the beginning, the primary reason behind a decline in J&J’s share price after the results were declared was a weak outlook for the future. As per the company, adjusted profit this year will reach $6.12 to $6.27 a share. That figure excludes an estimated charge of 32 cents a share for intangible amortization costs -- an expense Johnson & Johnson previously included in its pro forma results. Incorporating that figure, 2015 earnings would be $5.80 to $5.95 a share, compared with 2014 adjusted profit of $5.97 a share.
Weak outlook
Analysts have cited the existence of competitive pressure from the likes of Gilead Sciences. Basically, OLYSIO (the star performer in J&J’s pharmaceutical portfolio) finds credible competition in Gilead’s Harvoni pill, which combines two drugs in a single pill. Besides the Harvoni pill, J&J faces competition in other segments as well. In addition to that, it is expected that the company will launch fewer products this year, which will only escalate the competitive pressure on its existing line of products.
Takeaway
Johnson & Johnson, the leading healthcare enterprise, reported a decline in sales number because of negative currency impact. However, the prospects of J&J’s business still remain strong. The risk that offsets the healthy business prospects is competition from upcoming drugs, which can hamper the reach of J&J’s existing drugs. For now, the healthy option for investors is to watch the developments in J&J’s product portfolio as well as the competitive scenario in the industry, from the side-lines. Even though the stock price has fallen, J&J has to bridge some gaps to become an ideal investment.
