J&J (JNJ) to Kick-Start Pharma Q2 Earnings: A Beat in Store?

We expect Johnson & Johnson JNJ to beat expectations when it reports second-quarter 2019 results on Jul 16, before market open. In the last reported quarter, the company delivered a positive earnings surprise of 3.45%.

The healthcare bellwether’s performance has been pretty impressive, with the company exceeding earnings expectations in all the trailing four quarters. The average positive earnings surprise over the last four quarters is 1.85%

 

Johnson & Johnson Price and EPS Surprise

 

Johnson & Johnson Price and EPS Surprise

Johnson & Johnson price-eps-surprise | Johnson & Johnson Quote

 

J&J’s stock has risen 9.4% this year so far compared with an increase of 2.3% recorded by the industry.

 

Factors to Consider

Strong sales performance by the Pharmaceutical segment and continued improvement in Medical Devices unit offset a softer performance by the Consumer unit, driving J&J’s top line in the first quarter of 2019. We expect the trend to continue in the second quarter.

J&J’s strong performance in pharmaceuticals segment is being led by its oncology portfolio, a trend expected to remain unchanged in the second quarter. The company’s cancer drugs like Imbruvica and Darzalex should continue performing well backed by market growth and market share gains. J&J markets Imbruvica in partnership with AbbVie ABBV. The Zacks Consensus Estimate for Imbruvica and Darzalex is $806 million and $691 million, respectively.

J&J’s psoriasis treatment, Stelara, should also remain a key contributor to sales. The Zacks Consensus Estimate for Stelara is $1.6 billion.

Other core products like Simponi/Simponi Aria and Invega Sustenna and new drugs like immunology medicine Tremfya and prostate cancer drug Erleada are also expected to contribute to growth.

However, at the first-quarter call, the company said that sales in the second quarter are expected to be hurt by divestiture of minimal Advanced Sterilization Products unit, currency headwinds and difficult comparison with a strong sales performance in the second quarter of 2018. Also, potentially accelerated generic erosion of Zytiga and biosimilar erosion of Procrit in the United States are likely to affect results. Sales of Remicade, which J&J markets in partnership with Merck MRK, should also continue to decline in the second quarter.

Sales of J&J’s some other drugs like Invokana/Invokamet and Xarelto declined in the first quarter. Xarelto’s sales fell as prescription growth was offset by increased discounts and rebates. However, the October 2018 FDA approval of Xarelto for a new 2.5 milligram vascular dose for the CAD/PAD indication significantly expands the drug’s eligible patient population, which can improve sales of the drug in the second and future quarters. Regarding this label expansion, management said on the first-quarter call that it has seen positive response to the 2.5 milligram vascular dose, and it could be a significant contributor to Xarelto’s sales in the future quarters. We expect an update at the second-quarter call.

In the pulmonary arterial hypertension (PAH) category, strong demand for Uptravi and Opsumit will be partially offset by the expected decline of Tracleer due to increased use of Opsumit and generic competition in Europe.

While the Consumer unit should continue to be hurt by lower baby care sales and softer end-markets, the Medical Devices segment is expected to grow on the back of improved execution and new product introductions.

The Zacks Consensus Estimate for J&J’s Pharmaceuticals, Consumer and Medical Device segments is $10.28 billion, $3.54 billion and $6.5 billion, respectively.

J&J has already gained FDA approval for two new drugs in 2019 - Spravato (esketamine) for treatment-resistant depression and Balversa (erdafitinib) for metastatic urothelial cancer. Investor focus on the call will be on the initial sales uptake for these two new drugs. Regarding Spravato, which was approved and launched in the first quarter, J&J said at the first-quarter conference call that the drug is off to a very strong start and could prove to be an important growth driver for the company.

Earnings Whispers

Our proven model shows that J&J is likely to beat estimates this quarter because it has the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for a likely positive surprise.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate of $2.48 and the Zacks Consensus Estimate of $2.42, is +2.54%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: J&J has a Zacks Rank #3. The combination of J&J’s Zacks Rank #3 and positive ESP makes us confident of an earnings beat.

Sell-rated stocks (Zacks Rank #4 or 5), on the other hand, should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Other Stocks to Consider

Here are some other large drug/biotech stocks that also have the right combination of elements to beat on earnings this time around:

Merck with an Earnings ESP of +3.48% and a Zacks Rank #2. The company is scheduled to release results on Jul 30. You can see the complete list of today’s Zacks #1 Rank stocks here.

Allergan, plc AGN has an Earnings ESP of +2.00% and a Zacks Rank #3.

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