Will J&J's (JNJ) Pharma Segment Pull Up its Q4 Earnings?

Johnson & Johnson JNJ has one of the most diverse revenue streams in the industry within the pharmaceutical division, which accounts for almost half of its revenues. The company has several multi-million dollar drugs covering a broad range of areas such as neuroscience, cardiovascular and metabolism; immunology; oncology; pulmonary hypertension; and infectious diseases/vaccines. However, several products in this segment are facing generic competition.

J&J’s shares have gained 28.7% in the past year, outperforming the 23.3% increase witnessed by the industry it belongs to.

J&J’s domestic Pharma segment sales decelerated in the first half of 2017.  However, sales growth accelerated in the third quarter and we are likely to see, a continuation of the positive trend in the fourth quarter and probably in 2018. The Zacks Consensus Estimate for the Pharmaceutical segment is $9.61 billion. Last quarter, segment sales beat the consensus estimate.

We believe that new products in all segments, label expansion of drugs like Imbruvica, Xarelto, Stelara and Darzalex and meaningful contribution from Swiss biotech, Actelion which J&J bought in June, will support the top line. The Pharma segment will also continue to benefit from easier comps in the second half of 2017 compared with the first. 

Continued share gains are likely to drive sales of Imbruvica (cancer indications) and Stelara (psoriasis). Strong adoption for the newer indication of Crohn's disease is expected to contribute to Stelara growth. Also, strong adoption in outside U.S. markets and accelerated adoption in the United States across all lines of therapy are likely to drive sales of multiple myeloma product, Darzalex. These positives will offset the loss of sales of some drugs like Invokana due to higher managed care discounting.

J&J also gained FDA approval for several line extensions in  the second and third quarters of 2017 —  a lower dose of Xarelto, two new indications of Simponi Aria, use in adolescents for Stelara, combination use of Darzalex with Celgene’s CELG multiple myeloma drug Pomalyst and the sixth indication for Imbruvica, among others. The line extensions can expand the eligible patient population of these drugs and drive their sales in the fourth quarter.

Two new drugs were approved last year. These include Tremfya (guselkumab) in the United States (July) as well as in the EU (November) for plaque psoriasis and the first dual treatment for HIV, Juluca (dolutegravir + rilpivirine) in partnership with GlaxoSmithKline GSK in the United States (November). Juluca is under review in the EU.

Regarding Tremfya, J&J said on the third-quarter conference call that it has been well received by physicians and patients. The drug is likely to contribute to sales in the soon-to-be reported quarter. We expect an update on the commercialization plans of Juluca on the fourth quarter conference call.

However, biosimilar competition is expected to hurt sales of key arthritis drug, Remicade outside the United States. Please note that J&J markets Remicade in partnership with Merck MRK.

Overall, strong performance of the pharmaceutical segment as well as positive contribution from acquisitions like Actelion and Abbott Medical Optics should pull up the top line in the quarter. Meanwhile, higher investments for product launches will continue to hurt profits as had been the case in the third quarter. (Read More:J&J to Set Pharma Q4 Earnings in Motion: What's Up?)

J&J carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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