By Kris Rosemann
As US-based multinational corporations continue to battle currency headwinds related to the strong US dollar, Johnson & Johnson (JNJ) reported solid underlying results in its most recent quarter and full-year report, released January 26.
Johnson & Johnson reported full-year sales in 2015 of $70.1 billion, which represents a 5.7% decrease on a reported basis from 2014 due to a negative currency headwind of 7.5 percentage points. On an operational basis, sales grew 1.8%, domestic sales advanced 2.6%, international sales grew 1.1% on an operational basis, and sales excluding acquisitions, divestitures, and hepatitis C sales on an operational basis increased 6.5% on a year-over year basis.
The underlying growth witnessed in 2015 at Johnson & Johnson was driven by its ‘Pharmaceutical’ business and a variety of its iconic ‘Consumer’ brands. The Consumer business advanced sales by 2.7% on an operational basis from 2014, with international sales growth being slightly higher than domestic sales growth in constant currency. The segment accounted for ~19% of total revenue in the year. Over-the-counter products such as Tylenol and Motrin, upper respiratory products such as Zyrtec allergy medication, and digestive health products were positive contributors for the segment, as were international feminine protection products, Listerine oral care products, and Neutrogena skin care products.
Johnson & Johnson’s ‘Pharmaceutical’ business was its best performing segment in 2015, as it grew sales 4.2% on an operational basis. Domestic sales outpaced international sales on a constant currency basis, and the segment made up nearly 45% of total revenue. The strong performance in this segment was driven by both the strength of existing core products and higher growth in new products. We’re not surprised by either of these drivers, as we have long been high on the pharmaceutical pipeline of the company.
Growth in the segment was partially offset by lower sales of the firm’s hepatitis C offerings, which continue to face significant pressure from competitive entrants as sales fell nearly 70% on an operational basis from 2014. We would expect this headwind to continue in the near term as more competing offerings are expected to enter the market in 2016. However, the company did acquire Novira Therapeutics, a privately-held clinical-stage biopharmaceutical company that develops innovative therapies for curative treatment of chronic hepatitis B, which has the potential to expand its portfolio to other strains of the hepatitis virus.
Key drivers of sales growth for Johnson & Johnson’s ‘Pharmaceutical’ business were new products, including its type 2 diabetes treatment, its once-daily blood cancer therapy, its oral anticoagulant, a once-daily medication for the treatment of metastatic and castration-resistant prostate cancer. Also providing growth were some of its more established products including its psoriasis and psoriatic arthritis treatment, an injectable schizophrenia treatment for adults, an ADHD treatment, and a treatment of a number of immune-mediated inflammatory diseases. While the growth rates in these products may not have been as high as some of the new products, but the continued strength in their performance provided a strong base for the segment’s revenue in 2015.
In 2015, Johnson & Johnson delivered on its expectation to continue the strength of its 3 core brands that had each already delivered more than $1 billion in revenue, as well as achieving the same feat with 7 new products that were targeting the $1 billion in individual revenue mark. As we said after the third quarter of 2015, the firm has as strong a pipeline as ever, and it continued its momentum in relation to new approvals from the FDA and new regulatory submissions for the expansion of existing products to new treatments and new products in the fourth quarter of the year. The company will continue to invest in 12 key new products that are planned to be filed for approval by 2019, each of which has the potential to reach the $1 billion in annual revenue mark.
Johnson & Johnson’s ‘Medical Devices’ was the firm’s weak link in 2015, as sales fell 1.4% on an operational basis from 2014. Domestic sales grew by 1% in the year, while international sales fell by 1.7% on an operational basis. The segment accounted for ~36% of total revenue in 2015, and the company recently announced a restructuring plan for the segment. The restructuring initiative is expected to save $0.8-$1 billion in pre-tax costs annually by 2018, $200 million of which is expected to be realized in 2016, while targeting the acceleration of its pace of innovation and improving its go-to-market model.
The restructuring of the ‘Medical Devices’ business will result in the segment cutting 4%-6% of its global workforce over the next two years. The business will be reported in the following divisions moving forward: Cardiovascular; Diabetes; Diagnostics; Orthopedics: Hips, Knees, Trauma, Spine & Other; Surgery: Advanced, General, Specialty; and Vision Care. $2-$2.4 billion in restructuring charges will be incurred by 2017 in relation to the move, $600 million of which was recorded in the fourth quarter of 2015.
The true highlight of the fourth quarter of 2015 for Johnson & Johnson was the tremendous jump in its diluted earnings per share of more than 29%, to $1.15. Adjusted diluted earnings per share, which excludes the restructuring charge related to the Medical Devices business and after-tax intangible amortization expense, advanced 5.1% to $1.44. This shows the decrease in special items and expenses from the fourth quarter of 2014 to the fourth quarter of 2015, and we think the adjusted growth number of approximately 5% is the more ‘representative’ number for earnings growth for the year.
Looking ahead to 2016, Johnson & Johnson is expecting modest top-line growth on an operational basis similar to that of 2015 of 2.5%-3.5%. Adjusted earnings per share are expected to be in a range of $6.43-$6.58, representing growth of 5.3%-7.7% on an operational basis from 2015. Currency headwinds are expected to continue to drag on results in the near term, but organic performance looks solid. We will be following management’s plans to restructure its ‘Medical Devices’ business closely, while its ‘Consumer’ business continues to provide a steady revenue stream, but the clear driver behind the firm’s operations going forward remains its Pharmaceutical business. Johnson & Johnson continues to be a core holding in the Dividend Growth Newsletter portfolio.