Dividend Growth Newsletter portfolio holding Johnson & Johnson (JNJ) reported 2015 second-quarter results July 14. Though the healthcare and consumer goods giant experienced quarterly revenue and adjusted earnings-per-share declines of 8.8% and 3.9% during the period, respectively, both numbers beat consensus estimates. Divestitures and currency headwinds weighed heavily on reported results, with currency negatively impacting revenue by 7.9%. Revenue–excluding divestitures, acquisitions, and the impact of currency exchange–advanced 1.7% in the quarter; though this wasn’t great, the modest quarterly organic increase was nowhere near the pace of the reported top-line decline. More encouraging was the firm’s profitability in the quarter. Though adjusted net earnings and adjusted diluted earnings per share declined 6.3% and 3.9%, respectively, adjusted diluted earnings per share increased 6.7% on an operational basis. From our perspective, underlying growth remains prevalent throughout Johnson & Johnson’s portfolio, and we think its pharmaceutical portfolio remains a bright spot.
Though each of Johnson & Johnson’s three operating segments reported significant sales declines in the second quarter, currency neutral revenue results were more reassuring. The firm’s consumer segment, the smallest of the three, experienced a reported sales decline of 7% in the quarter, while revenue on a constant currency basis advanced 2.3%. The company’s second largest segment, the medical devices segment, was the worst performer of the three in the period; the segment reported sales diminishing 12.2%. Revenue on a currency neutral basis fell 4.7% in the segment due, in part, to the divestiture of its diagnostics business in June 2014. Johnson & Johnson’s largest segment, its pharmaceutical segment, reported sales declines of 6.6%, or an increase of 1% on a constant currency basis. The only pharmaceutical sub-segment to lose sales on a constant currency basis in the quarter was the infectious diseases sub-segment, which reported a sharp decline in sales due to competitive drug launches in the hepatitis C market by competitors Gilead Sciences (GILD) and AbbVie Laboratories (ABBV).
Despite the competitive drug launches taking a bite out of pharmaceutical sales, management is unfazed. The firm offered its response to Hepatitis C competitors in the second quarter of 2015 in the form of an exclusive license and collaboration agreement with Achillion Pharmaceuticals to develop and commercialize one or more of Achillion’s lead hepatitis C virus assets. Also in the quarter, the US FDA approved INVEGA TRINZA™, the first and only four-times-a-year treatment for Schizophrenia. The firm has improved its European pharma platform, recently winning European Commission approval for three different drugs. The firm’s pharmaceutical segment has already launched 7 products in the last five years that are expected to exceed $1 billion in annual sales by the end of 2015, and its robust pipeline includes more than 10 new molecular entities (NMEs) that have the similar upside sales potential. These 10+ NMEs are expected to be filed by 2019. Below is a chart highlighting significant recent approvals and potential filings for Johnson & Johnson’s pharmaceutical pipeline.
Image source: Johnson & Johnson corporate presentation
Regardless of quarterly reported results, management remains confident in the power of its incredibly diverse portfolio. In the face of strong currency headwinds, and on the back of its strong pharmaceuticals portfolio, the company raised its guidance for full-year adjusted earnings per share from a range of $6.04-$6.19 to $6.10-$6.20. Currency headwinds are not a reflection of the company’s underlying performance, and Johnson & Johnson’s pharmaceutical pipeline cannot be ignored. We see no reason for major concern and expect the Dividend Growth Newsletter portfolio holding to continue to churn out solid returns for investors.