J&J Beats On Q4 Earnings, Revenues Hit By Currency

Johnson & Johnson (JNJ - Analyst Report), the first among the large health care companies to report fourth quarter and full year 2014 results, beat earnings expectations yet again. The company’s fourth-quarter 2014 earnings (excluding special items) were $1.27 per share, a couple of cents above the Zacks Consensus Estimate of $1.25 per share and 2.4% above the year-ago earnings.

Johnson & Johnson - Quarterly EPS | FindTheBest

Fourth quarter sales, however, fell short of expectations. Fourth quarter sales of $18.3 billion were just shy of the Zacks Consensus Estimate of $18.5 billion and down 0.6% from the year-ago period.

While operational factors favorably impacted sales by 3.9%, currency fluctuations had a negative impact of 4.5%.

Including one-time items, Johnson & Johnson reported fourth quarter earnings of 89 cents per share, well below the year-ago earnings of $1.23 per share.

Full year earnings came in at $5.97 per share (up 8.2% year-over-year) on revenues of $74.3 billion (up 4.2% year-over-year).

Revenues Hit by Currency

Fourth quarter sales increased 7.4% in the domestic market. Meanwhile, international sales declined 6.7%, consisting of 1.2% operational growth and 7.9% negative currency impact. Once again, the Pharmaceutical segment recorded sales growth with the remaining two segments recording a decline in sales.

Pharmaceutical segment sales increased 9.6% year-over-year to $8 billion (operational growth of 13.9%). Sales in the domestic market increased 22.7% to $4.4 billion, whereas international sales declined 2.7% to $3.6 billion.

New products like Zytiga, Stelara, Xarelto and Invega Sustenna continued to perform well. However, hepatitis C virus (HCV) treatment Olysio fell 59.7% sequentially. Remicade sales also declined 2.3% during the reported quarter.

Other growth drivers include Simponi. Fourth quarter Zytiga sales were $595 million, up 20.2% year-over-year. Launch in additional countries and label expansion for use in chemo-naïve patients should continue driving sales.

The Medical Devices & Diagnostics segment posted sales of $6.6 billion, down 9% from the year-ago period comprising an operational decline of 4.7% and a negative currency movement of 4.3%.

Sales in the domestic market declined 7.7% year-over year to $2.9 billion; international market sales fell 10% year-over-year to $3.7 billion.

Several Medical Devices & Diagnostics markets have been facing challenges in the form of austerity measures, pricing pressure and a slowdown in elective surgeries, which have all contributed to more tempered growth rates. Cardiovascular Care was the only sub-segment to record growth. The Vision Care business continued with its disappointing performance most likely reflecting competitive pricing dynamics.

The Consumer segment recorded revenues of $3.6 billion in the reported quarter, down 3.9% from the fourth quarter of 2013. Foreign currency movement negatively impacted sales in the segment by 4.8%. Sales in the domestic market increased 2.5% year-over-year to $1.3 billion.

Meanwhile, the international segment recorded sales decline of 7.1% with currency having a negative impact of 7.2%. OTC sales increased 9% in the U.S. with some key products being re-launched. Johnson & Johnson has been working on ensuring reliable and consistent supply of products.

2015 Guidance

J&J expects 2015 earnings in the range of $6.12 to $6.27 per share. Starting from 2015, adjusted earnings will exclude after-tax intangible amortization expense in addition to special items. After-tax intangible amortization expense for 2014 was about 42 cents per share in 2014 and is expected to be approximately 32 cents per share this year.

Our Take

Although Johnson & Johnson’s fourth quarter earnings were better-than-expected, sales fell short mainly due to a negative currency impact. Currency will continue to have a negative impact on 2015 numbers.

The huge sequential decline in Olysio sales is quite disappointing. Olysio, one of J&J’s new and promising product offerings, will continue to be impacted by the changing competitive dynamics in the HCV market. The decline in Remicade sales is also disappointing.

Meanwhile, a closer look at the company’s 2015 guidance, which excludes after-tax intangible amortization expense, shows that after adjusting the amortization expense numbers provided by the company, J&J is headed for a decline in year-over-year earnings.

Johnson & Johnson is a Zacks Rank #3 (Hold) stock. Companies that currently look attractive in the health care space include Amgen (AMGN - Analyst Report), Celgene Corp. (CELG - Analyst Report) and AbbVie (ABBV - Analyst Report). While Amgen and Celgene are Zacks Rank #1 (Strong Buy) stocks, AbbVie is a Zacks Rank #2 (Buy) stock.