Morningstar | J&J Posts Solid 1Q, but Increasing Generic Competition Weighs on Full-Year Outlook
Buoyed by strong drug sales and solid expense management, Johnson & Johnson reported first-quarter results slightly ahead of our and consensus expectations, but we don't expect any major changes to our fair value estimate based on the minor outperformance. Recent drug launches in oncology and immunology supported total operational drug sales growth of 8% year over year, outpacing device (up 4%) and consumer (up 1%) sales. The strong drug sales reinforce the intangible assets moat source backing our wide moat rating.While first-quarter drug sales were solid, we expect the division's growth to slow later in the year due to increasing generic pressure. We expect intensifying generic competition to cancer drugs Zytiga and Velcade along with continued pressure from biosimilar Remicade in immunology to weigh on total drug sales. We believe these factors played a part in management's decision to sell Advanced Sterilization Products and record the gain in adjusted earnings to maintain overall earning growth for the year. Following 2019, we expect generic pressure to ease and recently launched drugs to return the drug group to steady growth.
The medical device segment continues to accelerate growth, offsetting weakness in the consumer group. Strong growth from devices in interventional solutions, including in electrophysiology for atrial fibrillation, helped offset relatively flat operational growth from orthopedics. In consumer, slow overall industry growth weighed on sales, but we also believe J&J's strong brand power is not holding up as well in the increasingly important online sales channel.
J&J is holding expenses in check slightly better than we expected, but the one-time legal charge of $423 million is concerning and probably relates to talcum litigation. We continue to expect only a minor impact to our J&J fair value estimate based on this litigation and have modeled close to $2 billion in related charges.
Looking deeper into the pipeline, J&J continues to advance its drug portfolio. The recent approvals of Spravato for treatment-resistant depression and Balversa for bladder cancer help position the company for long-term growth. For a complete review of J&J's pipeline, please see "Annual Drug Pipeline Report: Moats Remain Secure as Innovation Counters Pricing and Generic Headwinds, but M&A Accelerating."
Johnson & Johnson is a holding company engaged in the research and development, manufacture and sale of a range of products in the health care field. The company has three business segments: Consumer, which includes a range of products focused on personal healthcare used in the beauty, over-the-counter pharmaceutical, baby care, oral care, women's health and wound care markets; Pharmaceutical, which is focused on six therapeutic areas: immunology, infectious diseases, neuroscience, oncology, cardiovascular and metabolism and pulmonary hypertension; and Medical Devices, which includes products used in the orthopaedic, surgery, interventional solutions, and eye health fields.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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