The healthcare industry is in constant flux, but Johnson & Johnson (NYSE:JNJ) aims to be a blue-chip stalwart for investors in the space to get wide-ranging exposure throughout the sector. With reform efforts ongoing and criticism of high-priced drugs from pharmaceutical manufacturers, J&J has had to navigate a difficult industry environment lately, but coming into Tuesday`s first-quarter financial report, investors in Johnson & Johnson wanted to see that the healthcare giant could still produce growth.
J&J`s recent decision to acquire Actelion led the company to boost its guidance for the full year, but the healthcare conglomerate`s results weren`t everything those following the stock had hoped to see. Let`s look more closely at Johnson & Johnson to see how it did and what`s ahead for the company going forward.
J&J is still struggling to boost its top line
Johnson & Johnson`s first-quarter financial results again showed some of the challenges the company has faced lately. Revenue was up just 1.6% to $17.77 billion, which was about half of the growth rate investors had wanted to see. GAAP earnings actually dropped slightly from year-ago levels, due largely to a substantial boost in income tax expense. But adjusted earnings of $1.83 per share were up almost 6% from the year-earlier quarter and topped the consensus forecast for $1.77 per share.
Once again, there was a change this quarter in the leading segment within Johnson & Johnson`s corporate structure. The medical devices business performed the best from a top-line perspective, seeing sales climb 3%. As we`ve seen in past quarters, the unit benefited from its Acuvue contact lens products, as well as electrophysiology devices for cardiovascular applications and endocutters in J&J`s advanced surgery business. The acquisitions of Abbott Medical Optics and privately held specialists Megadyne Medical Products and Torax Medical helped boost the unit`s prospects for the quarter.
Consumer sales lost some momentum, seeing growth slow to just 1%. Without acquisitions, the unit would have seen its top line fall, and U.S. sales dramatically outperformed J&J`s international revenue. Tylenol and other over-the-counter products did fairly well, but oral care, baby care, and wound care products didn`t pull their weight during the quarter.
Most importantly, pharmaceutical sales lagged the rest of the company`s performance, with sales gains of just 0.8%. Drug sales internationally grew while domestic revenue dropped, and J&J pointed to the success of multiple myeloma treatment Darzalex and blood-cancer drug Imbruvica as key contributors to its overall performance.
Can Johnson & Johnson grow faster?
CEO Alex Gorsky was measured in his statements about the quarter. "Johnson & Johnson`s first-quarter results are in line with our expectations," Gorsky said, "and we are confident we will achieve the full-year financial guidance we established at the beginning of the year." The CEO also pointed to the Actelion acquisition as a key driver of future growth.
In response to its successful tender offer to acquire a substantial supermajority stake in Actelion, J&J changed its 2017 outlook to include estimated impacts from the acquisition. Sales projections rose roughly $1.3 billion, with a new range of $75.4 billion to $76.1 billion. Johnson & Johnson anticipates about $0.07 per share in positive impact on earnings from Actelion, providing a new range of $7 to $7.15 per share for the bottom line on an adjusted basis.
Yet investors are still trying to parse together exactly what the $30 billion buyout will mean for Johnson & Johnson. In Gorsky`s words, the deal should help J&J "expand our portfolio with leading, differentiated in-market medicines and promising late-stage products." However, the vagueness of that statement shows just how difficult it is to predict how even a major high-profile acquisition will necessarily lead to better results going forward.
Johnson & Johnson investors didn`t seem entirely satisfied with the performance, and the stock fell more than 1% in pre-market trading following the announcement. What`s becoming clearer is that in order to foster the kind of growth investors want to see, J&J will have to take aggressive steps to bolster organic efforts as well as tapping the M&A market as appropriate. Otherwise, Johnson & Johnson might start falling behind some of its nimbler rivals in finding the opportunities that will drive growth in the years to come.