Pharma Companies: Earnings Review and Preview

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On Tuesday, Johnson & Johnson (NYSE: JNJ) reported its 4Q12 earnings. The company was the first of the major pharma/diversified healthcare companies to report full year 2012 financial results and 2013 guidance. It topped the EPS estimates but missed the revenue estimates. Considered as the bellwether for the pharma sector, what does this mixed earnings imply?

Analysis

The 4Q 2012 EPS of $1.19 topped the estimate of $1.17. The 4Q12 revenues of $17.6 billion fell short of the $17.68 billion consensus. One key difference between the EPS estimate and actual EPS figure was the higher tax rate (21.2% vs. consensus of 19.8%) in 4Q12 due to the delayed R&D tax credit. While 4Q12 financials provided valuable insights, investors remained more focused on 2013 guidance for JNJ and read across to the sector. For 2013, the company expects to make $5.35-5.45 EPS rather than the earlier forecast of $5.49. The company also reported a lower than forecasted revenue outlook for 2013 ($70.9-71.9 billion rather than the earlier forecasted figure of $72.1 billion for revenues).

Also noteworthy in the conference call was the discussion of J&J’s MD&D business review. Synthes drove 3.1% top-line YoY 2012 growth for the company which would have otherwise been nearly flat. For 2013, I estimate Synthes will contribute about 2%-7% top-line growth. Key issues addressed in the conference call were:

Commercial outlook for Xarelto: It is expected to capture significant share in the U.S. According to recent IMS data, this drug is capturing 30% of new to brand share in its category.

Tracking new pharma launches:  Along with Xarelto, Zytiga and Incivo are also relatively newer products. Zytiga achieved operational sales growth of over 75%. Together these three drugs drove $280 million of YoY sales gain.

Color on MD&D volumes and new products: The growth for the MD&D segment was considered as sluggish by the Street. The organic sales growth was 1% which is 100-150 bps lower than the large cap med tech average. However, the future products in the pipeline look promising. The division spent another $1.7B in R&D in 2012, which is the highest level in med tech. New products such as the Evarrest patch, Sedasys anesthesia system, Acclarent TULA, and Attune Knee are on the horizon. DePuy’s Attune Knee System, which will be launched in mid-2013, will be one of the biggest MD&D launches.  

OTC products: The growth for these products went in the red after two straight quarters of growth. Key products like Tylenol and Motrin have returned to the shelves. However, OTC is below Street’s expectations as most products are expected to return to the market in 2013.

Further divestures: Chairman and CEO Alex Gorsky are both willing to divest and/or spin off businesses that are unlikely to have the scale to hold a dominant position and there is no easy way to reach such a level. While most of the discussion was on MD&D, I would assume Consumer could also be undergoing a similar evaluation. Hence, this version of JNJ may be as likely to “swap” pieces as add them and/or trade assets for cash and repay shareholders such as Pfizer has done more recently. If this view proves correct, we believe it could help change the perception that J&J is too big to be nimble.

Another important upcoming earnings

Bristol Myers Squibb (NYSE: BMY): When you talk about J&J’s Xarelto, you have to talk about the potential for Eliquis, a Joint product of Bristol and Pfizer, created to cure an irregular heartbeat. The National Institute of Health and Clinical Excellence (NICE) is expected to issue guidance on Eliquis in the coming Feb.

Bristol is expected to announce it earnings on Jan. 24. The company is expected to announce an EPS of 43 cents and quarterly revenue of $4.15 billion. The revenue guidance for 2012 is $17.4 billion - $17.8 billion. Investors’ attention will be focused on FY 2013 guidance. Three potential catalysts have been greatly overlooked by the sell-side:

1) Potential Yervoy data in post-chemo CRPC (castrate-resistant prostate cancer) in the first half

2) Completion of the SAVOR-TIMI study of Onglyza, potentially the first diabetes drug to demonstrate an CV (cardiovascular disease) outcome benefit in the first half and

3) Possible data from the Phase III ELOQUENT-2 study of Elotuzumab in RRMM (relapsed/refractory multiple myeloma) (expected at the year’s end or early 2014).

Foolish Bottom-Line

J&J’s earnings release disappointed investors.  Considering it to be a bellwether for the sector, this has sent bearish signals to the market. Let’s see what Bristol and other pharma companies have for their investors. 


AnalystX has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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