Is This Healthcare Company Finally on Its Deathbed?

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Johnson & Johnson (NYSE: JNJ) is one of the largest multinational manufacturer of medical devices, pharmaceutical products, and consumer goods. Founded in 1886, the company makes a difference in the health and well-being of people every day. Its consumer products, prescription drugs, and medical instruments and diagnostics impact the state of health care for many people around the world. I think every household uses at least one Johnson and Johnson product.

One of the most trusted, and largest health care marketers of the world, JNJ spells reliance and health to families everywhere. But does it do the same for investors? Let’s see….

What the reports show
Johnson & Johnson’s Q2 report showed net sales to be $16.5 billion in 2012, down 0.7% in comparison to that of 2011. Its most recent acquisition Synthes, also let the company down. Synthes showed 1.2% growth worldwide-- below expectations. US sales were also down by 1.2%. The company’s net income was $1.41 billion, or .5% per share, down from $2.78 billion or 1% each share.

Q3 results were no better.

The survey said the rising cost of medicines and medical devices cut a big chunk out of third quarter profit, causing it to fall by 7%. According to maker of Tylenol, baby shampoo, and prescription drugs, the company’s net profit was $2.97 billion, or $1.05 per share. This represents a $370 million decrease from the same quarter of the precious year. Also, sales of consumer health products fell by 4.3%, to $3.58 billion. Unfavorable currency exchange also reduced revenue by 4.3%.

Further disappointment came from the consumer section. Instead of sales picking up, as expected, investors noted a further drop in figures, despite the company solving most of its managerial and quality issues.
 
Net income attributable to the company for the nine months of 2012 was $8.29 billion, or $2.96 per diluted share, compared to $9.45 billion, or $3.40 per diluted share, for the same period of 2011.

In this crisis, the company turned to the launch of the new drugs to help recover its position. But are they enough? I have tried to answer the question below.

The New ‘Game-Changers’
FDA recently approved the company's application for the new drug Canagliflozin along with Metamorfin to treat the patients with type 2 diabetes. The company expected certain dosages of the drugs would be extremely beneficial for treating diabetic patients.

An oral drug, Canagliflozin, is recognized as a selective sodium glucose co-transporter. It inhibits the kidney from re-absorbing the glucose, thereby increasing secretion. In layman’s terms, it helps lower blood glucose level.

Canagliflozin was also to treat genital and urinary tract infections.

Another recently approved med, Zytiga, also gave hope to investors. Preliminary tests demonstrated Zytiga’s effectiveness in combating prostate cancer and extending life expectancy if added to chemotherapy.

Will these new drugs be able to boost sales significantly?
Unfortunately for investors, the answer seems to be no. Zytiga, when originally approved in April, 2011 caused analysts to expected sales to exceed $2.3 billion by 2016, with 70% coming from pre-chemo use. But newer reports reveal this dream to be far-fetched...

Recent analyses show that market share is likely to dwindle as the drug loses out to Medivation’s Xtandi. Although Xtandi is still in its testing stages, and probably will not be ready for mass production for a couple of years, it is, however, most likely to capture the market by mid-2014, analysts said. This will be a heavy blow to the company’s hopes.

Canagliflozin is still too recent, and way too revolutionary to take the market by storm. Moreover, the FDA had already rejected a similar drug preciously. The unknown risks of the new one, coupled with the previous rejection, are likely to cause significant impact in sales. 

The other Players in the field
Optimistic Reports elsewhere are certainly not helping JNJ’s case. Baxter International (NYSE: BAX) reported net income of $583 million, amounting to $1.06 per diluted share for its third quarter, in comparison to $576 million last year.  Profits rose by 0.23 cents per dilute share and a nine-month analysis shows $10.44 billion, as compared to $10.29 billion of the previous year. Net sales remained marginal.

Abbott Labs (NYSE: ABT) also continued to impress analysts, showing double digit growth in the previous quarter. Diluted earnings per share showed 10.2 per cent growth, clocking in at $1.30, exceeding guideline expectations. Sales increased 4.1 per cent worldwide, excluding foreign exchange and operational sales showed an increase of 3.9 per cent. With such exceptional earnings, the company is now estimating prices to rise by more than 10 per cent per share.

So what does it mean?
As we all know, all good things must come to an end…but the question is, is this the time for JNJ’s world dominance to flounder? Or can the company salvage its lost glory?

The answer isn’t as simple as one would like to believe. Although the reports from the past year have been gloomy at best, and competition is seeking to eliminate the threat, this isn’t the first crisis the company has weathered. Nor will it be the last. Sure, the drugs failed to pan out, but Synthes’ performance is still unproven.

Yes, it did let the company down initially, but the true value of its acquisition is only coming to the surface. CEO Alex Gorsky expressed strong belief in the company’s revival, claiming that the third quarter results only showed that the company was gearing up for better results. As of Dec 22, polls at The Financial Times website echoed this opinion, with the consensus that, in 2013, Johnson and Johnson’s will definitely outperform the market.

 

 

 


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