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J&J (JNJ) to Kickstart Pharma Q3 Earnings: What’s in Store?


Johnson & Johnson JNJ, a healthcare bellwether, will report third-quarter 2017 results on Oct 17, before the opening bell. Last quarter, the company reported a positive earnings surprise of 2.23%.

J&J’s shares have gained 18.6% so far this year, underperforming the 18.3% increase witnessed by the Zacks classified industry.

The company has consistently surpassed earnings expectations. Its earnings beat expectations in each of the last four quarters, with an average positive surprise of 2.18%.

Let's see how things are shaping up for this announcement.

Factors to Consider

At the Q2 conference call, J&J’s chief executive officer, Alex Gorsky had said that the company's sales and earnings growth will accelerate in the second half of the year. Organically, excluding acquisition divestitures and purchase price adjustment, sales grew 2.4% in the first half of the year. The company expects organic sales growth of 4% in the second half of the year.

The Pharma segment is expected to benefit from easier comps in third and fourth quarters compared with the first half, continued growth of Imbruvica and Darzalex, new product launches like Tremfy (approved in the United States in July 2017 for plaque psoriasis), better performance of Stelara as well as Xarelto and meaningful contribution from Swiss biotech Actelion, which J&J bought in June. These positives will offset the loss of sales of some drugs like Invokana due to higher managed care discounting.

However, biosimilar competition is expected to continue to hurt key arthritis drug Remicade’s sales outside the United States.

Management is expected to comment on Pfizer, Inc.’s (PFE) lawsuit, which was filed in a U.S. district court recently. In the lawsuit, Pfizer alleged that J&J is resorting to unfair practices to prevent sale of Inflectra — Pfizer’s biosimilar version of Remicade — that was launched in the United States in November last year. We remind investors that at the Q2 conference call J&J had said that the rate of penetration of Inflectra may be modest.

In the Medical Devices segment, increased contribution from new products and strong growth in Vision Care are expected to lead to better sales trends. However, weaker macroeconomic dynamics in some consumer categories and geographic markets will continue to put pressure on sales in the Consumer segment.

Meanwhile, at the investor call, management may also provide an update on the complete response letter (CRL) received for rheumatoid arthritis candidate sirukumab last month for want of additional safety data.

What Our Model Indicates

Our proven model does not conclusively show that J&J is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: Its Earnings ESP is -0.06%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: J&J’s Zacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings beat.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

A couple of stocks in the large-cap pharma sector that have a positive Earnings ESP and a favorable Zacks Rank are:

Eli Lilly & Company (LLY) has an Earnings ESP of +4.46% and a Zacks Rank #3. The company is scheduled to release results on Oct 24.

Pfizer, Inc. (PFE) is scheduled to release results on Oct 31. The company has an Earnings ESP of +0.97% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

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