J&J posts 10.6% y/y net profit decline in Q1 despite 14.7% rise in US pharmaceutical sales

US pharmaceutical Johnson & Johnson (J&J) announced financial results for the first quarter (Q1), demonstrating an increase of total product sales by 8.5% year-on-year (y/y) to USD17.5 billion. Of the firm's three business segments, pharmaceuticals continues to dominate, realising a 10.4% y/y rise in sales in 2013 to USD6.8 billion, mainly led by US sales that saw the largest proportion of growth at 14.7% y/y. Pharmaceutical sales outside the US were negatively impacted by two percentage points due to currency effects.

Medical devices and diagnostics also realised considerable growth rising 10.2% y/y to USD7.1 billion, which J&J mostly attributed to the recent acquisition of Synthes (US/Switzerland) and the added revenues realised from consolidating the latter's orthopaedics products into the J&J portfolio. J&J consumer product sales in the US were significantly affected last year from the recall of several over-the-counter (OTC) products and the suspension of manufacturing at the McNeil Consumer Healthcare facility in Fort Washington, Pennsylvania. The pharmaceutical firm has continued to enhance quality and manufacturing activities and has seen a modest 2.2% y/y growth in the consumer segment to USD3.7 billion as high quality products return to the market in adequate supply.

With regards to cost structure, the firm has increased its research and development (R&D) expenditure by 12.3% y/y, as well as its selling, marketing and administrative expenses by 4.1 % y/y. Cost of product sales also demonstrated a significant increase by 13% y/y in Q1 2013. As a result of increased expenditure, operating income grew by 6.9% y/y, while net income saw a significant 10.6% y/y decline to USD3.5 billion in Q1. The net earnings included an after-tax expense of USD600 million primarily due to litigation activities, and integration and transaction costs related to the Synthes acquisition. By contrast, last year's Q1 net earnings included an after-tax gain of USD106 million related to the currency adjustment associated with the acquisition of Synthes

Pharmaceutical products

Within the pharmaceutical segment, product performance included positive contributions from J&J's highest revenue generating drug Remicade (infliximab), indicated for the treatment of inflammatory diseases, benefitting from sales in Canada, Central and South America, the Middle East, Africa, and Asia-Pacific, based on the amended distribution agreement with Merck & Co (US; see United States: 18 April 2011: Merck & Co and J&J End Dispute on Distribution of Remicade and Simponi). The main contributors to the growth this quarter were arthritis treatment Simponi (golimumab), antipsychotic schizophrenia treatment Invega Sustenna (paliperidone palmitate), as well as recently launched products such as Zytiga (abiraterone acetate), Stelara (ustekinumab), and Incivo (telaprevir) showing 72%, 56.6%, and 22.7% y/y growth, respectively. Newly approved indications for oral anti-coagulant Xarelto (rivaroxaban) led to a considerable 485.2%y/y increase in sales from 2012 (see United States: 10 July 2012: Xarelto Granted Priority Review by FDA for DVT and PE As ACS Indication Filing Is Withdrawn).

Key developments in Q1 include regulatory approval of Invokana (canagliflozin), a first-in-class SGLT2 inhibitor, by the US FDA for the treatment of type 2 diabetes, which is forecasted to generate peak sales in excess of USD1 billion (see United States: 1 April 2013: FDA approves J&J's diabetes drug Invokana). Additionally, a New Drug Application was submitted for simeprevir (TMC435) for treatment of genotype 1 chronic hepatitis C (see United States: 1 April 2013: Janssen submits NDA for Simeprevir). Most notably a third "breakthrough" designation has been granted by the FDA to investigational oncology drug ibrutinib, currently being co-developed with Pharmacyclics (US) for three B-cell malignancy indications that may see an expedited process bring the candidate to market faster than previously expected (see United States: 9 April 2013: J&J, Pharmacyclis' ibrutinib granted third breakthrough therapy designation for CLL).

Outlook and implications

J&J's first quarter demonstrated solid growth in revenues, which is a marked improvement from the previous year's Q1. The pharmaceutical division in Q1 2012 had demonstrated 10.8% y/y decline in US sales due to increased generic competition for drugs including Levaquin (levofloxacin) and Concerta (methylphenidate) in the market. Although generic competition has seen some drugs decline in sales in Q1 2013, the firm has performed much better in this segment, particularly stemming from growth in sales from newly approved products.

J&J consumer product sales in the US have been significantly affected by a large number of recalls of several over-the-counter (OTC) products since 2009, affecting sales of large bestsellers such as Tylenol (acetaminophen) and Motrin (ibuprofen). However, J&Js CEO Alex Gorsky has stated that they will "continue to make progress in returning a reliable supply of high quality products" to consumers, as more and more consumer products return to the market, and as such the segment should see a boost in coming quarters.

The medical device and diagnostics division has also picked up significantly in sales compared to the previous year's Q1, mainly as a result of the sales generated from the USD21-billion acquisition of Synthes last year (see United States - Switzerland: 12 June 2012: J&J Cleared to Buy Synthes Following Divestment). The pharmaceutical firm has continued to face some litigation challenges, however, and those might continue to cast a shadow on its performance in the medical device side of the business (see United States: 25 February 2013: J&J faces investigation over hip devices marketing in US).

Looking ahead, the firm can expect to see more growth within the pharmaceutical and consumer segment divisions as newly approved diabetes drug Invokana makes its way to the market and previously-recalled OTC products return to the shelves in the US market.