Johnson & Johnson exceeded analyst expectations for its core businesses in the third quarter of 2019 — particularly for medical devices, where the company has struggled in the past — despite pressures from headline-grabbing legal risks, as well as generic and biosimilar competition.
In medical devices, J&J reported 5.3% operational sales growth, which excludes the impact of acquisitions and divestitures. Executive Vice President and Worldwide Chairman of Medical Devices Ashley McEvoy said on the Oct. 15 earnings call that the company had invested $12 billion in medical devices M&A since 2017, which includes the $3.4 billion acquisition of surgical-robot maker Auris Health completed in April.
After reporting a decline in medical device sales in 2018, the company said at the time that it expected to see above-market growth by 2020. McEvoy touted J&J's recent developments in oncology devices, contact lenses and knee surgery but also the innovation she expects in the next year and a half.
"What you're seeing is really a benefit strength in commercial execution," McEvoy said. "But I would say what I'm equally bullish on is really the innovation agenda."
Among those slated to come to market in that time are a micro-catheter that could cut electrophysiology procedure times in half, a drug-eluting contact lens to treat allergies and digital surgery options like the upcoming Monarch platform, McEvoy said.
Overall earnings at J&J rose by 1.5% in the quarter, ahead of analysts' expectations. The New Brunswick, N.J.-based company raised its guidance for the year, with J&J CFO Joseph Wolk acknowledging that the original guidance in January was on the conservative side.
"Ultimately, we think J&J management is continuing its trend of setting and maintaining conservative guidance, much like they did in 2018, while also likely pointing to reinvestment of the non-operational upside into the base business," SVB Leerink analyst Danielle Antalffy said.
Shares of J&J were up 2.14% to $133.51 at 11:36 a.m. EST on Oct. 15.
J&J CFO Joseph Wolk
On the call, Wolk addressed the three major "headline drivers" of litigation that the company faces with total risks in the billions of dollars.
The most recent decision against the company required a payment of $8 billion to a man using the antipsychotic treatment Risperdal who said the drug had unintended consequences that were not disclosed by J&J.
Wolk called the court's decision "very egregious," and reiterated that the company expects the amount to be lowered upon appeal.
The most high-profile of the cases alleges that the company, among others, marketed its opioid painkillers in a way that accelerated the opioid crisis. The company chose to take an Oklahoma lawsuit to trial, where it was ordered to pay $572 million, a decision J&J also intends to appeal.
But in another case from two counties in Ohio, J&J chose to settle for just over $20 million. Wolk said these divergent paths are calculated.
"For many reasons there, we thought the best path for all stakeholders was settlement, and that's something that we will always kind of take into account in terms of what is the best solution for all stakeholders including investors, who obviously want certainty," Wolk said.
The third litigation risk relates to the company's talc baby powder products, which have been alleged in more than 14,000 cases to contain cancer-causing asbestos. J&J has denied any wrongdoing. Wolk said the plaintiffs' attorneys have drummed up "a $36 billion industry" with the class-action approach.
Pharma business competition ramps up
Although competition from generic and biosimilar rivals has not affected J&J's bottom line as much as expected in 2019, executives on the call warned that those forces will drag pharma sales ever lower.
"We think we're seeing about $2 billion of incremental impact from biosimilars and generics business," said Executive Vice President and Worldwide Chairman of Pharmaceuticals Jennifer Taubert. "It's a little bit less than what we'd anticipated this year — however, the number of generic approvals and the erosion rates are starting to catch up, and so we think as we enter into next year, we'll work through the rest of that."
Rheumatoid arthritis treatment Remicade has been one of the hardest hit by biosimilar competition, with sales erosion of almost 17%. J&J's other immunology drugs picked up some of that slack, however, with double-digit growth for Stelara, Tremfya and Simponi.
Stelara benefited from a new approved use in Crohn's disease, contributing to sales growth of almost 31%, and Tremfya surged more than 70% based on its share of the lucrative psoriasis market.
Other forces were also at work, including rebates as a result of a 20% increase rate for the U.S. Medicare program's "doughnut hole," which kept sales of blood thinner Xarelto flat.
"We believe the beat and raise today will refocus investors on the core business, which we expect to perform well, especially entering 2020," Cowen analyst Joshua Jennings said in an Oct. 15 note.