Not all pharmas are created equal: JNJ beats estimates

Posted Jul 15th 2008 2:18PM by Melly Alazraki
Filed under: Earnings Reports, Pfizer (PFE), Johnson and Johnson (JNJ), Merck and Co (MRK)

Johnson & Johnson (NYSE: JNJ) shares rose over 2% by 12:45 on a day the market saw some scary dips earlier and the S&P 500 is still in the red.

The health-care giant is rising after it reported its second-quarter financial results, posting an 8% growth in profit to $1.18 per share (excluding one time charges) and a 9% increase in total revenue to $16.45 billion. The results handily beat analyst expectations (according to Thomson Financial) of $1.12 per share, on revenue of $16 billion. Not only that, but the company also increased its 2008 earnings forecast.

J&J execs claim the company wasn't being significantly hurt by the weakened U.S. economy, and judging from the effect of the lower dollar, which was responsible for 5.6% of the 9% higher revenue, perhaps they're right. Still, the company can't ignore that while international sales jumped 16.2%, U.S. sales increased only 2.1%.

But among the different pharmaceutical companies, it seems there is little doubt that J&J is better poised to ride this global economic downturn; as opposed to to pure-play pharmas, J&J has a more diversified business model. Already the difference was clear in this quarter's results and will probably make even more of a difference in the future, as many pharma companies lose sales to generic drug makers when products go off patent.

This is the biggest challenge facing pharmas these days. J&J is no different, but already its consumer products division increased 13.2% this quarter and medical-devices sales rose 12.1%, offsetting somewhat the mere 3.1% in its pharmaceutical division. If this is the kind of sales growth expected for other pharmaceutical companies like Pfizer (NYSE: PFE) and Merck (NYSE: MRK) in the future, it's no wonder their stocks are declining today.

It's important to remember that while CFO Dominic Caruso believes J&J's business is not that correlated to economic cycles, it is, however, affected by inflation and rising costs. As J&J feels margins getting pinched, it will hike prices, it announced. Once again we see how higher prices trickle through to consumers.

Bottom line, J&J seems like a defensive health-care play at the moment. To illustrate, year-to-date, JNJ shares are up some 1.5%, when major drug shares are down nearly 8% and the S&P 500 is down over 16%.

Tags: earnings, inthenews, jnj, johnson and johnson, JohnsonAndJohnson, mrk, pfe