The solid results are driving shares higher by about 3% this morning, but a significant overhang remains due to lawsuits revolving around its talc-related baby powder products. Recall that back in mid-December, Reuters reported that JNJ knew its baby power products contained cancer-causing asbestos. Consequently, JNJ's legal expenses have exploded as it continues to face thousands of lawsuits. In Q1, the company shelled out $423 mln in litigation fees, compared to zero in 1Q18.
As a result, its GAAP net earnings declined by 14% yr/yr to $3.7 bln. For its part, JNJ says that it will continue to defend its brand, denying any wrongdoing. Ultimately, what this is means is that JNJ's legal expenses will continue to mount and the final result of these lawsuits is uncertain, clouding the company’s outlook.
From an operational standpoint, JNJ is performing well. Excluding special items (such as legal fees), adjusted EPS grew by nearly 6%. This growth was driven by a mix of healthy pharmaceutical sales, despite ongoing pricing pressure, lower interest expense, and share buybacks.
Worldwide pharmaceutical sales grew by 7.9% to $10.2 billion, following last quarter's 7.2% increase, and accounted for more than half of JNJ's total revenue. Broadly speaking, growth in JNJ's pharmaceutical segment has been driven by volume, rather than price, as generics have applied some pressure.
Within the segment, there were two drugs largely responsible for the growth. Anti-inflammatory drug Stelera generated 33% growth to $1.4 billion, while multiple myeloma treatment Darzalex increased by 46% to $629 million. These two products helped to offset weakness from ZYTIGA (prostate cancer treatment) which experienced a steep 15% decline as it faced generic competition for the first time in the quarter.
JNJ's consumer segment, which includes its' baby care products, experienced some market softness, up a pedestrian 0.7%. There were a couple bright spots, though, including the 5.5% growth from its over-the-counter medicines. This category was led by Tylenol’s 10% consumption growth, fueling market share growth as it regained its status as the leading brand of analgesics.
Another area of strength came from its beauty franchise, led by Aveeno lotions and Neutrogena products, which experienced healthy growth in the e-commerce channel in particular.
Additionally, JNJ has been paying down its debt, which lowered its interest expense by $142 mln this quarter. It also has been steadily buying back stock, including $900 mln worth during Q1.
As a result, JNJ increased its FY19 adjusted operational sales growth by 50 basis points to 2.5-3.5%. Due to the aforementioned pricing and currency headwinds, its total sales outlook remains the same at $80.4-$81.2 bln. It also slightly adjusted its EPS guidance to $8.53-$8.63 from $8.50-$8.65, in-line with analysts' $8.59 expectation.
Looking ahead, JNJ anticipates that pricing pressure and a stronger dollar will continue to impact results this year. However, the company also expects momentum in its pharmaceutical segment to continue as it invests in R&D at competitive levels, due to milestone payments and capital outlays to advance candidates in its pipeline.
Key Takeaways: There are some moving parts regarding JNJ's financials and outlook, including the ongoing litigation, currency headwinds, and competitive pressures from generic drug makers. But, in terms of what JNJ can control, the company is performing well. Investments in its pharmaceutical division are clearly paying dividends, helping to offset softness in its consumer business. It’s also managing costs well, including the deleveraging of its balance sheet, and its robust stock buyback program is providing an added boost.