J&J Sets in Motion Pharma Q2 Earnings: 3 Stocks to Buy
Johnson & Johnson JNJ is usually the first pharma company to report quarterly earnings. It posted decent second-quarter results, beating estimates for both earnings and sales. The company also raised itsadjusted earnings and sales outlook for 2020.
Mixed Performance of J&J’s Segments
Its Pharmaceuticals unit continued to do well despite the coronavirus crisis. The sales increase was led by the company’s oncology drugs, Imbruvica and Darzalex as well as psoriasis treatment, Stelara, which offset the impact of biosimilar and generic competition on some drugs and the negative impact of COVID-19. Delayed diagnosis and slower new patient starts due to reduced patient interactions with health care provider amid the COVID-19 pandemic hurt sales of some physician-administered drugs in the quarter.
However, the pandemic has hit the Medical Devices unit of J&J the hardest due to widespread decline in elective surgical procedures and redeployment of hospital resources to address patients affected by COVID-19. However, the performance of the segment was not as bad as expected and the company now expects a lower-than-previously guided decline for the second half of the year.
In the Consumer Health segment, the massive coronavirus related stockpiling benefit seen in the first quarter, mainly related to its over-the-counter (OTC) medicines, reversed somewhat in the second quarter. Sales in the skin care and beauty care categories were hurt as a result of reduced store traffic and social distancing due to government lockdowns. OTC and Oral Care businesses were positively impacted by increased COVID-19 demand.
Meanwhile, J&J raised its financial outlook for the year due to faster-than-expected recovery in sales of the Medical Devices unit as economies around the world began opening sooner than anticipated. J&J now expects a negative procedure delay-driven sales impact of approximately $3.8 billion-$5.3 billion in the Medical Devices unit in 2020 versus $4 billion - $7 billion expected earlier. J&J also expects continued strength in Pharma and higher growth across Consumer health unit.
Importantly, J&J said that it saw improvement in trends throughout the quarter as countries and states began to reopen. Joseph Wolk, J&J’s chief financial officer, said that though visits to doctors' office were still low, they have started showing an improving trend. He also said that category trends are improving in the Consumer Health unit.
What Does J&J’s Results Mean for Others?
J&J is the first of the big drugmakers to report earnings for what is expected to be the most brutal quarter of 2020. Investors typically look at J&J’s results for signals about how the rest of the big drugmakers will fare.
J&J’s second-quarter sales performance, clearly shows that the first quarter benefit from stockpiling of consumer healthcare products and oral and self-administered medicines by consumers/patients/distributors will reverse in the second quarter. Meanwhile, sales and new patient starts of drugs/medicines that require significant physician office or institutional are expected to have been hurt significantly in the second quarter. However, J&J’s optimistic discussion about clear improving trends in the macro environment bodes well not only for the company but for other drugmakers as well. When asked about a possible second wave of coronavirus cases, J&J’s management sounded positive and said that the healthcare system should be better able to manage through a possible second wave, with better testing capabilities and general management protocols.
The coronavirus pandemic has significantly hurt economic growth, hitting some industries harder than the others. While economic damage to the retail, restaurants, gaming, transportation and travel industries has been the maximum, the impact on the drug and biotech sector has been relatively softer. In fact, all eyes are on this sector to find a cure/vaccine for the deadly COVID-19 disease and bring an end to the global economic catastrophe. The drug and biotech sector is a good sector to invest in right now.
3 Big Drugmakers to Buy
The Zacks Large Cap Pharmaceuticals industry, comprising some of the biggest drugmakers in the world, has risen 1.6% this year so far, outperforming the Zacks S&P 500 increase of 0.4%.
Moreover, the Zacks Large Cap Pharmaceuticals industry currently carries a Zacks Industry Rank #37, which places it in the top 15% of more than 250 Zacks industries.
In this scenario, investing in stocks of large drugmakers is a prudent move, given the fact that they control a large portion of an industry. Here we have highlighted three stocks that may prove to be good buys. All the three stocks have a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.
AstraZeneca’s newer drugs, mainly cancer medicines Lynparza, Tagrisso and Imfinzi, should keep driving revenues in 2020. Its pipeline is strong with abundance of catalysts. Several launches are underway across each of the therapeutic areas — Oncology; Cardiovascular, Renal and Metabolism; and Respiratory. AstraZeneca engages in external acquisitions and strategic collaborations to boost its pipeline while investing in geographic areas of high growth like China. Cost-cutting efforts should drive earnings.
Importantly, AstraZeneca is making rapid progress in its efforts to develop a recombinant adenovirus vaccine, in partnership with Oxford University, to prevent COVID-19. Data from a phase II/III study, being conducted on 10,000 volunteers, is expected to be released shortly. If the data is successful, late-stage studies with 30,000 participants are expected to begin in a number of countries. Also, AstraZeneca has signed a number of supply deals across the world to support access to the vaccine. These supply deals will require it to produce 2 billion doses of the vaccine, if it is successfully developed.
AstraZeneca’s stock has risen 15.1% this year so far. The Zacks Consensus Estimate for 2020 and 2021 has risen 1% and 1.9%, respectively, over the past 60 days.
AbbVie’s earnings estimates have risen 0.7% for 2020 over the past 60 days. This year so far, AbbVie’s shares have risen 12.8%.
AbbVie has become one of the top-most pharma companies with the acquisition of Botox maker, Allergan for $63 billion this year. The deal has transformed AbbVie’s portfolio and lowered its dependence on Humira, its flagship product, which has already lost patent protection in Europe and is due to face biosimilar competition in the United States in 2023. Meanwhile, AbbVie has built a substantial oncology franchise with Imbruvica and Venclexta, which generated combined revenues of nearly $5.5 billion in 2019. Strong double-digit growth is expected in 2020.
Meanwhile, its newly approved drugs, Skyrizi (plaque psoriasis) and Rinvoq (moderate-to-severe rheumatoid arthritis) are off to strong starts and AbbVie expects combined revenues of these two drugs to be approximately $1.9 billion in 2020. Overall, strong demand trends of Humira in the United States, a strong portfolio of new drugs, and continued strong sales performance of Imbruvica and Venclexta are some solid reasons to own the stock.
Roche’s performance has been impressive lately as strong growth in Ocrevus, Perjeta, Tecentriq and Hemlibra offset the impact of biosimilar competition for Herceptin, MabThera and Avastin. Label expansion of Tecentriq into additional indications is a positive. The Spark acquisition of 2019 boosted Roche’s presence in the gene therapy space as well. Roche is evaluating its RD drug, Actemra, for the treatment of COVID-19 and a positive outcome will be a great boost. Moreover, Roche’s Diagnostics segment got a boost with the approval of detection tests like cobas SARS-CoV-2 test for COVID-19.
Roche’s shares have risen 10.5% this year so far. Earnings estimates for 2020 and 2021 have risen 0.8% and 1.4%, respectively over the past 60 days.
A chart showing the share price movement of the five stocks this year so far is given below:
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