Johnson & Johnson offers up weak 2017 outlook, considers selling diabetes units

January 25, 2017 – 8:53 AM | By Andrea Gonzalez | No comments yet

By Omar Ford, Staff Writer

Johnson & Johnson Corp. (J&J) forecast lower-than-expected 2017 sales but managed to beat Wall Street expectations for its 4Q16 earnings. In addition, the New Brunswick, N.J.-based company said it could potentially sell off its diabetes care businesses amid disappointing sales.

Tuesday’s news was mixed at best. While 4Q16 adjusted earnings per share of $1.58 exceeded analysts’ consensus estimates of $1.56, J&J drew criticism for its soft 2017 guidance.

The firm forecast 2017 adjusted earnings of $6.93 to $7.08 per share – below the average analyst estimate of $7.11 per share.

Joshua Jennings, an analyst with Cowen and Co. said 2017 guidance “tells a deeper than expected deceleration story for the crown jewel Pharma franchise and has offset the strong 4Q print.”

Part of the reason for the low guidance stems from headwinds J&J’s pharmaceuticals division is facing.

Particularly, J&J’s biologic immune disorder drug’s revenue dropped 3.3 percent to $1.62 billion in 4Q16. The firm’s Remicade had been a strong revenue stream for nearly 18 years but has been taking a pounding from Pfizer Inc.’s Inflectra. The New York-based company received approval for the biosimilar in April 2016 but launched the product in October. The products treat rheumatoid arthritis, psoriasis, Crohn’s disease and colitis.

“Full-year operational sales growth guidance for [2017] reflects management’s expectations for a pharma slowdown as the unit’s significant success has created difficult comps and the Remicade biosimilar launch will have an impact,” Jennings said.

But all is not lost for J&J in the immunology drug market, said Damien Conover, an analyst with Morning Star.

He said other immunology drugs, including Stelara and pipeline drugs guselkumab and sirukumab, should help stabilize the franchise for J&J.

Conover added that “the tepid growth is probably driving J&J to make acquisitions” and mentioned J&J’s potential acquisition of Allschwil, Switzerland-based Actelion Ltd. The two companies have been in discussion for a potential merger for weeks.

During the call, J&J’s Alex CEO Gorsky declined to give further detail on the possible acquisition.

DIABETES NO LONGER VIABLE FOR J&J?

There can be no denying that the diabetes monitoring and treatment space is exploding. Firms such as San Diego-based Dexcom Inc. have been gaining ground in diabetes. Unlikely competitors such as Google’s Verily Lifescience’s have begun to populate the diabetes market and have formed high profile partnerships with existing market players to bring new products to market.

However, the space has been a sore spot for J&J throughout 2016. The company took in sales of $1.8 billion from its diabetes businesses in 2016, down about 7.2 percent from 2015. J&J’s Lifescan unit was a highlight of the diabetes businesses and took in sales of $462 million, which was $41 million higher than analysts’ consensus of $447 million.

Gorsky said J&J would welcome a potential sale, partnerships or other options for its diabetes businesses, which include Lifescan Inc., Animas Corp. and Calibra Medical Inc. These units sell blood glucose monitoring and insulin delivery devices.

He added that there’s no guarantee this review would result in a transaction or when the review would be completed.

“This announcement is not terribly surprising given ongoing strip testing price erosion and increasingly less diabetes overlap with the existing J&J footprint,” said Rick Wise, an analyst for Stifel.

DON’T CALL IT A COMEBACK

Nearly a year ago, J&J said it would lay off about 6 percent of its employees from its medical device division. (See Medical Device Daily, Jan. 20, 2016.) The company had been struggling with lagging device sales throughout 2015, prompting the firm to take such an action – which would save it about $1 billion.

Shortly after news of the layoffs, Artisian Partners began urging several activists to ask J&J to consider separating its pharmaceutical, medical device and consumer products divisions.

But J&J managed to turn its device division around.

“Our medical device business is refocused and has accelerated our pace of innovation,” Gorsky said. “The [Medical devices unit] developed novel commercial models to meet the evolving needs of today’s health care systems.”

The company had device sales of $25.1 billion for 2016. Although sales saw a decrease of 0.1 percent vs. the prior year, domestic sales increased 1.1 percent. Medical device sales in 4Q16 of $6.44 billion beat analyst consensus of $6.4 billion.

“New product launches are helping the device segment post steady gains that should accelerate in late 2017,” Conover said.

One potential boon for J&J would be the products it would gain from its $4.33 billion acquisition of Abbott Medical Optics Inc. (AMO), which is set to close before the end of 1Q17. The company first announced it would acquire AMO from Abbott Laboratories in September 2016. (See Medical Device Daily, Sept. 19, 2016.)

“Our goal is to return to above market growth [in devices] by the second half of this year,” Gorsky said.

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