Johnson & Johnson (JNJ) misses revenue estimates

Johnson & Johnson (JNJ) topped earnings estimates on cost cuts, but reported lower revenues than analysts had expected. The pharmaceutical business was the main drag on revenues due to a couple big patent expirations (Risperdal and Topamax). Partially offsetting weakness in the pharmaceutical division was slight operational gains in the consumer division as well as the medical device and diagnostics groups.

The pharmaceutical business will likely be hindered by patent losses until mid-2010, but will then return to solid growth with the launch of several new drugs. J&J is widely believed to have one of the best late-stage pipelines in the industry.

On the cost front, J&J is making impressive strides in increasing efficiency. Operating margin improved 260 basis points from a year ago, and it appears that the company is cutting expenses more aggressively than they have let on.

Management conservatively raised its full-year EPS estimate by about 1%.

J&J is a decent proxy for the healthcare sector due to its diverse health operations (drugs, consumer, devices, diagnostics, etc). Cost cutting will obviously be a common theme across the healthcare sector, but J&J’s results may give us some insight into results due next week.

• Big Pharma companies, such as Pfizer (PFE) and Eli Lilly (LLY), will likely see revenues impacted by a stronger U.S. dollar compared to the same period a year ago, just as J&J did.
  
• Impressive growth in J&J’s DePuy unit, which makes replacement hips and knees, suggests that Zimmer Holdings (ZMH) could surprise to the upside next week. Zimmer faces several near-term pressures including hospital budget cuts, healthcare reform, and individuals delaying elective procedures in light of economic difficulties.
  
• J&J’s strong growth in their diagnostics business might be a positive omen for other diagnostic companies like Quest Diagnostics (DGX). Quest has seen significant volume growth due to the outbreak of the swine flu and the growing demand for esoteric testing for advanced diseases. What will drag on Quest’s results will be drugs-of-abuse testing, which falls in tandem with the unemployment rate.
  

Hopefully we will see more healthcare firms beat revenue expectations. The market would likely be happier with firms beating bottom-line estimates by less as long as revenue exceeds expectations.


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Peter J. Lazaroff, Investment Analyst