J&J Beats Profit Forecasts Even as Drug Sales Lag Estimates

Inside Johnson & Johnson's Earnings Beat
  • Lower tax rate helps health-care company surpass projections
  • Board approves $10 billion buyback program, biggest since 2007

Johnson & Johnson beat analysts’ estimates for third-quarter profit as a lower tax rate helped the world’s biggest maker of health-care products overcome slightly weaker-than-projected sales for key drugs such as Remicade.

The company also announced a $10 billion share repurchase program, the biggest not related to an acquisition since 2007.

Earnings of $1.49 a share, excluding one-time items, beat by 4 cents the average of 18 analysts’ estimates compiled by Bloomberg. An effective tax rate of about 20 percent, compared with 24.2 percent a year earlier, helped boost profit above analysts’ estimates, according to Bloomberg Intelligence analyst Sam Fazeli.

The company also raised its forecast for the year to earnings of $6.15 to $6.20 a share. Third-quarter sales fell 7.4 percent from a year earlier to $17.1 billion, missing the $17.45 billion average projection. J&J shares fell less than 1 percent to $95.35 at 9:45 a.m. in New York.

J&J has been investing heavily in building up its pharmaceutical business as other products, such as medical devices, face pressure to compete on price to retain customers. The company fell short in the third quarter on several of its top drugs. Arthritis treatment Remicade had revenue of $1.61 billion, compared with expectations for $1.68 billion of sales, while blood thinner Xarelto’s $461 million in sales missed the $468.5 million average projection. Psoriasis drug Stelara was an exception, bringing in $613 million, more than the $586.5 million average estimate.

Buyback Plan

The $10 billion buyback plan approved by J&J’s board is double the amount it budgeted last year. The company will finance the repurchases with debt, New Brunswick, New Jersey-based J&J said in a statement on Tuesday. The repurchase program has no time limit, and J&J had $34 billion in cash, equivalents and short-term investments at the end of June, leaving plenty of room for acquisitions.

Dividends are J&J’s top priority for cash, followed by acquisitions, Chief Financial Officer Dominic Caruso said Tuesday on a conference call. The repurchase program doesn’t change J&J’s outlook for deals, he said.

J&J has about 2.77 billion shares outstanding. The program would let the company buy back about 3.8 percent of those shares at Monday’s closing price.

AAA Rating

J&J is one of only three U.S. industrial issuers to command a triple-A rating from the two largest credit-rating firms. That’s a rating grade not even matched by debt sold by the U.S. government. In May, Standard & Poor’s said it could lower J&J’s rating if share repurchases or acquisitions significantly increased the company’s debt leverage.

Investors have been waiting to see if the drugmaker makes a large acquisition to bolster its pharmaceutical division, an industry that has been rapidly consolidating as larger players seek out new hot drugs. In March, J&J lost out to AbbVie Inc. when the latter bid $21 billion for Pharmacyclics Inc., J&J’s partner in the development of Imbruvica. The cancer drug is projected to be a blockbuster with sales surpassing $1 billion for J&J as soon as next year. Imbruvica had revenue of $184 million in the third quarter, compared with the $186.7 million average estimate.

Excluding fluctuations foreign exchange rates, which hurt revenue because of the stronger U.S. dollar, sales would have increased 0.8 percent, J&J said. About half of J&J’s sales come from overseas.

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