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Will J&J (JNJ) Pull a Surprise Again in Q1 Earnings?

Johnson & Johnson JNJ, a bellwether in the health care sector, will be reporting results on Apr 19, before the opening bell.

J&J’s track record has been pretty good with the company beating earnings estimates throughout 2015. The average earnings surprise over the last four quarters is 1.84%.

Let’s have a look at how things are shaping up for the first quarter of the year.

Factors at Play

While unfavorable currency movement, which impacted fourth quarter sales by 6.8%, will impact first quarter results as well, products like Stelara, Imbruvica, Xarelto and Invega Sustenna, which are a part of J&J’s Pharma segment, should continue performing well. Imbruvica’s label was expanded in early March for the first-line treatment of patients suffering from chronic lymphocytic leukemia. This has expanded the patient population significantly.

Meanwhile, robust market growth and increased penetration with the psoriatic arthritis indication should boost Stelara sales. Concerta should also continue to benefit from the reclassification of generic competitor products in the U.S. Investors will also be focused on the performance of the company’s new cancer treatment, Darzalex, which was approved in Nov 2015. On its fourth quarter call, J&J had reported that the product is off to a good start, with strong underlying market demand.

However, Olysio sales will keep declining due to additional competition while Invega will be impacted by generic competition. Moreover, sales of the company’s SGLT2 inhibitor, Invokana/Invokamet, could be affected by the addition of warnings regarding the increased risk of bone fractures.

In addition to this, investors will be interested in knowing whether the company is losing any share to Boehringer Ingelheim/Eli Lilly and Company’s LLY SGLT2 inhibitor, Jardiance, considering the favorable long-term cardiovascular (CV) outcomes data on Jardiance.

Zytiga is also facing increased competition while Remicade is being affected by biosimilar competition in Europe. A biosimilar version of Remicade was also approved in the U.S. in April.

Overall, the Pharma segment should continue growing this year albeit at a slower pace compared to 2015 as many of the products are beginning to mature in their growth trajectory. However, longer-term, Johnson and Johnson should benefit from new product launches – the company is targeting 10 new molecular entity (NME) filings by 2019, each of which have blockbuster potential.

The Medical Device business has also been under pressure with several markets in this segment facing challenges in the form of austerity measures, pricing pressure and a slowdown in elective surgeries, which have all contributed to more tempered growth rates. Soft global market conditions and pricing challenges will continue impacting the performance of this business.

In fact, earlier this year, J&J had announced restructuring actions for this segment which will see the company cutting approximately 3,000 jobs. The company has also been pretty active in divesting lower growth assets in this segment.

Meanwhile, the consumer business which is slowly recovering from the impact of the manufacturing issues that had affected this segment, is experiencing market pressure in China where volumes have slowed due to lower demand resulting from shift in consumer behavior and the emergence of new retail channels in the country.

The company’s M&A strategy will be a key focus area on the first quarter call. J&J’s share buyback program (worth up to $10 billion) should also boost the bottom-line.

What Our Model Indicates

Our proven model does not conclusively show that J&J is likely to beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) to be able to beat earnings. That is not the case here as you will see below.

Negative Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -1.83%.

Zacks Rank: J&J carries a Zacks Rank #2. J&J’s Zacks Rank #2 when combined with an ESP of -1.83% makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some health care stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter.

AbbVie Inc. ABBV has an Earnings ESP of +0.88% and carries a Zacks Rank #3. It will be reporting results on Apr 28.

The Earnings ESP for Sanofi SNY is +9.86% and it carries a Zacks Rank #2. The company is scheduled to release results on Apr 29.

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