Key J&J meds disappoint in Q4, triggering a top-line miss

Johnson & Johnson is facing a variety of strong headwinds across its business lines, from currency fluctuations to generic competition on some of its previous blockbusters. But perhaps more alarming to investors is that in Q4, its newer pharma products—including Invokana and Imbruvica—couldn't bail the company out.

J&J said Tuesday that its sales in the quarter rose 1.7% to $18.1 billion, missing the consensus analyst estimate of $18.2 billion. Earnings came in at $4.4 billion excluding some amortization expenses and special items, or $1.58 per share. That figure slightly exceeded expectations, though the company seems to have benefited from a lower-than-expected tax rate in the U.S. The company’s shares fell 2% when the market opened to $111.58.

Sales in the company’s Diabetes Care unit dropped 3.8% year-over-year during the quarter to $462 million and were down 7.2% for the year to $1.8 billion—no doubt contributing to the company’s announcement that it has launched “a process to evaluate potential strategic options” for the business. The unit includes blood-glucose meter maker LifeScan, insulin pump developer Animas and Calibra Medical, which developed an insulin patch.

During a conference call with analysts after the earnings release, CFO Dominic Caruso said the decision to consider alternatives for the diabetes unit was part of a regular business review that J&J routinely does to “look at various aspects of the business we think are either better in someone else’s hands or we can get more value from our shareholders through a divestiture. Of course we’ll reinvest as appropriate in the business.”

J&J’s willingness to pull back on diabetes devices is a bit surprising, considering its recent investments there, particularly in Calibra. The company bought Calibra in 2012 and had been preparing to launch its Finesse mealtime insulin patch.

The company remains committed to diabetes, the company’s executives said during the call, mentioning products such as Invokana for the treatment of the type 2 form of the disease. But sales of that product came in flat in the fourth quarter at $371 million. That was disappointing to analysts such as Geoffrey Porges at Leerink, who released a note to investors on Tuesday naming the drug as one of many underperformers leading to “tepid Q4 sales” and a prediction that investors in biopharma “are unlikely to be very encouraged by this announcement.” The company’s cancer drugs Imbruvica and Velcade also came in below expectations.

The diabetes industry is becoming increasingly competitive, and proving to be a continuing challenge for several companies, not just J&J. Eli Lilly, for example, failed to live up to expectations in the third quarter last year after sales of its diabetes blockbuster Humalog slipped 9%.

J&J investors are counting on strategic mergers and acquisitions to help drive growth going forward. The company confirmed it is still in takeover discussions with Swiss drugmaker Actelion Pharmaceuticals, which makes drugs to treat pulmonary arterial hypertension. J&J declined to discuss particulars, but investors in Actelion are expecting J&J’s bid to exceed $26 billion, despite disappointing clinical trial news Monday on Actelion’s drug Opsumit. 

During the conference call, J&J CEO Alex Gorsky also mentioned his participation in a meeting between business executives and President Donald Trump that happened Monday. “We had a productive conversation about accelerating growth in jobs in the United States. We look forward to continuing that dialogue,” he said. He added that J&J plans to advocate for a replacement to the Affordable Care Act that maintains coverage for people with pre-existing conditions and adult children who are under their parents’ insurance plans. J&J will also advocate for value-based healthcare and reforms that encourage wellness and provide incentives for consumers to engage in healthy behaviors, he said.

Gorsky said J&J will also advocate for modernizing the U.S. tax code. “The U.S. tax code for business is outdated,” he said. “In many cases it makes the U.S. a more costly place to do business, leaving U.S. workers and the U.S. economy at a disadvantage. We are very encouraged by the proposals currently in discussion and will support business tax policy that’s competitive with most developed countries and encourages innovation and growth.” The company is also in favor of allowing companies to bring cash that’s held abroad back into the U.S. at “a more competitive tax rate,” he said.

But Gorsky knows it’s too soon to count on Trump and the new administration to champion business-friendly tax changes. At the J.P. Morgan Healthcare Conference earlier this month, Gorsky warned biopharma executives that their tax rates might actually go up, depending on how any changes are implemented.

When asked during the earnings call what Trump might be planning to do to resolve controversies over high drug prices, Gorsky said J&J has already made promises to be more transparent about its pricing practices. “I remain confident that in the long run, the most important thing we can do is continue to bring innovative products to market to make a big difference for patients and consumers, and that’s what we’re going to be focused on doing,” he said. J&J recently signed on for a Medicare project that focuses on value-based pricing.

J&J’s goal is to return to above-market growth by the second half of the year, executives said during the call. No doubt disappointed investors will be watching closely to see how changes in Washington impact the pharma giant’s efforts to get its growth back on track.