J&J takes $14B hit on the way to 'immediate' tax reform windfall

Johnson & Johnson may have posted a loss for the fourth quarter, but it’s a necessary step toward bringing home billions in cash previously stashed overseas.

For the fourth quarter, the company took a $13.6 billion hit related to the new U.S. tax law, which led to a $10.7 billion net loss. But as CFO Dominic Caruso told investors on a conference call, J&J has $16 billion in cash outside the U.S.—about $12 billion of which “will come back immediately.”

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And while some industry watchers may be anticipating an industrywide M&A bonanza, where J&J is concerned, investors should expect a good portion of that money to go back into R&D rather than toward new deals.

Alex Gorsky called investing in the pipeline “the wise thing to do,” adding that “we think ultimately doing that will have the greatest impact on our business.” And as both Gorsky and Caruso reminded shareholders, J&J was pretty active at the dealmaking table last year, beginning with its $30 billion deal for Actelion’s marketed drugs.

Speaking of those products, they helped drive fourth-quarter pharma sales growth of 15.5% and pushed the segment’s quarterly haul to $9.7 billion. Leading the charge, though, was J&J’s oncology portfolio, which managed 36% growth over the year-ago quarter.

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Within that group, blood cancer stars Darzalex and Imbruvica made big gains, growing 82% and 46%, respectively—though Imbruvica actually came in $10 million below consensus estimates at $522 million, Barclays analyst Geoff Meacham, Ph.D., wrote to clients. Prostate cancer drug Zytiga turned up the biggest surprise thanks to market-expanding data from the company’s Latitude study, beating Wall Street projections by $177 million to tally $755 million in quarterly sales.

It’s unclear how long J&J will be able to rely on those kinds of numbers from Zytiga, though; less than a week ago, the U.S. Patent Trial and Appeal Board invalidated Zytiga's 2027 patent after an inter partes review challenge from Argentum Pharmaceuticals. The move paved the way for copies to roll in as soon as October.

But J&J doesn’t expect to see that happen. In guiding to 2018 sales of $80.6 billion to $81.4 billion and adjusted earnings per share of $8.00 to $8.20, it did not include the impact of a potential generic entry. J&J intends to “vigorously defend” its IP, Caruso said, but even if that fails, “we’re pretty confident that the range we provided could absorb any impact” from a Zytiga knockoff.