* Reports Q2 2019 results on Tuesday, July 16, before market open
* Revenue Expectation: $20.29 billion
* EPS Expectation: $2.44
For Johnson & Johnson (NYSE:JNJ) investors no news is good news until the world’s largest maker of both consumer and pharmaceutical health care products finds a way to settle thousands of lawsuits claiming its talcum powder caused ovarian cancer.
There are so many of these cases—14,000 according to media estimates—that the issue threatens enormous financial and reputational risks to the multinational pharmaceutical company. The stock plunged more than 4% on Friday after reports the U.S. Justice Department is investigating whether the company has withheld from the public the possible cancerous risks of its talcum powder.
The criminal probe coincides with a regulatory investigation and civil claims by thousands of cancer patients that J&J’s Baby Powder talc was responsible for their illness. Now, a grand jury in Washington is examining documents that could help shed light onto what officials from the company may have known about any carcinogens in its products, a Bloomberg report said citing unnamed sources.
These developments and ongoing litigations in multiple jurisdictions have kept JNJ shares under pressure since December last year, despite some positive news on the earnings front. Trading at $134.29 at Friday's close, J&J stock is up just 5.5% this year, underperforming the S&P 500, which surged more than 20% in the same period.
For the quarter that ended on June 30, the company is expected to earn $2.44 a share on sales of $20.9 billion, according to analysts’ consensus estimate. Though baby powder accounts for only a tiny fraction of J&J’s annual revenue, it’s been a core brand for the company for more than a century—as well as a big drag on the company’s financial health amid uncertainty about the amount it may need to set aside for out-of-court settlements.
The company has said it has set aside money for legal costs related to talc claims but hasn’t specified the amount. According to Bloomberg estimates civil settlements could cost J&J as much as $15 billion overall. The company, however, maintains that it has no liability because its products are safe.
Keeping the lawsuits-related risk aside, J&J has consistently proven that its product portfolio is strong enough to produce hefty cash flows for investors. In the first quarter, the company's fast-growing pharmaceutical unit was key to offsetting its weaker consumer and medical device lines.
J&J’s drug business is now the largest of the company’s three main segments, with Q1 sales growing 4.1% to $10.2 billion—helped by psoriasis drug Stelara, sales of which were up 32% to $1.4 billion.
Another bright spot was the launch of nasal spray Spravato, a close chemical cousin of the anaesthetic ketamine that works quickly to alleviate symptoms of depression. The rollout is “off to a very, very strong start,” Jennifer Taubert, head of the group's pharmaceutical unit, told investors on a conference call.
J&J stock could remain under pressure for some time and it’s hard to see it hitting a bottom anytime soon. At the same time, we continue to believe that the company has the resources to fight these claims, thanks to its wide moat and massive cash-generation capabilities. But the question is: when should investors focus on the company’s core earnings and start ignoring litigation-related risks?
In our view, it all depends on how consistently J&J performs on the earnings front and whether it shows its future outlook is improving. The Q2 earnings report coming out tomorrow should give some clarity.
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