Guidance raised, big quarter with Hepatitis drug

JNJ released their second quarter results before the market opened yesterday, here, take a look: Johnson & Johnson Reports 2014 Second-Quarter Results. Pretty significant numbers in some way, pretty insignificant in the bigger picture. First and foremost, why own a conglomerate inside of the health space, why not own separate businesses in the same space? JNJ is actually a fairly rare company as far as investments go, in my last look at the business, in May of 2014, a post titled Great diversified business, we described the business:


The difference between JNJ and their "peers" as it were is that they are probably not an out and out pharma company, neither are they a consumer business. Nor are they a devices and diagnostics business. They are all of those things. In fact, in the last annual report the sales breakdown is 39 percent pharma, 40 percent devices and diagnostics and the balance, 21 percent is their consumer division. The acquisition of the business Synthes, an orthopaedics business has boosted the sales of the devices division specifically.


The conclusion back then remains exactly the same, the enduring quality of the business remains. In fact for 128 years that they have been around (there were three brother that founded the business, not two), there have been only 7 CEO's, including the current chap, Alex Gorsky. Listed since 1944, 29 consecutive years of unbroken earnings increases and currently in the 52 year of unbroken higher dividend payments. That counts for a lot. In their description of themselves, the company suggests that they touch the lives of over one billion people a day. As such, you can see that almost everyone knows their brands and business.


Their devices and diagnostics business as a standalone is currently the biggest in the world. I say currently, because there is a fair amount of M&A in this space. Very exciting, joint replacements through to monitoring devices for diabetes and other chronic diseases. That business reported flat sales versus the prior year comparable quarter, mostly domestic factors in the US, that geography experienced a fall in sales.

The Pharma business, the 8th largest standalone of its kind on the planet had a solid quarter. This was also where the surprises came from, sales were 21.1 percent higher when measured against the prior years Q2. Domestically (the US) sales rocketed 36.6 percent. Why? Well, a chronic set of Hepatitis C drugs (OLYSIO and SOVRIAD) had a fabulous quarter, and has had a very decent first half. The second half is not expected to be repeated, not because everyone will be cured with this exceptionally expensive therapy, but rather as a result of Gilead having a therapy for Sovaldi. As Gilead point out on their website, 500 million people worldwide are living with chronic hepatitis B or C infection, making viral hepatitis many times more common than HIV.


Lastly their consumer division, not great, but increasing worldwide sales when compared to Q2 2013 up 3.6 percent, slice off 1.2 percent for currency translation. Internationally doing a lot better than in their home base, that is the beauty of it all, the global environment that we live in means many more customers have access to quality products. If you have scale, eventually the price for the consumer gets cheaper, reactively speaking.


The guidance for the full year was raised somewhat, $5.85 - $5.92 per share is what the company said. At the closing price last evening 103.28 that translates through to 17.5 times earnings. The yield, currently is 2.7 percent. Which is more than US treasuries, the ten year yields 2.54 percent, which is close to a 52 week low.


The company is not expensive and it is not cheap. The quality is not in doubt, that remains enduring. If JNJ increase their dividend by 6.5 percent each and every year, in ten years time you would have had a return of around 38 percent. And you would still own JNJ, who spends around 11.7 percent of annual revenue searching for the next blockbuster drug, therapy or product. We continue to buy what is the best quality healthcare business on the planet, in our opinion.