What's going on?
Johnson & Johnson (J&J), the world’s largest healthcare company (and owner of brands like Neutrogena and Listerine) reported strong vital signs in its latest quarterly health check on Tuesday, beating investor expectations and giving its stock a booster shot.
What does this mean?
J&J’s pharmaceuticals division, which accounts for about half of the company’s sales, was in rude health last quarter. Investors were concerned they’d see a slowdown as top-selling arthritis drug Remicade faced competition from cheaper alternatives (known as generics), but blistering sales growth in areas like cancer treatment more than offset the declines.
The company also announced plans to reinvest proceeds from recent US tax reform into research and development as well as capital expenditure (a.k.a. investments in property and equipment) – to the pulsating tune of $30 billion over the next four years. J&J aims to use this cash to improve its healthcare and manufacture new technologies in the US.
Why should I care?
For markets: Good medicine – but investors aren’t convinced it’s a wonder drug.
Alongside stronger-than-expected results, J&J modestly raised its target for 2018’s revenue [tweet this]. Crucially, however, it left its expectations for profits unchanged – which may have disappointed investors who hoped to see more sales translate into more profit. Johnson & Johnson’s shares fell by almost 1% on Tuesday.
The bigger picture: Companies may be using acquisitions to keep drug prices higher in the future.
The spate of acquisitions in healthcare over the last few years has seen “big pharma” gobbling up biotech companies focused on niche treatments or innovative ways to treat common ailments. One reason for this could be that owners of the rarest treatments can often charge high prices that reflect the scarcity of their products (at least, over the life of their patents), while other drugs may struggle to justify “price-gouging”. This has become a pressing issue lately, with US President Donald Trump expected to reveal proposals to tackle high prescription drug prices later this month.