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What's Behind Johnson & Johnson's Double-Digit Growth?

Johnson & Johnson (NYSE: JNJ) is a healthcare giant that racks up tens of billions of dollars in revenue every quarter. Usually, it's tough to deliver double-digit growth when you get to be as big of a company as J&J. However, in the second quarter, its sales were 10.6% higher than one year ago.

What's behind this healthcare Goliath's surprising growth: acquisitions, currency fluctuations, and demand for some of its best-selling drugs. Here's what you should know about the company's recent performance, and what to watch in the future.

The numbers

Johnson & Johnson's sales were $20.8 billion last quarter, and rising demand for its drugs (more on that in a minute) was responsible for most of the increase. But its acquisition of Actelion last year, and tailwinds from converting sales outside of the U.S. back into U.S. dollars, also contributed meaningfully to the results.

IMAGE SOURCE: GETTY IMAGES.

Specifically, 1.9% of its 10.6% sales increase was due to fluctuating currency. If you back out the benefit associated with currency exchange and the contribution to sales from acquisitions, the company's organic growth was a healthy, but less exciting, 6.3%.

There's not a lot you can do about quarterly currency headwinds and tailwinds. J&J operates worldwide, and currency is always in flux, so conversion will either hurt or help the company's results in any given quarter. Similarly, acquisitions are unpredictable, and while they can boost sales (and hopefully, profit) in the short term, their benefit is typically temporary. After one year, the comparisons become apples-to-apples again.

Because of this, investors should focus their attention on product sales, because that's what provides the best insight into whether a company's executing well.

At J&J, the company's pharmaceuticals segment is giving investors plenty to cheer about.

Although Johnson & Johnson generates billions of dollars in sales from consumer brands such as Band-Aid, and from medical devices, it's the pharmaceutical business that really moves the needle at J&J; its second-quarter performance was no exception. Consumer-goods sales were flat and medical device revenue only grew 1.9% ex-currency, but after backing out currency and acquisitions, J&J's pharmaceutical sales jumped 11% from last year.

That's particularly impressive because the growth came even as sales of its best-selling drug, Remicade, continue to decline because of biosimilar competition. Biologics like Remicade are complex and created in living organisms, so they can't be copied exactly, but companies can create inexact biosimilars that are as effective. And following the launch of Inflectra, a cheaper biosimilar, J&J's Remicade revenue is sliding.

In Q2, Remicade sales fell 13.7% in the U.S. and 14.1% worldwide to $1.32 billion, or about 12.5% of J&J's $10.35 billion in total pharmaceutical sales.

That's a stiff headwind, but J&J was still able to deliver double-digit operational growth in the segment because of Stelara, Darzalex, Imbruvica, and Zytiga.

The immunology drug Stelara has been on the market for psoriasis since 2009, but its sales have surged following its approval for use in Crohn's disease patients in 2016. The expanded label was largely responsible for global Stelara revenue of $1.3 billion in Q2, up 34.2%, ex-currency, from one year ago.

Darzalex, a multiple myeloma drug, initially won approval for use in heavily pretreated patients in 2015. Late-line multiple myeloma patients were in serious need of new treatment options, so Darzalex sales ramped up quickly. But sales really accelerated once the Food and Drug Administration approved its use earlier in treatment alongside other medications, including Celgene's megablockbuster Revlimid, and more recently, the widely used Velcade. In Q2, Darzalex's sales skyrocketed 70.9% to $511 million, giving it an annualized sales run rate over $2 billion after less than three years on the market.

J&J shares the blood cancer drug Imbruvica with AbbVie (NYSE: ABBV); Imbruvica has also been a big beneficiary of an expanding addressable market. Imbruvica was initially used for chronic lymphocytic leukemia (CLL), but last August, the FDA also OK'd it for chronic graft-versus-host disease, a life-threatening condition often experienced by patients following stem cell transplants. In Q2, J&J's share of Imbruvica revenue was $620 million, up 34.2% year over year.

Finally, sales of J&J's prostate cancer drug Zytiga have also taken off. Prostate cancer is the most common cancer in men, and since Zytiga's launch in 2011, it's been used earlier and earlier in patient treatment. In February, Zytiga won approval for use alongside steroids in metastatic high-risk castration-sensitive prostate cancer, after it reduced the risk of death by 38% versus placebo in patients who had undergone surgery or hormone therapy. The approval helped Zytiga's sales skyrocket nearly 60% year over year to $909 million last quarter, an incredible increase for a drug that's been around as long as it has been.

What to watch next

Remicade is still a multibillion-dollar-per-year drug, so declining sales will remain a headwind for a while. So far, J&J's fast-growing cancer drugs are offsetting its impact, but investors will want to keep an eye out to see if sales start to slow for those fast-growers in the coming quarters.

It will also be important to keep tabs on J&J's research and development programs. The company has spent nearly 16% more on R&D so far this year than last year, and that spending will need to translate into regulatory wins if J&J investors are to be rewarded with additional growth. Among the most intriguing drugs in the company's late-stage pipeline are esketamine and erdafitinib, two drugs J&J plans to file for approval of this year.

If approvals are granted, esketamine could carve out meaningful sales as a treatment for depression because up to 30% of patients fail to respond to existing treatment options. Erdafitinib could similarly be an important new option for patients with metastatic urothelial cancer. Earlier this year, the FDA granted erdafitinib breakthrough status, adding conviction to the thinking that it could win an accelerated OK following its positive midstage trial.

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Todd Campbell owns shares of Celgene. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Celgene. The Motley Fool owns shares of Johnson & Johnson. The Motley Fool has a disclosure policy.

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