On The Fly: What to watch in Johnson & Johnson earnings report

Johnson & Johnson (JNJ) is scheduled to report results of its fourth fiscal quarter before the market open on July 18, with a conference call scheduled for 8:30 am EDT. What to watch for: 1. UPBEAT GUIDANCE: Along with its last report, J&J raised its fiscal year 2017 earnings per share view to $7.00-$7.15 from S $6.93-$7.08, versus a consensus at the time of $7.05. Analysts currently see the company reporting EPS of $7.10 this fiscal year. On April 19, the day after J&J's Q1 earnings release, research firm UBS said that the company's quarterly EPS results were a "solid" beat. The firm raised its estimates to reflect the Actelion (ALIOF), deal which is expected to close in Q2. UBS reiterated its Buy rating and $136 price target on Johnson & Johnson shares. Another research firm, Leerink, weighed in on J&J earnings after its last report. Leerink analyst Danielle Antalffy lowered her price target for Johnson & Johnson to $140 from $150 on valuation. The analyst noted that the shares sold off as investors seemed taken aback by weakness in both non-REMICADE Pharma and Consumer, but she pointed out that there were a number of potential drivers for an improving outlook going forward, including Medical Devices growth reacceleration, continued strong double-digit growth of key new drugs, and likely consumer growth reacceleration as the macroeconomic environment improves. The analyst reiterated an Outperform rating on the shares. 2. TOUGH PHARMA ENVIRONMENT: According to a research paper from University of Pennsylvania, out in May, the pharmaceutical industry faces some critical challenges, including the decline in the discovery, approval and marketing of new chemical entities with fewer and fewer blockbuster drugs making it to the market, competition from generics drugs, regulatory pressures and the weak growth in the U.S. market and therefore the need to explore other markets, to name a few. Recently, JPMorgan analyst Michael Weinstein noted the difficult conditions for pharma and their potential impact on J&J's Q2 results." J&J is coming off a disappointing Q1, and Q2 is going to be just as challenging, owing to $340M in Q2 of 2016 gross-to-net adjustments that make for a particularly tough comp. As a result, Q2 is likely to look a lot like the first," wrote Weinstein in a note out in early May. JP Morgan analyst Weinstein and his team called attention to the fact that J&J shares underperformed due to "the prospect of decelerating top-line growth in 2017, owing to increased competition for the Pharmaceutical business. According to JP Morgan's Weinstein deceleration should abate after the current quarter, which him to raise his rating to Overweight and price target to $140 on J&J shares. ACTELION ACQUISITION: In late January, J&J announced it was acquiring Switzerland-based Actelion. Actelion has a "strong" history of innovation to discover and develop new and differentiated products in multiple therapeutic areas, J&J said in a press release on January 26. Actelion has developed oral, inhaled and intravenous formulations of compounds to treat patients at various stages of pulmonary arterial hypertension. It is also developing therapies for multiple sclerosis, digital ulcers, Niemann-Pick type C disease, Gaucher disease, a lymphoma known as mycosis fungoides, and infectious diseases such as Clostridium difficile-associated diarrhea. The transaction closed on June 16 and will now become part of the Janssen Pharmaceutical Companies of Johnson & Johnson. Johnson & Johnson expects the transaction to add approximately $1.3B in sales for 2017 and be accretive to 2017 adjusted EPS by approximately 7c. This impact was already included in the company's full-year sales and adjusted EPS guidance provided in April. Also, as previously disclosed, in the first full year after close, Johnson & Johnson expects the transaction to be accretive to adjusted EPS by 35c-40c.