Johnson & Johnson (NYSE: JNJ), a major component of healthcare sector exchange traded funds, will enjoy greater sales of its specialized drugs.
“Based on second-quarter-to-date IMS data, we see the potential for outperformance from several of Johnson & Johnson’s key U.S. drugs–including Invokana/Invokamet [type 2 diabetes], Xarelto [blood thinner], Invega Sustenna [schizophrenia]and Remicade [Crohn’s disease and others]–that in aggregate could deliver some modest upside in the quarter, although we expect this strength to be largely offset by weaker-than-expected Olysio [chronic hepatitis C]sales,” according to Wells Fargo analysts.
Consequently, Wells Fargo has placed an outperform rating on the pharmaceuticals giant.
Johnson & Johnson’s outlook bodes well for the healthcare sector as the company stock is a major component in both healthcare and pharmaceutical sector ETFs.
For instance, the Health Care Select Sector SPDR (NYSEArca: XLV) includes a 9.6% tilt toward JNJ while iShares U.S. Healthcare ETF (NYSEArca: IYH) holds a 9.1% position in JNJ. The pharmaceuticals sub-sector makes up 42.5% of XLV and 40.6% of IYH.
Additionally, JNJ is 9.3% of iShares U.S. Pharmaceuticals ETF (NYSEArca: IHE) and 8.2% of Market Vectors Pharmaceutical ETF (NYSEArca: PPH).
Supporting the pharma space, recent Nielsen data revealed in-line or better performance in the U.S. consumer segment. Additionally, currency risk has diminished after the euro improved marginally against the USD since mid-April while the yen only depreciated modestly. The analysts calculate that for the full year, net exchange-rate impact worsened by less than $10 million.
“With marginally worse incremental exchange-rate headwind, we believe these strong underlying overall trends in the U.S. Pharmaceuticals and Consumer businesses to bode well for Johnson & Johnson’s second-quarter results and remainder-of-2015 outlook,” Wells Fargo added.
Later this year, J&J plans to file for approval for the experimental drug daratumumab for multiple myeloma, a type of blood cancer, in the U.S. and Europe. Wells Fargo analyst Larry Biegelsen projects daratumumab sales could hit $1.3 billion by 2019. [Innovators to Support Healthcare Sector, ETFs’ Growth]
The shift into research and development comes at a time as big pharmaceutical names brace for large drug patent expirations. Looking ahead, industry growth will be propelled by a slew of niche or specialized drugs with a targeted application for specific diseases.
“From an innovation standpoint, drug companies are focusing most on specialty care,” according to Morningstar analyst Robert Goldsborough. “As a result, pharmaceutical and biotech firms are targeting smaller patient populations, particularly in oncology, virology, and immunology. Innovating in areas of previously-unmet needs should offer higher odds of approval by U.S. regulators and better pricing power for drug firms.”
For more information on the healthcare sector, visit our healthcare category.
Max Chen contributed to this article.