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Two of the largest life science companies got the third-quarter earnings season underway. While there were differences between the results of Johnson & Johnson and Roche Holding AG, the former demonstrated how easily pandemic-related events divert investors’ attention while the latter demonstrated the persistence of biosimilar competition.

Good Start in Third-Quarter Earnings

As usual, Johnson & Johnson kicked-off 2020’s third-quarter earnings season for life science companies with a set of results that were as good as could be expected. However, developments in J&J’s coronavirus vaccine program stole the show.

The group announced third-quarter revenue and earnings per share (EPS) of $21.1bn and $2.20, respectively, which easily beat analysts’ consensus estimates. J&J’s 1.7% increase in total quarterly revenues over the same period in 2019 was a welcome positive sign that had not occurred in six months. This green shoot was reinforced by the sequential 15% increase in total revenue between the ends of the second and third quarters of 2020. For once, J&J’s medical device division was the favored child after its “better than expected procedure recovery” resulted in medical device revenues bouncing back by 43.4% between the ends of the second and third quarters of 2020. The implied recovery in elective surgeries bodes well for other medical device and hospital-administered drug companies. While the green shoots were most obvious in J&J’s surgical division, this was from a very low second-quarter base and its medical device revenues were still down by 3.7% compared with the same quarter of 2019.

But there was no disguising J&J’s “solid performance.”

Pharmaceutical sales rose by 5.0% over those in the same quarter of 2019, and by 6.2% between the ends of the second and third quarters of 2020. J&J’s consumer division’s sales grew by 1.3% and 6.6% over the same respective periods. If there were flies in J&J’s ointment, they were in its pharmaceutical division, where biosimilar and generic competition to its former blockbuster drugs Remicade (infliximab) and Zytiga (abiraterone acetate) resulted in those revenues falling by 18.9% and 20.4%, respectively, over the same quarter of 2019. In addition, one-time inventory and returns in the US muted Imbruvica’s (ibrutinib) revenue growth to only 8.6% between the ends of the second and third quarters of 2020 and probably deserved more discussion. J&J’s financial guidance took a dive at its first-quarter results in response to the global pandemic, but has been revised upwards every quarter since. J&J’s third-quarter results continued this trend with 0.8% and 1.9% increases in operational sales and adjusted EPS, respectively, at their midpoints. J&J’s latest guidance improvement however, still remains 4.4% and 11.4%, respectively, at the midpoints, below that of those halcyon pre-pandemic days of January 2020.

The Pandemic Subordinates Results

While J&J should have been rewarded by investors for its iterative and transparent guidance revisions in every quarter of 2020 so far, and for the recovery of its revenues in the third quarter, other events negated such a reaction. On the day before its results, J&J – like AstraZeneca PLC and Inovio Pharmaceuticals, Inc. before it – announced a pause in the recruitment of the clinical trials of its COVID-19 vaccine candidate after a participant developed an unexplained illness. (Also see "J&J Says It's Wait And See On COVID-19 Vaccine Delay, Outlines Rosier Outlook for 2021" - Scrip, 13 Oct, 2020.)  Prior to its results announcement, J&J’s stock price was already trading down 1.8% in the premarket and while its financials temporarily softened this drop intraday, J&J’s stock price closed the day of its results down by 2.29% compared to the 1.18% fall in the NYSE Arca Pharmaceutical (DRG) index.

 

If J&J − which has pledged to supply its vaccine on a not-for-profit basis for emergency pandemic use − can suffer such a reaction after a coronavirus vaccine hiccup, imagine the detrimental effects on the expectations of smaller biotech companies without the diversity or magnitude of revenues that J&J has. As Eli Lilly and Company’s safety-related trial pause demonstrated in the same week, further pandemic-related clinical holds, abandonments and therefore stock price volatility should to be expected. (Also see "Coronavirus Update: Trial Of Lilly's Antibody Is Next To Be Paused" - Scrip, 14 Oct, 2020.) 

 

Roche Also Disappoints, But Differently

Roche reported its results for the first nine months of 2020 and its stock price received the same sort of drubbing as J&J. Roche’s group sales fell by 5.8% over the same quarter of 2019, but rebounded by 4.0% between the ends of the second and third quarters of 2020 – considerably less than J&J’s most recent quarterly rebound. Like J&J’s unlikely medical device division hero, Roche’s diagnostics division was its pandemic growth driver, with revenues up by 10.9% over the same quarter of 2019 and by 12.0% between the ends of the second and third quarters of 2020 as a result of increased coronavirus testing. But revenues in Roche’s largest division, pharmaceuticals – accounting for 78% of third-quarter sales – fell by 10.1% over the same quarter of 2019 and rose by an anemic 1.6% between the ends of the second and third quarters of 2020.

 

Unlike J&J, Roche has left its full-year revenue guidance of sales growing “in the low- to mid-single digit range, at constant exchange rates” unchanged, despite group revenues rising by just 1% in the first nine months of 2020. On the one hand, Roche’s full-year 2020 guidance back in January was probably low-balled because of its expectations for biosimilar competition to its biggest oncology products. On the other, the flattering inclusion of the channel-filling enjoyed by most pharmaceutical companies in the first quarter probably implied some skepticism on whether Roche’s full-year guidance could be attained.

 

Biosimilar Competition Does Not Subside

Ever since its full-year 2019 earnings announcement in February, Roche’s narrative has been that its newly launched products would make up for biosimilar competition, and that biosimilar competition would not get any worse (in Europe at least). (Also see "Stockwatch: Biosimilars And Dividends Connect Earnings At Pfizer And Roche" - Scrip, 3 Feb, 2020.) Indeed, Roche’s third-quarter announcement highlighted the CHF3.7bn revenue growth from its new products over the same period in 2019, which outpaced the CHF3.5bn lost to biosimilar competition. However, as the first nine-month revenues of Avastin (bevacizumab), Rituxan (rituximab) and Herceptin (trastuzumab) were CHF15.2bn in 2019, and fell by CHF 4.7bn to CHF 10.5bn in first nine months of 2020, investors were probably confused.

 

This confusion resulted in Roche’s stock price falling by 3.49% on the day of its announcement against the DRG’s 1.28% same day fall. Perhaps the stock price reaction also reflected investors’ fear of what Roche may have to expensively buy in the fourth quarter just to bring full-year 2020 sales growth into its guidance.

 

Andy Smith gives an analyst and former investor's view on life science companies. He joined the independent research house Equity Development in October 2019 having previously been an analyst at Edison group and a Senior Principal in ICON PLC’s Commercialization, Pricing and Market Access consulting practice. Smith has been the lead fund manager for four life science–specific funds, including 3i Bioscience, International Biotechnology and the AXA Framlington Biotech Fund, and was chief investment officer at Mannbio Invest. He was awarded the techMark Technology Fund Manager of the year for 2007 and was a global product manager at SmithKline Beecham Pharmaceuticals until 2000.

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