The Medical Devices and Diagnostics business, however, continue to be a major source of investor angst. Bulls are at ease that worldwide sales increased 14% year over year, including double-digit growth performances in both the domestic and international businesses. That's all well and good. And here, too, management's vision on the Synthes acquisition looks solid. But without Synthes, the Devices numbers are not as breathtaking.
Profitability was also mixed. Although there was a slight sequential improvement, margins continue to disappoint. After gross margins fell by 135 basis points in fourth quarter, margins fell again this quarter by more than a full point, missing Street estimates. But management was able to offset this with a reduction in expenses, which helped advance operating income and earnings per share by 8% and 5%, respectively.
This quarter did little to damp any optimism about Johnson & Johnson's long-term prospects. In the near term, however, investors will likely remain nervous about JNJ's organic growth while demanding improvements in the medical devices business. But it seems far-fetched to assume that management won't turn things around, given JNJ's strong global presence.
What's more, JNJ's strong drug business should keep growth going for the next several years. Management has done a better-than-adequate job over the past couple of years building the company's pipeline of products, many of which are now contributing to the bottom line. Zytiga and Remicade are perfect examples.But I wonder how JNJ will respond to increased competition and further threats of weakening margins. Companies including Medivation (MDVN), which has a strong oral medication drug that rivals Zytiga, should not be taken lightly. This is where JNJ's extraordinarily well-diversified business should offset potential near-term headwinds.