Johnson & Johnson Earnings: Broad Portfolio Strength Drives Solid Results

Johnson & Johnson JNJ reported stronger second-quarter results than we had projected and raised 2023 guidance, but we don’t expect any major changes to our fair value estimate based on the slight outperformance.

In the quarter, broad strength across the portfolio supported 6% operational growth (excluding acquisitions), but we expect this growth to slightly slow over the next three years. As medical procedures continue to rebound following the coronavirus pandemic, demand for J&J’s devices has increased (sales up 10%), but we expect this bolus of demand to normalize by 2025. The drug group posted solid growth (up 4%), but we project slowing growth as generic pressures build, especially the expected biosimilar Stelara launch in early 2025. The consumer group Kenvue KVUE (up 8%) showcased its brand power by largely passing along inflationary supply costs.

The remaining divestiture of Kenvue (J&J owns close to 90% still) could come as early as the next few days in the form of a split off. The split off would allow current J&J shareholders the option to take Kenvue shares or J&J shares (excluding Kenvue). We continue to view the strong intangible assets in the pharma business and switching costs in the device segment (along with some intangible assets as well) as supporting a wide moat for J&J.

On the talc litigation risk, we believe the strategy to move this legal overhang into a bankruptcy subsidiary for $8.9 billion will likely move forward in the third quarter of the year. For the bankruptcy plan to work, 75% of claimants need to support the arrangement. Even though a recent case favored a plaintiff, we expect J&J to appeal the case into a venue where more scientific information will be allowed, increasing the probability of overturning the ruling. If the bankruptcy plan lacks enough claimant support, we expect J&J to follow a more traditional path of litigating cases one-by-one until reaching a settlement with costs similar to the bankruptcy subsidiary strategy.