J&J Posts Gains in Q3, Despite the Delta Resurgence

Johnson & Johnson (JNJ) reported third-quarter results largely in line with our expectations and we don’t expect any major change to our fair value estimate. We continue to view the stock as slightly undervalued with the consistency of growth reinforced by the firm’s wide moat not fully appreciated by the market. While the coronavirus pandemic continues to disrupt sales, J&J’s overall operations are trending back toward normalization.

In devices (sales up 8% after adjustments), the resurgence of the delta variant created a moderate headwind to more robust growth, but increasing sales helped lift the device margin segment by almost 400 basis points. We expect continued steady device gains as patients feel more comfortable to return to hospitals and doctor offices as COVID-19 vaccination rates increase.

In the drug segment (close to 70% of income), sales increased 14% and looked largely unfazed by COVID-19, but we expect a deceleration in drug sales over the next three years as key drugs mature. The firm’s oncology drugs Darzalex and Erleada posted strong gains based on leading efficacy and look well positioned for growth (albeit decelerating growth). Immunology drugs Stelara and Tremfya also posted solid growth, likely supported by the drugs’ strong safety profiles in a competitive market segment. Also, the firm’s COVID-19 vaccine sales of $502 million helped add almost 400 basis points of drug segment growth, but since J&J is committed to selling its vaccine at a not-for-profit price, these sales didn’t help the bottom line. We expect J&J to move the vaccine into a for-profit position once the pandemic subsides, likely in 2023.

Despite several strong drugs supporting sales growth, J&J needs to replenish its pipeline. We expect the drug unit review on Nov. 18 will highlight new innovative treatments, helping to drive long-term growth while reinforcing the firm’s wide moat. We are most bullish on new cancer treatments Rybrevant and Ciltacabtagene Autoleucel (CAR-T).