J&J Earnings Miss Expectations; Innovation Efforts Producing Results

Johnson & Johnson (JNJ) reported second-quarter results slightly below our expectations, partly due to weaker-than-projected medical device sales, but we don’t expect any significant fair value estimate change on this basis. The solid traction shown in the quarter from a wide breadth of innovative products supports our wide moat rating.

In the quarter, total sales increased 8% operationally, with the drug group buoying overall sales, a trend that should continue over the next two years. J&J’s strong entrenchment with cancer drugs Darzalex and Erleada should continue, given leading efficacy despite increasing competition. Immunology drugs Stelara and Tremfya are also performing well and should post steady gains over the next two years. By 2025, the company does face some potential patent losses (Stelara and immunology drug Simponi) that are likely to create headwinds to longer-term growth.

However, it is making strides with its pipeline. We remain most bullish on multiple myeloma drug Carvykti (approved earlier in the year in key markets) and lung cancer drug Rybrevant (approved in 2021 in key markets). These drugs should help mitigate the patent losses in 2025, but to really invigorate growth, J&J will need additional new drugs. Mid-stage drugs milvexian (cardiovascular) and an oral interleukin-23 treatment for psoriasis hold major blockbuster potential and could drive significant long-term growth if late-stage studies hold up.

Outside the drug group, performance was mixed. Covid-19-related challenges appear to be affecting the medical device group more than we expected, but we expect more normalization of growth for this group as patients adapt to the ongoing waves of Covid cases. We believe nursing shortages could also be constraining device sales. In consumer, 2% operational growth was largely as expected. The company continues to track toward a separation of the unit in 2023.