Despite Pausing Drug Trials, J&J Reports Strong Quarter

Johnson & Johnson JNJ reported third-quarter results that were ahead of both our and S&P CapIQ consensus expectations, partly due to a quicker-than-anticipated rebound in medical device products. Based on the strong results, we expect to slightly increase our fair value estimate despite the firm pausing the trial of its COVID-19 vaccine after an unexplained illness in one of the volunteers, which we believe is weighing on the stock price. However, since J&J was planning to offer the vaccine on a nonprofit basis, we didn’t expect it to be a major driver of value. Also, though the trial’s pause is concerning, given the large size of the study (60,000 patients) and its rapid progression, we believe putting it on hold to evaluate one patient’s health seems normal, and we remain cautiously optimistic that the vaccine will still reach the market in 2021. Further, we believe the firm’s speed of developing a vaccine highlights the strength of creating innovative medicines that shows up across the J&J pipeline, a core source of the company’s wide moat.

In the quarter, total sales increased 2%, led again by the drug group (up 5%), but still affected by a stabilizing medical device group (down only 3%). The pandemic had been crowding patients out of hospitals, especially hurting device sales for more elective surgeries like joint replacements. However, the medical community appears to have adapted more quickly than we anticipated, with particular strength in the United States. We believe the strong medical device growth is a key reason J&J increased full-year 2020 guidance and provided a reassuring outlook for devices in 2021.

On the drug side, recently launched drugs are more than offsetting patent pressures, which we expect to continue for several years. Oncology drugs Darzalex, Erleada, and Imbruvica are posting steady gains that offset generic pressures to older cancer drugs Velcade and Zytiga. A strong cancer pipeline should help further long-term gains.

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