J&J Posts Q1 Results Slightly Below Our Expectations

Johnson & Johnson JNJ reported first-quarter results slightly below our projections, but we don't expect any changes to our fair value estimate based on the minor underperformance. We view the shares as slightly overvalued after their runup over the past six months, which we largely attribute to investors looking for a steady investment against a backdrop of inflation concerns, the war in Ukraine, and supply chain disruptions. J&J's results largely held up well versus these headwinds, but supply chain issues did weigh slightly on the consumer unit. However, we don't expect these issues to disrupt the planned 2023 consumer unit divestment. In the quarter, total sales increased 8% operationally, with the drug and device units again leading the sales growth contribution, a trend we expect will continue throughout the year. In oncology (second-largest drug division), total sales increased 15%, driven by continued Darzalex (blood cancer) and Erleada (prostate) gains. While we expect declines from older prostate cancer drug Zytiga to accelerate later in the year as a result of generic competition, recently approved CAR-T blood cancer drug Carvykti should help mitigate those generic pressures. The strong ability to offset upcoming generic pressures is a key factor in J&J's wide moat, which looks intact. The firm left overall 2022 operational guidance largely in place, except for removing COVID-19 vaccine sales guidance. J&J's acknowledgement of high levels of COVID vaccines in the market is consistent with our view that later in 2022, COVID vaccine sales will fall as developed markets have already supplied individuals wanting the vaccine. We do project some long-term demand for the vaccines from more-vulnerable patient groups. However, given J&J's largely nonprofit pricing strategy for its COVID vaccine, we don't expect these dynamics to significantly affect our fair value estimate.

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