J&J Posts Strong Q2 Results

Johnson & Johnson JNJ reported strong second-quarter results ahead of our expectations, and we plan to slightly increase our fair value estimate based on the outperformance. While destocking in the prior-year period helped drive growth in the quarter (especially in medical devices), the increase from prepandemic 2019 levels shows steady overall growth. J&J continues to innovate across segments, adding support to its wide moat.

Overall, sales increased 23% operationally, driven by the strong rebound in medical device sales (up 57%). The second quarter of 2020 was hit significantly by the COVID-19 pandemic, which caused patients to defer surgery and doctor office visits due to fear of contracting the virus and hospitals and doctor offices to scale back more-elective procedures in order to fully treat COVID patients. Despite the resurgence of COVID variants, we expect a more normalized healthcare setting that should drive continued gains for medical device products, and we project almost 10% growth in the back half of 2021 versus the back half of 2019. While some pent-up demand is driving the gains, improving innovation in robotics and digital surgery is also helping.

Drug sales increased 14% with less impact from COVID trends. Strong growth in oncology and immunology drugs helped drive the gains, and we expect this will continue, buoyed by best-in-class drugs and first-to-market drugs Darzelex (multiple myeloma) and Tremfya (immunology). While the COVID-19 vaccine added $164 million in sales for the quarter, its nonprofit status should mean only minor cash flow impacts. On the pipeline front, we are most bullish on recently approved cancer drug Rybrevant, which targets EGFR-mutated lung cancer.

Consumer health sales increased 9%, aided by sales recovery from pandemic pressures in the second quarter of 2020. While we expect continued growth in the segment, we believe deceleration toward 3% growth is more likely over the long term.

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