Johnson & Johnson Q3 Earnings Show Broad Support Across Key Business Segments

Johnson & Johnson (JNJ) reported third-quarter results largely in line with our projections, and we don’t expect major changes to our fair value estimate. We continue to see the firm as fairly valued, with the market outlook similar to our view. While inflation seems to slightly pressure J&J’s costs (as shown by a 50-basis-point reduction to 2022 margin guidance), we don’t expect a material headwind to earnings from increasing inflationary pressure, given J&J’s relatively low production cost and ability to pass along price increases. We view the strong pricing power as reflective of J&J’s innovative products and brand power, which also support the firm’s wide moat.

In the quarter, total sales increased 8% operationally with broad support across all key segments, but we expect a deceleration of growth over the next few years partly due to increasing generic pressures and a reduction in the COVID-19-related pent-up device demand. The drug sales (up 9%) continued to lead overall growth with strong contributions from cancer drugs Darzalex and Erleada as well as immunology drug Tremfya, all of which look positioned for further growth supported by leading efficacy. However, generic versions of cancer drug Zytiga (2022 internationally) and immunology drug Stelara (late 2023) will likely pressure sales, as will the expected decline in COVID-19 vaccine sales. J&J’s 2025 guidance of $60 billion in organic drug sales is close to $3 billion ahead of our estimate and could provide upside to our fair value estimate if achieved.

J&J’s remaining segments are also supporting solid growth. The device segment (up 8%) is partly benefiting from new product launches and a recovery in procedures following demand disruptions from COVID-19. Also, the consumer group (up 5%) is adapting well to macro pressures, partly supported by the strong brand power embedded in the product portfolio. The consumer group is on track to separate from J&J as a newly created firm called Kenvue in mid- to late 2023.