J&J's Q3 Earnings & Sales Top: Time to Buy, Sell or Hold the Stock?

On Oct. 15, J&J JNJ announced strong third-quarter results, beating estimates for both earnings and sales. The Innovative Medicine segment outperformed expectations. However, the MedTech segment underperformed due to continued headwinds in Asia-Pacific markets like China.

Sales in the Innovative Medicine segment rose 4.9% year over year to $14.58 billion. Higher sales of key products such as Darzalex, Tremfya, Uptravi, Opsumit and Erleada drove the segment’s growth. New drugs like Carvykti, Tecvayli and Spravato also contributed to growth. The sales growth was partially dampened by lower sales of Stelara, Simponi/Simponi Aria and Imbruvica and generic/biosimilar competition to drugs like Zytiga and Remicade. MedTech segment sales of $7.89 billion rose 5.8% year over year.

J&J raised its total revenue expectation for 2024 as it expects an improved performance in the rest of the year. However, the company lowered its adjusted earnings expectation as its expectation of a better operational performance was partially offset by costs associated with the recent acquisition of private medical device company V-Wave.

Total revenues are expected in the range of $88.4 billion-$88.8 billion for 2024, up from $88.0 billion-$88.4 billion expected previously. The adjusted earnings per share guidance was lowered from a range of $9.97-$10.07 to $9.88-$9.98 per share.

J&J also gave a preliminary guidance for 2025. In 2025, the company expects sales to be more than its guidance of $57 billion, which it issued in 2021. It expects positive growth in the Innovative Medicine segment despite the loss of exclusivity of its key blockbuster drug, Stelara, in January. The growth is expected to be driven by its key products, such as Darzalex, Tremfya and Erleada, as well as new drugs and new indications, including Tremfya in inflammatory bowel disease (“IBD”) and Rybrevant in non-small cell lung cancer.

In MedTech, J&J expects operational sales growth at the upper end of its long-term guidance range of 5-7%, driven by the launch of new products and contributions from Abiomed and Shockwave acquisitions. However, it expects continued negative impacts from VBP issues in China in 2025.

Nonetheless, a single quarter’s results are not so important for long-term investors, and the focus should, rather, be on the company’s strong fundamentals. Let’s understand the company’s strengths and weaknesses to better analyze how to play J&J’s stock in the post-earnings scenario.

JNJ's Innovative Medicine Unit Showing Consistent Strength

J&J’s Innovative Medicine unit is performing at above-market levels. Its growth is being driven by existing products like Darzalex, Stelara, Tremfya, Uptravi and Erleada and also by the continued uptake of new launches, including Spravato, Carvykti and Tecvayli. The segment’s sales rose 6.8% in 2022, 9% in 2023 and 5.6% in the first nine months of 2024 on an organic basis. In 2024, J&J expects to record above-market growth in the Innovative Medicine unit for the 13th consecutive year. J&J expects the Innovative Medicine business to grow 5% to 7% from 2025 to 2030.

Moreover, J&J believes 10 of its new Innovative Medicine products have the potential to deliver peak non-risk adjusted operational sales of $5 billion, including new cancer drugs like Talvey and Tecvayli and pipeline candidates like nipocalimab and JNJ-2113.

J&J's Talc Suits and Bankruptcy Attempts

J&J faces more than 62,000 lawsuits for its talc-based products, primarily baby powders. The lawsuits allege that its talc products contain asbestos, which caused many women to develop ovarian cancer. J&J insists that its talc-based products are safe and do not cause cancer. J&J permanently discontinued the sale of its talc-based Johnson’s Baby Powder.

Earlier, J&J failed twice in its attempts to seek bankruptcy to fully resolve these thousands of lawsuits related to its talc products. In May 2024, J&J proposed a new plan committing to pay claimants approximately $6.5 billion nominally over 25 years, which could resolve 99.75% of all pending talc lawsuits against the company.

In September, J&J, via another subsidiary called Red River Talc, filed for voluntary bankruptcy (in Texas) for the third time after it received the support of around 83% of current claimants for the proposed bankruptcy plan. Red River also increased its settlement commitment by $1.75 billion to approximately $8 billion.  A Houston judge passed a ruling rejecting the claimants' lawyers' request to transfer the case to New Jersey, where J&J’s earlier bankruptcy filings were rejected. This was a positive development. The talc bankruptcy confirmation hearing is expected to occur in early 2025.

Upcoming Patent Expiration of J&J's Blockbuster Drug Stelara

J&J will face the patent expiration of its blockbuster drug, Stelara, in 2025. Stelara generated sales of $8.0 billion in the first nine months of 2024. The launch of generics could significantly erode the drug’s sales and hurt J&J’s sales and profits. Stelara biosimilars are expected to be launched in the United States in January 2025, while a biosimilar version of Stelara was launched in some European markets for certain indications in July 2024.

Slowing Sales in J&J's MedTech Segment

Sales in J&J’s MedTech business are facing continued headwinds in Asia Pacific, specifically in China. Sales in China are being hurt by the impact of the volume-based procurement (VBP) program and the anti-corruption campaign. VBP is a government-driven cost containment effort in China. Competitive pressure is also hurting sales growth in some MedTech businesses. J&J does not expect any improvement in its business in the Asia Pacific region, specifically in China, in the rest of this year. Accordingly, along with the third-quarter results, J&J lowered its expectation for adjusted operational sales growth in the MedTech segment for 2024 to be closer to 5% versus the prior expectation of being closer to 6%.

It expects continued impacts from VBP issues in China in 2025 as VBP continues to expand across provinces and products.

J&J Stock’s Price, Valuation and Estimates

Though J&J’s stock mostly underperformed the industry this year, its performance improved in the past three months.  In the past three months, J&J’s stock has risen 6.3% compared with an increase of 1.3% for the industry. J&J has also outperformed the sector as well as the S&P 500 in the same timeframe, as seen in the chart below.

JNJ Stock Outperforms Industry, Sector & S&P 500 in 3 Months

Image Source: Zacks Investment Research

From a valuation standpoint, J&J appears attractive relative to the industry and is trading below its 5-year mean. Going by the price/earnings ratio, the company shares currently trade at 15.69 forward earnings, lower than 19.14 for the industry and the stock’s mean of 16.07. The stock is much cheaper than some other large drug stocks like Eli Lilly LLY and Novo Nordisk NVO.

JNJ Stock Valuation

Image Source: Zacks Investment Research

The Zacks Consensus Estimate for 2024 as well as 2025 has gone down in the past seven days, as seen in the chart below.

JNJ Estimate Movement

Image Source: Zacks Investment Research

Stay Invested in J&J's Stock

J&J’s biggest strength is its diversified business model. With last year’s complete separation of the Consumer Health segment into a newly listed company called Kenvue KVUE, J&J has now become a two-sector company focused on the Pharmaceutical and MedTech fields.

J&J’s Innovative Medicine segment is showing a growth trend. The company has an interesting R&D pipeline that can generate innovative products and drive its growth further. It recently completed acquisitions of Shockwave and V-Wave in MedTech and Ambrx, Proteologix and NM26 bispecific antibody in Innovative Medicine, thus boosting its pipeline.

However, the softness in the MedTech unit is a concern. It remains to be seen if the trends improve in 2025. Nonetheless, the third-quarter results and the overall positive outlook for 2025 met investors' expectations. Those who already own J&J’s stock may stay invested for some time in this Zacks Rank #3 (Hold) company as the visibility for a potential resolution of the talc lawsuits has improved. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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