Johnson & Johnson Earnings: Largely In Line as New Products Ready to Offset Stelara Biosimilars

Key Morningstar Metrics for Johnson & Johnson

• Fair Value Estimate: $164.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

What We Thought of Johnson & Johnson’s Earnings

We are holding our fair value estimate for Johnson & Johnson JNJ steady at $164 per share following second-quarter results that were largely in line with our expectations. The stock looks undervalued, with the market likely not fully appreciating the broad innovation across the firm’s pipeline that should drive steady growth and reinforce its wide moat.

In the quarter, total sales increased 7% operationally (excluding covid-related sales), with stronger drug sales growth (9%) versus devices (4%). The device sales growth was slightly below our expectations, partly due to pricing pressure in China. However, with high US medical utilization trends and new products gaining more traction, we expect a slight acceleration of device sales later in the year.

We expect drug sales growth will slow later in the year as biosimilars launch against immunology drug Stelara, which represents close to 20% of drug sales. However, we expect a more gradual decline in Stelara sales, given the complexity of substituting a biologic versus a traditional small-molecule drug.

Offsetting the Stelara pressure, J&J’s strong position in multiple myeloma continues to look secure and should drive significant growth over the next five years. The firm’s entrenched drug Darzalex is still gaining share, and more recent next-generation multiple myeloma drugs Carvykti, Tecvayli, and Talvey look poised to rapidly grow. We expect this segment of drugs to add almost $10 billion in incremental sales (representing close to 20% of drug sales) over the next five years. Additionally, the firm’s next-generation immunology drug Tremfya recently showed superior data versus Stelara in Crohn’s disease, which should help drive future Tremfya sales and mitigate the Stelara biosimilar headwind.

On the talc litigation front, J&J’s already-announced total payout plan of close to $11 billion looks on track for plaintiff approval by late summer, likely removing this litigation risk overhang.