J&J's 6% slide on an imperfect quarter is a gift to prospective buyers
Shares of Johnson & Johnson slid Tuesday after the pharma giant reported another solid but imperfect quarter. But with key growth drivers, including psoriasis drug Icotyde, gaining traction, the sell-off presents a gift to long-term investors. Revenue in the third quarter rose 5.9% to $25.4 billion, topping the consensus of $25.28 billion, according to LSEG. Adjusted earnings per share (EPS) in the July-to-September period totaled $2.59, exceeding expectations by 5 cents, LSEG data showed. On a year-over-year basis, adjusted EPS declined 7.5%, partially reflecting charges related to business development deals completed during the quarter. J & J is down more than 6% and pacing for its worst day since April 2025. Jim Cramer warned, going into the quarter, that J & J has historically traded poorly on its earnings days, and what we’re seeing Tuesday certainly aligns with that trend. The pullback isn’t totally unfounded given the problems in its medical devices business. But that shortfall obscured the strong performance and positive outlook of J & J’s largest segment, Innovative Medicine. As a result, we’re reiterating our buy-equivalent 1 rating and $275 price target. JNJ 1Y mountain J & J 1-year return Bottom line The stock probably deserves to be down, but not this much — even in this unforgiving market. J & J remains the class of the healthcare industry, with a strong product portfolio and pipeline. “The number of drugs they have is extraordinary,” Jim Cramer said on Tuesday’s Morning Meeting . “The billion-dollar blockbusters that are in the queue, amazing, and that’s why you buy this stock right here,” Jim said on Tuesday’s Morning Meeting. “There’s going to be a December meeting where, I think, a lot of this is going to be spelled out. … You buy 100 shares here. If it goes down another 5%, you buy another 100 shares. This is Johnson & Johnson.” This is not a stock used to one-day moves of this size. The last time the stock fell at least 3.5% in a single session was July 30, the day the company cut its full-year earnings guidance to reflect its acquisition of Firefly Bio and a strategic collaboration with Sail Biomedicines. At the time, we argued the market reaction was a nothing-burger because it wasn’t a cut due to the company’s performance. This time around, some of the selling is due to performance, specifically within its MedTech segment, where its cardiovascular business disappointed again and its surgery business faced pressures abroad in the Middle East and China. While we won’t pretend to like seeing these hiccups, they don’t rise to the level of changing our thesis for a couple of reasons. Some of the problems are beyond the company’s control: the fallout from the war in the Middle East and Chinese government policies. In the case of the Middle East, specifically, executives said they expect this to be a case of deferred sales, not lost revenue. Plenty of other healthcare companies are being hurt by China’s volume-based procurement practices. Meanwhile, executives are working to address perception problems that are hurting sales of Abiomed’s heart pumps in the wake of a disappointing U.K. study earlier this year. This was also a problem in the second quarter, though they stressed they don’t believe the problems are structural. We’ll take them at their word and expect to see progress on their planned fixes. A big reason why we’re comfortable looking past the weakness in MedTech is that there’s so much to like on the pharmaceutical side of J & J’s house, led by the newly launched Icotyde. The drug was approved by the Food and Drug Administration in March, so the company isn’t disclosing exact revenue figures. The statistics that were shared, though, were encouraging: more than 20,000 patients have initiated the therapy (compared with more than 10,000 in July), and nearly 9,000 doctors are writing prescriptions (an increase from about 6,000 in July). Icotyde is also now broadly covered across all national insurance plans, up from roughly 50% commercial coverage in July. Icotyde is the first oral drug in the IL-23 inhibitor class to hit the market, rivaling best-selling shots such as J & J’s Tremfya and AbbVie’s Skyrizi. For now, Icotyde is only approved to treat moderate-to-severe plaque psoriasis, but J & J is studying it to expand its label to include other autoimmune conditions, such as Crohn’s disease and ulcerative colitis. Securing approval for those additional indications is likely necessary for Icotyde to become one of J & J’s biggest drugs of all time , as executives have projected. Tom Cavanaugh, the head of J & J’s pharma segment, said roughly 60% of Icotyde patients are new to systemic treatments for plaque psoriasis, which doctors may prescribe after topical and light-based therapies have not worked. This is a sign that Icotyde isn’t cannibalizing the market, but rather expanding it. Of the remaining 40%, he said about 20% are coming from other oral therapies that work differently than Icotyde, while “20% are sourced from other treatments, most likely biologics.” While J & J didn’t offer names, Tremfya, Skyrizi, and Eli Lilly’s Taltz are among the biologics on the market for psoriasis. The growth of Tremfya, nevertheless, continues to impress, with sales up 68% and exceeding consensus for the seventh consecutive quarter. That predates our ownership of the stock, which began in April. One of the big drivers for Tremfya is its expanded label to treat Crohn’s disease and ulcerative colitis. “This momentum reinforces our conviction in Tremfya as a foundational medicine in inflammatory bowel and psoriatic diseases, and our belief that it can grow into a $10 billion franchise,” CEO Joaquin Duato said on the earnings call. Not every one of its cancer drugs beat expectations, but the overall oncology business grew at a 16% annual clip to reach $7.6 billion in quarterly revenue. That’ll work. The same goes for its portfolio of neuroscience drugs, where the standout is Caplyta, which grew revenue 66% year over year. Overall, the neuroscience unit saw 17% sales growth. “You almost can’t heap enough praise on the pharmaceutical unit,” CFO Joe Wolk said on CNBC earlier Tuesday, while plainly acknowledging that MedTech is coming up short. The business vs. the stock From a fundamental perspective, J & J entered Tuesday as a widely respected story. It has a pharma business that is gathering steam toward double-digit growth, and a MedTech unit that is being retooled to focus on faster-growing areas. J & J stock is more contested. Nobody denies it’s had a great run, up 82% since the start of 2025, outpacing the 33% advance for the NYSE Arca Pharmaceutical Index, known as the DRG. But J & J’s valuation has also expanded in this stretch — and so the debate around the stock is largely about the right price to pay for each dollar of future earnings. At the start of 2025, J & J and the DRG index both traded at roughly 14 times forward earnings, according to FactSet data. Now, J & J’s price-to-earnings ratio sits at 22, versus 17 for the DRG. The challenges in the MedTech business may prevent the stock from seeing more multiple expansion in the near term, but improved execution and continued progress in the launch of Icotyde in the coming quarters should help. Additionally, J & J has an investor day scheduled for Dec. 8 that represents another catalyst for shares. “I would tell investors, while the stock run has been good in the last year, we’re just getting started,” CFO Walk said on CNBC. “As we close the end of this decade, I would say it’s a de-risked portfolio. A lot of the products that are in the market today and already approved will be the catalysts for growth for the balance of this decade. We’re going to exceed $100 billion [in revenue this year] for the first time in the company’s 140-year history, and we’re going to grow at 10% levels in the coming years. We think we’re just getting started with respect to share appreciation.” We agree. Nevertheless, as we try to understand the depth of Tuesday’s sell-off, one exchange from the conference call’s question-and-answer session is worth highlighting. Goldman Sachs analystAsad Haider asked about this line on the earnings press release: “This progress, together with strategic investments in high-growth areas, gives us a clearer line of sight to double-digit growth by the end of the decade.” In particular, the analyst wanted to clarify whether those “strategic investments” were internal development, which would be organic growth, and not M & A, which would be considered inorganic growth. He said his clients were asking him about this line. Wolk, the finance chief, responded by saying the strategic investments were internal. “That is the correct interpretation. It does not assume any inorganic additions at this moment in time.” At risk of overanalyzing, this exchange may illustrate some of the concerns investors have about Tuesday’s print beyond the MedTech weakness, because that double-digit growth target is a key prong of the bull case for the stock. Another notable update from Tuesday: J & J signaled that it is likely going to spin off its orthopedics business in the middle of 2027, rather than sell it to an interested party. This is notable because The Wall Street Journal reported in September that private-equity giant Apollo was in talks to buy the hips-and-knee replacement business for $20 billion. “We had all options on the table,” Wolk said. “We’re not cash-strapped. We don’t have to pursue a deal that is, maybe, not optimal. If you think about some of the potential buyers of this business, medtech valuations are depressed right now. We can sit this out for a little bit, separate the business sometime next year, and I think owners of that company in a few years’ time will benefit for the long term. So, from a J & J shareholder standpoint, we think this is the way for the best value creation. … We’re targeting mid-2027.” One final note: J & J set aside about $5.5 billion in reserves as part of the talc lawsuit settlement reached in July. That deal “will settle … most of the ovarian talc claims that are out there,” Wolk said. “It requires 95% consent, but we’re on track to get that. We feel fairly confident based on what we’re hearing from the other side.” (Jim Cramer’s Charitable Trust is long JNJ and LLY. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
