J&J Buoyed by Elective Procedures, Cancer Drug Sales

Johnson & Johnson JNJ reported solid first-quarter results that were slightly ahead of our and Visible Alpha consensus expectations, but we don’t expect any major changes to our fair value estimate based on the minor outperformance. Importantly, the firm’s more elective products in orthopedics continue to return to normal after COVID-19 concerns weighed heavily on joint-replacement procedures in 2020. Even though knee procedures still appear under pressure, this area is viewed as one of the most elective surgeries and will likely trend toward normal later this year. We believe the high switching costs (doctors investing time to learn a competitor's product) will likely support consistent orthopedic market share as sales rebound, which also supports the firm’s wide moat along with the strong intangible assets in the drug and consumer groups.

On the top line, total operational sales increased 6%, led by the rebound in medical devices and strong drug sales, offsetting consumer product declines. The easy comparisons in devices as well as an improving environment around COVID-19 should drive 2021 device sales up over 15%. On the drug side, a lack of major patent losses and continued gains in cancer treatments (up 15% in the quarter) should drive continued gains for this high-margin division. Multiple myeloma drug Darzalex (up 42%, representing 6% of total sales) should continue to gain share and is well positioned against Sanofi’s competing drug Sarclisa (launched in 2020). While consumer group sales declined 3%, the prior-year quarter included heavy stocking, which suggests the actual underlying consumer group showed slight growth.

We still expect J&J’s COVID-19 vaccine will return to the market following the pause in administration due to highly rare blood clot side effects. Because the firm is distributing the vaccine on a not-for-profit basis, we don’t expect the vaccine sales to affect our fair value estimate.

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