Wide-Moat J&J Posts Better-Than-Expected Q2

With the backdrop of a challenging COVID-19 pandemic, Johnson & Johnson JNJ reported second-quarter results ahead of our and consensus expectations, but we don’t expect any change to our fair value estimate. Additionally, J&J slightly increased its full-year 2020 sales and earnings guidance as the COVID-19 impact is weighing on operations slightly less than expected. The strong durability of the drug franchise during the pandemic and expected recovery of the medical device segment help support our wide moat rating.

In the quarter, total sales fell 9% operationally, with gains in the drug group (up 4%) mitigating COVID-19-related pressures in consumer (down 4%) and devices (down 33%). While COVID-19 challenges also weighed on the drug group by 3%-3.5%, the drug group was still able to post gains led by critical-care drugs that patients need regardless of the pandemic. COVID-19 pressure hit the device group hardest, as expected elective procedures were delayed or crowded out by COVID-19 prioritization by hospitals. However, J&J said overall office visits improved throughout the quarter, with late June visits down 10%-15%, recovering from a 70% decline seen in mid-April. While recent increasing COVID-19 infection trends are concerning, we expect continued recovery from the depths of the second quarter for J&J’s medical device group.

Additionally, we expect a return to more normalized operations in 2021 following likely approvals of COVID-19 vaccines in late 2020 or early 2021. J&J’s COVID-19 vaccine remains on track for approval in early 2021, with likely dose capacity of over 1 billion in 2021. However, J&J’s commitment to bring the vaccine to the market on a not-for-profit basis is likely to mean little support for the firm’s valuation. Rather, we expect J&J will probably use the goodwill related to creating a vaccine in discussions with government policymakers to engender more-favorable pricing for other products.

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