Johnson & Johnson

Johnson & Johnson reported 5.9% top-line growth and a 7.5% adjusted EPS decline in the third quarter (including the cost of the Firefly acquisition), and management slightly raised full-year guidance on both measures. Shares fell 7% intraday on Oct. 13.

Why it matters: While J&J's update for its Innovative Medicine business (two-thirds of sales) was almost uniformly positive, the MedTech business is facing a few headwinds, particularly outside the US, that weigh on J&J's growth and prevent management from raising guidance more significantly. Global Innovative Medicine growth of 7.7% (with even higher growth in the US at 11.1%) reflects the steady share gains for J&J's biggest products, led by Darzalex (15.4%) in oncology and Tremfya (68.3%) in immunology. MedTech struggles were most apparent in cardiovascular (Abiomed down 2.3% due to reduced use of Impella following a disappointing clinical trial result) and surgery (down 0.6% due to reimbursement pressure in China and order disruptions in the Middle East).

The bottom line: We're maintaining our $190 fair value estimate per share for wide-moat J&J after making modest changes to our valuation model. We think the market continues to overvalue J&J shares, incorporating higher long-term top- and bottom-line growth than we think is warranted. Our model includes 6.5% average annual sales growth (6.8% pro forma excluding orthopedics) from 2025 to 2030, and we're skeptical of J&J's ability to reach its goal of double-digit growth by the end of the decade. We're also short of its $50 billion oncology sales target by 2030 (at $46 billion).

Coming up: We're looking forward to more details on J&J's 2027 outlook and early-stage pipeline promise at the Enterprise Business Review on Dec 8. We expect more details around long-term sales potential for new immunology drug Icotyde as well as the separation of the orthopedics business, which management now says is more likely to take the form of a spin.

BLANK PAGEBeyond this, the single biggest near-term catalyst for J&J's pipeline is data for Bristol and J&J's milvexian in secondary stroke prevention (around the end of the year) and atrial fibrillation (first quarter of 2027), and we assign J&J minimal ($1 billion) milvexian annual sales by 2035.

For more information on J&J's portfolio and pipeline, please see our recent in-depth report, "Biopharma Product Pipelines Rise to Meet Steeper Patent Cliffs."

We are maintaining our J&J fair value estimate at $190 per share.

While J&J is one of the most diversified healthcare names we cover, we highlight new products like Inlexzo (bladder cancer, $3 billion peak) and Icotyde (immunology, $7 billion peak), as well as share gains for immunology drug Tremfya ($16 billion peak) as some of the key drivers of growth in our model.

With broad strength in J&J's innovative medicine and medtech segments, we expect average annual growth of 6.4% on the top line and 7.5% on the bottom line over the 2025-30 period, despite headwinds from moving past its biggest patent cliff beginning in 2025 (immunology drug Stelara, 12% of 2024 sales).

In the drug unit, strong innovative new drug launches are helping to offset increasing patent pressures. In immunology, J&J looks well positioned to mitigate the patent loss for Stelara with recently launched drugs that hold the potential to expand in approved indications and gain traction in new indications. We view Tremfya as well-positioned for growth, with peak annual sales of $16 billion in 2030. While the drug was approved in 2017 for moderate to severe psoriasis, new gastrointestinal indications are helping to drive robust sales.

In oncology, J&J continues to report strong data, suggesting increased potential for several of its drugs. Adding to the firm’s strong entrenchment in multiple myeloma with Darzalex, we expect CAR-T drug Carvykti and bispecific antibodies Tecvayli and Talvey to post solid gains. Also, the firm's Rybrevant/Lazcluze combination targeting EGFR-mutated lung cancer looks increasingly well positioned to develop into blockbuster sales in 2026.

We expect strong growth in new pipeline drugs to offset relatively limited near-term patent losses in the pharmaceutical division, although uncertainty in growth picks up in the 2030s as patent expiration of Darzalex Faspro approaches and as growth becomes more dependent on programs currently at an earlier stage. We expect fairly flat operating margins over the next several years as cost-containment efforts across the firm help offset margin pressure from the loss of patent protection on several high-margin drugs, including Stelara.

Under our updated discount-rate framework, we've raised our J&J weighted average cost of capital estimate to 7.4% from 7.2%. Our beta of 0.5 reflects our view of both biopharma's defensive nature as well as J&J's own fundamentals and market returns. The change does not reflect a new view of the business, but a more granular expression of our existing risk assessment.

We believe Johnson & Johnson has one of the widest moats in the healthcare sector, supported by intellectual property in the drug group and intellectual property and (to a lesser extent) switching costs in the device segment. The company's diverse revenue base, strong pipeline, and robust cash flow generation create a very wide economic moat. An extensive salesforce makes J&J a powerful candidate for a smaller biotechnology company looking to partner on a new drug, which strengthens J&J's ability to bring new products to market.

Johnson & Johnson's diverse operations are a major pillar supporting the wide moat. The company holds a leadership role in a number of drug and device markets. It is not overly dependent on one particular operating segment; the pharmaceutical business and medical device group represent close to 65% and 35% of total sales, respectively. Additionally, within each segment, no one product dominates sales. The largest drug by sales, Darzalex, accounted for only 15% of total sales in 2025.

Johnson & Johnson's R&D efforts support its robust revenue base. In pharmaceuticals, the firm recently launched several new blockbusters, which should allow it to escape largely unscathed from its biggest patent headwinds, led by immunology drug Stelara (12% of 2024 sales). Its efforts in MedTech, including robotics and digital data, should help maintain leadership in several medical device areas as well as support strong pricing power. Switching costs remain high with several of the device products. For example, physicians switching vendors for hip and knee devices could take weeks if not months to learn the new products, which keeps physicians tied to J&J's products.

We think the firm does face environmental, social, and governance risks, particularly related to potential US drug price-related policy reform (39% of 2025 sales were generated by prescription drugs in the US) to increase access by lowering drug prices. Ongoing product governance issues, including litigation related to side effects and patents, also weigh on the company. While we have factored these threats into our analysis, we don't see them as material to the company's moat rating.

J&J's strong position in oncology (Darzalex and Carvykti) and next-generation immunology product Tremfya (following Stelara) create a foundation of innovative drugs.

Diverse healthcare segments help insulate J&J from downturns in the overall economy, offering a defensive growth opportunity with a steady and likely growing dividend.

Several of J&J's key next-generation pipeline drugs are specialty drugs that tend to carry strong pricing power as well as lower regulatory hurdles for approval.

J&J's late-stage drug pipeline could face significant competitive threats, as oncology and immunology remain popular areas for biopharma investment.

Biosimilar competition to Stelara is rapidly eroding sales of the drug, putting pressure on the rest of the portfolio to compensate.

J&J's orthopedics segment is struggling to maintain share against more focused players like Stryker and Zimmer Biomet, and the economics of the separation are still up in the air.