Johnson & Johnson Inc. (NYSE: JNJ). The company recently raised its 2020 guidance following a strong 3Q. Despite headwinds from COVID-19, all three of the company’s business segments showed sequential improvement in third-quarter sales.
In the particular, we see stronger growth for the Medical Device segment as procedural volume recovers in the second half of 2020 and into 2021. In addition, the company is benefiting from a growing consumer business, boosted by newly acquired brands. The consumer segment is rationalizing its product portfolio with the goal of boosting margins by 150 basis points. We also expect both pipeline and recently approved products to provide solid growth drivers and to more than offset headwinds in other businesses.
On October 13, JNJ posted adjusted 3Q20 EPS of $2.20, up 3.8% from the prior year and above the consensus forecast of $1.98. Worldwide sales rose to $21.082 billion (+1.7% as reported; +2.0% on an adjusted operational basis).
Key growth drivers in the quarter were the Pharmaceutical segment (sales of $11.42 billion; +4.7% operational growth; segment margin +340 basis points) and Consumer (sales $3.51 billion; +3.1% operational growth; margin +280 basis points). Due to the deferral of elective procedures, the Medical Device segment posted lower sales of $6.15 billion. However, all three segments showed improvement from the second quarter, a sign that the overall business is recovering from the pandemic.
Within Pharmaceuticals, the growth drivers were Darzalex, Stelara, Imbruvica, Invega Sustenna, Opsumit, Uptravi and Erleada. Segment growth was also slowed by lower prescription volumes for infused immunology drugs, as patients stayed away due to social distancing precautions.
Within Consumer, the growth drivers were Tylenol analgesics, Listerine oral care products, and Band-Aid bandages. The Consumer segment is trimming product lines through SKU rationalization. Though this has slowed top-line growth, it has improved margins.
Within Medical Devices, the 3.3% operational decline in sales was much milder than the 32.7% decline in 2Q20. Sales of orthopedic hip implants also returned to growth (+2.2% worldwide; +8.7% U.S.).
The Phase 3 trial of the company’s lead coronavirus vaccine candidate was halted on October 12 due to an unexpected illness in a trial participant. The Phase 3 ENSEMBLE trial of the potential vaccine, called JNJ-78436735, began on September 23. JNJ had planned to enroll 60,000 participants in three countries, including the U.S., for the trial. It initiated the Phase 3 study following positive interim results from a Phase 1/2a trial, which demonstrated the vaccine’s safety and immunogenicity after a single vaccination.
J&J has not detailed the nature of the illness that halted the trial, or whether the participant is in the treatment arm or the placebo arm. An independent Data Safety Monitoring Board (DSMB) is currently reviewing the participant’s illness and will decide on next steps. It is not known how long the pause will last or whether JNJ’s development timeline, which is targeting emergency use authorization by early 2021, will be affected. We note that adverse events, such as illnesses, are an expected part of any clinical study, especially large studies.
The suspension of JNJ’s Phase 3 trial is the second for a major COVID-19 vaccine candidate. AstraZeneca paused a Phase 3 study of its vaccine in early September. That trial has since resumed in Europe, but not in the U.S.
EARNINGS & GROWTH ANALYSIS
It looks for operational sales to be flat to up 1%, compared to its previous forecast of down 1.3% to up 0.5%. It also expects adjusted EPS of $7.95-$8.05, up from $7.75-$7.95. The new guidance raises the midpoint of the range by $0.15. On an operational basis, JNJ now expects EPS to decline 7.3%-8.4% from the prior year. It previously projected a decline of 7.3%-9.6%.
FINANCIAL STRENGTH & DIVIDEND
It issued commercial paper in 2Q for additional liquidity.
Our dividend estimates for $4.04 for 2020 and $4.30 for 2021. The company has halted stock buybacks.
J&J faces a range of competitive, regulatory, and legal risks. On the pharmaceutical side, its competitors include both established manufacturers of branded drugs and biologics as well as suppliers of generics. In addition, the company faces significant costs in developing prescription drugs, which typically have lengthy development cycles. JNJ also faces pricing pressures from insurance companies and regulatory agencies in overseas markets.
In particular, we expect improvement in the Medical Device segment as procedural volume recovers in the second half of 2020 and into 2021. In addition, the company is benefiting from a growing consumer business, boosted by newly acquired brands. The consumer business is rationalizing its product portfolio with the goal of boosting margins by 150 basis points. We also expect both pipeline and recently approved products to provide solid growth drivers and to more than offset headwinds in other businesses.