The healthcare sector's latest quarterly-earnings parade kicked off on Tuesday with a report from Johnson & Johnson(NYSE: JNJ) that was somewhat mixed. As is often the case, the purveyor of pharmaceuticals and medical technology exceeded Wall Street estimates on the top and bottom lines.
The average analyst following J&J expected the company to earn an adjusted $2.21 per share, but it reported a much healthier $2.42 per share. Looking ahead, though, the company also lowered its adjusted earnings-outlook range for the year from between $10.00 and $10.10 per share to $9.86 and $9.96 per share.
If you're trying to decide whether to buy, sell, or hold J&J, the mixed messages from recent headline-earnings figures aren't helping. Let's weigh the good news against the bad before making any rash decisions.
Reasons to buy Johnson & Johnson
Recently, J&J completed an acquisition of V-Wave for $600 million upfront. The developer of devices for heart failure patients is also eligible for up to $1.1 billion in milestone payments if its experimental heart failure device becomes a successful commercial-stage product.
V-Wave is working on Ventura, a shunt installed in the heart via a catheter-based procedure that could become the first device of its type to earn approval from the Food and Drug Administration (FDA). Heart failure with reduced-ejection fraction affects around 800,000 Americans, but this large group lacks a minimally invasive surgical intervention. Filling the gap with Ventura could soon generate more than $1 billion in annual sales for J&J's top line.
J&J lowered its earnings-guidance range by $0.24 per share to account for the V-Wave acquisition, not because profits have taken an unexpected hit. Management actually raised its earnings outlook by $0.10 per share, but this gain was offset by V-Wave-related expenses.
The Ventura device could be an important growth driver in the future, but J&J already has some recently launched blockbusters that pushed total third-quarter sales 5.2% higher year over year.
In April, the FDA expanded Carvykti's approval to include all multiple myeloma patients who have received at least one prior line of therapy. This move up the line helped Q3 sales shoot 88% higher year over year to an annualized $1.1 billion. J&J thinks sales of this treatment will top out above $5 billion annually.
In addition to a strong oncology division, J&J's neuroscience sales are rising thanks to Spravato. The FDA approved this purified ketamine isomer in 2019 for treatment-resistant depression in combination with another antidepressant. Q3 sales bounded 55% higher to an annualized $1.1 billion and could get another boost. In July, the company submitted an application that could make it available for treatment-resistant depression patients as a monotherapy, which could do a lot to improve access and sales.
Reasons to remain cautious
J&J has plenty of growth drivers, but some of its top products have started pushing its big needle in the wrong direction. For example, biosimilar competition will come for Stelara's U.S. sales in 2025. This drug is responsible for about 12% of total revenue, and it's already losing market share.
J&J's antipsychotic medications are responsible for about 5% of total sales. This revenue is at risk now that the FDA approved Cobenfy from Bristol Myers Squibb(NYSE: BMY) for the treatment of schizophrenia. Cobenfy is the first antipsychotic drug that acts on muscarinic receptors while ignoring the dopamine receptors that J&J's treatments act on. As such, it's associated with fewer side effects, which could help it gain market share from J&J's Invega franchise.
Buy, sell, or hold
Before worrying too much about Stelara's loss of market share, it's important to know it's losing ground partly because patients are transitioning to a more recently launched treatment from J&J called Tremfya. Q2 Tremfya sales rose 13% year over year to an annualized $4 billion.
J&J shares have been trading for around 16.5 times the midpoint of management's adjusted-earnings expectation for 2024. That's a very reasonable price to pay for a business that could keep growing total revenue by a mid-single-digit percentage for at least another decade.
If you're already holding shares of this stock, selling them now is a bad idea for more reasons than one. In addition to a somewhat low valuation, J&J stock offers investors quarterly-dividend payments and a 3% yield at recent prices. The company hasn't missed a dividend payment in over a century, and it's raised that payout for 62 consecutive years.
With steady dividend payments and plenty of relatively new products to push those payments higher, buying some J&J shares, or at least holding on to the ones you already have, is the smart thing to do.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.
