Johnson & Johnson (NYSE:JNJ) has announced its second-quarter earnings, exceeding expectations and raising its 2023 guidance. The impressive results were driven by the company’s diversified portfolio, although the overall impact on its fair value estimate remains marginal.
During the quarter, Johnson & Johnson (NYSE:JNJ) witnessed a robust 6% operational growth (excluding acquisitions) across its broad portfolio. However, analysts predict a slight deceleration in growth over the next three years. The medical procedures rebound following the pandemic has resulted in increased demand for J&J’s medical devices, leading to a 10% rise in sales. Nevertheless, this surge in demand is anticipated to normalize by 2025. The drug group also performed well, achieving solid growth of 4%, but it is expected to face challenges with generic pressures, particularly with the upcoming launch of biosimilar Stelara in early 2025. Additionally, the consumer group Kenvue (KVUE) demonstrated brand power by managing to pass along inflationary supply costs, resulting in an 8% increase in sales.
Regarding the remaining divestiture of Kenvue, Johnson & Johnson (NYSE:JNJ) owns close to 90% and might proceed with a split-off, allowing current J&J shareholders to choose between Kenvue shares or J&J shares (excluding Kenvue). The company’s strong intangible assets in the pharmaceutical business and the presence of switching costs in the device segment contribute to a wide moat for Johnson & Johnson.
Addressing the talc litigation risk, the company aims to move this legal concern into a bankruptcy subsidiary for $8.9 billion during the third quarter of the year. To implement the bankruptcy plan successfully, 75% of claimants need to support the arrangement. Despite a recent case favoring a plaintiff, JNJ is expected to appeal the ruling in a venue where more scientific information will be allowed, increasing the likelihood of overturning the decision. In case the bankruptcy plan lacks sufficient claimant support, Johnson & Johnson is prepared to pursue the traditional path of litigating cases one-by-one until reaching a settlement, with costs similar to the bankruptcy subsidiary strategy.
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Author Faith Yakubu 
