Johnson & Johnson announced on Tuesday that its medical device business sales fell short of Wall Street's expectations, attributing the reason to geopolitical issues, including conflicts in the Middle East. Following the announcement, the company's stock price dropped by more than 6%.
This is also the second consecutive quarter that the company's MedTech business has fallen short of analyst expectations.
In an interview, Chief Financial Officer Joe Wolk stated that the conflicts in the Middle East, Europe's austerity measures, and pricing issues in China continued to drag down international business performance in the third quarter, "but perhaps more so than before."
He said that the conflicts in the Middle East have pushed up fuel costs, but they have not yet affected the company's costs. However, they have already damaged sales in that region.
"These countries still place great importance on and indeed desire to have high-end healthcare systems, such as Kuwait, the United Arab Emirates, and Saudi Arabia. They take pride in having very stable and excellent healthcare systems," said Wolk, "but their current budgets are being reallocated to a greater extent towards defense."
MedTech Business under pressure
According to LSEG data, the overall sales of the medical technology department increased by 2.5% to $8.6 billion, which is lower than the analysts' forecast of $8.71 billion. Sales in regions outside the United States remained relatively stable.
"Our performance fell short of the standards we set internally, as well as the expectations we communicated to investors beforehand," said Tim Schmid, the head of Johnson & Johnson's medical technology division.
"In short, we can do better," he said, adding that the company is focusing on improving its performance in the fourth quarter. He noted that the medical procedure environment in major markets remains stable.
The stock prices of other medical device manufacturers also declined; Boston Scientific fell by nearly 3%, and Intuitive Surgical fell by about 2%.
However, JPMorgan analyst Robbie Marcus stated that considering the disruptions in China's supply chain, the upcoming spin-off of its orthopedic business, and the potential for greater exposure to disruptions in the Middle East region, it is difficult to simply generalize Johnson & Johnson's performance to the entire medical technology sector.
Hip and knee business divestiture
Later last year, the company stated that it planned to spin off its orthopedic business DePuy Synthes into an independent company, which marked its second major spin-off as part of its strategy to focus on faster-growing segments of the healthcare industry.
Wolk stated during a teleconference discussing the company's performance that Johnson & Johnson is still proceeding as planned, with the goal of completing the split by the middle of 2027.
"Given the performance of DePuy Synthes, we tend to believe that a split is the best option for creating long-term value for Johnson & Johnson's shareholders. This has always been our basic plan, and we are confident that we will be able to execute it successfully," he said.
Gabelli Funds, Portfolio Manager, and Daniel Barasa stated that the undervalued medical technology sector "may make it more difficult to complete the sale of the orthopedic business, which could also put pressure on the stock price."
Johnson & Johnson has raised its full-year revenue forecast median to approximately $101.2 billion, up from the previous $101.1 billion; it has also increased the adjusted earnings per share forecast range, with a new median of $11.10, higher than the previous $11.04.
In the third quarter, pharmaceutical business sales increased by 7.7% to $16.76 billion.
Sales of Tremfya for Crohn's disease and other autoimmune diseases increased by 68% to $2.4 billion, exceeding analysts' expectations of around $2.2 billion; whereas the sales of Stelara, which faces competition from generic drugs, decreased by 54% to $716 million, but still surpassed Wall Street's revised forecast of $591 million. With its recent approval for inflammatory bowel diseases, Tremfya is increasingly replacing the lost revenue from Stelara.
The sales of the blood cancer treatment drug Darzalex increased by about 16% to $4.24 billion, which is lower than the analysts' expected $4.4 billion.
Johnson & Johnson announced third-quarter revenue of $25.4 billion, higher than the expected $25.28 billion, with an adjusted earnings per share of 2.
