Johnson & Johnson stock falls despite strong earnings as investors focus on medical technology unit

Johnson & Johnson (JNJ) stock is falling even after the healthcare giant again raised its full-year profit and revenue forecast.

Investors are focusing on the company’s medtech unit, which posted disappointing 2.5% sales growth.

Johnson & Johnson stock was up more than 27% this year before Tuesday’s decline. That trails only Merck (MRK) among the largest stocks in the iShares US Pharmaceuticals ETF (IHE), which has gained nearly 16%.

The stock was down more than 5% as of Tuesday’s close.

Johnson & Johnson CFO Joe Wolk told Yahoo Finance (video above) that the company faces a dual challenge: a study earlier this year in the United Kingdom questioning the benefits of the company’s heart pump in certain high-risk procedures, and a geopolitical conflict affecting sales.

“If you think about the war in the Middle East, it’s not that the demand isn’t there,” Wolk said. “It’s just that some of the neighboring countries are now allocating budgets to defense rather than healthcare. But because the demand is there, we think that passes over time because we know that these are countries that prioritize top-notch healthcare. So we think that will resolve itself as we move towards 2027.”

Part of Johnson and Johnson’s medtech unit is its orthopedics business. The company had evaluated options for this unit, and there were reports that J&J was in talks with Apollo Global Management to sell it. Wolk now says he prefers a split, in part because J&J’s strong cash position gives it flexibility. (Disclosure: Yahoo is a holding company for funds managed by affiliates of Apollo Global Management.)

“As we move forward and throughout the process, we understand that medtech valuations are going down,” Wolk said. “And so if you think about potential acquirers, they’re going to use these valuations to their advantage. It’s not optimal for the long-term J&J shareholder. We think this is a stock that will trade as a leading global orthopedics player for years to come. And so we’re going to benefit from that.”

“It hasn’t slowed down demand at all.”

Sales at Johnson & Johnson’s much larger pharmaceutical unit rose 7.7% to about $16.8 billion, driven by double-digit gains in its multiple myeloma franchise and in new drugs to treat psoriasis and schizophrenia.

The largest of these is Tremfya, an injectable biologic for psoriasis and inflammatory bowel disease, whose sales have increased by 68%. Wolk said he expects the amount to continue to climb.

“We think it will be better than a $10 billion product in the future,” he said, adding that “it’s still a very underpenetrated market when it comes to inflammatory bowel disease, both ulcerative colitis and Crohn’s disease.”

Wolk is also optimistic about the prospects of Icotyde, a new pill to treat psoriasis. Because Icotyde is new, it is frequently offered to patients as free samples and has racked up 20,000 prescriptions since its introduction earlier this year.

Wolk said Icotyde’s revenue “would probably be double without the free products, and that would probably be a reportable product for us at this point.”

Unexpectedly, primary care doctors, nurse practitioners and physician assistants — not just dermatologists — are prescribing it, he said. The prescribing base is around 9,000 people, which Wolk says “really speaks to broad appeal.”

The pill also did not reduce demand for Tremfya.

“It hasn’t slowed demand at all,” Wolk said. “So what we’re really doing with this easy-to-take, once-a-day oral pill is expanding the market.”

Market research shows that only 30 to 40 percent of people eligible for treatment receive a biologic, Wolk said, “either because there is a fear of needles or because there is a connotation that biologic treatment suggests a much more serious illness than people want to admit.”

Julie Hyman is the co-host of Market dominance on Yahoo Finance. You can find her on social media @juleshyman.

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