Johnson & Johnson (J&J) shares dropped over 5% on Tuesday despite reporting third-quarter adjusted earnings of $2.59 per share—beating Wall Street estimates of $2.53—and raising its full-year sales forecast. The stock selloff was driven by weakness in the healthcare giant's medical device unit, where sales came in below analyst projections.
Pharmaceutical Growth Outpaces MedTech Performance
J&J’s pharmaceutical division generated $16.76 billion, representing approximately 66% of total quarterly sales and reflecting a 7.7% year-over-year increase. Among the largest holdings of the iShares US Pharmaceuticals ETF, only Merck has outperformed J&J this year. Sales of Tremfya, a treatment for psoriasis and bowel disease, surged 68.3% to nearly $2.4 billion. However, multiple myeloma drug Darzalex generated $4.24 billion, missing the $4.4 billion expected by analysts. Total adjusted earnings per share fell 7.5% compared to the same period last year.
In contrast to pharmaceutical growth, MedTech unit sales grew just 2.5% to $8.64 billion, falling short of the $8.71 billion consensus estimate compiled by LSEG. U.S. device sales increased 4.8%, while international device sales were essentially flat. Chief Financial Officer Joe Wolk pointed to several global headwinds, including Gulf state budget reallocations to defense, European economic austerity, and pricing pressure in China. Additionally, J&J's Abiomed heart pump unit faces scrutiny from a U.K. study challenging the device’s benefits in certain high-risk procedures. Speaking on international demand, Wolk stated, "So we think that'll remedy itself as we move into 2027."
Sector Pressures and Orthopedics Spinoff Plans
The weakness in J&J's device unit reflects broader headwinds across the medical technology sector. Competitor Boston Scientific saw its stock decline approximately 49.5% in 2026 by early September following guidance cuts and an August cyberattack. Meanwhile, analysts on CNBC noted that J&J's valuation had expanded to nearly 20 times earnings from previous levels of 15 to 16, leaving shares vulnerable to earnings disappointments as corporate earnings season unfolds, similar to broader market reactions seen when Goldman Sachs beat Q3 estimates while JPMorgan missed.
To address valuation and growth disparities, J&J plans to spin off its orthopedics unit, DePuy Synthes, by mid-2027, following its previous spinoff of consumer health arm Kenvue. Wolk explained that depressed sector valuations make a spinoff preferable to an outright sale. Management will detail the transaction and outline 2027 financial guidance at an investor event on Dec. 8.
Key Takeaways
- Earnings Beat: Adjusted EPS of $2.59 beat estimates of $2.53, despite falling 7.5% YoY.
- Pharma Strength: Drug sales reached $16.76 billion (up 7.7%), buoyed by Tremfya jumping 68.3% to $2.4 billion.
- MedTech Miss: Device sales rose 2.5% to $8.64 billion, missing the $8.71 billion estimate.
- Spinoff Strategy: Orthopedics unit DePuy Synthes will be spun off by mid-2027, with details scheduled for Dec. 8.
Why It Matters
J&J's stock reaction highlights how market expectations can penalize healthcare conglomerates even when top-line guidance is raised. The divergence between resilient drug sales and stagnant international device demand demonstrates that macroeconomic shifts—such as European austerity and government budget reallocations—are directly impacting medical procurement. Investors should watch J&J's Dec. 8 presentation closely to evaluate whether the planned DePuy Synthes spin-off will successfully unlock shareholder value or if persistent margin compression will continue across medtech.
