With COVID-19 causing deferments of medical procedures worldwide, Johnson & Johnson beat Wall Street estimates for the second quarter of 2020, with better than expected performance in its medical device segment. Worldwide sales for the unit totaled $4.29 billion, down 32.5% year over year on an adjusted operational basis vs. the Street’s projected 47% decline.
Domestic sales took a harder hit than international sales, declining 39.6% vs. 26.4%. Within the unit, worldwide vision sales recorded the sharpest decline, down 39.3% to $695 million, due in large part to the shuttering of optical outlets due to the coronavirus. Worldwide orthopedic sales dropped 33.9% to $1.45 billion, while surgery sales fell by 32.2% to $1.55 billion. Interventional solutions, which includes products for treating heart rhythm disorders and neurovascular care, tallied $590 million, down 20.5% from the same period in 2019.
Cowen analyst Joshua Jennings noted “atypical performances” in several niche segments, including the surgical business within Vision (down 55.2%) and knees within Orthopedics (off 52.5%). “Nevertheless, with the exception of Vision, JNJ’s units all exceeded the Street’s divisional sales expectations, and we think this relative outperformance will keep sentiment favorable on the 2Q showing for Medical Devices,” he wrote.
Overall, J&J reported sales declined 10.8% to $18.34 billion for the quarter to $18.3 billion, compared with $20.56 billion a year ago – ahead of the $17.61 billion consensus forecast. Worldwide pharmaceutical sales showed the only positive gain, up 3.9% to $10.75 billion, while consumer health dipped 3.4% to $3.3 billion.
Earnings per share (EPS) also topped estimates at $1.67 vs. $1.49.
Based on the results, J&J raised its 2020 guidance from April’s estimate of between $77.5 billion and $80.5 billion to $79.9 billion to $81.4 billion. The company also reset its EPS guidance, raising it to $7.75-$7.95 from $7.50-$7.90 previously.
The adjusted guidance includes nearly $600 million in reduced foreign exchange headwinds, according to Wells Fargo senior analyst Larry Biegelsen. “We assume that the majority of the rest of the raise reflects a faster recovery in medical devices,” he wrote in a note.
On a Thursday earnings call, J&J officials highlighted some bright spots in the medical device unit during the quarter. Within Advanced Surgery, which declined 22.9%, Biosurgery fell less than 13% “as results were impacted by almost nine points due to the recovery from the Surgiflo stop shipment in Q2 2019,” said Christopher DelOrefice, vice president of investor relations. “Biosurgery returned to growth in the month of June, led by the U.S. and Asia Pacific.”
Interventional Solutions also returned to growth last month, fueled by electrophysiology sales. “Procedures in electrophysiology over the last two weeks of the month averaged 91% of pre-COVID levels across the U.S., with the northeast part of the country recovering at the slowest rate, primarily due to the New York City area,” DelOrefice said.
Focus on digital surgery
Leadership also underscored their commitment to digital surgery solutions.
“We continue to see really good uptake with our Monarch system. We’re going to expand the system with multiple specialty applications, with endourology next in line for U.S. approval for the treatment of kidney stones,” Gorsky said, adding that market is about double Monarch’s current market.
The company is also working to create a high-value, differentiated general surgery robotic platform, incorporating elements from surgical robotics startups Verge Surgical, a joint venture of J&J and Verily Life Sciences LLC, and Auris Health Inc., which J&J acquired in February 2019 for $3.4 billion in cash plus additional milestones of up to $2.35 billion.
Based on discussions with the U.S. FDA, the company has decided not to go the 510(k) route with its general surgery solution and will initiate first-in-human studies in the second half of 2022. “We continue to be impressed by the technology advancements we’re seeing with both the Verb and Verily and the Auris combination,” Gorsky said.
Better days ahead
While the med-tech space continues to be buffeted by the negative effects of the pandemic, J&J is hedging its bets that its worst is over. “We assumed the most significant negative impact to Medical Devices would occur in the second quarter,” said Paulus Stoffels, chief scientific officer. “That is still our expectation.”
The company now expects overall revenues in Q3 and Q4 to decline by 10%-25% and 15%-0%, respectively, compared with expectations at the start of the year. “We estimate a negative operational sales impact of approximately $3.8 billion to approximately $5.3 billion to the Medical Devices forecast below our original January guidance,” DelOrefice said. “While there are many moving parts, the impact on Medical Devices is the sole change to our prior operational sales guidance for the enterprise.”
Margaret Kaczor, of William Blair, echoed the company’s outlook on recovery. “From a valuation perspective, medical technology has posted a solid rebound from its March trough, now trading at 5.9 times 2021 sales and only down about 3% year-to-date,” she wrote in an overview of the medical device industry’s second quarter performance. “The rebound is roughly in line with the broader S&P 500, though it is outperforming the rebound in the Russell 2000.”
As of 4 p.m. ET Thursday, J&J’s stock was up 1.02 to $149.28.