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April 17, 2020, 6:23 a.m. EDT

Johnson & Johnson execs offer upbeat view of second-half recovery from COVID-19 pandemic

Here’s how Johnson & Johnson expects the pandemic to impact its 2020 performance: first quarter (initial impact), second quarter (significant impact), third quarter (stabilization), and fourth quarter (recovery)

By Jaimy Lee


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Johnson & Johnson executives had a surprisingly rosy take about an economic recovery in the second half of the year even as the COVID-19 pandemic cratered the company’s $25 billion medical-device business in the first quarter of 2020.

“If the virus does return, the world should be much better prepared to test, identify and isolate it,” Chief Financial Officer John Wolk told investors on Tuesday, according to a FactSet transcript of the company’s earnings call. “Coming out of the second quarter, we assume an improving global economy with lower unemployment, better insurance coverage and higher procedure capacity than what has been or will be experienced at peak.”

J&J’s (NYS:JNJ)  stock jumped 4.5% in trading on Tuesday and was up 0.6% in premarket trading on Wednesday. Year-to-date, shares are up 0.1%.

The company’s first-quarter profit and sales beat expectations, and it boosted its dividend. However, it also lowered its sales guidance for the year, to a range of $79.2 billion to $82.2 billion, down from $85.8 billion to $86.6 billion, which it had issued in January.

“The fact that JNJ management did provide guidance with a very detailed framework outlining the assumptions for the COVID impact and recovery seemed to give investors some level of comfort in a time of significant uncertainty,” SVB Leerink’s Danielle Antallfy wrote in a note on Wednesday.

The company’s medical-device business took the largest hit in the first quarter, driven by a rolling slowdown of elective surgeries that began in China, where the virus was first detected late last year, and then on to Japan, South Korea, Europe, and the U.S. American hospitals first began postponing or canceling elective procedures in mid-March.

Worldwide sales of medical devices fell 8.2% to $5.9 billion in the first quarter of 2020, compared with $6.4 billion in the same quarter a year ago. The FactSet consensus was for $5.6 billion.

That drop-off in medical device sales is likely short-term, however, J&J said. “Our premise is that elective procedures and doctor visits will largely be permissible in the second half of this year,” Wolk said. “We assume a recovery for procedures that begins in the third quarter and improves further in the fourth quarter.”

About two-thirds of the medical devices sold by J&J are used in elective procedures, like hip and knee implants. Many of these surgeries have been rescheduled as hospitals have focused their workforce and supplies on treating COVID-19 patients in different markets across the world. Stay-at-home orders have also meant that fewer people are spending time outdoors doing the sorts of things that can lead to trauma procedures, company executives said.

Global sales of orthopedic devices, in particular, dropped 6.6% to $2.0 billion in the first quarter of 2020. (This includes hips by 5.6%, knees by 6.1%, trauma by 3.5%, and spine by 10.6%.) J&J said it expects a negative operational sales impact of $5 billion to $7 billion for the year in its device business. That’s the only J&J business to see its operational sales guidance change as a result of the COVID-19 pandemic.

“We suspect it could take time for patients to get comfortable scheduling an elective procedure,” Wolk said. “Hospitals and surgeons may still be recovering from peak COVID-19 impacts, and there will be economic challenges we discussed earlier, namely potential impact in the number of insured patients and a changing prioritization of income in the near term.”

Insured patients are more likely to sign on for costly elective procedures.

As for the rest of J&J’s business, its consumer health segment got a boost from consumers stocking up in preparation for stay-at-home orders. This includes everything from sales of Listerine mouth wash to Aveeno hair and skin care products to O.B. tampons in Germany. All regulatory filings and anticipated product approvals remain on track, and it expects to put its COVID-19 vaccine candidate into clinical trials this fall.

Pharmaceutical sales rose 8.7% to $11.1 billion in the first quarter of 2020, up from $10.2 billion in the like period a year ago. That compares with a FactSet consensus of $10.5 billion. Consumer sales also increased, by 9.2%, to $3.6 billion for the quarter, up from $2.2 billion in the first quarter of 2019, beating the FactSet consensus of $3.3 billion.

The earnings call took an economic turn as J&J explained its rationale behind organizing 2020 into four categories: first quarter (initial impact), second quarter (significant impact), third quarter (stabilization), and fourth quarter (recovery). “Our estimates of the COVID-19 impact assume the relative shape of the COVID-19 curve has been more of an acute shorter-term impact rather than a prolonged impact,” Wolk said. “For our largest market, the U.S., this assumption is consistent with the estimated mid-April peak.”

In China, where the outbreak peaked in early February, procedures have started to take place again. In some markets, it’s up to 70% of normally scheduled surgeries, J&J said. Looking forward, executives said that restarting elective procedures would likely go in this order: oncology and general surgery, orthopedics, and then cataracts.

Other medical device companies including Boston Scientific Corp. (NYS:BSX) , Medtronic (NYS:MDT) , and Smith & Nephew (NYS:SNN)  that report later in the earnings cycle than J&J had previously reported during the fourth-quarter earnings season that elective surgeries had started to slow down and halt in China and other parts of Asia.

“But it’s really going to depend on the pandemic itself,” Wolk said. “What’s the health priorities, how are patients and consumers feeling about going to the hospital for these procedures?”

The Health Care Select Sector SPDR Fund (PSE:XLV)  is down 4.6% for the year. In comparison, the S&P 500 (S&P:SPX)  has tumbled 11.9%.

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