Johnson & Johnson's Medtech Miss and $1.36 of 2027 EPS Dilution Overshadow a Guidance Raise; Management Now Leans Toward Spinning DePuy Synthes
Third-quarter earnings call, October 13, 2026: Pharma carries the quarter, shares fall about 6%
Johnson & Johnson raised the midpoint of its 2026 operational sales guidance. Even so, shares traded down about 6% in midday action on a call in which management repeatedly acknowledged that Medtech underdelivered. Third-quarter sales were $25.4 billion, up 6% operationally, with U.S. growth of 9.1% and ex-U.S. growth of only 1.8%. Innovative Medicine grew 7.9% to $16.8 billion. Medtech grew just 2.5% to $8.6 billion. Reported EPS was $0.09, against $2.12 a year ago. Adjusted EPS was $2.59, down 7.5%, which reflects roughly $7 billion of items tied to the proposed talc settlement, the Firefly Bio acquisition and the Sale Biomedicines collaboration.
Medtech: management concedes the quarter was "below the standard"
Medtech was the weak point, and the company did not argue otherwise. Tim Schmid, Worldwide Chairman of Medtech, said the performance was "below the standard we have set internally and below the expectations we previously communicated to investors. Simply put, we can do better, and we absolutely will." CFO Joe Wolk called the shortfall "disappointing" and said the problems are concentrated in cardiovascular and in surgery outside the U.S.
Surgery declined 1%. Management cited the expansion of volume-based procurement in China, the surgery transformation program and a Middle East conflict that is now disrupting tender timing and ordering patterns. Wolk said the Middle East effect "is no longer limited to a handful of markets," as management first believed, and now spans a wider group of countries where governments are slower to commit funding. Management characterized the impact as timing, saying it expects "many of these opportunities to be deferred rather than permanently lost." The company did not quantify the Middle East or VBP drag when asked.
Cardiovascular grew 4.1%. Electrophysiology grew 4.4%, held back by competitive pulsed-field ablation pressure that was more pronounced in Asia Pacific, and by tough comparisons from prior-year ex-U.S. inventory dynamics. Abiomed declined 1.5% on lower patient volumes. Schmid attributed the slowdown to the reception of a non-U.S. study in high-risk PCI, and said the company questions whether best practices were followed in that trial. J&J is responding with physician education and a larger evidence program. The PROTECT IV trial enrolls 1,252 patients, roughly four times the size of the earlier study, and will read out in 2027. The company also wrote off $339 million of in-process R&D tied to Pre-cardia, a noncore asset acquired with Abiomed. Management said it sees no change in patient need, reimbursement or competition for Impella. That is a notable claim for a franchise in decline, and the 2027 data will test it.
There were bright spots. Shockwave grew 17.2%. Vision grew 5.1%, with surgical vision up 7.1%. Orthopaedics grew 3.4%. Varipulse Pro is driving double-digit electrophysiology growth in Europe and was approved in Japan last week, and U.S. approval is expected in the fourth quarter. Management guided to a return to growth in surgery in the fourth quarter, with acceleration in EMEA. It also pointed to the Ottava soft-tissue robot, which received FDA de novo authorization in July and has signed its first commercial customer, as the long-term fix. Revenue contribution from Ottava will "build over time," with the goal of making it a significant pillar by the end of the decade. Investors will have to wait until the December 8 Enterprise Business Review for any quantification.
DePuy Synthes spin moves to the front of the queue; talc nears resolution
Wolk said that given how DePuy Synthes is performing, the company is "leaning towards a spin as being the best option to create long-term value for Johnson & Johnson shareholders." He said a spin has always been the base plan, and the separation remains on track for mid-2027. The $5.5 billion ovarian talc settlement, booked in the quarter, requires participation from at least 95% of the remaining claims. Wolk said the company is "trending to meet" that threshold.
In response to a question from Goldman Sachs, management also said its target of double-digit growth by the end of the decade relies on internal investment and assumes no acquisitions. Wolk described the Medtech urgency as one of "fixing what we currently have," not buying growth.
Guidance raised on sales; 2027 EPS carries a heavy dilution burden
J&J now expects 2026 operational sales growth of 6.7% to 7.1%, or about $100.7 billion at the midpoint, which would put annual revenue above $100 billion for the first time. Reported sales are guided to $101.2 billion at the midpoint, up 7.4%. Adjusted operational EPS is guided to $10.95 to $11.05, up about 2% at the midpoint, and reported adjusted EPS to $11.05 to $11.15, up 2.9%. Excluding $0.64 of dilution from Firefly Bio and Sale Biomedicines, reported EPS growth would approach 9%. Operating margin is now expected to decline about 60 basis points, versus 75 basis points in July. The company lowered net interest expense guidance to $150 million to $200 million and narrowed the tax rate to 17.0% to 17.5%. Free cash flow guidance of about $21 billion was maintained. The quarter ended with net debt of about $28 billion.
The more important figure for modeling is 2027. The two deals will dilute 2027 adjusted EPS by a combined $1.36. In response to Wells Fargo, Wolk said EPS growth typically runs "a little bit better" than sales growth, after adjusting for that charge. The analyst's math implied roughly 5.4% reported sales growth in 2027 once the extra week is stripped out. Wolk did not dispute the framing but deferred specifics to December 8. He also noted that, at the current euro spot rate of 1.12 versus a 2026 average of 1.15, currency would be a headwind next year.
Icotide: strong early launch metrics, but no sales disclosed
Management declined to disclose icotide sales, though it promised to start doing so next year. It offered usage data instead. More than 20,000 patients have started therapy through nearly 9,000 prescribers, and access is now preferred or broad across all national commercial plans. Tom Cavanaugh, who now leads Innovative Medicine following Jennifer Taubert's departure, said about 60% of patients are naive to systemic therapy, with roughly 20% coming from oral treatments and 20% from other therapies, most likely biologics. That mix supports the argument that the pill is expanding the market instead of cannibalizing biologics.
John Reed, head of Innovative Medicine R&D, said Phase III psoriasis and psoriatic arthritis trials enrolled in about one-third of the usual time. On whether the oral's gut delivery could yield biologic-like efficacy in inflammatory bowel disease, he said only that it is "to be determined." For patients who need more than monotherapy, J&J has a Phase III combination of guselkumab and golimumab. A head-to-head study against Stelara and psoriatic arthritis data are expected in the coming months. Management called icotide one of its largest future assets but did not raise the $10 billion-plus framing.
Inlexzo and the oncology engine
Inlexzo generated about $200 million of year-to-date sales, with third-quarter sales "north of $90 million," and new patient starts grew 45% sequentially. The currently approved carcinoma in situ population is only about 4,000 patients. The larger opportunities are SunRISe-5 at about 15,000 patients and SunRISe-3 in BCG-naive patients at about 50,000. Management reiterated a $5 billion-plus platform ambition. Reed said the FDA has invited a label expansion filing in the more common papillary disease, based on a SunRISe-1 cohort in which nearly 75% of patients had no recurrence at one year and over 95% had no progression. Oncology grew about 17% overall. Darzalex grew 15.6%, and Rybrevant grew 63.5%. J&J reiterated its goal of becoming the number one oncology company by 2030 with more than $50 billion in sales. Fourth-quarter catalysts include prostate cancer data for pasritamig and JNJ-6143, bladder cancer data, and expected U.S. approval of Rybrevant Faspro in head and neck cancer.
Immunology and neuroscience
Tremfya grew 68.2% on four points of share gains in both ulcerative colitis and Crohn's disease, and management reiterated a $10 billion-plus franchise view. Stelara fell 54% as biosimilars and class shifts continued to erode it. In neuroscience, Caplyta grew 66.1% and has passed $1 billion in year-to-date sales, and Spravato grew 36%. On Milvexian, Reed said secondary stroke data could arrive this year, with the larger atrial fibrillation study next year. He pointed to a dose four times higher than competitors' as a differentiator, supported by the compound's safety margin.
Margin quality
Gross margin deteriorated, with cost of goods sold deleveraging 150 basis points on unfavorable mix and higher intangible amortization. Innovative Medicine segment margin fell to 35.4% from 44.3%, mostly because of the roughly $1 billion Firefly IPR&D charge. Medtech margin improved to 22.9% from 21%, aided by tariff recoveries, which means the margin gain came from an external offset and not from operating improvement. Enterprise adjusted pre-tax margin was 30.2%, down from 35.2%.