Executive Summary / Key Takeaways

• Johnson & Johnson is strategically transforming its portfolio, highlighted by the planned separation of its Orthopaedics business, to sharpen its focus on high-growth, high-innovation segments across Innovative Medicine and MedTech.
• The company delivered a strong third quarter in 2025, with operational sales growth of 5.4% worldwide, driven by robust performance in both Innovative Medicine (5.3% operational growth) and MedTech (5.6% operational growth), despite significant headwinds from STELARA's loss of exclusivity.
• A powerful pipeline and differentiated technological platforms, including INLEXZO for bladder cancer, CARVYKTI in multiple myeloma, Impella heart pumps, and the oral IL-23 inhibitor ICOTROKINDA, are fueling future growth and establishing competitive moats.
• Management has reaffirmed its elevated 2025 guidance and expressed a bullish preliminary outlook for 2026, projecting revenue growth to exceed 5% and potential upside to adjusted earnings per share consensus.
• While navigating ongoing legal challenges (talc, opioids) and macroeconomic pressures, Johnson & Johnson's diversified business model and disciplined capital allocation strategy position it for sustained value creation.

A Healthcare Powerhouse Redefined: Setting the Strategic Scene

Johnson & Johnson, founded in 1886, stands as a uniquely diversified global healthcare leader, strategically positioned across its Innovative Medicine and MedTech segments. The company's enduring success is rooted in a purpose-driven approach and a relentless focus on high unmet need, high growth, and high innovation markets. This strategic clarity has been forged through a history marked by both significant challenges and transformative decisions. The company's proactive handling of the 1982 Tylenol crisis, for instance, became a textbook example of reputation management, while more recent extensive opioid and talc litigations have tested its resilience. The 2023 spin-off of its Consumer Health business, Kenvue (KVUE), and the subsequent strategic acquisitions and divestitures underscore a continuous commitment to portfolio optimization.

The competitive landscape for Johnson & Johnson is vast, encompassing other large, diversified healthcare conglomerates as well as specialized pharmaceutical and medical device firms. Against rivals like Pfizer (PFE), Merck (MRK), AbbVie (ABBV), and Novartis (NVS), Johnson & Johnson's unique diversification across pharmaceuticals and medical technology provides greater operational stability, allowing it to weather market fluctuations more effectively. Its integrated approach, offering solutions across the patient journey, often provides a more holistic value proposition. For instance, in oncology, Johnson & Johnson's comprehensive suite of treatments from DARZALEX to CARVYKTI demonstrates an unrivaled expertise in multiple myeloma, contrasting with more focused competitors. While some rivals may exhibit faster innovation in specific niches, Johnson & Johnson's scale, broad distribution networks, and commitment to end-to-end solutions often translate into superior operational execution and consistent financial performance.

The Engine of Innovation: Technological Edge and R&D Prowess

Johnson & Johnson's core competitive advantage is deeply embedded in its differentiated technological platforms and robust research and development engine. The company consistently invests heavily in R&D, allocating approximately 15% of sales, or $3.7 billion, in the third quarter of 2025 alone, to fuel its pipeline and expand its technological moats.

In Innovative Medicine, several groundbreaking technologies are driving growth:

• INLEXZO (formerly TAR-200): This first-of-its-kind drug-releasing system for bladder cancer, which received FDA approval in September 2025, provides sustained local delivery of a cancer treatment directly into the bladder. Its tangible benefit is a remarkable 82% complete response rate without the need for re-induction in its initial indication. This technology is projected to be a blockbuster, generating at least $5 billion in annual peak year sales, by transforming the treatment paradigm for non-muscle invasive bladder cancer.
• CARVYKTI: As a CAR T treatment for multiple myeloma, CARVYKTI has demonstrated the potential for lasting treatment-free remissions, with new long-term data showing one-third of patients remaining progression-free for five years or more with a single infusion. Operational sales grew over 80% in Q3 2025, making it the most successful CAR T launch ever, having treated over 8,500 patients globally. Johnson & Johnson is confident in its $5 billion peak year sales potential, aiming to redefine the standard of care towards a cure for multiple myeloma.
• ICOTROKINDA: This investigational oral peptide, submitted for plaque psoriasis to the FDA in July 2025, is the first to selectively block the IL-23 receptor. Phase 3 data demonstrated impressive complete skin clearance, with nearly half of adult patients and three-quarters of adolescents achieving clear skin by week 24. This once-a-day pill has the potential to revolutionize plaque psoriasis treatment, offering biologic-like efficacy with the convenience of an oral therapy, and is expected to be a $5 billion-plus asset.

Within MedTech, technological advancements are equally impactful:

• Impella Heart Pump (Abiomed (ABMD)): This heart recovery technology, highlighted by the 10-year DANGER SOX study, demonstrated a 16.3% reduction in mortality and an average of 600 additional days alive compared to standard care for patients with cardiogenic shock. This represents a groundbreaking innovation in cardiovascular care.
• VARIPULSE (Electrophysiology): This Pulsed Field Ablation (PFA) platform achieved 99.7% acute effectiveness in nearly 800 patients with strong safety and no incidents of stroke. Despite a temporary pause in U.S. cases for investigation, the technology underpins Johnson & Johnson's leadership in electrophysiology.
• OTTAVA Robotic Surgical System: With an FDA de novo submission anticipated in early 2026, this soft tissue robotic system is poised to make Johnson & Johnson a major player in robotic surgery, leveraging advanced stapling technology and a sophisticated architecture.

These technological differentiators are not merely scientific achievements; they are critical drivers of Johnson & Johnson's competitive moat, enabling market share gains, supporting premium pricing, and underpinning its long-term growth strategy.

Strategic Portfolio Optimization: Sharpening the Focus

Johnson & Johnson's strategic evolution is characterized by continuous portfolio optimization, aimed at enhancing focus and driving value. A pivotal move announced in October 2025 is the intent to separate its Orthopaedics business, which will operate as DePuy Synthes. This decision is designed to accelerate the shift of the remaining MedTech portfolio towards higher-growth, higher-margin areas such as cardiovascular and robotic surgery. Management projects that this separation will improve MedTech's top-line revenue growth and operating margin by at least 75 basis points based on normalized year-to-date 2025 results. The separation is targeted for completion within 18 to 24 months, with a spin-off structure intended to be tax-free for U.S. federal income tax purposes, and no expected change to the Johnson & Johnson dividend.

Strategic acquisitions have also been instrumental in this optimization. The April 2025 acquisition of Intra-Cellular Therapies (ITCI), valued at $14.5 billion, significantly bolstered the neuroscience portfolio with CAPLYTA (lumateperone), a product projected to reach $5 billion in annual sales. Similarly, the May 2024 acquisition of Shockwave Medical Inc. (SWAV) for $12.6 billion added intravascular lithotripsy (IVL) technology, with Shockwave expected to become Johnson & Johnson's thirteenth billion-dollar MedTech platform by year-end 2025. These targeted, high-value additions, alongside the Abiomed acquisition, exemplify Johnson & Johnson's disciplined approach to inorganic growth, focusing on opportunities that leverage its expertise and align with its strategic priorities. The company emphasizes that it does not need large M&A to achieve the high end of its long-term growth targets, preferring strategic bolt-ons and partnerships.

Complementing these moves are ongoing restructuring programs, such as those initiated in the Surgery and Orthopaedics franchises within MedTech. These initiatives aim to streamline operations, exit non-strategic product lines, and optimize manufacturing sites, with estimated costs between $0.9 billion and $1 billion for the Surgery franchise, expected to be substantially completed by the end of fiscal year 2026. Furthermore, Johnson & Johnson has committed to investing over $55 billion in the U.S. over the next four years in manufacturing, R&D, and technology, including four new manufacturing facilities, to ensure that all advanced medicines consumed in the U.S. are manufactured domestically.

Financial Performance: Resilience Amidst Headwinds

Johnson & Johnson's financial performance in 2025 demonstrates remarkable resilience amidst significant industry headwinds, particularly the loss of exclusivity for STELARA and the impact of Medicare Part D redesign. For the fiscal third quarter ended September 28, 2025, worldwide sales reached $23.99 billion, representing an operational increase of 5.4% compared to the prior year. This growth was achieved despite an approximate 640 basis point headwind from STELARA. Net earnings for the quarter were $5.15 billion, with diluted earnings per share of $2.12.

The Innovative Medicine segment reported sales of $15.56 billion in Q3 2025, an operational increase of 5.3%. Notably, excluding the impact of STELARA, the pharmaceutical business grew a robust 16%. This performance was driven by double-digit growth across 11 key brands, including DARZALEX, which achieved $3.67 billion in worldwide sales (21.7% growth), CARVYKTI with $524 million in sales (83.5% growth), and TREMFYA, which saw a 41.3% increase to $1.42 billion. The segment's income before tax margin significantly improved to 41.4% in Q3 2025, up from 30.7% in the prior year, partly due to lower acquisition-related expenses and favorable changes in the fair value of securities.

The MedTech segment also showed strong momentum, with operational sales accelerating to 5.6% in Q3 2025, reaching $8.43 billion. This growth was broad-based, with Cardiovascular sales increasing approximately 12.6%, driven by Shockwave (+21.2%), Abiomed (+16.8%), and Electrophysiology (+10.8%). Surgical Vision contributed 14.9% growth, and the Orthopaedics franchise returned to growth at 3.8%, with hips and knees growing 6.4% and 7.0% respectively. The MedTech segment's income before tax margin was 15.3% in Q3 2025, an improvement from 13.4% in the prior year, despite macroeconomic factors impacting cost of products sold.

From a consolidated perspective, the cost of products sold leveraged by 60 basis points in Q3 2025 due to reduced amortization and favorable currency in Innovative Medicine, and a non-recurring inventory step-up related to the 2024 Shockwave acquisition. Research and development expenses leveraged by 670 basis points, primarily due to a significant $1.25 billion expense in 2024 for the NM-26 bispecific antibody acquisition. Johnson & Johnson ended Q3 2025 with $19 billion in cash and marketable securities and a net debt position of $27 billion, down from $32 billion in Q2 2025, reflecting strong cash flow generation. Cash flow from operating activities for the nine months ended September 28, 2025, was $17.2 billion.

Outlook and Guidance: A Trajectory of Accelerated Growth

Johnson & Johnson's management is confident in its trajectory of accelerated growth, underpinned by a robust pipeline and strategic portfolio shifts. For the full year 2025, the company has increased its operational sales guidance by approximately $300 million, now projecting growth in the range of 4.8% to 5.3%, with a midpoint of $93.2 billion or 5.1%. Adjusted operational earnings per share guidance remains elevated at $10.68, representing 7% growth at the midpoint. This outlook incorporates a higher effective tax rate of 17.5% to 18%, primarily due to the "One Big Beautiful Bill Act" enacted in July 2025, which included changes to corporate income tax and an increase in the statutory tax rate on foreign earnings.

Looking ahead to 2026, Johnson & Johnson anticipates continued acceleration. Management believes current consensus revenue models for 2026, which project 4.6% growth, are "lower than we project," with the company expecting to exceed 5% revenue growth. Similarly, there appears to be "some upside" to the current adjusted earnings per share consensus of $11.39. This bullish outlook is driven by several key factors:

• Innovative Medicine: Continued strong performance from in-market brands and significant contributions from recently launched products. This includes TREMFYA in inflammatory bowel disease, RYBREVANT plus LAZCLUZE in non-small cell lung cancer, and INLEXZO in bladder cancer. The company also anticipates a 2026 approval for ICOTROKINDA in psoriasis.
• MedTech: Expected accelerated growth driven by a sharpened focus on higher-growth markets and the continued adoption of newer products. This includes the anticipated launch of the Shockwave C2 Aero Coronary IVL Catheter, the Technis Pure C intraocular lens in the U.S., and the regulatory submission for the Ottava robotic surgical system.

Management's conviction in delivering on the upper end of its long-term growth targets remains strong, emphasizing that the company's diversified portfolio and pipeline momentum negate the need for large, speculative acquisitions to drive growth.

Risks and Challenges: Navigating a Dynamic Landscape

Despite its strengths, Johnson & Johnson faces a dynamic landscape of risks and challenges that warrant careful consideration. The STELARA loss of exclusivity (LOE) remains a significant headwind, with sales declining 42% in Q3 2025 due to biosimilar competition and Medicare Part D redesign. The company models this erosion based on the HUMIRA curve, anticipating an acceleration as more biosimilars enter the market.

Legal proceedings continue to pose a notable risk. The talc litigation, involving over 73,570 plaintiffs as of September 28, 2025, saw a reversal of approximately $7 billion in reserves in Q1 2025 following a bankruptcy dismissal. Johnson & Johnson has returned to the tort system, expecting favorable rulings on Daubert motions by 2026. Opioid litigation, while largely settled, still involves approximately 23 remaining state cases and 285 in the Ohio MDL. Product liability claims related to various MedTech devices (e.g., DePuy ASR Hip, Pelvic meshes) and ELMIRON also persist.

Regulatory and policy changes present ongoing challenges. The Inflation Reduction Act (IRA) is redesigning Medicare Part D, shifting a greater portion of costs to manufacturers. Increased scrutiny from government agencies and intellectual property challenges from generic and biosimilar manufacturers for key products like XARELTO, INVEGA SUSTENNA, ERLEADA, SPRAVATO, and CAPLYTA could lead to market share and revenue losses. Operational challenges include the temporary pause of U.S. VARIPULSE cases for safety investigation and continued headwinds in China due to volume-based procurement (VBP) and anti-corruption campaigns. Global economic conditions, including inflation, interest rate fluctuations, and geopolitical tensions, also introduce uncertainty.

Conclusion

Johnson & Johnson is firmly establishing a new era of accelerated growth, driven by a clear strategic vision, relentless innovation, and disciplined portfolio management. The company's unique diversification across Innovative Medicine and MedTech, coupled with its robust pipeline and cutting-edge technological differentiators, provides a resilient foundation for sustained performance. The strategic decision to separate the Orthopaedics business further sharpens its focus on high-growth, high-margin areas, promising enhanced financial metrics for the remaining enterprise.

While significant headwinds from STELARA's loss of exclusivity, ongoing legal challenges, and a dynamic regulatory environment persist, Johnson & Johnson's strong financial health, proactive investment in R&D, and commitment to operational excellence position it to effectively mitigate these risks. The bullish outlook for 2025 and beyond, supported by a stream of new product launches and an expanding market presence in critical therapeutic areas, underscores the company's potential to deliver compelling value for discerning investors. Johnson & Johnson's ability to consistently innovate and adapt, even in the face of adversity, reinforces its standing as a leading healthcare investment.