Pharma Carries the Quarter and Talc Finally Has a Price, but MedTech Slows for a Third Straight Quarter: Maintaining Hold as Fair Value Rolls to $230–260

Rating Action & Valuation

Maintaining Hold; fair value range rolled forward to $230–260 from $215–245. We downgraded JNJ to Hold in July on valuation, not fundamentals, and wrote that the business had gotten better while the stock had gotten more expensive. The three months since then tested both halves of that sentence. The stock ran to $263.73 into the print, up 6.8% from our downgrade close and 27.4% for the year against the S&P 500's 14.0%. The business delivered another Innovative Medicine beat, reached a proposed talc resolution, and raised its underlying guide again. It also produced a third consecutive MedTech deceleration, and the market took the stock down 5.7% in a session in which the index was flat.

The arithmetic starts with which earnings number to use. J&J's adjusted EPS includes acquired IPR&D, so the FY26 guide midpoint of $11.10 carries $0.64 of one-time cost from the Firefly Bio acquisition and the Sail Biomedicines collaboration. Excluding those, the underlying FY26 midpoint is $11.74, up from $11.68 at the July 15 guide and about 8.8% above FY25. For FY27, management has given a framework rather than a number: reported sales growth similar to 2026 after normalizing the 53rd week (an analyst put it at about 5.4% and was not corrected), and EPS growth "a little bit better" than sales growth after adjusting for $1.36 of deal dilution. Applying roughly 6% to the $11.74 base gives about $12.44; we take roughly $0.09 off for the currency headwind management flagged at the current euro spot, for an FY27E underlying estimate of $12.35. On the company's adjusted basis, including the $1.36, that is about $10.99.

We value the stock on underlying EPS because the two deal charges are asset purchases, not operating costs, and because the 2027 portion depends overwhelmingly on Sail milestones and an acquisition option that may or may not be exercised. That choice flatters the multiple, and readers who prefer the company's adjusted basis should look at the bottom row. Rolling from FY26 to FY27E is the natural step at this point in the calendar: by the end of this rating's twelve-month horizon, FY27 will be most of the trailing year. We hold the multiple band where it was in July, 18.6–21.1x versus 18.4–21.0x, because the two big inputs offset: talc moved from an unbounded liability to a defined $5.5B payment schedule, and MedTech moved from a decelerating segment to one that has missed twice and has not yet shown a floor.

At the $255.56 close on October 16, the stock trades at 20.7x FY27E underlying, about 4% above the $245 midpoint and about 2% below the top of the range. Including a dividend yield of roughly 2%, the expected total return to the midpoint is slightly negative and to the top is in the low single digits. That is a Hold. Twelve months of good execution in pharma remain in the price, and the segment that would justify paying more is the one that keeps disappointing.

Results vs. Consensus

Q3 2026 Scorecard

Year-over-Year Comparisons

Quarter-over-Quarter Comparisons

Nine Months

Revenue assessment. This is the seventh consecutive quarter in which the ex-STELARA lens describes the business more accurately than the headline. STELARA fell 54.0% operationally to $716M and is now 4.3% of Innovative Medicine; its impact on the segment narrowed to 690bps from 760bps in Q2. The pharma side is no longer growing through a cliff so much as past one, and it accelerated to 7.9% from 6.8%. The problem is that a third of the company is going the other way. MedTech is 34% of sales, its growth has fallen by more than two points in two quarters, and enterprise growth accelerated only 40bps despite a 110bps acceleration in Innovative Medicine. Every incremental point of pharma momentum is being partly spent covering for devices.

Margin assessment. The reported margin decline is noise, and the underlying margin is better than it looks. R&D excluding Firefly was flat in dollars, against our July concern that expense phasing would push spend into the second half; SM&A was flat as a share of sales while ICOTYDE direct-to-consumer advertising was running. The full-year operating margin guide, excluding the deals, moved up again, to roughly +90bps from roughly +75bps. Two cautions. MedTech's segment margin rose to 22.9% from 21.0% on tariff recoveries, which are real cash but exogenous and non-recurring, so the one MedTech number that improved this quarter improved for a reason that will not repeat. And Innovative Medicine's margin of 35.4% against 44.3% is a deal-charge artifact that will flatter next year's comparison in a way that will look like operating leverage and will not be.

EPS assessment. $2.59 against roughly $2.53 is a real beat and a small one. The full-year guide rose $0.06 at the midpoint to $11.10, which is $11.74 excluding the deals, and the raise came with a lower interest-expense guide ($150–200M from $250–300M) and a tightened tax range (17.0–17.5% from 17.0–18.0%). Some of the six cents is therefore below the line again, as it was in July. The quarter does not change the picture of a company compounding pharma earnings at a high-single-digit underlying rate, with MedTech contributing less each quarter and the adjusted EPS line about to be distorted for two years by the accounting for business development.

Segment Performance: Innovative Medicine ($16.76B, +7.9% operational)

The segment's best growth rate of the year, with immunology turning positive for the first time this year at +1.4% as TREMFYA outgrew the STELARA decline in absolute dollars. Eight brands grew double digits. Excluding STELARA, the segment grew about 14.8%. The soft spots were DARZALEX, which slowed and missed consensus, the continued decline of IMBRUVICA, and the pulmonary hypertension franchise, where U.S. OPSUMIT sales fell by more than half.

Oncology: the bispecifics accelerate while DARZALEX slows

Oncology grew 16.7% to $7.6B, slightly faster than in Q2, but the composition shifted. DARZALEX, at 56% of the franchise, slowed to +15.6% from +17.6% and missed consensus by roughly $90–160M; management cited share gains of five points across lines and ten in frontline, partially offset by pricing headwinds outside the U.S. (international DARZALEX grew 8.5% operationally against 21.1% in the U.S.). The layer built on top of it accelerated: TECVAYLI grew 77.3% and more than doubled in the U.S. after last quarter's approval in earlier lines, RYBREVANT plus LAZCLUZE grew 63.5%, and CARVYKTI grew 35.2% with five-year data showing half of second-line patients in treatment-free remission. The data cadence remained heavy, including an 89% reduction in the risk of progression or death for TECVAYLI plus TALVEY in earlier-line myeloma.

"Our multiple myeloma portfolio and pipeline are unmatched with 80% of patients receiving a Johnson & Johnson therapy as part of their treatment journey." — Joaquin Duato, Chairman & CEO

Assessment: The franchise is in good health and the $50B-by-2030 ambition does not depend on DARZALEX accelerating. But DARZALEX is the single largest product in the company, its international pricing headwind is unquantified, and a two-point deceleration in the anchor brand is worth watching more closely than the bispecific growth rates that offset it this quarter.

Immunology: TREMFYA is already near its stated peak

TREMFYA did $2,396M, up 68.2% and 17.1% sequentially, beating consensus by more than $100M. It is now the U.S. new-to-brand leader among IL-23s in Crohn's disease, ulcerative colitis and psoriatic arthritis, and added four points of share in both IBD indications in the quarter. STELARA declined only 3.2% sequentially, to $716M. Other immunology, which holds ICOTYDE and IMAAVY, reached $147M. Immunology as a whole grew for the first time this year.

"This momentum reinforces our conviction in Tremfya as a foundational medicine in inflammatory bowel and psoriatic diseases and our belief that it can grow into a $10 billion-plus franchise." — Joaquin Duato, Chairman & CEO

Assessment: The Q3 quarter annualizes to about $9.6B, so "$10 billion-plus" describes roughly where TREMFYA already is, not where it is going. Management has framed the peak conservatively for two years running, and the IBD induction-share data and the axial psoriatic arthritis label argue the peak sits meaningfully higher. This is the most under-modelled asset in the portfolio on management's own framing.

Neuroscience: the quiet accelerator

Neuroscience grew 17.6%, up from 13.4% in Q2. CAPLYTA reached $1B of year-to-date sales, becoming the company's 29th billion-dollar platform, with pivotal bipolar mania data presented in September. SPRAVATO grew 36.0%, and even the mature INVEGA long-acting injectables accelerated to +7.5%.

Assessment: CAPLYTA continues to track the trajectory that justified the Intra-Cellular acquisition, and neuroscience is now growing faster than oncology. It remains almost absent from the debate about the stock.

Pulmonary hypertension and the first visible piece of the 2027 exclusivity wave

The franchise fell 19.2% after growing 2.2% in Q2. OPSUMIT and OPSYNVI fell 35.2% operationally, and U.S. sales dropped to $193M from $416M in Q2. The release named the franchise as an offset to growth; the call did not discuss it. At a September investor conference, the CFO counted the PAH franchise, at about $1.5B, among roughly $4–4.5B of product sales losing exclusivity in the 2027 window, alongside XARELTO at about $2B and SIMPONI and STELARA at about $1B combined.

Assessment: The OPSUMIT decline is the first piece of that wave to reach the income statement, and it arrived a quarter or two before most models assumed. It cost the segment roughly 1.3 points of growth this quarter on our math. XARELTO grew 2.7% and is the larger exposure. We discuss what that means for 2027 below.

Segment Performance: MedTech ($8.64B, +2.5% operational)

The segment decelerated for a third straight quarter and missed consensus for the second. The U.S. business accelerated, to 4.8% from 3.9% in Q2, which management was right to emphasize. International MedTech grew 0.1%, from 3.2% in Q2. Surgery swung to a decline, orthopaedics and vision eased, and cardiovascular improved slightly from a weak Q2 without Abiomed recovering. Management called the performance below its internal standard and below what it had told investors to expect, which is the second consecutive quarter of that admission.

Cardiovascular

Cardiovascular grew 4.1%, a modest improvement on Q2's 3.1%. Shockwave accelerated to 17.2% on coronary and peripheral adoption and office-based-lab reimbursement in the U.S. Electrophysiology improved to 4.4% on procedure growth and new products, despite two offsets: competitive pulsed-field ablation pressure, more pronounced in Asia-Pacific, and a tough comparison against last year's international inventory dynamics. VARIPULSE passed 100,000 AFib patients treated, VARIPULSE Pro is driving double-digit EP growth in Europe, Japan approved it the week before the call, and U.S. approval is expected in the fourth quarter. Abiomed fell 1.5%, with the U.S. down 0.3% and international down 6.5%.

Assessment: The EP repair has a mechanism, a product and a date, which is more than most MedTech fixes on this call. Abiomed does not: its recovery is still gated on PROTECT IV data in 2027. Cardiovascular is no longer the source of the deceleration, but it is not yet the source of a re-acceleration either.

Surgery

Surgery declined 1.0% including about 30bps of divestitures. The U.S. grew 3.7%; international fell 4.2%. Management attributed the decline to volume-based procurement in China, the outcomes of its own surgery transformation program (exits from non-strategic product lines), and disruption in the Middle East to tender timing and ordering. Wound closure and biosurgery grew, and newer energy and endomechanical products contributed.

Assessment: Two of the three named causes are self-inflicted or long-running, and only one is new. Management committed on the call to surgery returning to growth overall in the fourth quarter. That is the most specific and most testable MedTech promise of the quarter, and Q4 will tell us whether the international drag is deferral or loss.

Vision

Vision grew 5.1%, close to Q2's pace. Contact lenses grew 4.3%, held back by U.S. inventory dynamics, and surgical vision grew 7.1% with the U.S. up 13.6% on the TECNIS PureSee launch. TECNIS PureSee and Odyssey together passed one million implants worldwide.

Assessment: The U.S. surgical vision turnaround we flagged as the catalyst in April has arrived. Vision is the steadiest business in MedTech and the only one where the international business grew faster than the U.S. this quarter.

Orthopaedics

Orthopaedics grew 3.4%, from 4.2% in Q2. Trauma led at 6.5% on the VOLT launch; hips grew 3.3% and knees 3.1%; spine, sports and other was flat. The business absorbed $369M of separation cost in the quarter and $746M year to date, all excluded from adjusted earnings.

Assessment: Respectable for a business being prepared for a spin, and not the problem in the segment. The deceleration in knees is worth watching into a separation where standalone growth will be the main valuation input.

Key Topics & Management Commentary

Overall Management Tone: Confident and expansive on pharma, contrite and specific on MedTech, and notably more willing than in July to name what went wrong: management raised the segment's shortfall in prepared remarks and characterized it as below its own standard before any analyst asked. The posture on Abiomed shifted again, from recovery to stability: the CFO now calls it a stable business that the company wants to catalyze back to double-digit growth, without a date. On 2027, management promised acceleration but gave a framework rather than guidance, and the hardest number it offered was $1.36 of deal dilution.

1. Talc: a 15-year overhang gets a price

The single largest change since our July recap happened between the calls. On July 22, the federal multi-district litigation court ordered plaintiffs to show why the remaining ovarian claims should not be dismissed for inability to prove specific causation, after plaintiffs withdrew their specific-causation experts in two bellwether cases. On July 27, J&J announced a proposed resolution with the lead plaintiff firms: a $5.5B commitment covering the roughly 76,000 remaining ovarian claims, conditioned on participation of at least 95% of them, with the first payment of no more than $3B in 2027 and nothing further due before 2028. The Q3 GAAP results carry a $5,519M litigation charge.

"In July, we announced an agreement for a resolution of the ovarian talc litigation for $5.5 billion, which is reflected in our third quarter GAAP results." — Joe Wolk, CFO

"While we are confident the Company would have ultimately prevailed with further litigation, as it has in the vast majority of cases tried to date, this resolution allows the Company to put this matter behind it and remain focused on its mission to develop medicines and devices that save lives." — Erik Haas, Worldwide VP of Litigation (July 27 release)

In July we wrote that two quarters of silence on talc alongside a rising litigation accrual was "not resolution." In retrospect it was the run-up to one. The CFO told a September investor conference that the settlement is far below the earlier bankruptcy settlement, and that he considers the matter behind the company. The company also retains the talc liabilities it agreed to indemnify for Kenvue.

Assessment: At about $2.25 per share, under 1% of the market value, and paid over 2027 and later years, the cost is easily absorbed by roughly $21B of annual free cash flow. The real value is the removal of an unbounded tail, which is why it offsets MedTech in our multiple. It is not finished: the 95% threshold is a condition, not a fact, and the call gave no participation count. We move the talc bear point toward retirement and will retire it when the threshold is confirmed.

2. MedTech: three quarters, three decelerations

Operational growth of 4.6%, 3.6% and 2.5% in successive quarters is a trend, not a quarter. Management did not dispute that. It located the shortfall in two areas, international and Abiomed, and argued the U.S. business and the procedure environment are healthy. The U.S. numbers support it: U.S. MedTech accelerated to 4.8%.

"Simply put, we can do better, and we absolutely will. And right now, we are focused solely on the actions needed to deliver stronger results in the fourth quarter and beyond." — Tim Schmid, EVP & Worldwide Chairman, MedTech

"We are clear on where med tech performance needs to improve. Specifically cardiovascular and surgery outside The U.S. and are taking action to strengthen results." — Joe Wolk, CFO

The CFO's answer to whether the shortfall raises the urgency for MedTech acquisitions was explicit: the urgency is to fix the existing portfolio, not to buy a new one.

Assessment: The candour is real and the U.S. acceleration is real. But in July the explanation was a trial in the U.K. and an inventory dynamic in China; in October it is the Middle East, VBP and surgery exits. A segment that needs a different explanation each quarter has a credibility problem that a single good quarter will not fix. The MedTech mix-shift pillar, which carried our original thesis, is broken for 2026. The re-test is 2027, and the evidence will be VARIPULSE Pro in the U.S., OTTAVA's early placements and PROTECT IV.

3. Abiomed: "stable" is the new "recovering"

The Q2 call offered two incompatible recovery paths: the CFO's "not declines, but more modest growth until our PROTECT IV data comes out," and the MedTech chairman's double-digit growth "over the coming quarters." We weighted the CFO. Q3 failed both: Abiomed declined again, by 1.5%, and fell 6.4% sequentially to $412M. Management now describes the business as stable, attacks the methodology of the U.K. study that triggered the slowdown, and says it saw sequential improvement through the quarter.

"We did, by the way, already see some improvement sequentially throughout the quarter, and we do believe that, that business will be back to growth in short order." — Tim Schmid, EVP & Worldwide Chairman, MedTech

The CFO's own phrasing on the call was that Abiomed is "now a stable business, but we want to catalyze back to double digit growth." At the September conference he said that next year the business would be in a much better position to return to the double-digit growth rates it had before the U.K. report. He also told that audience that Abiomed has had field actions and that the company is working with the FDA to resolve them. Separately, the quarter's $339M IPR&D impairment wrote off preCARDIA, a non-core asset that came with the Abiomed acquisition. PROTECT IV, with about 1,250 patients, reports in 2027.

Assessment: The direction of the language is the signal: in July, a near-term dynamic with double-digit growth to return over the coming quarters; in September, "a much better position" next year for a return to double-digit growth; in October, a stable business to be catalyzed back to double-digit growth, with the MedTech chairman promising a return to growth "in short order." We still believe the mechanism is mostly behavioral and the evidence base favors Impella. But the CFO's floor from July did not hold, a field-action issue was disclosed at a conference rather than on the call, and the recovery date is still the 2027 readout. We model Abiomed flat into 2027.

4. Outside the U.S.: the Middle East joins China and Asia-Pacific

International MedTech grew 0.1%. Management named three drivers: volume-based procurement in China, competitive pulsed-field ablation intensity in Asia-Pacific, and, new this quarter, the Middle East conflict, which has broadened beyond the few markets management initially expected and has delayed tenders, ordering and government spending decisions.

"We have seen increased disruption to ordering patterns, tender timing in spending decisions across a wider group of countries, unfortunately." — Tim Schmid, EVP & Worldwide Chairman, MedTech

"That said, I think it is important that we see this really as a short term factor." — Tim Schmid, EVP & Worldwide Chairman, MedTech

Assessment: Asked directly to quantify the Middle East and VBP impacts, management did not. "Deferred rather than permanently lost" is a reasonable hypothesis for a conflict-driven procurement delay and an unreasonable one for VBP, which is structural pricing. We treat the Middle East as transitory, VBP as permanent, and the surgery transformation program as self-inflicted and finite.

5. Electrophysiology: VARIPULSE Pro is the repair kit

EP grew 4.4%, with the U.S. at 7.0%. The product cycle is the most concrete part of the MedTech recovery case. VARIPULSE Pro offers five-times-faster ablation, has returned European EP to double-digit growth, was approved in Japan the week before the call, and is expected in the U.S. by year-end. Management also cited a retrospective analysis showing 68% lower risk of adverse cardiac events against a competing PFA platform.

"For example, electrophysiology in markets like Europe, where we have already launched VARIPULSE Pro, which by the way is a faster and easier to use catheter, we are back to double digit growth." — Tim Schmid, EVP & Worldwide Chairman, MedTech

Assessment: Europe is the proof of concept, and a U.S. launch in the fourth quarter makes 2027 the year EP should re-accelerate. The safety comparison is retrospective and should be weighted accordingly. EP is the one MedTech business where we would expect the re-acceleration management promises to show up first.

6. OTTAVA: the surgery story moves to the end of the decade

The FDA granted de novo authorization for OTTAVA in July. Management called it one of the most significant MedTech innovations it will bring to market this decade, signed a first commercial customer, and has an investigational device exemption trial underway in inguinal hernia repair with urology and gynecology to follow.

"We expect adoption and revenue contribution to build over time with the goal of establishing Ottava as a significant pillar of our surgery portfolio by the end of the decade." — Joe Wolk, CFO

Assessment: "By the end of the decade" and, from the September conference, "go slow there to go fast later on" are the right expectations to set for a new entrant against an entrenched installed base, and they mean OTTAVA does nothing for MedTech growth in 2026 or 2027. It is a long-dated option on the surgery franchise, and December 8 is where we expect the first sizing.

7. ICOTYDE: patients nearly double, revenue stays undisclosed

ICOTYDE has now been started by more than 20,000 patients through nearly 9,000 prescribers, against 11,000 patients and 6,000 prescribers at the Q2 call. It is broadly covered across all national commercial plans. For the first time, management gave the source of business: about 60% of patients are new to systemic therapy, about 20% come from orals and about 20% from other treatments, most likely biologics.

"Approximately 60% of the patients are systemic naive. So they have not received any systemic therapy." — Tom Cavanaugh, EVP & Worldwide Chairman, Innovative Medicine

Revenue remains undisclosed, and management said it expects to begin reporting it next year. The line that contains it, other immunology, was $147M in the quarter ($126M in the U.S.) and also includes IMAAVY. That line grew 41% sequentially while the patient count rose about 80%.

Assessment: The 60% systemic-naive share is strong evidence that ICOTYDE expands the market, which was the bull case. The roughly 20% sourced from other treatments, which management said are most likely biologics, is the first cannibalization number the company has given, and some of those patients may be TREMFYA's. The gap between patient growth and revenue growth points to heavy free-drug and gross-to-net effects in year one. None of that changes the long-term case, but the patient count is not yet a revenue count.

8. INLEXZO finally gets a number

In July we noted that INLEXZO had gone three quarters without a sales figure. This quarter it got two: year-to-date net sales of approximately $200M and a Q3 figure above $90M, which implies a first half of roughly $110M. New patient starts grew 45% sequentially, and about one in three eligible patients started on an INLEXZO regimen. The FDA has invited a submission for the papillary population, and SunRISe-5 data are expected later this year.

"And quite honestly, we have not reported quarterly sales, but I could say that Q3 was north of $90 million." — Tom Cavanaugh, EVP & Worldwide Chairman, Innovative Medicine

Management sized the ladder in patients: about 4,000 in the current carcinoma-in-situ population, about 15,000 in the SunRISe-5 setting, and about 50,000 in BCG-naive disease (SunRISe-3), supporting a platform ambition of more than $5B.

Assessment: The disclosure we asked for arrived, verbally. Sequential growth slowed as expected for a launch in a 4,000-patient niche: new patient starts grew 45% this quarter, where in Q2 management cited new patient insertions up about 75%. The value is in the label expansions, and the papillary submission and SunRISe-5 readout are the next two steps.

9. The deal dilution: $0.64 this year, $1.36 next year

On July 29, J&J closed the $1B Firefly Bio acquisition (an asset acquisition, booked as roughly $1B of IPR&D in Q3) and signed a collaboration with Sail Biomedicines: $785M of initial payments including a $465M equity investment, $140M of milestones, and an option to acquire Sail for $2.58B. The same day it cut FY26 adjusted EPS guidance by $0.64 ($0.46 Firefly, $0.18 Sail) and the operating margin guide by about 150bps, and disclosed 2027 dilution of about $1.36 ($0.08 Firefly, $1.28 Sail, assuming milestones are met and the option is exercised).

"During the quarter, we completed the $1 billion acquisition of Firefly Bio, deepening capabilities in oncology with next generation antibody engineering to address complex tumor biology." — Joe Wolk, CFO

Assessment: Together the two deals commit up to about $4.5B for two early-stage platforms, a degrader-antibody conjugate in oncology and in vivo CAR-T in autoimmune disease. That is a reasonable use of a balance sheet with roughly $28B of net debt and $21B of free cash flow. The accounting is the issue for the stock: because J&J's adjusted EPS includes acquired IPR&D, FY27 adjusted EPS will look roughly flat if the Sail option is exercised. We look through it on valuation, and we flag that the Street will need to decide whether to as well.

10. 2027: acceleration promised, a flat EPS line on our math

Management's message on 2027 was unambiguous in tone.

"As you can see, we continue to build momentum. Growth improved sequentially in the third quarter. We expect further acceleration in 2027, with a clear path to double digit growth by the end of the decade." — Joaquin Duato, Chairman & CEO

The numbers behind it came from a September investor conference and an analyst's question on the call. At the conference, the CFO said 2027 reported growth should be roughly equivalent to 2026 once the 53rd week is normalized, while absorbing a larger exclusivity loss than STELARA's first year.

"There's about $4 billion to $4.5 billion of products that are losing exclusivity, right? That's more than what we experienced STELARA's loss of exclusivity impact in year one of that biosimilar coming out." — Joe Wolk, CFO (investor conference, September 17)

On the call he added that EPS growth should run a little ahead of sales growth after adjusting for the $1.36 of deal dilution, that currency could be a headwind if the euro stays near its current 1.12 spot, and that December 8 will include a 2027 outlook, a pro forma for the orthopaedics separation and a longer-term view.

Assessment: If 2027 absorbs $4–4.5B of exclusivity losses with no slowdown in reported growth, it will be the strongest single proof of the portfolio thesis we have seen. But the reported EPS line will be roughly flat, the OPSUMIT decline shows the losses are already arriving, and the currency headwind is a new subtraction. December 8 has to do more work than it did in July.

11. Margins: the underlying guide rose again

Including the deals, the full-year adjusted operating margin guide is now a decline of about 60bps, better than the 75bps decline in the July 29 update. Excluding the deals' 150bps, that is an improvement of about 90bps, against about 75bps at the July 15 guide and more than 50bps in January. The guide still absorbs the 53rd week's costs and the U.S. government pricing agreement.

"Absent those deals, we continue to deliver base margin improvement." — Joe Wolk, CFO

The proxy we used in July still points the same way. The adjusted pre-tax income margin ran 310bps below last year through nine months, roughly 130bps below excluding our estimate of the deal charges, against a full-year operating margin guide of about +90bps excluding deals. The two measures are defined differently (the guided measure excludes other income and interest), so the gap is directional rather than exact, but it leaves a lot of the year's improvement for a 14-week fourth quarter.

Assessment: The margin bear point keeps receding on the guide and keeps not being proven in the reported numbers. Q3's underlying evidence is good (R&D flat ex-Firefly, SM&A flat as a share of sales). The MedTech margin gain is tariff recovery, which does not repeat. We treat the margin bear as contained and the fourth quarter as the test.

12. DePuy Synthes: leaning toward a spin

For two quarters the language was "all separation options." This quarter the CFO stated a preference.

"we are leaning towards a spin as being the best option to create long term value for Johnson & Johnson shareholders. That has always been our base plan, and we are confident that it can be successfully executed." — Joe Wolk, CFO

Assessment: A spin keeps the mix lift we have modelled (remaining MedTech grows faster and at higher margins without orthopaedics) but brings no cash proceeds, and it hands shareholders a business growing about 3–4%. One reading in the market was that weak device valuations made a sale harder, and we think that is probably right. The pro forma at December 8 will show how much stranded cost the remaining company carries.

13. Leadership: a new head of Innovative Medicine

Jennifer Taubert retired as head of Innovative Medicine, and Tom Cavanaugh, previously head of the North America region, succeeded her on September 1 and handled the pharma questions on this call. He opened with ICOTYDE, gave the first source-of-business breakdown, put a number on INLEXZO and committed to ICOTYDE revenue disclosure next year.

Assessment: A seamless handoff on the evidence of one call, and slightly more forthcoming on disclosure than his predecessor. The commercial engine that delivered the past three years of pharma growth is unchanged.

Guidance & Outlook

A small raise on every sales, margin and EPS line, with the ranges narrowed upward. The reported sales midpoint went up $0.1B and the adjusted EPS midpoint $0.06, and both the operating margin and the interest-expense guides improved. This is the third consecutive raise on an underlying basis this year: $11.53 in January, $11.55 in April, $11.68 in July, and $11.74 now, excluding the deals. The size of the raises has been uneven, and this one is about half of July's $0.13 reported raise and a third of its $0.18 operational raise.

Implied Q4: Against nine-month sales of $74,771M, the reported sales range implies Q4 of $26.2–26.6B, up 6.8–8.4% on Q4 2025's $24,564M. On the operational basis, where the nine-month base is about $73.8B on our math, the midpoint implies Q4 operational growth of about 9.5%. How much of that is the 53rd week matters. On the 100bps of full-year growth used in the Q&A, the week is worth roughly 380bps of Q4, and implied underlying Q4 operational growth is about 5.7%, close to Q3's 6.0%. On the "1.5 point to 2 points" the CFO cited in September, the implied underlying rate falls to roughly 2–4%. Either way, the guide does not embed the acceleration management described. The EPS range implies Q4 adjusted EPS of $2.86–2.96.

Street at: Consensus entering the print was roughly $2.53 for Q3 EPS on the deal-inclusive basis, and the Q3 beat plus the $0.06 raise lift FY26 estimates modestly. The larger revision is in 2027: some estimates may not yet carry the full $1.36 of Sail-option dilution, and the CFO's framework of reported sales growth near 5.4% with EPS growth slightly ahead implies a FY27 adjusted EPS near FY26's on the company's basis.

Guidance style: Conservative and beaten again, with the implied Q4 underlying growth set at roughly the Q3 rate rather than the acceleration management talked about. That leaves room for another beat in January, and the history this year says to expect one. The pattern also makes the December 8 framework more important, because the annual guide has stopped telling us much about the trajectory.

Analyst Q&A Highlights

Whether double-digit growth depends on M&A, and whether MedTech needs a deal

The opening question asked management to confirm that the press release's reference to "strategic investments" behind double-digit growth meant internal investment, not acquisitions, and whether the MedTech shortfall created urgency to buy growth. The answer was a clean yes on the first and a clean no on the second, followed by the MedTech chairman's restatement that Abiomed's slowdown is temporary.

Q: "On the double digit growth by the end of the decade, the vocabulary in the press release references the progress in the underlying business, quote, together with strategic investments I just want to be clear that refers to internal investments and not M&A."
— Asad Haider, Goldman Sachs

A: "On the first aspect, that is correct. Your view of that being internal strategic investments is what will propel us to double digit growth by the end of this decade… With respect to the urgency, it is an urgency to fix what we currently have. We like the portfolio and the construct."
— Joe Wolk, CFO

Assessment: The organic commitment is now explicit and on the record, which raises the bar for December 8: a double-digit bridge cannot lean on acquisitions that have not been announced. The "fix, don't buy" stance on MedTech is the right instinct and also the slower path, and it puts the burden on VARIPULSE Pro, OTTAVA and PROTECT IV.

How to model 2027 after the deal dilution

The second question pinned the CFO's September conference comments to a number, about 5.4% reported sales growth next year, and asked how to think about EPS growth excluding IPR&D. The answer accepted the sales framing without correcting it and gave the EPS framework as a relationship rather than a figure.

Q: "On the top line, you said you expect reported sales growth to be similar to 2026 after adjusting 100 basis points for the extra week in both years, which I think would mean about 5.4% reported growth next year. And on EPS, how should we think about your ability to grow earnings excluding IPR and D?"
— Larry Biegelsen, Wells Fargo

A: "So for this year, the IPR&D dilution is $0.64. And for next year, the combination of those deals is $1.36… typically our income growth or EPS growth will be a little bit better than our sales growth… We will outline specifically kind of the components to that."
— Joe Wolk, CFO

Assessment: The most useful exchange on the call for valuation. It anchors FY27 underlying EPS at roughly 6% growth on the $11.74 base, which is where our $12.35 comes from after a currency haircut. It also confirms that on the company's adjusted basis FY27 will look roughly flat, which is an optics problem the stock will have to carry until December 8 or until the market decides to look through it.

ICOTYDE's source of business and whether the peak exceeds $10B

A two-part question asked where ICOTYDE patients are coming from and whether the asset could be much larger than $10B given the indications still to come. The answer gave the first breakdown of patient sources and stopped short of raising the peak.

Q: "Can you just give us an update in terms of what you are seeing terms of patient uptake as we think about new to biologic versus oral switches versus injectable switches?"
— Christopher Schott, J.P. Morgan

A: "Approximately 60% of the patients are systemic naive. So they have not received any systemic therapy. And the-- roughly, the remaining 40% remaining 20 percent are sourced from orals and 20 percent are sourced from other treatments, most likely biologics as we dig into the data."
— Tom Cavanaugh, EVP & Worldwide Chairman, Innovative Medicine

Assessment: The 60/20/20 split is exactly the data the market-expansion debate needed, and it mostly favors the bulls. The peak question was not answered with a number. With head-to-head data against STELARA, psoriatic arthritis data and IBD still ahead, management is keeping the peak framing deliberately conservative, as it has with TREMFYA.

What exactly is wrong with MedTech, and what is not

A question asked management to confirm that "underlying fundamentals" meant procedure volumes and hospital capital spending, and what needs to be done to improve the franchise. The answer was the most direct admission of the call and also the clearest defense of the U.S. business.

Q: "When you use a phrase underlying fundamentals in med tech, MedTech are solid, I wanna confirm that you are thinking about all the good stuff, the patient volumes, the CapEx spending from the hospitals, and then what you are seeing in terms of just general flows."
— Joanne Wuensch, Citi

A: "And to be clear, our performance is below the standard… Simply put, we can do better, and we absolutely will… the underlying procedure environment remains stable across key markets. I know there is been a lot of debate about that. Our job now is to make sure that we convert that demand into more consistent performance."
— Tim Schmid, EVP & Worldwide Chairman, MedTech

Assessment: By ruling out a procedure slowdown for the second quarter in a row, management again declines the macro excuse and owns the shortfall as execution. That is credible and it is also a higher bar: if procedures are fine and the U.S. is accelerating, then a stalled international business and a declining Abiomed are company problems with company timelines, and the fourth quarter is a fair test.

Whether ICOTYDE sales will be disclosed, and how big INLEXZO can get

A question noted that investors were asking for ICOTYDE's net sales or its position against consensus, and asked for the size of the INLEXZO opportunity in the current and next indications. The response declined the first, committed to disclosure next year, and gave the INLEXZO quarter for the first time.

Q: "Just curious if you would be willing to provide any commentary around the actual net sales."
— Vamil Divan, Guggenheim Securities

A: "Obviously, we have not disclosed any sales for ICOTYDE, but I am confident we are gonna be doing that next year, just based on the momentum and progress that we are seeing with the launch of ICOTYDE… I could say that Q3 was north of $90 million."
— Tom Cavanaugh, EVP & Worldwide Chairman, Innovative Medicine

Assessment: A disclosure commitment with a date is progress. Until then, the other immunology line ($147M, shared with IMAAVY) is the upper bound for the quarter, and it argues that the 20,000-patient headline is running well ahead of paid revenue. The INLEXZO number puts the product at an annualized run-rate above $360M in a small first indication.

milvexian: the secondary stroke readout may come first

A question asked about confidence in the secondary stroke prevention study given a competitor's positive factor XI data. The answer moved the likely order of events: the stroke data could arrive this year, and the larger atrial fibrillation study next year.

Q: "I know you share in that partnership. SSP data is coming up, and I just wanted to check-in on your confidence that should be similar to Asundexian."
— Michael Yee, UBS Securities

A: "So we remain confident in the results and expect that perhaps the secondary stroke data will be available even this year… The atrial fibrillation, the larger population, will be next year… There, we were able to push the dose 4x higher given our safety margin in the drug."
— John Reed, EVP, Innovative Medicine R&D

Assessment: In July the AFib readout was "towards the end of this year, beginning of next year"; it is now next year. The stroke readout, de-risked by the competitor's class data, becomes the near-term event. We continue to carry milvexian unmodelled; a stroke win would be a free positive and the AFib result remains the large prize.

Quantifying the Middle East and the plan for international surgery

A question asked management to quantify the Middle East and VBP impacts and to describe the actions being taken in international surgery. The response described the Middle East effect in detail but did not size it, and committed to surgery growth in the fourth quarter.

Q: "Is there any way to quantify the impact of the dynamics in the Middle East and VBP?"
— Jayson Bedford, Raymond James

A: "We have seen increased disruption to ordering patterns, tender timing in spending decisions across a wider group of countries, unfortunately… And we would have we would expect many of these opportunities to be deferred rather than permanently lost… we will see acceleration in EMEA and return to growth overall in the fourth quarter."
— Tim Schmid, EVP & Worldwide Chairman, MedTech

Assessment: No number, but a commitment that can be checked: surgery returns to growth overall in Q4 with EMEA accelerating. If it does, the "deferred, not lost" reading gains credibility; if it does not, the MedTech problem is broader than the call admitted.

Moving CARVYKTI into earlier lines

The closing question asked how J&J is preparing physicians and treatment centers for a shift of CARVYKTI into newly diagnosed myeloma as the CARTITUDE-5 and -6 trials advance. The answer showed the shift is already underway in the U.S.

Q: "I guess, with the CARTITUDE V and VI trials advance in newly diagnosed multiple myeloma, how is J and J preparing to educate physicians and treatment centers for the potential shift to use earlier into the treatment journey."
— Alexandria Hammond, Wolfe Research

A: "And I would say roughly, in the U.S., 50% of the utilization of CARVYKTI lies in lines 2 and 3."
— Tom Cavanaugh, EVP & Worldwide Chairman, Innovative Medicine

Assessment: Half of U.S. use already in second and third line, plus five-year treatment-free remission in half of second-line patients, is the setup for a frontline label. CARVYKTI's growth slowed to 35% this quarter, and the frontline readouts are what re-accelerate it.

What They're NOT Saying

The Q3 10-Q had not been filed as of this writing. The items below were checked against the release, its financial schedules, the call transcript, the July 8-Ks and the September conference transcript.

1. Abiomed's field actions. The CFO told a September investor conference that Abiomed has had field actions and that the company is working with the FDA to resolve them. The phrase does not appear in the Q3 release or on the call, where Abiomed's decline was attributed entirely to physician selectivity after the U.K. study. Investors should know whether product actions are contributing to the volume decline, and the 10-Q is the next place to look.
2. The size of the Middle East and VBP headwinds. Asked directly to quantify them, management described the Middle East effect qualitatively and did not size either. With international MedTech at +0.1%, the split between transitory conflict effects and permanent China pricing determines how much of the deceleration reverses.
3. ICOTYDE's revenue. Asked directly, management declined and committed to disclosure next year. The only bound available is the other immunology line, $147M including IMAAVY, which grew 41% sequentially against a patient count up about 80%.
4. The talc participation count. The call restated the 95% participation condition and gave no progress figure. The resolution is the most important de-risking event of the year and it remains conditional.
5. The OPSUMIT decline. U.S. OPSUMIT and OPSYNVI sales fell to $193M from $416M in Q2, the steepest sequential decline in the portfolio. The release named the franchise only as an offset to growth, and the call did not mention it. The CFO's September comments place the PAH franchise among the 2027 exclusivity losses; the Q3 numbers say the loss is already underway.
6. Sail's charge in the quarter. Management quantified Firefly's Q3 IPR&D at about $1B but did not separate the Sail charge recorded in the quarter. That makes the underlying margin and EPS a derived estimate rather than a disclosed one.
7. The size of the MedTech tariff recoveries. MedTech's segment margin rose 190bps to 22.9%, attributed to tariff recoveries net of commercial investment. The recovery was not quantified, so the underlying MedTech margin trend is not visible, and the item will not recur.
8. DARZALEX's international pricing headwind. Named as an offset and not quantified, in the quarter DARZALEX slowed by two points and missed consensus. It is the company's largest product.
9. Whether the Sail option will be exercised, and when. $1.28 of the $1.36 2027 dilution assumes Sail meets development milestones and J&J exercises its $2.58B option. The call treated the $1.36 as a modelling input without discussing the conditions.

Market Reaction

• Pre-print setup: Closed at $263.73 on October 12, entering the print up 27.4% year to date against the S&P 500's 14.0%, up 38.2% over twelve months and down 0.7% over the trailing 30 days. The 52-week closing range was $186.00 to $278.43, putting the stock 5.3% below its high. It was 6.8% above our July downgrade close of $247.02, at 23.9x the FY26 adjusted EPS guide then in force and 22.6x the underlying figure.
• Reaction session (before-open reporter; the print day is the reaction day): Opened at $254.56, a 3.5% gap down, traded between $245.17 and $256.18, and closed at $248.61, down 5.7% or ($15.12). The S&P 500 was flat.
• Volume: 16.6M shares against a 6.6M 30-day average, 2.5x normal, heavy for a stock of this kind.
• Peers on the day: Device peers fell modestly (Boston Scientific -1.2%, Intuitive Surgical -1.3%) while Medtronic (+1.2%) and Abbott (+0.8%) rose. Large-cap pharma traded lower (Merck -2.4%, AbbVie -2.4%, Lilly -1.4%), and the health care sector ETF fell 1.4%.
• Follow-through: JNJ rose 2.1% on October 14 while the S&P fell 1.1% and pharma rebounded broadly. By the October 16 close of $255.56 the stock had recovered 2.8% from the reaction close but was still 3.1% below the pre-print level; the S&P fell 1.9% over the same three sessions.

A 5.7% decline on an in-line, beat-and-raise quarter needs explaining, and three forces stand out.

The MedTech miss had no floor. The proximate cause was the second consecutive MedTech miss, and the way management explained it mattered as much as the size. In July, the market could treat MedTech as an Abiomed problem with a known cause. In October, the cause list grew to include the Middle East, VBP and the surgery program, Abiomed was still declining, and the MedTech chairman described the performance as below the company's own standard. A segment that is a third of revenue and has slowed three quarters in a row, with a new explanation each time, makes it harder to argue the slowdown is bounded. The device-peer reaction (modest declines at two names, gains at two others) suggests the market treated it as a J&J problem rather than a sector one, which is consistent with management's own framing.

Crowded positioning in a defensive name. The stock came in up 27% for the year, at 23.9x the reported guide then in force, as one of the most-owned defensive positions in large-cap health care. In that setup a beat is the entry ticket and any blemish is sold. Volume at 2.5x average and the broad pharma decline on the day are consistent with crowded longs reducing exposure rather than with a change in the long-term view; part of the Street called the move excessive and said it set a negative tone for the sector.

Headline optics and 2027. GAAP EPS of $0.09 and a 7.5% decline in adjusted EPS made for poor headlines, even though both were known effects of the talc settlement and the July deals. The more durable issue is the reminder that 2027 adjusted EPS carries $1.36 of dilution. The partial rebound over the following three sessions, while the index fell, suggests the market looked through the optics and kept the MedTech concern. That is the split we would make too.

Street Perspective

Debate: Is MedTech's slowdown fixable inside J&J, or is it a portfolio problem?

Bull view: Every identified drag is international or product-specific and at least partly transitory: the Middle East is a deferral, the surgery exits are finite, and Abiomed's issue is behavioral with a 2027 data catalyst. The U.S. business accelerated to almost 5%, VARIPULSE Pro has already returned European EP to double digits, Shockwave is growing high teens, and OTTAVA gives surgery a robotics entry. Fix, don't buy, is the right call.

Bear view: MedTech has slowed for three quarters with a different explanation each time. The segment's growth engine, cardiovascular, depends on a single-vendor pump whose recovery keeps moving out and on an EP market where J&J is fighting from behind in pulsed-field ablation. OTTAVA will not matter before the end of the decade, and the orthopaedics spin removes a slow business without fixing the growth rate of what remains.

Our take: The bears have the better recent evidence and the bulls have the better product calendar. We think EP re-accelerates in 2027 on VARIPULSE Pro and that surgery's international drag partly reverses, but we no longer underwrite MedTech as a source of upside to the enterprise growth rate in our 12-month view. Q4's surgery and Abiomed numbers are the first checkpoint.

Debate: Should investors look through the deal dilution?

Bull view: The $0.64 this year and $1.36 next year are acquired IPR&D, one-time purchases of pipeline assets that most peers would exclude from adjusted EPS. Excluding them, FY26 EPS grows nearly 9% and FY27 grows a little faster than sales. The market should value the underlying earnings, and the deals add two platforms that may matter in the 2030s.

Bear view: They are real cash, about $4.5B in total, for early-stage science, and J&J chose to include such charges in its adjusted numbers. On the company's own basis FY27 EPS will be roughly flat, during a year that also absorbs $4–4.5B of exclusivity losses. A company that does this regularly cannot ask for every charge to be ignored.

Our take: We look through it for valuation because the 2027 charge depends almost entirely on Sail milestones and a conditional acquisition option, and we show the reported-basis multiple alongside. The bear point is still valid as a pattern: if large IPR&D charges become a recurring feature of how J&J builds the pipeline, they belong in the earnings we capitalize. We will revisit that if the December 8 bridge relies on them.

Debate: Is the 5.7% drop an entry point?

Bull view: The sell-off was excessive for an in-line, beat-and-raise quarter with pharma accelerating, talc close to resolution and a clear December 8 catalyst. At about 20x FY27 underlying earnings, a high-single-digit compounder with a top-tier pipeline and a 2% dividend is reasonably priced, and the Street's price targets sit well above the stock.

Bear view: The drop only took back part of a 27% year-to-date run, and the stock is still above where it traded when it was cheaper on the fundamentals. FY27 reported EPS will be flat, MedTech has no visible floor, and the 2027 exclusivity wave has started. There is no reason to pay a premium multiple for a transition year.

Our take: Neither, at today's price. At $248.61 the stock was just above the top of our old range; at $255.56 it is about 4% above the midpoint of our rolled-forward range. The talc resolution and the pharma momentum are why we have not moved to Underperform. MedTech and the 2027 optics are why we are not buyers here. A move toward $215 would change that.

Model Update Needed

Valuation impact: Fair value rolls forward to $230–260 from $215–245, equivalent to 18.6–21.1x FY27E underlying EPS of $12.35 (19.6–22.1x FY26 underlying of $11.74). The multiple band is essentially unchanged from July; the higher range reflects one more year of earnings, with the talc resolution offsetting the weaker MedTech outlook. At $255.56, the stock trades about 4% above the range midpoint.

Thesis Scorecard Post-Earnings

Graded against the standing thesis carried since the Q3 2025 upgrade and the July 2026 downgrade, pillar for pillar. One pillar is added this quarter.

Overall: the thesis is unchanged in balance and different in composition. Three bull pillars confirmed, two neutral and one broken; one bear point resolving, one contained, one still binding and one new. The pharma half of the thesis is as strong as it has been, and the talc resolution removes the risk that most worried long-term holders. The MedTech half has failed its test for a second quarter, and the 2027 earnings line now has a visible flat spot. In July the question was whether the price had run ahead of a better business. In October the price came back toward our range and the business got better in one segment and worse in the other.

Action: Hold. Do not chase the rebound from $248.61. Existing holders have no reason to sell: the dividend, the balance sheet, the pharma momentum and the talc resolution all support patience. We would move to Outperform on a pullback toward $215, on a fourth-quarter MedTech print that shows surgery and Abiomed returning to growth, or on a December 8 review that puts a base year, a rate and a date on double-digit growth and shows 2027 absorbing its exclusivity losses. Any one of those restores the asymmetry. None of them is in hand today.