Johnson & Johnson Stock Jumps on Earnings Beat. But Talc Worries Loom.

Johnson & Johnson said it now expects adjusted earnings for the full 2023 fiscal year of $10.75 per share, up from its April estimate of $10.65 per share. Analysts had also expected earnings of $10.65 per share, according to FactSet.

“We started the year, we had some qualifiers on our outlook,” Johnson & Johnson Chief Financial Officer Joe Wolk told Barron’s early Thursday. “The qualifiers are off right now. The growth of the business is just tremendous across all fronts.”

The company also announced early Thursday it had decided to allow shareholders to exchange shares of Johnson & Johnson for shares of

Kenvue

(KVUE), the consumer health business it spun off last quarter. The company still owns roughly 90% of Kenvue, and will distribute the vast majority of those shares through the exchange offer. The terms and timing have yet to be determined.

“It’s the opportunity for us to acquire potentially a large number of shares of Johnson & Johnson without the outlay of cash,” Wolk said. “So we still have financial flexibility going forward to do other great things, like dividend increases and M&A.”

Johnson & Johnson is the first biopharma firm to report earnings for the quarter, and its announcement often sets the tone for the barrage of reports to come in the weeks that follow. The company’s announcement seemed to buoy shares of its peers early Thursday, with

Pfizer

(PFE) up 0.2% in remarket trading, while Merck (MRK) and Bristol Myers Squibb (BMY) were both up 0.3%.

Johnson & Johnson’s worldwide sales were up 6.3% compared with the same quarter last year, driven by a sharp increase in sales for the company’s MedTech division—up 14.7% on an operational basis, which excludes the impact of currency exchange.

Johnson & Johnson CEO Joaquin Duato warned at an investor conference early in January that he saw “uncertainty moving into 2023,” sparking a selloff in the company’s shares as investors anticipated weaker earnings for the year. Johnson & Johnson has now fully pulled back from that bearish outlook, amid a brightening economic picture.

The earnings beat and raise comes two days after a decision by a California jury raised new worries about the company’s ongoing effort to settle the thousands of lawsuits it faces from plaintiffs who say they were harmed by the company’s talc products.

Johnson & Johnson stock briefly fell as much as 1.5% in premarket trading Wednesday, after a jury in a California state court decided late Tuesday the company must pay $18.8 million to a 24-year-old man who says he developed cancer after using Johnson & Johnson’s products. Shares fell 0.2% on Wednesday.

Johnson & Johnson has been struggling to move past the talc cases, which it says are baseless. The company mantains that its baby powder is safe and does not cause cancer. In early April, Johnson & Johnson announced an agreement to pay $8.9 billion to settle all the talc claims against it, in the context of a second attempt by the company to put into bankruptcy a subsidiary called LTL Management, which Johnson & Johnson created to hold its talc liabilities. Its prior attempt was thrown out in January by the U.S. Court of Appeals for the Third Circuit, which said the bankruptcy filing had not been made in “good faith.”

The court has not yet decided whether to accept this second bankruptcy filing. In the meantime, some plaintiffs have opposed the proposed $8.9 billion settlement. A vote on whether to accept it is expected this summer; 75% of the plaintiffs will need to support a deal for it to go through.

“The verdict in California was certainly disappointing, but what you never see in the headlines is that majority of time we went on appeal,” Wolk said. “We plan to appeal this verdict, and have strong grounds to do so.”

Wolk said the company’s lawyers don’t believe the California verdict has any bearing on the proposed settlement. He added that if the settlement is rejected this summer, the company will continue to fight in the trial courts. “We’re also prepared to escalate our offense as well,” he said. “Bring to light the form shopping done by plaintiffs’ attorneys. Identifying the private-equity financing that props up this type of litigation.”

Some of the weakness in pharmaceutical stocks this year could be due to investors’ worries about the future impact of Medicare price negotiations, passed last year as part of the Inflation Reduction Act.

On Tuesday, Johnson & Johnson filed a lawsuit in federal court in New Jersey against the Department of Health and Human Services and the Center for Medicare and Medicaid Services, seeking to overturn the price negotiation law. Similar lawsuits have been filed by

Merck

(MRK),

Bristol Myers Squibb

(BMY),

Astellas Pharma

(ALPMY), the U.S. Chamber of Commerce, and PhRMA, the industry trade group.

Write to Josh Nathan-Kazis at [email protected]