Is There A Risk Hiding In Johnson & Johnson Stock’s Earnings?
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Johnson & Johnson (JNJ) made about two-thirds of its third-quarter sales in Innovative Medicine, its prescription drug business, so the profit that business keeps matters to every holder. Management said the business’s adjusted pretax margin fell to 35.4% in the quarter, down from 44.3% a year earlier. Yet sales in the same business grew 7.9% operationally. So why is the drug business keeping less of each dollar it sells?
Why Did Johnson & Johnson’s Drug Margin Fall?
On its October 13, 2026 call, management pointed first to two deals. The drug business booked about $1 billion of research expense for buying Firefly Bio, which adds a platform aimed at hard-to-treat cancers, plus transaction costs for a collaboration with Sail Biomedicines.
Management named a second cause as well: a less profitable mix of products and a higher cost of making them. Across the whole company, the cost of goods sold took up 150 basis points more of sales than a year earlier, and management tied that to the same mix and to higher amortization charges for acquired drugs in Innovative Medicine. Management’s adjusted figures leave out amortization, so that part of the rise does not reach the drug business’s adjusted margin. Unlike the deal costs, the mix comes from what the drug business sells.
Johnson & Johnson’s Earnings Lag Behind Its Sales
On management’s adjusted measure, third-quarter earnings per share fell 7.5% from a year earlier. For all of 2026, management expects adjusted earnings per share to grow 2.9% at the midpoint of its guidance, while it expects sales to grow 7.4%. Without the costs of the Firefly Bio and Sail Biomedicines deals, management says that earnings growth would approach 9%.
The drag does not end in 2026, though: management expects the two deals to cut $1.36 a share from adjusted earnings in 2027. That is more than twice the $0.64 a share the deals cost in 2026.
On the other side, management says the company’s adjusted pretax operating margin for 2026 is still improving if those deals are left aside. With the deals included, it expects that margin to fall about 60 basis points. Management said the two deals take about 150 basis points off it. The drug business also has products growing fast: Tremfya, its treatment for inflammatory bowel and psoriatic diseases, grew 68.2% in the quarter.
What Are You Paying For Johnson & Johnson Stock?
You are paying a high price for the business. Johnson & Johnson stock trades at 6.8 times sales, against 3.2 times for the S&P 500. At the end of September, its multiple of 6.4 times sales was already the highest of the 40 quarter ends since fiscal Q4 2016. Over the past year, the stock has returned 52.2%, against 12.8% for the S&P 500. The price likely assumes that the deal costs fade and that the drug business keeps growing.
So a holder has reason for some worry, but not alarm. Much of the margin fall comes from deals management chose, and sales in the drug business are still growing. The costlier product mix and the drag on 2027 earnings are the parts that matter, while the stock trades above its highest quarter-end sales multiple in ten years of data. Management plans to give its 2027 outlook at its enterprise business review on December 8, 2026, and Johnson & Johnson is expected to report next in January 2027. The adjusted pretax margin of the drug business is the number to watch in that report.
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