Ready, Reset, Go

I had to laugh when I saw Johnson & Johnson's (JNJ) Q4 earnings hit my screen earlier this month.

Here we have Wall Street wringing its hands over a slight revenue miss, sending shares down 3.5%, while management is busy plotting its path to pharma industry dominance.

The numbers tell an interesting story.

Q4 revenues grew 5.3% (or 5.7% on an adjusted operational basis) to $22.5 billion. Wall Street got the vapors because earnings came in at $1.41 per share, well below their $2.04 consensus.

Reminds me of the time analysts completely missed Apple's (AAPL) transformation into a services company.

For the full year 2024, JNJ delivered 4.3% sales growth (5.4% operational) to $88.8 billion, with earnings per share landing at $5.79, or $9.98 adjusted after swallowing a $(0.67) hit from acquired IPR&D charges.

Not too shabby for a company in transition.

Looking into 2025, management is guiding for 2.5-3.5% operational sales growth ($90.9-91.7 billion) and adjusted operational EPS of $10.75-$10.95.

That's 8.7% growth at the midpoint, though they're careful to hedge around legal proceedings and acquisition costs.

And here's where it gets interesting.

During last week's JP Morgan Healthcare Conference, CEO Joaquin Duato was practically bouncing in his chair about their drug pipeline. Let's look at what's got him so excited.

Darzalex, their multiple myeloma superstar, raked in $11.67 billion in 2024, up 20%.

The new kid Carvykti exploded 93% higher to $963 million. Tecvayli landed $550 million in its rookie year.

Depression med Spravato jumped 56% to hit the magic $1 billion mark. Tremfya, their Stelara successor, grew 17% to $3.7 billion.

Speaking of Stelara – there's the elephant in the room.

JNJ's crown jewel is losing patent protection, already showing up in Europe with a >12% sequential decline in Q4 to $2.35 billion. Expect a 30% "haircut" this year.

But here's what Wall Street is missing: JNJ saw this coming years ago.

They just dropped $14.6 billion on Intracellular Therapies, mostly debt-funded (they can afford it with only $31.3 billion in long-term debt and $19.98 billion in cash).

This brings them Caplyta, an antipsychotic med with blockbuster potential that's already approved for schizophrenia and bipolar disorders.

The medical device business isn't sitting still either.

Q4 worldwide revenues jumped 6.7% year-on-year. While Surgery was flat at $2.5 billion and Orthopedics grew a modest 2.5% to $2.32 billion, Vision popped 9% to $1.3 billion.

But the real story? Cardiovascular surged 24% to $2.1 billion. Those Shockwave and Abiomed acquisitions are looking pretty smart right about now.

For the year, MedTech grew 4% to $31.56 billion. Operating margins slipped a bit – Innovative Medicines down from 42% to 39.4%, MedTech from 23.7% to 21.6%.

Late-stage pipeline products nearing approval should ease R&D expenses in 2025, just as JNJ gears up for its next growth phase.

The foundation looks rock solid - $19.98 billion in cash, $31.3 billion in long-term debt, 2025 adjusted EPS guidance of $10.75-$10.95, and that reliable $1.24 quarterly dividend.

But forget the current numbers - the real money's in what's coming next.

Here's what the market is missing: JNJ is promising 5-7% compound annual growth between 2025-2030, with ten drugs hitting $5+ billion in annual sales by decade's end.

Sound ambitious? Maybe. But they've got the pipeline to back it up – from immunology stars nipocalimab and icotrokinra to neuroscience contenders seltorexant and aticaprant, plus oncology plays like TAR-200 for bladder cancer.

I've seen this movie before with AbbVie (ABBV), which navigated the loss of $20+ billion Humira without missing a beat.

And JNJ looks even better positioned - their pharma division is targeting $58 billion in 2024 revenues, which would make them the biggest player in Big Pharma, ahead of Pfizer (PFE), AbbVie (ABBV), Roche (RHHBY), AstraZeneca (AZN), Sanofi (SNY) and Novartis (NVS).

The only real wildcard? That pesky talc litigation.

JNJ's latest move – spinning the lawsuits into Red River Talc LLC and filing for bankruptcy – could cap the damage at $8.5 billion. They claim 75% of claimants are on board, with a court ruling expected this month.

So, what's my take? I think JNJ's 2025 will be a "reset" year, especially the first half. But just like buying straw hats in winter, there might be an opportunity here for patient investors. Management says the back half will be stronger, setting up 2026 for what could be a very interesting guidance call.

While the market frets about Stelara's patent cliff, smart money is quietly building positions. That's why I'm maintaining my stand to buy the dip.

After all, sometimes the best trades are the ones that make you a bit uncomfortable at first. And if you're worried about patent cliffs, just ask any AbbVie shareholder how that worked out for them.