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Johnson & Johnson topped the street's expectations in its latest quarter, thanks to strong cancer drug sales during the 3-month period. The company boosted its full-year sales outlook, but tempered expectations for its adjusted operational profit, citing the impact of a recent acquisition and, of course, tariffs. President Trump has warned that levies will be placed on the sector very soon. Joining us now to discuss is Saad Hater, Goldman Sachs Global Investment Research Head of the Healthcare Business Unit. Saad, great to speak with you. Let's start on Johnson & Johnson maintaining the EPS outlook. How were they able to do that in your view and what are your other big takeaways?

Yeah, thanks for having me. Um so, there there were some questions. I mean, overall, we thought that the quarter was actually very encouraging and very much in line with the thesis uh that we have on Johnson & Johnson. And just to zoom out for a second, we upgraded the stock to buy last week, uh based on our view that the innovative medicine business is going to continue to surprise on the upside and show encouraging trends. And that's really what you saw. Now, there was some gross margin related pressure, um which they cited, uh they attributed to Part D dynamics. This is the first quarter that the pharma industry is going to see uh some headwinds from the inflation reduction act, uh particularly related to Part D. Uh and there were also some tariff related costs that they that they talked about, um about $400 million that they attributed to the MedTech business. But beneath the hood, uh the pharma business did really well and their operating margins actually beat because they flex the P&L by cutting costs and cutting R&D. And to us, that was actually a very encouraging sign. And I think the combination of those things, along with a little bit of an FX tailwind, had them maintain uh the earnings for the year.

And how are you thinking about the impact of tariffs, both on on Johnson & Johnson, and then just moving forward? Because they are the first pharma name to report, what does the what what did their results tell you about how the rest of the industry might be impacted by tariffs as well?

Well, the short answer is not much. And I think uh it's still all very uncertain. I think uh we all have been waiting to see what the announcement for tariffs is. I think what's known, of course, is that uh the the pharmaceutical industry is going to have be tariffed, the way semiconductors and autos and several other industries are. Uh we've been waiting for this for a while. What we also know is that there has already been a section 232 investigation that has begun. Uh and uh depending on how that goes, uh what we're all going to be waiting for is to see what level of tariffs are going to be applied to the industry. And uh at this point, I just don't think we have a lot of clarity on any of that. And so, what that's been doing is creating a lot of uncertainty across the entire pharmaceutical sector. It's making people question the traditional orthodoxy around the margin structure and the profitability of this sector. But we just don't know a lot right now, and I think it would be too early for me to speculate on where this all lands. Uh but this is a cloud that the sector that it's an overhang on the sector. And until we get a real off-ramp, uh it's going to be hard to see how that uh um you know, how that overhang goes away.

And Saad, my guest host, John Hilsenrath, is still with me. John, you got a question for Saad?

Saad, you you talk about J&J flexing their earnings muscle by cutting costs and cutting R&D. Uh I'm listening to hear how all of this affects the economy, and that sounds like bad news to me.

Well, I don't think it's I don't think it's bad news necessarily. I mean, I think we don't we don't really know uh line items on what exactly they did on the SG&A and the R&D side. I think it just speaks a little bit to the leverage that they have across the P&L to uh you know, make these types of investments. I think what's more interesting is just the way that Johnson & Johnson is has been responding, as I expect others to to to these tariff threats, which is uh building uh infrastructure, manufacturing facilities in the US. I think everyone saw that uh about 3 weeks ago, they announced a $55 billion manufacturing commitment to the US that is higher, that's about 25% higher than what they had initially said they'd do. Uh they opened a new facility in North Carolina, which they are going to use to manufacture in the US. And there's three other facilities that they're going to bring on the manufacturing side that are yet to come. So, I think those types of measures are probably more important for, as far as the overall economy goes, than them, these pharma companies, really flexing the the the the P&L in there with with things like SG&A and and R&D.

Yeah, Saad, I'm also curious how you're thinking about the impact of China and any China demand on this. John, I wonder if you have a question to that end as well.

Well, I I mean, I'm I'm interested in in China, and I'm also interested in, you know, the risk that that they cut off supply chains and that that affects the supply chain of the pharma industry.

I mean, John, I just don't think we know. I just think it's just too early to speculate how this all plays out. Um like I said, uh there are we are right now navigating navigating a period in the pharmaceutical sector where there are just a lot more questions than there are answers. I think it would be too premature for me to speculate uh on, you know, where uh what gets tariffed, what happens with China, what happens with demand. Um but our focus is just on fundamentals, and our call on J&J really has to do with the fact that their pharma business and some of the new product cycles within their pharma business are actually underappreciated, based on some of the diligence that we've done. And once this blows through, I mean, that's really where we'd be guiding investors.