Often, the first step toward fixing a problem is admitting you have one. Johnson & Johnson seems to be following that playbook.

The healthcare giant is refocusing its medtech portfolio against a backdrop of persistent macro challenges. That pivot became clear late last year when J&J pledged to carve out its orthopedics unit as part of a sprawling restructuring.

Medtech came back into focus on Tuesday, as stumbles within the division tempered investor enthusiasm -- even as J&J beat quarterly earnings expectations and raised its full-year outlook.

Shares tumbled 5.5% to $249.20 on Tuesday, pacing toward their worst single-day percent decrease since April 2025. The iShares U.S. Pharmaceuticals exchange-traded fund, of which J&J is a component, slipped 2%, while the benchmark S&P 500 fell slightly.

J&J's pharmaceutical arm recorded a 7.7% jump in sales for the third quarter, making the 2.5% growth in medtech look all the more anemic.

The division raked in $8.64 billion for the quarter, missing Wall Street's target of $8.74 billion as all four segments -- cardiovascular, orthopedics, surgery, and vision -- underperformed. Global surgery sales slipped 0.6%, while growth across the remaining three areas ranged from 3% to 4.5%.

Chief Financial Officer Joe Wolk attributed weakness outside the U.S. to ongoing conflict in the Middle East. "It's not that demand isn't there, it's just that the budgets in some of those surrounding countries are being allocated toward defense," Wolk told Barron's. "We think that has to come back because they still prioritize healthcare for their citizens."

Beyond the Middle East, however, J&J continues to navigate persistent headwinds in the form of European austerity policies and volume-based procurement in China.

While those factors "are always a little bit of a challenge, we still have great enthusiasm for the long-term prospects of medtech," Wolk said. "We just have to correct a couple things."

One of the quickest ways to alleviate pressure could be a spin-off of J&J's orthopedics business, DePuy Synthes. The company announced its intention to separate the business last October, saying the process would take anywhere from 18 to 24 months.

"We think a spin is the best way to go right now," Wolk told Barron's. "Medtech valuations are currently depressed, so we're not optimizing the value we can create if we gave it to a third party at this moment in time. And we're not cash-strapped -- we don't have to make a deal that isn't optimized, and so we're going to use that to our advantage."

Wolk maintained that the orthopedics business is performing well, a claim backed by recent results. Third-quarter growth was driven in part by strength in trauma, a key segment within the business. Generating over $9.2 billion globally last year, orthopedics remains MedTech's second-largest unit, trailing only surgery, which brought in $10 billion.

Regardless, a spin would allow J&J to concentrate its medtech division on higher-growth, higher-margin sectors like cardiovascular devices and robotic surgery. In surgery, the company aims to take on entrenched players like Intuitive Surgical with its own Ottava soft-tissue robot, which secured regulatory approval in July.

Unlike Intuitive's market-leading da Vinci system, Ottava saves space by integrating four robotic arms directly into a standard-size operating table. J&J is currently placing the systems with customers, though it declined to identify them.

As J&J focuses on newer business verticals, a spin may be the best deal for investors, too. Under the continued leadership of Namal Nawana, who was appointed to lead DePuy Synthes through its transition, "this business will continue to thrive and J&J shareholders should win over time with that equation," Wolk said.

However, a separation of the orthopedics business wouldn't overcome every challenge. Within J&J's cardiovascular segment, performance remains mixed. Circulatory restoration maintained its momentum following the 2024 acquisition of Shockwave Medical, while growth in U.S. electrophysiology bodes well ahead of the approval of a new catheter device in the current quarter.

On the other hand, Impella -- the heart pump J&J added through its purchase of Abiomed in 2022 -- lost momentum earlier this year after a prominent U.K. study raised concerns over its use in high-risk, non-emergency procedures.

"Heart failure continues to be a concern for us, something that we need to address," Wolk admitted. "I think we will get back to double-digit growth, which that business was performing at prior to the study in the U.K." J&J plans to release data next year from a much larger, 252-patient study, which Wolk expects will help flip the narrative around the technology.

The healthcare giant's third-quarter numbers broadly beat or met expectations. J&J posted third-quarter adjusted earnings of $2.59 a share, outpacing Wall Street's call for $2.52, while sales grew 5.9% to $25.4 billion to align with analysts' forecasts.

Citing "strong operational performance" in the latest period, J&J hiked its full-year earnings guidance. Management is now targeting adjusted earnings in the range of $11.05 to $11.15 a share, up from a prior view of $10.96 to $11.11 in late July.

The updated range reflects the acquisition in July of Firefly Bio, a strategic collaboration with Sail Biomedicines, and a one-time charge for the proposed resolution of outstanding talc lawsuits. J&J also raised the low end of its annual sales forecast to bring the midpoint of the range to $101.2 billion, up from $101.1 billion.

While medtech faltered, the company's Innovative Medicine segment -- which spans prescription drugs and biologics -- drove strong results. Highlights included 68% sales growth for Tremfya, which is positioned to succeed J&J's blockbuster autoimmune drug Stelara as its key patents continue to expire.

Sales for antipsychotic medication Caplyta surged 66%, boosted by rising prescriptions for expanded uses including add-on depression therapy. Meanwhile, flaghsip multiple myeloma treatments Darzalex and Tecvayli each grew at a double-digit clip, with Tecvayli sales jumping nearly 77%.

Icotyde, a daily plaque psoriasis pill approved in March, has also shown promise. While J&J hasn't broken out sales figures "because it hasn't quite hit our threshold yet," Wolk told Barron's the company was pleased with its early traction. Icotyde has already reached 20,000 patients through 9,000 prescribers.

Given its vast reach across medical devices, pharmaceuticals, and biologics, J&J serves as a barometer for the broader healthcare sector. As the first big name to report earnings this quarter, J&J sets the stage for upcoming results from Novartis, Merck, and AbbVie later this month.