Johnson & Johnson 3Q profit down 6 pct, sales up
Wednesday, October 19, 2011
Johnson & Johnson’s third-quarter profit fell 6 percent as continuing product recall costs, rising generic competition and costs tied to an acquisition more than offset higher foreign sales.
The health care giant’s U.S. revenue dropped 4 percent because of competition from generic versions of antibiotic Levaquin and several other prescription drugs, a two-year string of product recalls that have hammered its over-the-counter drug business and marketing costs to launch two new products. Those are Incivo, a hepatitis C drug J&J sells in Europe, and Zytiga, a pill for treating advanced prostate cancer after chemotherapy.
U.S. sales also were hurt by a severe shortage of J&J’s chemotherapy drug Doxil caused by manufacturing problems. Doxil is one of hundreds of drugs, mainly used in hospitals, in such short supply that Congress is investigating.
The maker of baby products, medical devices and biologic drugs said Tuesday that net income was $3.2 billion, or $1.15 per share. That’s down from $3.42 billion, or $1.23 per share, a year earlier.
Excluding a charge of 9 cents per share for its biggest acquisition ever — a $21.3 billion deal for medical device maker Synthes Inc. set to close by June — earnings would have been $3.4 billion, or $1.24 per share.
That beat by 3 cents the expectations of analysts polled by FactSet. They were expecting revenue of $16.02 billion, just above the $16 billion J&J reported. Total revenue rose nearly 7 percent from a year ago, because of a 16.4 percent jump in foreign sales, but half of that came from favorable currency exchange rates.
Analyst estimates generally exclude one-time items.
The company, based in New Brunswick, N.J., raised the low end of its 2011 profit forecast, to between $4.95 and $5 per share, from its earlier forecast of $4.90 to $5 per share. Both sets of figures exclude one-time items. It forecast revenue of $63.5 billion. That’s still below the $63.75 billion posted in 2008, before generic competition and product recalls started taking a toll.
Chief Financial Officer Dominic Caruso told analysts on a conference call that declines in hospital surgeries and doctor visits over roughly the last two years continue to impact sales.
Scott Schermerhorn, chief investment officer at Granite Investment Advisors, said the quarter was “perhaps a touch better than what we anticipated,” although J&J isn’t fixing the consumer health manufacturing problems as quickly a he’d like.
His company, which holds nearly 200,000 J&J shares, said he thinks J&J will be in much better shape in about four years and in the meantime, given J&J’s 3.4 percent dividend yield, investors are “being amply paid to be patient.”
U.S. sales were down in all three J&J divisions — prescription drugs, consumer health care and medical devices and diagnostics.
U.S. prescription drug revenue fell 6 percent. U.S device and diagnostic product sales dipped 0.7 percent, on lower sales of artificial hips after a recall of implants causing severe pain and of artery-opening stents because J&J has stopped making heart stents as safety risks have reduced that market.
The consumer business declined 4.5 percent as the product recalls, mainly nonprescription medicines made by its McNeil Consumer Healthcare business, kept Tylenol, Motrin and other products off store shelves.
Only a couple of the consumer medicines, most recently Tylenol Cold and Flu Severe, are back in production so far. J&J officials said more will return to stores later this year and “the balance of key selected products” will begin shipping next year, but they are not predicting when all the products will be back.
One of McNeil’s three factories shut down in April 2010 and is being gutted and rebuilt. The other two have slowed production amid upgrades and heightened inspections required under a deal with the Food and Drug Administration. Manufacturing of some products is being switched to other J&J factories.
Meanwhile, shoppers have been buying much-cheaper store brands or rivals’ brands, some of them heavily advertised as competitors lure J&J customers.
“We’re hopeful that the loyalty these (J&J) brands have achieved with consumers over many years will stay with us as we bring these products back into the market,” Caruso said. He declined to give details but said the company plans a mix of marketing and coupons to win customers back, “kind of a surround-sound effect.”
International revenue was stronger in all three divisions, driven by sales jumps mainly in emerging markets — in the Asia-Pacific and Africa regions and in North and South America, excluding the U.S.
Worldwide, revenue from medical devices and diagnostics rose 6.1 percent, to $6.28 billion. Prescription drug revenue jumped 8.9 percent to $5.98 billion. Consumer product revenue rose 4.9 percent to $3.74 billion.
Analyst Steve Brozak of WBB Securities said J&J can’t produce the kind of growth it needs. It has $13 billion in net cash on hand, but executives said nothing about plans to use it to buy products, technology or companies.
“The silence on that front was defeaning,” Brozak said, adding, “At some point, they need to break up the company so they can become more nimble.”
J&J shares rose 63 cents, or 1 percent, to close Tuesday at $64.42.
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