Health care giant Johnson & Johnson, which reports first-quarter results before the stock market opens Tuesday, will have one bit of good news to trumpet amid all the bad, which includes its most recent medication recall just this week.
WHAT TO WATCH FOR: J&J, based in New Brunswick, N.J., will tout its settlement Friday of a two-year arbitration fight with Merck & Co. The dispute involved billions of dollars in sales from two immune disorder drugs that J&J has shared with Schering-Plough Corp., which became part of Merck in 2009.
Under the settlement, J&J received a $500 million payment from Merck, a higher percentage of sales of Remicade and Simponi in Europe, Russia and Turkey, and exclusive rights to the two blockbusters in these territories: Canada, Central and South America, the Middle East, Africa and Asia-Pacific. That could bring J&J roughly $900 million in extra revenue in 2012, according to one analyst's estimate.
The maker of Band-Aids, baby shampoo and birth control pills also closed its $2.4 billion acquisition of Dutch biotech company Crucell NV, in February. The deal gives J&J a big foothold in the lucrative vaccine business. Crucell is a major children's vaccine supplier to UNICEF and poor countries.
Still, with a startling number of product recalls eroding sales and consumer confidence, Chief Financial Officer Dominic Caruso will have a tough time convincing investors that everything is under control. CEO Bill Weldon has been saying that for some time, yet the recalls keep coming _ 22 in the last 19 months, covering hundreds of millions of medicine bottles.
Most involve nonprescription medicines, many made at a Fort Washington, Pa., factory that's been shut down for a year by the Food and Drug Administration. The problems range from contamination with metal shards and other particles, to nauseating odors and faulty levels of active drug ingredients. The recalls cost J&J about $900 million in sales last year and have triggered multiple lawsuits and probes by Congress and regulators.
Hip implants, contact lenses and medicine-filled syringes have been recalled as well.
J&J emphasizes that no patients have been seriously harmed.
Patients have, however, required additional surgeries to replace hip implants that caused crippling pain or damaged tissue.
Executives likely will discuss a reorganization of J&J's consumer business announced two weeks ago, and a new consent decree allowing extra FDA oversight of the closed factory. It can't reopen until FDA says it meets quality standards. The company probably will note it cooperated with the feds in a long-running bribery case, which involved giving foreign doctors and government officials kickbacks and gifts to get them to order J&J products. J&J agreed to pay $70 million to end criminal and civil charges.
J&J is expected to provide an update on its pharmaceutical pipeline. It has a few important drugs awaiting regulatory approval in the U.S. and Europe, including Xarelto for preventing strokes and other dangerous blood clots, abiraterone for prostate cancer and telaprevir for hepatitis C.
WHY IT MATTERS: Credit Suisse analyst Catherine Arnold says the company's future depends on acquisitions and getting drugs approved in the near term. Those three experimental drugs are J&J's "most attractive pipeline assets" and are expected to be approved this year, Arnold writes. She thinks investors are debating J&J's next potential acquisition target because the company has been accumulating cash and talking publicly "about the importance of business development."
Meanwhile, Goldman Sachs & Co. analyst Jami Rubin sees short-term fallout from the recalls and the Crucell acquisition. She expects J&J to reduce its 2011 profit forecast by 2-3 percent, or 10 cents per share, because of those factors _ despite a strong benefit expected from favorable currency exchange rates. "We believe investors could look beyond the continued earnings cuts to the emerging drug pipeline," Rubin adds.
WHAT'S EXPECTED: Analysts polled by FactSet, on average, expect earnings per share of $1.03 and sales of $15.6 billion.
LAST YEAR'S QUARTER: Johnson & Johnson reported profit rose 29 percent to $4.53 billion, or $1.62 per share, mainly on a $900 million gain from litigation. Adjusted net income increased 3 percent to $1.29 per share. Sales in 2010's first quarter rose 4 percent to $15.63 billion.