Johnson & Johnson's 1Q net falls on recall costs

AP News
Posted: Apr 19, 2011 1:13 PM
Johnson & Johnson's 1Q net falls on recall costs

Health care giant Johnson & Johnson's revenue rebounded but its profit dropped 23 percent in the first quarter because of higher costs for product recalls and litigation.

Adjusted earnings handily topped analysts' expectations Tuesday on strength overseas, helped by a weaker dollar. J&J also raised its full-year earnings outlook, sending the company's stock up $1.62, or 2.7 percent, to $62.08 in early-afternoon trading.

J&J also said that fixing manufacturing problems that led to the embarrassing string of 22 recalls of Tylenol, Benedryl and other over-the-counter drugs will take longer than expected. That will delay until late in 2012 resumption of full shipments. J&J had said that would happen throughout 2011.

The company also doubled its estimate of costs tied to the recalls to 12 cents per share this year

The maker of Band-Aids, baby shampoo and biotech drugs posted net income of $3.48 billion, or $1.25 per share, down from $4.53 billion, or $1.62 per share, in 2010's first quarter. Last year's first quarter was buoyed by a $910 million after-tax gain related to litigation.

But after an unprecedented two years of declining sales, revenue rose in the quarter by 3.5 percent to $16.17 billion.

"We believe they'll be able to get back on track," said analyst Linda Bannister at Edward Jones. "I think the position of J&J is strong from an investor standpoint," due to its diversification and the strong performance from its prescription drug business.

Overseas revenue jumped 7.3 percent to $8.57 billion, offsetting a 0.6 percent decline in U.S. revenue to $7.61 billion, tied to the recalls.

Adjusted income was $4.86 billion, or $1.35 per share. Analysts polled by FactSet, on average, expected earnings per share of $1.03 and revenue of $15.6 billion.

Johnson & Johnson, based in New Brunswick, N.J., raised its profit forecast for the year 10 cents to $4.90 to $5 per share, excluding one-time charges or gains. Analysts previously expected $4.84 per share.

The forecast may still be too low, said analyst Steve Brozak of WBB Securities.

"Their guidance up until now was conservative to the point where pretty much just keeping the doors open, they could meet their guidance," Brozak said.

Consumer product sales decreased 2.2 percent to $3.68 billion as a 5.9 percent rise in overseas revenue was wiped out by a 13.8 percent plunge in the U.S., mainly due to the recalls.

It's too early to predict whether consumer product sales will return to previous levels, Bannister said. Bad publicity, unavailable products and tight finances have driven consumers to rival products, particularly cheaper store brands.

Drug revenue rose 7.5 percent worldwide, to $6.1 billion, partly on new product launches such as psoriasis drug Stelara, antipsychotic drug Invega and Simponi for immune disorders. Revenue from medical devices and diagnostic products edged up 3.3 percent, to $6.43 billion.

J&J took after-tax charges totalling $271 million for litigation and costs of additional recalls of DePuy artificial hips.

It also reported higher costs for sales and administration, research and development, and production, the latter due to the factory upgrades.

The weak economy is still a drag on sales, Chief Financial Officer Dominic Caruso said in an interview, particularly for medical devices. Physician visits and elective surgeries are still below pre-recession levels, but the trend is slowing.

"People are starting, I guess, to go back and get the procedures they've been delaying," he said.

He noted the company is awaiting approval this year for four new drugs, including medicines for HIV, hepatitis C, prostate cancer and a blood thinner considered safer than current options.

Caruso declined to comment on a potential $20 billion deal to buy Synthes Inc., a Swiss-U.S. maker of implants and instruments for bone and tissue repair. Synthes confirmed Monday that the companies are in talks.

One uncertainty was settled Friday, when J&J resolved a two-year dispute with Merck & Co. over shared rights to two big-selling immune disorder drugs, Remicade and Simponi. As of July, J&J gets rights to sell the drugs in more foreign countries and a slightly bigger split on sales in the countries where Merck will market them. That could bring J&J an extra $900 million next year, one analyst estimates.