Product recalls, flat U.S. sales and litigation and restructuring costs slashed Johnson & Johnson's second-quarter profit by 20 percent, and that's after a big currency exchange benefit boosted results.
J&J executives said Tuesday that they're making progress on their manufacturing problems and have numerous new drugs, medical devices and toiletries hitting the market or coming soon. But J&J shares fell by 1.4 percent before recovering somewhat, a big drop for the health care giant, which makes everything from Band-Aids and Listerine to biologic medicines and surgical devices.
J&J said its second-quarter profit fell nearly 20 percent due to the one-time costs and higher spending on product launches, manufacturing improvements and research.
While the results topped Wall Street expectations, total U.S. revenue was flat as consumer health product sales were down 8.5 percent because recalled products remain off store shelves. Foreign sales were up 16 percent, but mostly due to favorable exchange rates.
On the bright side, sales were up in all three divisions _ consumer health, prescription drugs and medical devices and diagnostics _ for the first time since 2009's last quarter, shortly after the start of an embarrassing series of more than 25 product recalls.
Investors weren't impressed, as shares fell 69 cents, or 1 percent, to $66.40 in afternoon trading while the broader markets edged higher.
The New Brunswick, N.J., company said its net income was $2.78 billion, or $1 per share, boosted by a lower tax rate than last year at 19.6 percent. Net income was $3.45 billion, or $1.23 per share, in the 2010 second quarter.
Revenue rose 8.3 percent, to $16.6 billion from $15.33 billion a year ago.
Excluding one-time items, income would have been $3.55 billion, or $1.28 per share. The items totaled $991 million, including $676 million for restructuring the ailing Cordis heart device business, $363 million for litigation and $54 million for recalling defective DePuy hip implants, partly offset by a $102 million gain from a currency option.
Analysts polled by FactSet, on average, were expecting earnings per share of $1.24 and sales of $16.21 billion.
"The expectations were austere," said analyst Steve Brozak of WBB Securities. He noted J&J executives repeatedly cited pressures from austerity measures by cash-strapped European government health programs and flat or declining prices in the U.S. for things like joint replacements.
Still, the company maintained its profit forecast for 2011, at $4.90 to $5 per share, excluding one-time items. Analyst expect $4.95 per share, on average.
"We are making solid progress in our product launches, pipelines and investments" in product development, Chief Financial Officer Dominic Caruso told analysts on a conference call. "I expect to see additional improvement in third-quarter sales as our business momentum continues and as the overall market improves."
Brozak said the only positive signs he saw were the 14 percent increase in investment in research and development, which he thinks is still not enough given the $11 billion in net cash the company holds, and prospects for growth in device sales.
The company recently got three new prescription drugs approved in the U.S.: prostate cancer pill Zytiga in April, once-a-day HIV pill Edurant in May and Xarelto, for preventing blood clots after knee and hip replacement surgery, on July 1. Recent launches, including Zytiga, biologic plaque psoriasis treatment Stelara and Invega Sustena, a once-monthly injectable drug for schizophrenia in adults, are going well, Caruso said.
Since September 2009, J&J has recalled millions of bottles of liquid and pill nonprescription medicines, several prescription drugs, contact lenses and painful, defective hip replacements requiring replacement. Reasons range from a nauseating chemical smell linked to wooden shipping pallets to metal shards in liquid medicines and the wrong level of active ingredient.
Executives on the conference call said most of the consumer products affected by the 15-month shutdown of a Pennsylvania factory won't be on the market for some time _ a "modest amount" this year and the rest next year. The company has repeatedly pushed back the timing for their return to store shelves. Competitors have been aggressively courting consumers, who also are buying cheaper store brands.
"The recalls that the company persistently downplayed are hurting them," wrote Erik Gordon, an analyst and professor at the University of Michigan's Ross School of Business. "The good news is that analysts were expecting them to do even worse. It pays, at least for a quarter or two, to be so bad that analysts give you low expectations to beat. The better news is that foreign sales are holding up," mainly on the currency rates.
J&J is operating under a federal consent decree requiring major manufacturing improvements to multiple factories and has gutted the closed Fort Washington, Pa., plant to completely rebuild it.
On Monday, J&J's board decided to create a new committee to oversee manufacturing quality and compliance issues. But it decided to seek dismissal of a lawsuit brought by shareholders accusing CEO William Weldon and other officers of breaching their duties by allowing a series of kickback charges and the product recalls.
Revenue growth was led by prescription drugs, which saw sales jump 12 percent to $6.23 billion. That was mainly due to higher drug sales overseas and the exchange rates.
U.S. revenue was flat at $7.45 billion, but international sales jumped 16 percent to $9.15 billion, mainly on an 11 percent benefit from exchange rates.
Sales of medical devices, J&J's biggest division, rose 7 percent to $6.57 billion. Consumer health products, which includes nonprescription medicines and skin, dental and hair care products, increased 4 percent to $3.79 billion.
For the first six months, net income dropped 21.6 percent, to $6.25 billion, or $2.25 per share, from $7.98 billion, or $2.85 per share. Revenue rose 5.8 percent, to $32.77 billion, from $30.96 billion.
Alex Gorsky, chairman of worldwide medical devices and diagnostics, reviewed that business, touting products in development including contact lenses containing an anti-allergy substance and a device to repair or prevent often-deadly ruptures of the abdominal aorta, which distributes blood to the lower body.
But he noted doctor visits are down and consumers are still delaying elective surgeries, such as hip and knee replacements, with some workers afraid to take a leave in the current job market. Recovery can take one to six months.