Bloomberg News

J&J Declines After Sales Growth Limited by Economy, Generics

July 19, 2011

July 19 (Bloomberg) -- Johnson & Johnson, the world’s second-biggest maker of health-care products, declined after sales growth was limited by the faltering economy and generic competition.

Second-quarter net income slipped 20 percent to $2.78 billion, or $1 a share, from $3.45 billion, or $1.23, a year earlier, the New Brunswick, New Jersey-based company said in a statement. Earnings were reduced by a $549 million charge after J&J’s Cordis unit exited the market for drug-coated heart stents, where it had been losing ground to rivals.

Earnings of $1.28 a share, excluding a charge for closing the heart-stent business, beat by 4 cents the average estimate of 17 analysts in a Bloomberg survey. Discounting the impact of the exchange rate, sales didn’t suggest much improvement in health-care markets, while the earnings growth was largely driven by a lower tax rate than expected, said Kristen Stewart, a Deutsche Bank analyst in New York, in an e-mail.

“All considered, the beat wasn’t that high quality in our minds,” Stewart said.

J&J fell 55 cents to $66.72 at 4 p.m. in New York Stock Exchange trading, the only drugmaker in the 11-company Standard & Poor’s 500 Pharmaceutical Index to decline today. The shares have gained 7.9 percent this year.

Chief Executive Officer William Weldon won U.S. approvals for drugs to treat AIDS and prostate cancer during the quarter, after adding psoriasis medication Stelara in 2009. That helped offset declines for artery-clearing stents and dozens of recalled over-the-counter brands, led by Tylenol and Motrin.

‘Decent Quarter’

It was “a decent quarter for J&J,” Matt Miksic, a Piper Jaffray & Co. analyst in New York, said today in an e-mail. “In pharma, the strength in new products offset greater-than- expected generic pressure” to existing drugs.

The drug approvals, and the stock’s advance earlier this year, “created a lot of excitement,” said Jeff Bagley, a portfolio manager at Haverford Financial Services in Radnor, Pennsylvania. That may explain why today’s numbers didn’t translate into share gains, said Bagley, whose company manages 1.4 million J&J shares.

“The report was solid overall, but I think investors probably wanted a little more,” he said in a telephone interview. “They wanted some more positive momentum.”

Sales rose 8.3 percent from a year earlier to $16.6 billion, boosted by a weakening dollar that increased revenue earned outside the U.S. The dollar fell 14 percent from the end of 2010’s second quarter to June 30 of this year, as measured against a basket of six other currencies.

Forecast Maintained

The company maintained its projection for full-year earnings of $4.90 to $5 a share. The quarter’s sales growth was “very encouraging and we continue to see momentum,” Dominic Caruso, the company’s chief financial officer, said today on a conference call for analysts.

That’s been countered by unemployment in the U.S. and government austerity measures in Europe that have dragged on health-care companies, Caruso said.

“The markets we are competing in have still not rebounded to pre-recession levels,” he said.

Patents lapsed in the quarter for the antibiotic Levaquin and ADHD treatment Concerta, allowing generic competition for drugs that generated $2.7 billion in sales last year. The company has also lost ground to rival makers of over-the-counter medicines after last year’s recalls.

Recall ‘Drag’

The recalls “are a drag on the consumer business” and “the economy and store brands will continue to weigh on the segment,” said Michael Weinstein, a JPMorgan Chase & Co. analyst in New York, in a July 11 note to clients. “Customers continue to trade down to lower-priced brands.”

The company in April announced the $21.3 billion acquisition of Swiss device maker Synthes Inc., to boost slowing sales of orthopedic implants.

The company also took a $223 million charge that included litigation costs and the continued recall of 93,000 artificial hips by its DePuy division, as well as a gain on currency options related to the Synthes acquisition, according to the statement.

Pfizer Inc., based in New York, is the world’s biggest seller of medical products.

--Editors: Andrew Pollack, Reg Gale

To contact the reporter on this story: Alex Nussbaum in New York anussbaum1@bloomberg.net.

To contact the editor responsible for this story: Reg Gale at Rgale5@bloomberg.net


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