J&J Posts Lower Sales in Q1

US pharma major Johnson & Johnson (J&J) has announced financial results for the first quarter ended 31 March 2012, showing total product sales dropped marginally to USD16.139 billion. Of the firm's three businesses, pharmaceuticals continued to dominate, achieving a 1.2% year-on-year (y/y) rise in sales. This growth was driven by international operations, which rose by 16.5% y/y, while US sales dropped by 10.8% y/y. Medical devices and diagnostics as well as consumer products both saw sales fall during the period under review. The pharma major said that consumer product sales were affected by US over-the-counter (OTC) products. Sales in the United States of OTC medicines were significantly affected by the suspension of manufacturing at the McNeil Consumer Healthcare facility in Fort Washington, Pennsylvania, and the impact on production volumes related to ongoing efforts to enhance quality and manufacturing systems. Positive contributors to operational results were Neutrogena skin-care products and international sales of oral care products.

In terms of the cost structure, the firm has tried to apply a brake on its research and development (R&D) expenditure, which was down by 5.4% y/y, and selling, marketing and administrative expenses, which were also lower by 0.8% y/y. Cost of product sales, meanwhile, remained the exception. Despite these efforts, operating income ended 0.8% y/y lower to USD4.56 billion, while margins dropped as well. Significantly, net earnings ended higher at USD3.91 billion, up 12.5% y/y. The figure includes an after-tax gain of USD106 million primarily related to the currency adjustment associated with the acquisition of Synthes (US/Switzerland). In comparison, the first-quarter 2011 net earnings included after-tax charges of USD271 million, representing expenses due to litigation and DePuy ASR hip replacement recall costs.

Product performance included positive contributions from Remicade (infliximab), representing incremental sales from international territories included in the amended distribution agreement with Merck (US), while contributions also came from Velcade (bortezomib), and sales of recently launched products. The latter showed strong sales results particularly in Zytiga (abiraterone acetate), Stelara (ustekinumab), and international sales of Incivo (telaprevir). Sales results in the US were negatively affected by generic competition for Levaquin (levofloxacin), and the manufacturing suspension at a third-party supplier for Doxil (doxorubicin HCl liposome injection)/Caelyx (pegylated liposomal doxorubicin hydrochloride).

Outlook and Implications

J&J's financial performance during the first quarter of 2012 is in line with expectations, with cost-cutting efforts and foreign-exchange rate fluctuations providing some fillip. However, the firm's problems in the US, particularly with respect to its consumer products, have continued to cast a shadow. In a conference call, the firm's chief financial officer Dominic J. Caruso noted that the firm is potentially behind schedule in fixing its manufacturing problems at key sites. The firm has said that some of its OTC drugs may not hit pharmacy stores in the US until 2013, adding further uncertainty and pressure on revenue growth from its consumer products business. The firm's Fort Washington facility is not expected to resume operations until late-2013, and there is increasing scrutiny on the other two sites in the US from regulatory authorities. These efforts to overhaul the manufacturing facilities will add to costs in the medium term.

Furthermore, the firm is currently negotiating with the Department of Justice over a USD1-billion settlement over Risperdal (risperidone) promotional practices claims. The firm has also not created a reserve for the USD1.2-billion fine following a Texas court verdict recently on the same allegations. It is expected that the firm will appeal against this decision, increasing litigation costs.

Looking ahead, the firm can expect increasing pressure on its earnings and topline growth in the near term as market and litigation challenges persist. Already in this latest quarter, generic competition in the Levaquin and Concerta space have hit revenues. The firm will also seek to complete its latest acquisition announcement—Synthes—and potentially integrate the firm in the short term.