Johnson & Johnson (JNJ) reported first quarter 2010 earnings per share (EPS) of $1.62, which included an after-tax gain of $910 million arising from litigation. However, excluding this item, the company reported EPS of $1.29, exceeding the Zacks Consensus Estimate by a couple of cents and the reported $1.26 from the year-ago period.

The company reported revenues of $15.6 billion, an increase of 4% compared to the first quarter of 2009. While operational factors brought down sales by 0.1%, foreign exchange movement had a positive impact of 4.1%. Although sales in the domestic market came down by 5%, sales in the international markets increased 14.4%.

Segments

For the fourth quarter in a row, the Medical Devices & Diagnostics segment posted higher revenues than the pharmaceuticals segment. This segment generated revenues of $6,227 million, an increase of 12.5% from the year-ago period. Both operational factors (8.1%) and foreign exchange movement (4.4%) contributed to this growth. Sales in the domestic and international market increased 8.8% ($2,886 million) and 15.9% ($3,341 million), respectively.

Primary contributors to growth include Ethicon’s surgical care products, Ethicon Endo-Surgery’s minimally invasive products; DePuy’s orthopaedic joint reconstruction, and sports medicine businesses; and Ortho-Clinical Diagnostics’ professional products, partially offset by lower sales in the Cordis franchise.

The Consumer segment recorded revenues of $3,766 million, up 1.5% from the first quarter of 2009. Revenues would have been lower by 3.7% but for the 5.2% positive impact arising from foreign exchange movement. Sales in the domestic market came down by 9.6% ($1,560 million), whereas the international market recorded an 11.1% growth ($2,206 million).

During the quarter, the primary contributors to the operational growth of this segment are products such as Neutrogena, Aveeno, Le Petit Marseillais and Zyrtec. However, product recalls made by the company earlier this year have hampered revenues.

In Jan 2010, Johnson & Johnson had to voluntarily withdraw some of its over-the-counter (OTC) products from the U.S., the United Arab Emirates and Fiji. The product recall was made following a warning letter from the US Food and Drug Administration (FDA) over the company’s inability to investigate contamination issues of these drugs despite customer complaints way back in 2008. The recalled products included Tylenol, Motrin and Benadryl.

Johnson & Johnson continues to struggle with its Pharmaceutical segment which recorded a 2.5% year-over-year decline in revenues to $5,638 million. Revenues would have been lower by 5.7% but for the 3.2% positive impact arising from foreign exchange movement. Sales in the domestic market came down drastically by 12.7% ($3,206 million) whereas the international market recorded a 15.5% growth ($2,432 million).

While drugs such as Topamax and Risperdal were negatively impacted by generic competition, products such as Remicade, Prezista and Velcade recorded strong growth. Newly launched products such as Stelara and Simponi also recorded strong growth.

Guidance

In addition to posting first quarter results of fiscal 2010, Johnson & Johnson has lowered guidance for 2010. The company expects EPS in the range of $4.80 – $4.90 compared to the earlier guidance (provided with fiscal 2009 results) of $4.85 – $4.95. This reflects the impact of recent changes in foreign currency exchange rates as well as the health care reform. The Zacks Consensus Estimate of $4.90 is already towards the upper end of this range.

We are Neutral on the stock.
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