Johnson & Johnson (JNJ) posted first-quarter 2011 earnings (excluding special items) of $1.35 per share, 10 cents above the Zacks Consensus Estimate and 4.7% above the year-ago earnings of $1.29. The company beat expectations despite being hampered by product recalls.
Johnson & Johnson’s revenues for the reported quarter increased 3.5% year-over-year to $16.2 billion. Revenues exceeded the Zacks Consensus Estimate of $15.8 billion. Operational factors and foreign exchange movement favorably impacted sales by 1.8% and 1.7%, respectively.
Including one-time items, the company reported earnings of $1.25, 22.8% below the year-ago earnings of $1.62.
The Quarter in Detail
First quarter sales declined in the domestic market by 0.6%. Meanwhile, international sales increased 7.3%, consisting of 4.1% operational growth and 3.2% favorable currency impact.
The Medical Devices & Diagnostics segment posted sales of $6.4 billion, up 3.3% year-over year. Operational factors and foreign exchange movement positively impacted Medical Devices & Diagnostics segment sales by 1.3% and 2.0%, respectively. While sales in the domestic market declined 0.5% to $2.9 billion, international market sales increased 6.6% to $3.6 billion. Favorable currency movement helped drive international sales.
Primary contributors to growth included Biosense Webster’s electrophysiology business, LifeScan’s blood glucose monitoring products, Vistakon’s disposable contact lenses, DePuy’s sports medicine and neurovascular business, Ethicon’s surgical care products and Ethicon Endo-Surgery’s minimally invasive and advanced sterilization products. The Cordis franchise continued to record a decline in sales with performance being impacted by competitive pressures in the drug-eluting stent market.
The Consumer segment recorded revenues of $3.7 billion in the reported quarter, down 2.2% from the first quarter of 2010. While operational factors reduced sales in the segment by 4.1%, foreign currency movement favorably impacted sales by 1.9%. Sales in the domestic market declined 13.8% year over year to $1.3 billion, whereas the international market recorded a 5.9% year-over-year increase to $2.3 billion.
The series of OTC product recalls and the suspension of manufacturing at Fort Washington facility hampered US sales. The Fort Washington plant is currently operating under a consent decree enforced by the US Food and Drug Administration (FDA).
Pharmaceutical segment sales increased 7.5% year-over-year to $6.1 billion. Sales in the domestic market increased 5.8% to $3.4 billion whereas the international market grew 9.7% to $2.7 billion.
Pharmaceutical sales were driven by products like Remicade, Prezista, Risperdal Consta, Levaquin and Caelyx among others. New products like Stelara, Simponi and Invega Sustenna also contributed to growth.
Meanwhile, products like Aciphex, Duragesic/Fentanyl Transdermal, Procrit/Eprex, and Topamax continued to record a decline in sales. Topamax continued to be impacted by generic competition.
Earnings Guidance Raised
Following the release of first quarter results, Johnson & Johnson raised its earnings guidance by 10 cents to $4.90 – $5.00 per share (old guidance: $4.80 to $4.90 per share). Recent developments and the favorable currency movement led to the improved outlook. The Zacks Consensus Estimate currently stands at $4.84.
Settles Dispute with Merck
Johnson & Johnson recently settled its dispute with Merck (MRK) regarding the ex-US distribution rights of Remicade (infliximab) and Simponi (golimumab).
Per the terms of the amended deal, from July 1, 2011, Johnson & Johnson will be solely responsible for marketing Remicade and Simponi in markets such as Canada, Central and South America, the Middle East, Africa and Asia Pacific. Currently, Merck is responsible for marketing the drugs in these markets. The 2011 sales of the drugs in these markets will be recorded by Johnson & Johnson from July 1, 2011.
The amended deal allows Merck to retain sole marketing rights of the drugs in the European, Russian and Turkish markets. Approximately 70% of Merck’s 2010 revenue from the two drugs (amounting to approximately $2.8 billion) came from these markets. Moreover, the two companies will share equally in the profits resulting from Merck’s exclusive distribution of Remicade and Simponi in the European, Russian and Turkish markets from July 1, 2011.
Johnson & Johnson has also been in the news regarding the possible acquisition of medical device company, Synthes.
Neutral on Johnson & Johnson
We currently have a Neutral recommendation on Johnson & Johnson. This is supported by the Zacks #3 Rank (short-term Hold rating). Even though Johnson & Johnson has been facing challenges in the form of OTC product recalls, pricing austerity in the EU and generic competition, we believe that the company’s diversified business model, lack of cyclicality and strong financial position will help it in tough situations.
Other catalysts could be regulatory approval for a couple of important pipeline candidates. Johnson & Johnson is currently seeking FDA approval for abiraterone acetate plus prednisone for the treatment of metastatic, advanced prostate cancer in patients who have received prior chemotherapy containing a taxane.
Another important pipeline candidate, telaprevir, is currently under regulatory review. Telaprevir has been developed in collaboration with Vertex Pharmaceuticals, Inc. (VRTX) for the treatment of hepatitis C virus.
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