Johnson & Johnson’s (JNJ) fourth-quarter 2010 earnings (excluding special items) of $1.03 per share was in-line with the Zacks Consensus Estimate and a penny above the year-ago earnings of $1.02. Full year earnings came in at $4.76 per share, a penny above the Zacks Consensus Estimate and 2.8% above the year-ago earnings.
The company’s revenues for the reported quarter decreased 5.5% year-over-year to $15.6 billion. Revenues fell short of the Zacks Consensus Estimate of $15.9 billion. While operational factors negatively impacted sales by 5.1%, foreign exchange movement negatively impacted sales by 0.4%. Full year revenues, which fell short of the Zacks Consensus Estimate of $61.9 billion, declined 0.5% to $61.6 billion.
The top-line was impacted by the series of over-the-counter (OTC) product recalls announced by Johnson & Johnson during 2010.
The Quarter in Detail
Fourth quarter sales declined both in the domestic as well as the international market. While domestic sales declined 8.1%, international sales declined 3.1%.
The Medical Devices & Diagnostics segment was the only segment to record minimal growth during the fourth quarter. Sales increased 0.2% to $6.3 billion. Both operational factors and foreign exchange movement positively impacted Medical Devices & Diagnostics segment sales by 0.1% each. While sales in the domestic market increased 1.6% to $2.9 billion, international market sales declined 0.8% to $3.5 billion.
Primary contributors to growth included Vision Care, Ortho-clinical diagnostics, 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 $3.6 billion in the reported quarter, down 15.0% from the fourth quarter of 2009. Operational factors and foreign exchange movement reduced sales in the segment by 14.5% and 0.5%, respectively. Sales in the domestic market declined 28.8% year-over-year to $1.2 billion, whereas the international market recorded a 5.8% year-over-year decline to $2.4 billion.
The series of OTC product recalls, the suspension of manufacturing at Fort Washington facility and the currency devaluation in Venezuela hampered revenues in the segment.
Pharmaceutical segment sales declined 4.7% year-over-year to $5.7 billion. Sales in the domestic market declined 5.7% to $3.1 billion whereas the international market fell 3.5% to $2.6 billion.
Growth of drugs like Prezista, Invega and Velcade was offset by a decline in sales of Aciphex, Concerta, Duragesic/Fentanyl Transdermal, Levaquin/Floxin, Procrit/Eprex, Topamax, Remicade and Risperdal/Consta among others. Topamax continued to be impacted by generic competition.
Earnings Guidance Disappoints
Johnson & Johnson’s 2011 earnings guidance was well below expectations at $4.80 to $4.90 per share. This is significantly below the current Zacks Consensus Estimate of $4.98.
Pipeline Update
Johnson & Johnson also provided an update on its pipeline candidates. The company is currently seeking US Food and Drug Administration (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.
Johnson & Johnson is also looking to expand Simponi’s and Remicade’s label. While the Simponi expansion is being sought for the inhibition of structural damage in the treatment of psoriatic arthritis, the Remicade label expansion is being sought for the treatment of moderately to severely active ulcerative colitis in pediatric patients who have not responded suitably to conventional therapy.
Another important pipeline candidate, telaprevir, is currently under regulatory review. Telaprevir is being developed in collaboration with Vertex Pharmaceuticals, Inc. (VRTX) for the treatment of hepatitis C virus. Finally, Johnson & Johnson submitted a new drug application for its anticoagulant rivaroxaban.
Our Take
We currently have a Neutral recommendation on Johnson & Johnson. We have a Zacks #4 Rank on Johnson & Johnson which indicates a short-term “Sell” rating. We expect the stock to remain under pressure mainly due to the OTC product recalls. Moreover, Johnson & Johnson has guided below expectations and we expect downward revisions to earnings estimates for 2011.
Longer-term, we remain Neutral on Johnson & Johnson. The company’s diversified business model, lack of cyclicality, robust pipeline and strong financial position should help it pave its way through tough situations.
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