Amid major layoffs, Tylenol recall, Johnson & Johnson hopes news drugs, devices get approval

Earnings Preview: J&J to report 4th-qtr results

TRENTON, N.J. — Johnson & Johnson, the world’s largest, most diverse health care company and a Dow Jones industrial average component, reports earnings for the fourth quarter Tuesday. Here’s a summary of key developments and analyst opinion related to the period.

OVERVIEW: A household name for its “No More Tears” baby shampoo, Band-Aids and Clean & Clear skin care line, Johnson & Johnson had a difficult quarter. The New Brunswick, N.J.-based company announced its second major restructuring in 2 1/2 years and a still-expanding recall of Tylenol and other popular consumer brands.

In addition, the Food and Drug Administration for a second time rejected J&J’s experimental antibiotic ceftobiprole, for complicated skin infections like MRSA, in December, saying it will require additional studies.

The Tylenol recall, first announced in November, has twice been expanded and now includes products in the Motrin, Benadryl, Rolaids, St. Joseph’s aspirin and Simply Sleep lines. The items have a mildew-like odor associated in some cases with nausea, stomach pain and vomiting.

The restructuring, J&J’s biggest ever, aims to pare expenses by roughly $1.5 billion a year after 2011 and to address declines in sales of a couple of blockbuster prescription drugs with generic competition and lower consumer product sales because of the recession. Total revenue fell 5 percent in the third quarter, marking an unprecedented four straight quarters with revenue down significantly, after years of steady sales and profit increases.

The company said it will pare its work force by up to 8,000 jobs, or nearly 7 percent of the worldwide staff, over the next few years. Last August, J&J said it was consolidating management, starting by eliminating executive posts at its comprehensive care division. A restructuring begun in July 2007 eliminated roughly 4 percent of jobs.

Two bright spots during the quarter were acquisitions: Acclarent, which makes devices for minimally invasive treatment of ear, nose and throat disorders, for $785 million; and Gloster Europe, which makes decontamination technology to prevent hospital patients from catching infections. Terms of that deal were not disclosed.

BY THE NUMBERS: Analysts polled by Thomson Reuters expect, on average, earnings per share of 97 cents and revenue of $15.71 billion. A year earlier, J&J earned 97 cents per share on revenue of $15.2 billion.

ANALYST TAKE: Credit Suisse analyst Catherine Arnold raised her 2009 and 2010 earnings-per-share estimates by 2 cents and 9 cents, to $4.58 and $4.93, respectively. She also raised her 12-month target price for the stock to $71 from $61, well above J&J’s current price near $64, citing factors including the company’s high cash flow compared to competitors.

Arnold expects earnings growth from the pharmaceutical business to accelerate, driven by a “newer mix of products,” and thinks investors have been focusing on that business’s future. Still, she says, growth and diversification from the consumer and devices businesses have boosted share price. She had expected ceftobiprole to generate $350 million in U.S. sales alone by 2015, but has eliminated that, implying it won’t get approved.

UBS analyst Bruce Nudell sets his price target at $70 a share.

“We continue to like (Johnson & Johnson) shares based on accelerating top-line growth that should in turn drive” higher earnings per share, he writes. Nudell thinks the recovery from the recession “should bode well” for the consumer and devices businesses, while new products should boost the prescription drugs business.

Elsewhere, analyst Steve Brozak of WBB Securities expects to see another drop in quarterly sales.

“J&J is actually in a better position than any of their brethren, in that they have significant cash flow from their consumer health division,” Brozak adds.

He says that gives the company flexibility in what it can afford to acquire, but Johnson & Johnson needs to be buying more companies.

“They need to … announce four deals every quarter in 2010,” compared to the four major acquisitions and partnerships they announced in all of 2009, which were “simply not enough” to sustain the growth shareholders expect, Brozak says.

WHAT’S AHEAD: The company is awaiting the outcome of the troubled health care overhaul as well as rulings from the FDA on whether it will approve several products.

Those include Sedasys, a computerized sedation system for patients getting diagnostic procedures; the Pinnacle Complete hip-implant system, a ceramic-on-metal design meant to last longer and give freer motion than metal-on-metal artificial joints; anti-clotting drug rivaroxaban and an extended-release version of Nucynta, a pill for moderate-to-severe chronic pain.

However, the FDA, stung by increasing criticism over drug safety issues the past couple years, has required more data on patient survival from studies of a fifth product, Yondelis for ovarian cancer.

Meanwhile, J&J’s arbitration battle with Merck & Co. over rights to foreign sales of blockbuster biotech drug Remicade, for rheumatoid arthritis and other immune disorders, and successor drug Simponi is dragging on. The dispute started when Merck acquired Schering-Plough Corp., with whom J&J jointly sold the drugs. An arbitration panel has been selected, but a hearing won’t be held until September.

STOCK PERFORMANCE: Shares rose 5.8 percent to $60.41 during the fourth quarter. For all of 2009, shares rose 7.7 percent.