Device, drugmaker J&J needs revenue to rebound; investors also watching health reform impact

Earnings Preview: J&J sales growth key to rebound

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 first quarter before the market opens Tuesday.

WHAT TO WATCH FOR: After decades of steady increases in revenue and profits, last year New Brunswick, N.J.-based Johnson & Johnson posted its first annual sales decline since the Depression and gave a disappointing 2010 profit forecast.

Analysts will want to see whether sales are picking up — or consumers are still choosing cheaper store brands over Band-Aids and “No More Tears” baby shampoo, as well as delaying elective surgeries. That hurts sales of J&J’s artificial joints and surgical implements and supplies.

Analyst Steve Brozak of WBB Securities is predicting a quarterly revenue decline.

“Given the moves that they’re making, they’re preparing to hunker down,” he says.

Brozak notes J&J is selling its business that makes products to help doctors diagnose breast cancer early on; it has about $180 million in annual sales. Johnson & Johnson recently started its biggest restructuring ever, aiming to eliminate up to 8,000 jobs, nearly 7 percent of the work force. And Brozak says the company isn’t discovering enough new drugs, and there are few it can buy rights to from smaller companies at low prices.

In addition, generic competition is hurting sales of some prescription drugs, including blockbusters Topamax for epilepsy and the older pill form of schizophrenia drug Risperdal.

J&J executives will be expected to give an update on the six-month-old recall of a half-dozen popular nonprescription medicines, including Tylenol, that’s given the company a black eye.

“Count how many times they use the word ‘challenging’” or a synonym, to discuss their situation, during next Tuesday’s conference call with analysts, Brozak says.

Analysts will want to hear how the U.S. health care overhaul will affect the prescription drug and medical device businesses.

Barclays Capital analyst Adam Feinstein sees “reform as a modest negative for medical supply and device companies.” They have a new set of ground rules, including a 2.3 percent excise tax, he writes, but won’t see much near-term impact as the legislation’s provisions take a decade to unfold.

UBS Securities analyst Bruce Nudell thinks the company should perform well as its pipeline of experimental drugs matures and the consumer and devices businesses rebound. He has a 12-month stock price target of $75, well above the current range around $65 a share.

Meanwhile, J&J is in arbitration with Switzerland’s Basilea Pharmaceutica Ltd. after terminating their partnership to develop a highly touted drug for MRSA and other dangerous skin infections. J&J dropped out after both U.S. and European regulators rejected it over concerns that data from tests run by J&J isn’t reliable. Basilea, which got back all rights to the drug, is seeking damages.

Credit Suisse analyst Catherine Arnold expects J&J executives to discuss how the arbitration may go, as well as updates on any acquisition plans, when J&J might seek approval for new nerve pain drug Comfyde, how the launch of rheumatoid arthritis drug Simponi is going, and what impact fluctuating currency rates are having on the business.

In the first quarter, J&J won a $1.73 billion settlement from Boston Scientific Corp. in a patent fight, and paid $785 million for Acclarent Inc., which makes devices used in sinus surgery. On Tuesday, the Food and Drug Administration approved the drug Pancreaze, which helps people with conditions like cystic fibrosis digest food.

WHY IT MATTERS: Given the breadth of J&J’s product lines — in traditional and biologic prescription medicines, medical devices, hospital supplies and a huge range of consumer health products — its results are a great barometer of not just consumer spending but the performance of the pharmaceutical, device and hospital industries.

Health care, once considered recession-proof, has not been immune to the effects of the global recession, and a strong recovery by J&J would be an encouraging vital sign for many other businesses.

In addition, J&J shares are very widely held.

WHAT’S EXPECTED: Analysts polled by Thomson Reuters expect J&J to earn $1.27 per share on sales of $15.62 billion.

LAST YEAR’S QUARTER: J&J reported profit of $1.26 per share on revenue of $15 billion.

(This version CORRECTS the prior-year earnings and revenue results.)