Johnson & Johnson posts higher 2nd-qtr net income but cuts 2010 profit forecast over recalls

J&J posts higher 2Q net income despite recalls

Repeated recalls of popular Johnson & Johnson nonprescription medicines kept second-quarter revenue flat and forced J&J to cut its profit forecast, but a big drop in its tax rate enabled the healthcare giant to pull off a 7.5 percent increase in net income.

In a rare move, the maker of Band-Aids, birth control and biotech drugs on Tuesday reduced its 2010 profit forecast by 15 cents a share, sending its stock down 99 cents, or 1.7 percent, to $58.58 — an unusually big drop for the huge global conglomerate.

Johnson & Johnson cited the recalls of tens of millions of bottles of Tylenol and other well-known brands, the long-term closure of the suburban Philadelphia factory that made some of them and unfavorable currency exchange rates.

J&J also disclosed that it has received a grand jury subpoena from the U.S. Attorney’s Office in Philadelphia regarding the recalls and the company faces multiple lawsuits against McNeil related to the recalls. In addition, Congress is investigating how J&J handled at least one recall.

New Brunswick, N.J.-based J&J said its net income for the quarter was $3.45 billion, or $1.23 per share. That’s up from $3.21 billion, or $1.15 per share, a year earlier. The improvement was due to a $284 million drop in taxes paid for the quarter.

Excluding a one-time litigation gain of $67 million, earnings were $3.38 billion, or $1.21 per share.

That just matched the forecast of analysts polled by Thomson Reuters, who were expecting $1.21 a share, excluding one-time items. But the analysts expected revenue of $15.66 billion, $300 million more than J&J reported.

Johnson & Johnson said it now expects 2010 earnings per share of $4.65 to $4.75, down from its April forecast of $4.80 to $4.90. Both exclude the impact of any one-time items.

Credit Suisse analyst Catherine Arnold wrote that the profit forecast reduction “is somewhat larger than anticipated.” She noted the miss on revenue was due to “disappointing” sales in the consumer and medical device businesses.

Consumer sales were down 14.3 percent in the U.S. and 5.4 percent worldwide at $3.65 billion. Medical devices and diagnostics had a 4 percent increase, but had been growing faster recently.

Pharmaceutical sales were up just 1 percent at $5.55 billion.

Analyst Steve Brozak of WBB Securities said he was concerned by slower sales of some prescription drugs, particularly Levaquin, an important antibiotic often used in hospitals.

“Is this the canary in the coal mine?” he said. “Are people switching over to other antibiotics that are (cheap) generics?”

The company’s eight recalls since last September of nonprescription pain relievers, allergy medicine and other drugs involved products made in Puerto Rico or at a McNeil Consumer Healthcare factory in Fort Washington, Pa., that was shut down in April and will stay closed until at least next summer.

Food and Drug Administration inspections also uncovered problems at a McNeil factory in Las Piedras, Puerto Rico, and, more recently, at a Lancaster, Pa., factory run by McNeil’s joint venture with Merck & Co. That business makes former prescription drugs now sold in lower-dose nonprescription versions, including heartburn medicines Pepcid and Mylanta.

“We’re working closely with the FDA to correct the impact from these manufacturing and quality issues at the McNeil sites,” Chief Financial Officer Dominic Caruso told analysts during a conference call.

He refused to answer several analysts’ questions about the recalls, including whether there will be any management changes at Fort Washington, which is laying off 300 of the 400 factory workers while the plant is upgraded.

The McNeil recalls involve problems ranging from contamination with bacteria and a nauseating smell on containers to liquid medicines that may contain tiny metal shavings and products that may have the wrong amount of active ingredient.

Caruso said the “precautionary” recalls and the factory shutdown reduced second-quarter sales by $200 million and earnings per share by a nickel.

He said while recently launched products were doing well, prescription drug sales were hurt by European government health programs increasingly demanding lower prices — a problem for the entire pharmaceutical industry. Caruso also said the weak economy is still hurting sales of consumer products.

“As unemployment lingers, consumer buying patterns that have been impacted will remain,” Caruso said.

Johnson & Johnson, which sells first aid supplies, baby shampoo, Listerine and tens of thousands of other consumer health items, has been saying for at least a year that penny-pinching consumers are opting for cheaper store brands.

Caruso called the quarter’s results “a solid performance given the additional pressures.”

J&J previously said higher government drug rebates under health care reform would cut revenue $300 million in 2010 but it would offset that with cost controls.

“We remain positive about the underlying growth prospects for our business,” he said.

Meanwhile, analyst Les Funtleyder at Miller Tabak & Co. wrote the investment bank is sticking with its “Buy” recommendation for J&J, “as the financial strength (the recent acquisitions are indicative of that) overcompensate for issues in the consumer unit.”

For the first six months, net income rose 19 percent to $7.98 billion, or $2.85 per share, from $6.72 billion, or $2.41 per share, a year earlier. Revenue inched up 2 percent to $30.96 billion from $30.27 billion.