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NEW BRUNSWICK — Johnson & Johnson, a Dow component and the world's biggest healthcare company, reports earnings for the second quarter on Tuesday morning. The following is a summary of key developments and analyst opinion related to the period.
OVERVIEW: The maker of baby shampoo, Band-Aids, medical devices and biotech drugs, Johnson & Johnson, a household name seen as an economic bellwether, is showing some wear and tear from generic competition, unfavorable exchange rates, other pressures on the industry and the recession dampening consumer spending. Despite that, it's still making some strategic, midsize deals.
After years of reliable revenue and profit increases, J&J has seen revenue decline about 5 percent the last two quarters, and net income was down slightly in the first quarter.
This quarter, generic competition will sharply cut revenue of two top drugs, antipsychotic drug Risperdal and epilepsy treatment Topamax, which also recently got a new warning about suicidal behavior in some patients.
In April, J&J began cutting about 900 jobs, mostly salespeople in its U.S. marketing division handling drugs for psychiatric disorders, epilepsy, Alzheimer's, pain, heart conditions and contraception.
Also in April, J&J got FDA approval for U.S. sales of Simponi, a successor drug to the blockbuster biotech treatment Remicade for rheumatoid arthritis and other immune disorders. Partner Schering-Plough Corp. has rights to most foreign sales of the two products, but is being acquired by Merck & Co.
Given the nearly $6 billion in total annual revenue involved, J&J in May demanded arbitration to end its revenue-sharing deal with Schering-Plough Corp., citing change-of-control provisions in their contract that possibly would give J&J all the revenue. That legal battle is expected to drag on long after the $41.1 billion Merck-Schering-Plough merger closes in the fourth quarter.
Meanwhile, on July 2 J&J made a big jump into potentially lucrative Alzheimer's research, investing up to $1.5 billion initially in Irish biopharmaceutical company Elan Corp. The two will jointly develop two injected drugs to stop progression of Alzheimer's and a vaccine to prevent the buildup of plaque in the brain that causes memory loss and other symptoms.
On Friday, J&J completed the purchase of Cougar Biotechnology Inc., a development stage company testing a potential treatment for prostate cancer, for nearly $900 million.
At the end of June, a panel of FDA advisers recommended reducing the maximum dose of Tylenol and eliminating some prescription drugs containing its active ingredient, acetaminophen, to reduce fatal overdoses, ER visits and liver failure cases. J&J, which fiercely protects its brands, promptly rolled out commercials touting the safety of Tylenol, as long as it is taken at the recommended dose.
BY THE NUMBERS: Analysts polled by Thomson Reuters expect, on average, earnings per share of $1.11 and revenue of $15 billion. In the year-earlier period earnings per share were $1.17 per share and revenue was $16.45 billion.
In the first quarter, earnings per share totaled $1.26, the same as in the 2007 period.
ANALYST TAKE: J&J will post a third straight drop in quarterly revenues, falling roughly 8 percent in the second quarter, mainly due to a 16 percent drop in pharmaceutical sales, predicts Citi Investment Research analyst Matthew Dodds. Reasons include a hit from unfavorable foreign exchange rates, which should reduce revenue about 3.3 percent this year, and lower sales for Topamax and Risperdal.
Dodds reports that J&J "is tightly controlling costs" in both research and development and sales and administration, which could help boost earnings per share. Despite the problems with pharmaceutical sales, he writes, J&J has "enough flexibility below the top line to deliver a roughly flat" earnings per share year-over-year, plus a strong pipeline. "We believe Johnson & Johnson is undervalued," Dodds wrote.
WHAT'S AHEAD: The head of J&J's comprehensive care business, Donald M. Casey Jr., says its broad line of products, many targeting chronic diseases and older folks, puts the company in a strong position as health care reform is debated. The company's products range from a biotech drug for rheumatoid arthritis and stents for clogged arteries to diagnostic tests and several diabetes-related products. Reducing the number of uninsured people, a key goal of reform, might mean more middle-aged people, particularly those who have lost jobs, could afford those products.
STOCK PERFORMANCE: Shares rose 8 percent to $56.80 during the second quarter. In the first half of 2009, shares fell 5 percent.
(This version CORRECTS Corrects drug type from 'vaccine' to 'treatment' in graf 10.)
