J&J 2Q Profit Jumps on Higher Sales, Lower Charges

Johnson & Johnson’s second-quarter profit more than doubled, due to lower charges and higher sales for medicines and some medical devices, but the world’s most diverse maker of health products said it expects slower growth in the second half of the year.

It easily beat Wall Street expectations for the quarter and raised its 2013 profit forecast slightly.

But Tuesday’s news wasn’t all rosy, and its shares slipped by late afternoon.

J&J, based in New Brunswick, N.J., said sales growth is slowing and competition is increasing for its devices and prescription drugs. It’s had to lower prices for some of those products due to pressure from government and other buyers, increasing competition and “soft” retail markets, as many consumers continue to pinch pennies amid lingering effects of the Great Recession.

In particular, inpatient surgeries – which affect sales of everything from J&J’s bandages and certain drugs to scalpels and diagnostic tests – have been flat or down for about three years, CEO Alex Gorsky told analysts during a conference call. And revenue for J&J’s diabetes business, which sells blood-sugar testing supplies and insulin pumps, dropped 23 percent in the U.S. and 13 percent worldwide, despite the growing number of diabetics worldwide.

Unfavorable currency exchange rates cut revenue by 1.5 percent, and the manufacturing issues behind about four dozen product recalls since 2009 aren’t all resolved.

Still, J&J has about $10 billion in net cash to invest, and Gorsky said recently launched drugs such as Xarelto for preventing dangerous blood clots are selling well. He also repeatedly said J&J has plenty of opportunity to expand sales, particularly in emerging markets such as China and India.

“We still feel that we are uniquely positioned for strong growth and success,” because of J&J’s diverse product lines, Gorsky told the analysts.

J&J said net income in the quarter was $3.83 billion, or $1.33 per share, up from $1.41 billion, or 50 cents per share, a year earlier. Excluding one-time items, its earnings were $4.29 billion, or $1.48 per share.

Revenue was $17.88 billion, up 8.5 percent from $16.48 billion a year earlier.

Analysts were expecting earnings per share of $1.39 and sales of $17.72 billion.

Key reasons for the second-quarter profit jump were a very low tax rate, a huge acquisition of orthopedics device maker Synthes Inc. last year and a gain from selling J&J’s interest in Irish drugmaker Elan Corp. PLC. It was also an easy comparison to last year’s quarter that was hurt by $2.2 billion in charges for the Synthes acquisition, litigation and asset write-downs.

“Their growth is based on the Synthes acquisition, so unless they’ve got another acquisition in their back pocket, where is the growth coming from going forward?” said analyst Steve Brozak of WBB Securities.

J&J’s $19.7 billion acquisition in June 2012 of Synthes, a surgical trauma equipment and orthopedic implants maker, boosted sales of orthopedic devices by 47 percent, to $2.4 billion. Total sales of medical devices and diagnostics, J&J’s largest segment, climbed 9.6 percent to $7.19 billion in the quarter.

Prescription drug sales jumped nearly 12 percent to $7.03 billion, led by strong sales of immune disorder drug Remicade and prostate cancer drug Zytiga.

But sales of consumer health products edged up just 1.1 percent, to $3.66 billion.

“Consumer sales are still languishing – the after-effects of their record string of recalls – but their pharmaceuticals sales are impressive, especially in their newer biologics,” drugs produced in living cells, wrote Erik Gordon, a professor and analyst at the University of Michigan’s Ross School of Business. “The news isn’t just about cost-cutting. It includes some impressive revenue gains that bode better for the long run.”

Much of the conference call focused on efforts to improve the quality of both J&J’s own manufacturing and production contracted out to other companies, as J&J works to end recalls that have cut into sales. It has issued about four dozen recalls since 2009, mostly of consumer health products such as Tylenol and Motrin. Reduced sales of the recalled products, plus extensive factory upgrades and increased regulatory inspections, have cost J&J well over $1 billion.

Sandra Peterson, the new head of the consumer health business, said J&J is making steady progress on improving manufacturing and quality control in that business and the rest of the company.

Peterson repeated the company’s last forecast for getting consumer health products back in stores, saying that about three quarters of the items would return by year’s end, with more to follow next year. She said products already back, such as Tylenol, are winning back consumers and retailers.

Brozak said that J&J’s 2.9 percent dividend yield has pushed shares steadily up to an all-time high – they briefly hit $91.66 Tuesday morning, before declining a bit – as investors looking for safety switch out of low-yielding Treasury bills.

Meanwhile, the company raised its full-year profit forecast to $5.40 to $5.47 per share excluding one-time items, up from $5.35 to $5.45 per share. Analysts had expected $5.41 per share.