Johnson & Johnson Earnings Preview: Q1 Boosted By New Drugs

Johnson & Johnson (NYSE: JNJ), the world's second-biggest health care company, is expected to report higher first-quarter profit as strong performance of new drugs offsets drags from generic competition and strings of recalls.

Johnson & Johnson (NYSE: JNJ), which reports earnings Tuesday before the markets open, is likely to post a profit of $1.35 per share on $16.27 billion in revenue, compared with earnings of $1.25 a share, or $1.35 excluding litigation and DePuy hip recall-related charges, on revenue of $16.2 billion in the year-ago period, according to analysts polled by Thomson Reuters. Over the past three months, the consensus estimate has increased from $1.33 a share.

We are looking for some pretty respectable growth for Johnson & Johnson in the first quarter, Morningstar analyst Damien Conover said.

Revenue is projected to be $16.27 billion for the quarter, 0.6 percent above the year-earlier total of $16.17 billion. For the year, revenue is expected to come in at $66.4 billion.

The New Brunswick-N.J. based company didn't give quarterly guidance, but predicted 2012 annual earnings of $5.05 to $5.15 per share, which reflects currency impact of negative 13 cents a share.

In the fourth quarter, Johnson & Johnson reported profit of 9 cents a share, an 89 percent drop from 70 cents a share the year earlier due to legal settlements and product-liability costs, but exceeded analysts' expectations. It marked the fourth straight quarter of beating estimates.

Pipeline

The loss of the antibiotic Levaquin and its ADHD/ADD medication Concerta, which expired in May and June of 2011, hit the U.S. particularly hard. In the fourth quarter, U.S. pharmaceutical sales declined 8.3 percent.

In 2010, the collective sales of the two medications represented 12 percent of the revenues of the pharmaceutical side of the business, though due to Johnson & Johnson's more diversified business model, this equates to just 4 percent of the company's annual $61 billion revenue.

Levaquin and Concerta are still going to be annualized in the patent loss, Conover said.

In the four quarter, sales of Concerta dropped 40.6 percent in the U.S. to $155 million, from the year-ago period and 25.5 percent globally. It's expected to post another 40 percent decline in the first quarter of 2012. Meanwhile, sales of Levaqui fell 98.8 percent globally in the fourth quarter.

Both of these products are close to $1 billion in sales annually, so Johnson & Johnson needs to make up for that loss with some of this new product launches, which are going quite well, Conover said.

As its older products decline, Johnson & Johnson is moving forward with numerous pipeline products, some could even have the potential of becoming the next billion-dollar blockbuster drug.

Sales of prostate cancer pill Zytiga, which was launched in early 2011, came in at $280 million last year and analysts expect its sales to triple in 2012.

On an annual basis, we have Zytiga's peak sales at over $1 billion, Conover said. It's going to take a little time to get to that, but that's what we think it eventually could reach.

Anti-clotting pill Xarelto was launched in mid-2011 and is expected to jump from last year's $10 million in sales to $225 million in 2012 and $1.5 billion in 2015.

Sales of Simponi, a biologic compound for treating chronic inflammatory diseases, were $119 million in the fourth quarter, up 83 percent. In this same therapeutic area, Johnson & Johnson has also launched Stelara. Its sales were $207 million in the fourth quarter, up 73 percent.

Sales of another topline contributor, biologic Remicade, increased 34 percent to $1.43 billion in the quarter.

Johnson & Johnson will likely discuss more recent developments during Tuesday's conference call, including research data to be released later this year on some other drugs it's developing such as hepatitis C treatment TMC435, canagliflozin for Type 2 diabetes and bapineuzumab for Alzheimer's disease.

Despite strong sales performance in recently launched products, pricing pressures remains.

As you have seen in several markets, we have experienced pricing pressure in 2011, and we expect that this pressure will continue in 2012, Dominic Caruso, vice president and chief financial officer at Johnson & Johnson said during a Jan. 24 conference call with analysts. And then also we do expect that European austerity measures and the pressure in Europe will continue to cause pressure in pricing in 2012 to a greater extent than we saw in 2011.

Stumbles

While Johnson & Johnson has gotten past a spate of generic competition that ate into sales of its core drugs, the company continues to lose hundreds of millions of dollars a year as it struggles with manufacturing quality issues.

The trickle of recalls that started in 2009 with Tylenol products for kids turned into a flood over the next two years -- about 30 products recalled ranging from artificial hips to contact lenses -- and damaged Johnson & Johnson's reputation. However, as recent as February 2012, the company announced it would recall its entire U.S. supply of infant's Tylenol which had only just returned to shelves in November, due to a faulty dosing system.

Conover doesn't think the recalls will have a material impact on Johnson & Johnson's first quarter results. There are a couple of recalls announced in the quarter, but I think that trend of recalls should start to tail off and get to a more normalized level towards the end of this year, Conover added.

Johnson & Johnson executives have expressed confidence during the fourth-quarter earnings call that the worst is over.

We have turned the corner on a particularly difficult period for our company, Weldon said. We feel positive about where our consumer business is headed in 2012.

Johnson & Johnson expects most recalled products to be back on the market by late 2012 or early 2013. Broadly, re-launched brands are stabilizing performance in respective categories, but recovery is early and some major products have yet to return, UBS analyst Rajeev Jashnani wrote in a note to clients.

Investors should also watch for Johnson & Johnson's comments on its liability in continued litigation over allegations of Johnson & Johnson hiding antipsychotic drug Risperdal's risks and tricking Medicaid regulators into paying more than they should have for the medicine. The U.S. has been investigating Risperdal sales practices since 2004.

J&J was ordered to pay $1.1 billion in fines, the largest of the three handed down so far against the company in state cases. The penalty amounts to 11 percent of Johnson & Johnson's $9.7 billion in net income for 2011 and 1.7 percent of its $65.03 billion in revenue last year.

Johnson & Johnson will be undergoing a rare major shake-up in its executive suite following the swarm of product recalls and litigations. William Weldon, who presided over Johnson & Johnson during one of the most tumultuous periods in its history, will step down in less than two weeks, and receive a golden parachute worth $143.5 million.

Alex Gorsky, head of Johnson & Johnson's medical device business, is scheduled to take the helm at the company's annual meeting on April 26.

It's going to be his first quarter and it'll be interesting to see if he's going to shift directions, Conover said. Though I don't anticipate anything like that.

Synthes

In an important move in the orthopedic area, Johnson & Johnson agreed in April 2011 to acquire Swiss medical device maker Synthes in a cash and stock deal valued at $21.3 billion. Synthes is the world leader in equipment to treat trauma, and also has a large business in the spinal area.

The transaction would make Johnson & Johnson the leader in trauma and move the company into second place in spine, an area that might require some divestitures.

Biomet Inc.'s recent offer to acquire the global trauma business of Johnson & Johnson's DePuy Orthopaedics Inc. is expected to help clear regulatory hurdles for the Synthes acquisition, which is expected to close in the first half of the year.

Johnson & Johnson executives are also likely to discuss the acquisition on the conference call.

Stock Performance

Although the past decade has been essentially flat for Johnson & Johnson's stock, the close of the Synthes acquisition will result in nearly $4 billion of increased revenue immediately and could be a potential catalyst for Johnson & Johnson's stock. In addition, the company has increased its dividend for the past 49 years - now yielding 3.5 percent.

One of Johnson & Johnson's main competitors in the pharmaceuticals industry is Pfizer Inc. (NYSE: PFE), which will report first-quarter earnings on May 1, before market opens. Pfizer is currently trading around $21.85 a share.

Other competitors include: Merck & Co., Inc. (NYSE: MRK), Abbott Laboratories (NYSE: ABT), Eli Lilly & Co. (NYSE: LLY), Stryker Corporation (NYSE: SYK) and Novartis AG (NYSE: NVS).

Johnson & Johnson (NYSE: JNJ) is up currently trading around $63.54 a share. Year to date, the stock has lost 3.11 percent in value.