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The Science of Hitting
The Science of Hitting
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Johnson & Johnson 3Q 2011 Results

October 18, 2011 | About:

On Tuesday, Johnson & Johnson (JNJ) reported third quarter 2011 earnings. Many of the readers on this site are value investors and likely hold a stake in JNJ, so I’ll just jump straight into the quarterly results:

Sales in the quarter were $16.0 billion, an increase of 6.8% as compared to the third quarter of 2010. This increase came from a mix of operational results (2.6%) and positive impact of foreign currency (4.2%).

When looking by geographic region, the results were split between the domestic market and the rest of the world; sales in the United States were down 3.7% to $6.87 billion, while the remainder of the company’s business achieved 8.3% operational growth. The Western Hemisphere, excluding the U.S., grew by 17.1% operationally, while the Asia-Pacific, Africa region and the European region grew 8.1% and 4.9% operationally, respectively.

In the consumer division, sales dropped 4.5% in United States due to lower OTC revenues from the recalls (up 3% excluding this division). Internationally, sales increased double digits (10.1%), largely driven by positive currency effects (6.8%). In regards to the struggles in the U.S. over the counter business, management had this to say:

“For the third quarter of 2011, sales for the OTC pharmaceuticals and nutritionals decreased 9.4% on an operational basis compared to the same period in 2010, with U.S. sales down 24.2%, primarily due to supply constraints.

On March 10 this year, McNeil-PPC announced the signing of a Consent Decree covering the manufacturing facilities in Las Piedras, Puerto Rico and Fort Washington and Lancaster, Pennsylvania. To date, McNeil has achieved all major commitments under and is in compliance with the terms of the Consent Decree. Side assessments were completed on schedule, and McNeil is tracking to achieve the committed milestones. Site specific work plans are required to be developed and submitted to the FDA before the end of October. McNeil continues to operate the manufacturing facilities in Las Piedras and Lancaster.

As we previously discussed, production volumes from these facilities continue to be impacted due to the additional review and approval processes. However, many of the key selective products are returning to the market, and volumes will continue to ramp up throughout the remainder of the year and into 2012. Regarding the products previously produced at the Fort Washington facility, McNeil continues to work on the reciting of these products to other facilities. McNeil is making progress on the validations at these sites and expect the modest amount of certain products to ship in late 2011. We anticipate the balance of the portfolio of key selective products will continue to be reintroduced throughout 2012.”

U.S. Pharmaceutical sales were down 6.1% in the quarter, with the loss of marketing exclusivity for LEVAQUIN (which expired in June) negatively impacting growth by about 9%. International sales jumped 18.5% on a constant currency basis (27.5% reported), partly due to the recording of sales of products from the territories relinquished by Merck due to JNJ’s $175 million buyout of Merck’s half interest in their 22-year-old joint venture, Johnson & Johnson-Merck Consumer Pharmaceuticals Co (now renamed McNeil Consumer Pharmaceuticals Co).

Sales in U.S. Medical Devices & Diagnostics were down 0.7%, while international sales increased more than 8% on an operational basis (driven by a 9.8% increase in Diabetes Care and an 8.7% increase in Ortho-Clinical Diagnostics).

On a GAAP basis, net earnings and diluted earnings per share for the third quarter were$3.2 billion and$1.15, respectively, a decrease of 6.5% year over year. Q3 2011 net earnings included $316 million of a mark-to-market adjustment associated with a currency option and deal costs related to the planned acquisition of Synthes; excluding these special items, net earnings and diluted EPS for the quarter were$3.4 billion and$1.24, representing increases of 0.8% and 0.8%, respectively, as compared to the same period in 2010. On the full year guidance, management tightened the range upward from $4.90-5.00 to $4.95-5.00.

As I noted in an article last month (link), many investors have had an issue with the financing on the Synthes deal; here is what management had to say:

“I don't have any incremental visibility to share with you, other than to say we're making very good progress in that regard. We're making good progress overall in planning for the acquisition, and I'm encouraged. And, obviously, we're going to keep working to make this transaction much more efficient from a financing perspective in the way we modeled it. But it's too early to give you any specifics, and when we know the specifics, we'll actually be very close to the closing of the deal just because of getting all the approvals in line. So that's the best update I can give you at the time.”

Last time they talked about the deal, they said, “There is plenty of opportunity to make the transaction less dilutive for shareholders.” Now the goal is more efficiency from a financing perspective, which is quite a fancy way to say pretty much nothing at all; six months later, and still too early for any specifics…

For the day, the stock was up just under 1%, and closed at $64.42 per share.

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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