Johnson & Johnson (NYSE: JNJ), the world's second-biggest health care company, is expected to report higher second-quarter profit as strong performance of new drugs help mitigate 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 $1.29 per share on $16.7 billion in revenue, compared with earnings of $1 a share, or $1.28 excluding restructuring charges, litigation expenses and recall costs, according to analysts polled by Thomson Reuters. Revenue was $16.6 billion. Over the past three months, the consensus estimate remained unchanged.

The New Brunswick-N.J. based company didn't give quarterly guidance, but predicted 2012 annual earnings of $5.07 to $5.17 per share, which reflects the positive impact of current exchange rates.

Many major U.S. drug makers will be coping with the loss of market exclusivity on a number of blockbuster drugs during the past year and the entry of lower-priced generic competition.

In relation to most of the other pharmaceutical firms, I would say J&J probably had respectable growth in the second quarter, Morningstar analyst Damien Conover said. They've got most of their patent losses in the rear view mirror.

In the first quarter, Johnson & Johnson topped estimates by one cent, coming in at profit of $1.37 a share, compared with the estimate of net income of $1.36 a share. It marked the fourth straight quarter of beating estimates. Revenue fell 0.2 percent to $16.14 billion, from $16.17 billion.

New Drugs

Johnson & Johnson has gotten through a spate of generic competition that has slashed revenue from blockbuster drugs.

The loss of the antibiotic Levaquin and its ADHD/ADD medication Concerta, which expired in May and June of 2011, hit the U.S. division particularly hard. In the first quarter, U.S. pharmaceutical sales declined 10.8 percent.

Both of these products are close to $1 billion in sales annually.

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.

They still have a little bit of pressure from Levaquin and Concerta, which are all close to annualizing, Conover said.

In the first quarter, sales of Concerta dropped 22.4 percent in the U.S. to $197 million, from the year-ago period and 14.9 percent globally. Meanwhile, sales of Levaquin fell 93.3 percent globally in the first quarter.

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.

Developing new drugs is tough and not many companies are doing a really good job these days, said UBS analyst Rajeev Jashnani. But J&J is, whether internally or externally, they are having a success.

Sales of prostate cancer pill Zytiga, which was launched in early 2011, came in at $200 million in the first quarter of 2012 and analysts expect its sales to increase by $250 million in the second quarter.

Zytiga should continue to do very well, Conover said. According to recent data, Zytiga could even be used in more front-line therapy for prostate cancer. For 2012, we have Zytiga's sales at just under $1 billion.

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. I'm anticipating Xarelto to be a modest contributor this quarter, but it should eventually become a pretty important product, Conover said.

I think both drugs could easily exceed Levaquin and Concerta over the next two to three years, Conover added.

It's really a broad-based growth from their pharmaceutical franchise and it gives investors multi-year visibility on the top line, in which I think is really important these days, Jashnani said.


While Johnson & Johnson's 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.

Sales of consumer products fell 2.4 percent compared with the first quarter of last year, partly because of lower production levels of the over-the-counter products after the consent decree, the company said.

The worst is probably behind them, but it's not getting much better yet, Jashnani said. They've probably lost $1 billion in over-the-counter revenue and that's a pretty high-margin business.

Some popular over-the-counter consumer brands may not return to store shelves until next year, company executives said, as efforts to fix manufacturing problems at three Johnson & Johnson plants are taking longer than expected.

It is difficult to accurately predict the speed of recovery, and as such we are in fact behind where we thought we might be as this point, Dominic J. Caruso, chief financial officer of Johnson & Johnson, said during a conference call to discuss the company's first-quarter earnings.

Investors should also watch for the company'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.

Johnson & Johnson may note that it has taken another $600 million charge for litigation reserves. The company is reportedly close to a settlement with the Justice Department that would include paying about $2 billion in penalties.


Much of the blame for Johnson & Johnson's stumbles fell on former CEO William Weldon.

Alex Gorsky, who took the helm in late April from Weldon, has identified fixing problems at the health-care giant as a top priority.

Gorsky will address analysts on the quarterly conference call for the first time on Tuesday.

The biggest difference is that Alex is engaged at a different level, Jashnani said. What we are going to notice is someone who is more engaged in the business, someone who is strategically a pretty smart guy and someone who understands what the issues are.

Conover, however, said he doesn't anticipate a major shift in strategic direction.


Investors also are likely to be watching for any details on the integration of its recently completed $19.7 billion acquisition of Swiss surgical trauma equipment and orthopedic implants maker Synthes Inc., which it plans to integrate with its DePuy business.

Johnson & Johnson will give its usual update of its financial outlook, which could include some impact from integrating Synthes.

The discussion on Synthes is going to be important on the conference call, though there isn't going to be much revenue associated with that in the second quarter, Jashnani said.

This is Johnson & Johnson's biggest acquisition ever and the deal is meant to lift the company to a dominant global position in the growing orthopedic surgery market.

J&J is limited post-Synthes in what it can do while still maintaining its AAA credit rating. We think J&J continues to be an acquirer going forward, though certainly looking at smaller deals than the Synthes transaction, wrote JP Morgan stock analyst Michael Weinstein in a May 29 note to investors.

Stock Performance

Johnson & Johnson announced a major share repurchase and that was outside of what folks were expecting, Jashnani said.

With the closing of the Synthes deal in June, Johnson & Johnson announced a $12.9 billion accelerated share repurchase program. The buyback of an expected 203.7 million shares amounts to 6.8 percent of Johnson & Johnson's outstanding stock post-Synthes and will more than offset the deal's dilution.

Prior to this announcement, Johnson & Johnson had been sitting on a large cash pile but hadn't really done anything to help boost earnings per share.

Now they've come out and done this accelerated share repurchase program and that's coming back in a big way, Jashnani said.

Johnson & Johnson's shares soared from $61 to $69 on just this news alone.

However, Conover of Morningstar thinks investors should also pay attention to any clarification on whether or not the accelerated stock repurchase will be taxable.

We think it will be taxable, but it's unclear whether or not the company believes it will be taxable, Conover said.

One of Johnson & Johnson's main competitors in the pharmaceuticals industry is Pfizer Inc. (NYSE: PFE), which will report second-quarter earnings on July 31, before market opens. Pfizer is currently trading around $22.81 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 $68.61 a share. Year to date, the stock has gained 4.62 percent in value.