Johnson & Johnson Q1 Profit Rises 12% On Demand For New Drugs

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Products made by Johnson & Johnson for sale on a store shelf in Westminster.

Johnson & Johnson (NYSE: JNJ), the world's second-biggest health care company, reported better-than-expected first quarter profit on cost cutting and strong demand for new drugs, which offsets drags from generic competition and recalls.

Johnson & Johnson posted net income of $3.91 billion, or $1.41 a share, up 12 percent from $3.48 billion, or $1.25, a year ago, the New Brunswick, N.J.-based company said in a statement Tuesday.

Excluding acquisition-related currency gains and DePuy hip recall-related charges, net earnings were $3.8 billion, or $1.37 a share, topping the average analyst forecast of $1.35 per share, compiled by Thomson Reuters. Over the past three months, the consensus estimate has increased from $1.33 a share.

We continue to bring meaningful innovations to our patients and customers through the strong performance of our recently launched products, said William C. Weldon, Chairman and Chief Executive Officer. 

Revenue dipped 0.2 percent, to $16.14 billion, from the year-earlier total of $16.17 billion. Analysts were expecting sales of $16.28 billion.

The company raised its 2012 profit forecast by 2 cents, to $5.07 to $5.17 per share, excluding one-time items, from the $5.05 to $5.15 a share it projected last quarter.

Pipeline

Sales of new medicines that include the prostate cancer medicine Zytiga and blood thinner Xarelto bolstered J&J's results in the first quarter.

Sales of prostate cancer pill Zytiga, which was launched in early 2011, came in at $100 million in the first quarter, doubling the year-ago performance.

On an annual basis, we have Zytiga's peak sales at over $1 billion, Morningstar analyst Damien 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 $116 million in the first quarter, up 22.1 percent from the year-ago period, after rising 83 percent in the fourth quarter. In this same therapeutic area, Johnson & Johnson has also launched Stelara. Its sales were $221 million in the first quarter, up 33.1 percent from the same time a year ago, following a 73 percent increase in the fourth quarter.

Sales of another topline contributor, biologic Remicade, increased 18.4 percent to $1.52 billion in the quarter.

Johnson & Johnson is depending on the performance of these new drugs to make up for the loss of the antibiotic Levaquin and its ADHD/ADD medication Concerta, which expired in May and June of 2011.

Sales of Concerta dropped 22.4 percent in the U.S. to $197 million, from the year-ago period, after dropping 40.6 percent in the fourth quarter. Meanwhile, sales of Levaqui fell 93.3 percent globally, following a steep decline of 98.8 percent 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.

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 -- damaged Johnson & Johnson's reputation. As recent as February 2012, however, 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 thinks the trend of recalls should start to tail off and get to a more normalized level toward the end of this year.

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, relaunched 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.

Johnson & Johnson will be undergoing a rare major shake-up in its executive suite following the swarm of product recalls and litigations. CEO Weldon, who presided over J&J during one of the most tumultuous periods in the company's history, will step down in about a week, and receive a golden parachute worth $143.5 million.

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

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. The deal for Synthes, the world leader in equipment to treat trauma and also a key player in the spinal care business, may require divestitures.

The transaction would make Johnson & Johnson the leader in trauma care and move the company into second place in spinal care after Medtronic Inc. (MDT), 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. 

Stock Performance

Although the past decade has been essentially flat for Johnson & Johnson's shares, 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 shares. In addition, the company has increased for the past 49 years its dividend -- now yielding 3.5 percent.

One of Johnson & Johnson's main competitors is Pfizer Inc. (NYSE: PFE), the No. 1 pharmaceutical company in the U.S., which will report first-quarter earnings on May 1, before the market opens. Pfizer is trading around $22.08 a share.

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

Shares of Johnson & Johnson fell 12 cents, or less than 1 percent, to $63.84 in Tuesday morning trading. Year to date, shares have lost 2.58 percent in value.

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