Johnson & Johnson Delivers Solid -- Not Spectacular -- Earnings

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Johnson & Johnson (JNJ) reported 19% lower earnings due to an expected massive restructuring charge -- its biggest ever. But excluding these items, the maker of Tylenol and Band-Aid earned $2.8 billion, or $1.02 per share, beating analyst estimates of 97 cents per share. For the full year, earnings per share were $4.63, beating the $4.55 analysts had expected.The diversified health care company registered a healthy 9% jump in fourth-quarter sales to $16.6 billion, beating estimates of $15.7 billion. Operational growth was 4.5%, and currency-exchange gains contributed 4.5%. Worldwide sales for full-year 2009 were $61.9 billion, a decrease of 2.9% over 2008.

For 2010, J&J announced earnings guidance of $4.85 to $4.95 per share, which excludes the impact of special items. Sales guidance is in the $64 billion to $65 billion range.

"In a year of tremendous challenge, we maintained our long-term focus while delivering solid results," says William Weldon, chairman and CEO. "We made important investments in acquisitions, strategic partnerships and launches of recently approved innovative products while preserving our financial flexibility to continue to invest in innovation. This positions us well for continued leadership and growth in global health care as we enter 2010."

Investors weren't impressed, however. The stock is down nearly 0.9% in midmorning trading to $62.69 after the earnings report. Over the past 12 months, J&J shares outperformed their Big Pharma peers, but significantly underperformed the major indexes.

An Anti-Aging Promise

J&J operates through three segments: consumer, pharmaceuticals and medical devices and diagnostics, with subsidiaries in 57 countries. Worldwide consumer sales grew grew 10.2% in the fourth quarter, easing many concerns regarding the segment's growth. For the full year, the category decreased 1.6% but grew 2% operationally, thanks to growth for Neutrogena, Aveeno and the Dabao skin care product, and for international sales of Listerine, Splenda Sweetener and Vania.

Going forward, Weldon promises a breakthrough in anti-aging technology to be unveiled in the first quarter, as well as other products to ensure continued growth in this segment, which contributes 26% of J&J's revenue. As for the Tylenol recall and the warning letter from the U.S. Food and Drug Administration, Weldon says J&J doing everything to address the FDA's concerns, including discontinuing the use of those smelly wood palettes that were responsible for the problem.

J&J actually delivered growth in its pharmaceutical segment, with a sales growth of 5.4% in the fourth quarter. For the year, pharma sales declined 8.3%. While inflammatory drug Remicade, HIV treatment Prezista, Velcade for multiple myeloma and antipsychotic Risperdal Consta had strong growth, Topamax for migraine and antipsychotic Risperdal were hurt by generic competition.

During the quarter, J&J submitted for FDA approval tapentadol extended-release tablets, an investigational oral chronic pain treatments. In Europe, J&J submitted paliperidone palmitate, a once-monthly antipsychotic injection for schizophrenia.

Fewer Patent Expirations Coming

Weldon believes J&J is in better position in terms of patent expirations in the coming years compared to its peers and that the headwinds from such expirations are largely over. J&J plans to file at least three compounds in 2010 for hepatitis C, HIV and leukemia. By 2013, J&J expects to submit 10 more compounds. The pipeline for compounds investigated with other pharmas for Alzheimer's, vaccines, HIV and prostate cancer is promising, management says.

J&J's Medical Devices and Diagnostics segment is its biggest. Sales grew by 11.8% in the quarter. For the year, sales increased 1.9% mostly due to growth in Ethicon's surgical care and aesthetics products; DePuy's orthopaedic joint reconstruction, spine, and sports medicine businesses; Ethicon Endo-Surgery's minimally invasive products; and Ortho-Clinical Diagnostics' professional products. But the Cordis franchise declined as competition in the stent market increased.

The pipeline in this segment seems more robust than in pharmaceuticals. It includes a new stent and sedation system.

J&J sees growth opportunities across the globe as the BRIC countries (Brazil, Russia, India and China) and other emerging economies increase health care spending. Regarding health care in the U.S., Weldon believes that reform may lead to higher costs, but that the additional access to patients, especially for J&J, can be beneficial.

While certainly delivering solid numbers, and perhaps reporting on several interesting new developments, no real breakthroughs or meaningful developments came up. And without these, the stock may stay stalled. Investors are first looking for confidence in J&J's ability to deliver more exciting opportunities.
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