Johnson & Johnson Earnings Preview

Johnson & Johnson (JNJ) is scheduled to report quarterly results on Tuesday, January 26, kicking off the earnings season for Big Pharma. But J&J is more than just a pharma play. It's a fully diversified health care company, which has helped it weather the recent storm in the pharma sector.Pharmaceutical companies are bracing for a patent cliff in the coming years as many blockbuster drugs lose patent protection, and many of them are mimicking J&J's model, expanding into new areas and markets. Pfizer (PFE) and Sanofi-Aventis (SNY) are two notable examples.

J&J operates through three segments: consumer, pharmaceuticals, and medical devices and diagnostics, with subsidiaries in 57 countries. It sells such diversified products as No More Tears baby shampoo, Band-Aids, Clean&Clear skin care line, Visine, Tylenol, Listerine and more. It will be interesting to see how J&J is faring with its diversified model. Can its oft praised management team deliver?

Looking at the numbers, analysts call for earnings of 97 cents per share on revenues of $15.72 billion, a slight improvement over last year's fourth quarter results of earnings of 94 cents per share, excluding special items, on revenues of $15.18 billion. The company has recently reaffirmed its fiscal 2009 earnings guidance of $4.54 - $4.59 per share, excluding items. Analysts are projecting $4.55 per share.

In the third quarter, however, sales were down 5.3% to $15.1 billion, even as it beat expectations, with both consumer and pharmaceutical divisions' sales declining. As the global economic outlook improves, however, can the cash cow that is Johnson & Johnson's consumer division improve enough to offset the declines in its pharmaceutical division. Investors will want answers to such questions and more as J&J comes off what's been a rather rough quarter.

Challenges and Changes Ahead

The Tylenol maker recently issued massive recall that began last year and expanded to include other brands. J&J, once a symbol of putting its customers' safety first, has also been slapped with a letter from the U.S. Food and Drug Administration chastising it over its behavior in the matter. The FDA said J&J was far too slow to respond to reports of smelly products.

Operationally, the New Brunswick, N.J.-based company announced in November its second restructuring initiative since 2007, including reducing layers of management, amounting to 6-7% of its global workforce. The will lead to pre-tax cost savings of $800 to $900 million in 2010 and $1.4 to $1.7 billion when fully implemented in 2011. J&J said it expects to record an associated pre-tax, restructuring charge in the range of $1.1-$1.3 billion in the fourth quarter of 2009, treated as a special item.

The company made two acquisitions this past quarter: One of aprivately held medical devices company Acclarent, Inc. for approximately $785 million; and the other of Gloster Europe, a privately held developer of health care-acquired infections meds. J&J might give more clues as to what it has in store next and what's the strategy going forward.

During the quarter, the FDA approved Stelara for psoriasis, and European authorities approved Simponi for arthritis. Several devices were also cleared by regulatory authorities.

But it is here that J&J faces the most challenges. Just recently, it received response letter from the FDA regarding its antibiotic drug ceftobiprole with the FDA requesting more information. And while management sounded optimistic last quarter regarding its pipeline, this area will be the hardest to sell to investors without actual new developments.

Then there is the issue of allegations from the Department of Justice regarding kickbacks to Omnicare that investor will require answers to.

Over the last year, JNJ shares outperformed their Big Pharma peers with a 12.9% return, but significantly underperformed the Dow and the S&P 500. Still, at $63.40, JNJ stock is trading quite near its 52-week high of $65.95 and a relatively high trailing P/E of 13.8. Without meaningful developments, it's hard to see the stock going much higher from here.
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