By LINDA A. JOHNSON
AP Business Writer
Health care giant Johnson & Johnson, struggling with tough market conditions, ongoing manufacturing problems and other issues, lowered its profit forecast for the year after posting second-quarter net income that dropped by half due to a slew of litigation and acquisition-related charges.
The maker of Band-Aids, medical devices and prescription drugs, its iconic image tarnished by legal and manufacturing lapses, on Tuesday noted some positive signs. They include small increases in hospital admissions and surgical procedures in the U.S. Despite that, revenue dipped by 0.7 percent due to lower sales in the U.S. and for consumer health products worldwide.
The results beat analysts' expectations for adjusted profit by a penny, but fell short of the revenue forecast by nearly $250 million.
Many J&J nonprescription products remain off the market due to about three dozen recalls since September 2009. The company said Tuesday that they won't all be back in stores until sometime next year. Two of its consumer health product factories are operating at reduced capacity due to increased government scrutiny and the third is being rebuilt from the ground up. J&J noted remediation costs this year have been higher than expected.
"We remain committed to and optimistic about the future of our (over-the-counter) business," new CEO Alex Gorsky told analysts on a conference call Tuesday, adding that there's strong consumer demand for products that are back in stores, such as some versions of Tylenol.
Gorsky gave what amounted to a long pep talk about the company's great opportunities, despite continuing pressure from government and other health plans to reduce prices. His priorities include resolving the manufacturing problems, building on recent approvals and other success in the prescription drug business, and integrating Swiss orthopedics device maker Synthes. The company bought Synthes in June for $19.7 billion, its largest acquisition ever, and Synthes product sales in the quarter's last couple of weeks boosted revenue by 1.2 percent.
"I am resolute to keep our credo as the foundation of Johnson & Johnson," Gorsky said, referring to J&J's longtime guiding principle to put patients, doctors and employees before profits.
Many critics have questioned whether J&J still follows the credo. The government is prosecuting J&J for alleged kickbacks to boost medicine sales and improper marketing of a few prescription drugs. And J&J has had to recall medicines containing the wrong amount of active ingredient or glass or metal shards.
The company, based in New Brunswick N.J., said net income was $1.41 billion, or 50 cents per share, down from $2.78 billion, or $1 per share, a year earlier. Revenue fell by 0.7 percent to $16.48 billion.
Excluding a total of $2.2 billion in after-tax charges, income was $3.63 billion, or $1.30 per share. Analysts expected earnings per share of $1.29 on revenue of $16.71 billion, according to FactSet.
The charges included include asset write-downs, costs from the Synthes purchase, more recall costs for its DePuy hip replacements and another $611 million added to J&J's legal reserve for a potential civil settlement with the Justice Department its marketing practices. That case is expected to be finalized soon, with J&J paying a penalty in the $2 billion range.
J&J also took a charge for unfavorable currency exchange rates, which reduced total revenue by 4.2 percent.
Analyst Erik Gordon, a professor at University of Michigan's Ross School of Business, said the litigation, integration and currency expenses have become a recurring part of J&J's business and shouldn't be taken as charges.
"The challenge for (J&J) is to get new products out to the market, fix their manufacturing operations, and to change their culture so that it doesn't all go for waste because of quality control and illegal practices drains," he said.
Prescription drug sales edged up 1 percent, to $6.3 billion, on strong sales for some existing medicines and several new drugs. Those include Xarelto for preventing blood clots and strokes, cancer drug Zytiga, Invega for schizophrenia, Stelara for psoriasis and Incivo for hepatitis C.
But sales were down 0.1 percent to $6.57 billion for medical devices and diagnostics, and down 4.6 percent to $3.62 billion for the troubled consumer health business.
"This lackluster growth probably represents the 'new normal' in both sales and (earnings per share) growth," said analyst Steve Brozak of WBB Securities. "This is emblematic of" declines for all large drugmaker, medical device and health care companies, not just J&J.
Besides the manufacturing problems in consumer health, the company noted supply disruptions reduced sales of power surgical tools and products from the Cordis Endovascular business, which makes artery-opening stents and guidewires and catheters for minimally invasive surgery.
J&J's breast and ovarian cancer drug Doxil saw sales drop 90 percent in the quarter, to just $13 million, because the manufacturer to which J&J outsourced production shut down its Ohio factory last fall amid serious manufacturing deficiencies. J&J has been seeking a new supplier and said it hopes to resume shipments in the fourth quarter.
The company recently applied for approval of experimental drugs canagliflozin for Type 2 diabetes and bedaquiline for drug-resistant tuberculosis, and to allow sales of Zytiga and Xarelto for additional uses. Meanwhile, the first late-stage testing results for Alzheimer's drug bapineuzumab - arguably J&J's most closely watched experimental drug - will be announced at a September medical conference.
J&J now expects 2012 earnings per share of $5 to $5.07 per share, down from its April forecast of $5.05 to $5.15 per share, excluding special items. It expects revenue to total about $67 billion. Last year, J&J reported revenue of $65.03 billion, after rare declines for two years due to the global recession and the recalls.
Analyst Jeffrey Holder of Jeffries & Co. Inc. wrote that J&J's results "well illustrated some of the challenges facing the rest of the" large drugmakers, but called the business "operationally sound."
After an initial decline, J&J shares rose 55 cents to close at $69 Tuesday.
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