Product Recalls Affect J&J's 2010 Sales, Profits

Johnson & Johnson (J&J; U.S.) has announced financial results for the fourth quarter and full year ended 31 December 2010, with total product sales dipping by 5.5% for the quarter and 0.5% year-on-year (y/y) for the full year respectively. The firm reports in three major business segments—pharmaceutical, consumer, and medical devices and diagnostics—with the first two affected by a series of product recalls since early 2010. Pharma sales registered lower U.S. sales in both the periods under review, falling by 5.7% and 4% y/y/, while internationally there was a 3.5% y/y drop in the fourth quarter and an encouraging 4.4% y/y increase in the full year period. Consumer sales on the other hand reported falling sales in both periods, down 15% for the quarter and 7.7% for the full year. J&J acknowledged that topline was significantly affected by the recalls of over-the-counter (OTC) medicines and the suspension of manufacturing at McNeil Consumer Healthcare's Fort Washington facility. Furthermore, currency devaluation in Venezuela has also affected sales, the company said.

The firm maintained its tight grip on the cost structure, with an all-round decrease in selling, marketing, and administrative, and research and development (R&D) costs. However, cost of products sold registered a slight increase of 1.9% in the full-year period, reflecting new product sales. Net income stood at US$1.94 billion in the fourth quarter, down 12% y/y, while experiencing an 8.7% rise in the full-year period.

In terms of geographic sales, the firm's operations in Asia-Pacific and Africa rose to US$2.99 billion in the fourth quarter and US$32.13 billion in the full-year period. U.S. and European regional sales fared the worst, with the fourth quarter figures for the latter dropping by 10.5% y/y.

Product sales were dominated by Remicade (infliximab), Velcade (bortezomib), and Risperdal Consta (risperidone). Overall, the growth picture was negative for most of the blockbusters in the firm's product list, primarily due to increasing competition—generic and other brand name drugs—as well as regulatory challenges. The silver lining came in the form of recently launched products such as Prezista (darunavir), which reported sales growth of 31.8% y/y in the fourth quarter and 44.8% in the annual year figures. Among the new product launches, Invega (paliperidone) achieved sales of US$116 million, up 10.2% y/y in the fourth quarter and US$424 million, up 7.9% y/y in the full-year period.

Outlook and Implications

J&J's financial performance was expected to reflect lower topline growth due to the product-related events in 2010. Problems for the firm started early on in 2010 when it issued a mass recall of several OTC paediatric products, including Tylenol (paracetamol), Motrin B (ibuprofen), and Benadryl (diphenhydramine). Over 200 million bottles were withdrawn towards the end of the year. Apart from these OTC drugs, the firm also withdrew certain lots of Rolaids, Mylanta, and Lipitor (atorvastatin calcium). There was no respite as the firm's DePuy unit initiated a recall of its hip-replacement products as well. In all, the firm is known to have issued 17 notifications for product recalls from September 2009. J&J is also facing a series of litigations and product liability lawsuits following these withdrawals. The firm is being investigated by U.S. legislators for a "secret recall" it is alleged to have initiated in late 2009 relating to various OTC products. In 2010, charges of US$922 million representing the net impact of litigation settlements, product liability expenses, and costs associated with the DePuy recall were registered.

In the year ahead, the firm will focus firmly on upgrading its manufacturing and supply chain activities, with particular reference to the Fort Washington facility whose operations were suspended as a result of the recall last year. The investments going into the upgradation will increase the firm's cost structure. Furthermore, there is likely to be continued impact of the ongoing product liability lawsuits in the United States. J&J has issued an earnings guidance for the full year 2011 in the US$4.80–4.90 per share range excluding the impact of special items. These figures reflect the continued impact of the concerns registered earlier. Despite these issues, the firm is expected to maintain interest in acquisitions, particularly in speciality segments, to boost its experimental drug pipeline.