J&J’s Consumer Products Business Leads FY2006 Revenues

Strong Final Quarter…

U.S. healthcare giant J&J announced yesterday that sales of its products in the fourth quarter of 2006 reached a massive US$13.7 billion, representing 8.5% year-on-year (y/y) growth from the same period in 2005. Sales from its historically strong pharmaceutical business were up an impressive 8.5% y/y to US$5.9 billion, while the mainstay consumer care unit lead the way in growth by posting an 11.2% y/y rise in sales to reach US$2.6 billion. Sales from J&J’s Medical Devices and Diagnostics (MD&D) division also grew in the fourth quarter by 7.2% y/y, despite a sharp fall in stent sales.

These strong revenues allowed the New Jersey company to post net earnings of US$2.2 billion for the last quarter of the year; a rise of 3.5% y/y from 2005. However, these earnings were significantly impacted by an after-tax charge for in-process research and development of US$217 million, associated with the acquisition of Pfizer Consumer Healthcare. In a press release, the company noted that after excluding this charge, earnings for the full year were US$2.4 billion. All of the above numbers exclude charges associated with J&J’s pending US$1.4 billion acquisition of medical device manufacturer Conor MedSystems.

This strong bottom-line performance came as J&J once again managed to keep a lid on its costs. In the fourth quarter the company saw its cost of sales rise by 10.1% y/y compared to the same 2005 quarter, primarily due to an unfavourable product mix. Meanwhile, selling, marketing and administrative costs rose by a modest 1.1% y/y, due to cost cutting achieved over the quarter, although this was offset by aggressive investment in advertising . Research and Development (R&D) costs rose by just 1.1% y/y, which was a significant reduction from the annual trend of J&J making significant investment in R&D. However, the company explained this discrepancy as being due to the timing of milestone payments.

...Ending a Typically Solid Full Year

The strong results posted in the final quarter of 2006 were generally reflected in J&J’s full year results. Net earnings for the year were US$11.2 billion—a 9.9% increase over the prior year. These earnings included after-tax charges for in-process research and development of US$448 million and a one-time after-tax gain of US$368 million associated with the termination of the company’s planned acquisition of cardiac device specialist Guidant.

Pharma Product Revenues up 8.5% y/y in Fourth Quarter

Worldwide pharmaceutical sales hit US$23.3 billion for full-year 2006—a gain of 4.2% y/y. J&J achieved this against a backdrop of considerable generic erosion to some of its key products, which had a 3% negative impact on global sales. Major sales drivers for the company include:

• Sales of J&J’s top-selling pharmaceutical product, the anti-psychotic medicine Risperdal (risperidone), rose by 18% y/y to US$4.2 billion. Growth in this particular franchise was driven by sales of Risperdal Consta, a long-acting injectable formulation of the drug. On the negative side however, sales of the oral formulation dipped outside the U.S. market due to increased generic competition.
• J&J’s mutli-talented anti-TNF (tumour necrosis factor) inhibitor Remicade (infliximab), also posted strong growth for full-year 2006, with sales revenues rising to US$3.0 billion, compared to US$2.5 billion in 2005. This growth represents a significant expansion of the anti-TNF market, reflecting wider acceptance of these products by physicians as well as the addition of new indications.
• J&J’s epilepsy drug Topamax (topiramate) achieved sales growth for full-year 2006 of 21%, compared to 2005. Sales of this product were more or less flat outside the United States, although inside the U.S. market it posted particularly strong gains, driven by increased uptake of the drug to treat migraines.
• Finally, attention deficit hyperactivity disorder treatment Concerta (methylphenidate extended release), completed J&J’s roll call of pharmaceutical growth drivers for 2006. This product achieved full-year 2006 sales of US$930 million—an increase of 20% over 2005—with the product posting strong sales both within and outside the U.S. market.

MD&D Strong Despite Cypher Slump

J&J reported a 6.2% increase in sales from its MD&D units, with sales revenues for the full year coming in at US$20.3 billion. This strong growth came despite a weakness in revenues from one of J&J’s largest MD&D businesses, Cordis. This group recorded sales growth of just 3% for the full year, and saw its revenues for the final quarter slump by 4% after a sharp fall in sales of its Cypher sirolimus drug-eluting stent. This slowdown in Cypher sales was due to an overall toughening of the drug-eluting stent market, as the U.S. market in particular was rocked by renewed concerns about the potential link between these products and an increased and prolonged risk of blood clots. In its analyst presentation, J&J said that total worldwide sales of Cypher in the fourth quarter were down around 15% y/y to US$580 million. This figure consisted of US$280 million in sales of the artery propping device in the United States—an 18% y/y drop from the comparable 2005 period—and US$300 million in sales outside of the United States. This latter figure represents around a 12% y/y decrease from the same period in 2005.

However, despite this J&J commented that it has managed to maintain Cypher’s market share in the competitive drug-eluting stent market. Overall, the company believes that Cypher now holds around 48% of the global market, consisting of around 46% market share in the United States and 51% in regions outside the United States.

Breadth the Key to J&J’s Strong Business

There are problems in certain areas, notably in stent sales and from heavy generic competition impacting pharmaceutical business sales. However, J&J still managed to post a decent set of financial results for full-year 2006. This solid performance was supported significantly by J&J’s philosophy of being a broad healthcare company. A key part of this strategy is J&J’s mainstay consumer products business, which recorded a full-year sales revenue increase of 7.5% to reach US$9.8 billion. This figure does not include any sales from J&J’s US$16.6 billion acquisition of Pfizer Consumer Health (PCH) during the year, as products acquired during this deal were not added to J&J’s product mix early enough in 2006 to have a meaningful impact on results.

J&J expects this strong revenue growth to continue into next year, driven by the inorganic growth that it hopes to achieve from its acquisition of PCH. At its packed analysts meeting J&J’s chief executive officer, William Weldon, said that J&J feels that the PCH business is an ideal fit with J&J’s current consumer health offerings. This is particularly because the acquisition now gives J&J a toehold in a number of areas, including oral care, eye-care and smoking cessation, where previously it either had no presence or a very limited presence in the market. Weldon also saw a number of other synergistic advantages in areas that are currently considered a strength of J&J’s, such as over-the-counter pharmaceuticals.

Finally, and perhaps most importantly given the rapid march of globalisation, J&J also believes that this deal significantly enhances its global reach. J&J believes it can leverage growth from this deal through its historical strength in markets such as China and Brazil, where it feels its presence is much stronger than PCH’s, while the deal also gives J&J a foothold in many new markets around the globe.

Outlook and Implications

J&J has once again proven that its broad business model is robust enough to withstand the considerable challenges provided by the global healthcare market, and the company remains positive about the future. Despite weak Cypher stent sales in the final quarter, the company anticipates that this market will begin to recover next year. J&J also believes that it can maintain market share in this area, on account of Cypher’s strong safety record and its market-leading abilities in tackling difficult-to-treat lesions. This is despite the likely entry of further competition into the U.S. drug-eluting stent market in 2007. Looking further ahead for Cordis, the company expects the acquisition of Conor MedSystems to allow it to remain a market leader in the drug-eluting stent market, as it adds Conor’s next-generation CoStar stent, with its unique controlled drug-delivery technology, to the product mix.

Meanwhile, J&J’s management team were also bullish yesterday about the future of the pharmaceutical business, despite the impact of generic competition in a number of key product areas. This optimism was based on the strength of its pipeline and the robust performance of several newer products. J&J hopes these will offset the impact of the forthcoming exclusivity losses to Risperdal and Topamax.