Johnson & Johnson’s Earnings Beat Consensus; Raises Guidance

Johnson & Johnson’s (JNJ) third quarter earnings of $1.20 surpassed the Zacks Consensus Estimate by 7 cents and by 3 cents from the year-ago period.

However, the company reported revenues of $15.1 billion, a decline of 5.3% compared to the third quarter of 2008. While 2.8% of the decline in revenue was due to operational factors, foreign exchange movement was responsible for the remaining 2.5% decline. Sales in both domestic and international markets recorded declines of 8.1% and 2.5%, respectively.

Johnson & Johnson’s diversified business model is helping the company pave its way through tough situations. For the second quarter in a row, the company’s medical devices segment posted higher revenues than the pharmaceuticals. While medical devices recorded an increase of 2.3% compared to the year-ago period, consumer products and pharmaceuticals recorded a year-over-year decline of 2.7% and 14.1%, respectively.

While generic competition was primarily responsible for the decline in prescription drug business, unfavorable currency movements hampered sales of consumer products and medical devices.

For the pharmaceuticals segment, domestic and international sales declined 19.2% and 7.1%, respectively reflecting an operational decrease of 1.9% and a negative currency impact of 5.2%. Drugs such as Topamax (76% decline), an antiepileptic and a treatment for migraine, and Risperdal (40% decline), an antipsychotic medication, were negatively impacted by generic competition.

The company recently acquired an 18.4% stake in Elan Pharmaceuticals (ELN) for $885 million and an additional $500 million for its Alzheimer’s disease pipeline. Additionally, J&J entered into a licensing and collaboration agreement with Gilead Sciences, Inc (GILD) for the development and commercialization of a new fixed dose combination of investigational compound TMC278 (rilpivirine hydrochloride 25 mg) and Gilead’s Truvada (emtricitabine 200 mg/tenofovir disoproxil fumarate 300 mg) for treatment-naive adult patients with HIV-1. We believe J&J will look for such opportunities in the near future to boost its pharmaceuticals revenues.

While revenue from medical devices recorded a year-over-year increase of 2.3%, revenue would have been higher but for the negative currency impact of 1.8%. Primary contributors to growth include Ethicon’s surgical care and aesthetics products; Ethicon Endo-Surgery’s minimally invasive products; DePuy’s orthopaedic joint reconstruction, spine and sports medicine businesses; and Ortho-Clinical Diagnostics’ professional products. Increased competition in the US affected drug-coated stent sales.

Johnson & Johnson has been trying to offset the declining sales of some of its important products by bringing in new products through in-licensing deals and acquisitions. In addition, the company has been implementing several cost-cutting initiatives and consolidating its management structure to boost its earnings.

J&J raised its full year 2009 earnings guidance to $4.54 - $4.59 from the earlier guidance of $4.45 - $4.55. We have a Neutral recommendation on the stock.

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