Johnson & Johnson (JNJ.N) took quarterly charges of more than $3 billion largely related to the recall of its defective artificial hips and gave a 2012 earnings forecast below analysts' estimates.
The company's DePuy Orthopedics unit in 2010 issued a massive recall of its "metal-on-metal" hip-replacement devices after they shed metal fragments, causing disabling injuries.
"J&J is getting ready to offer some settlements" with patients who received an estimated 93,000 of the artificial hips, Morningstar analyst Damien Conover predicted. The fourth-quarter charges will allow money to be set aside for patients and lawyers involved in ongoing product liability litigation.
The DePuy ASR devices were developed to be more durable than traditional implants that combined metal and polyethylene for their ball-in-socket structure. But Conover said the J&J devices have almost a 30 percent failure rate, three times the typical rate of other metal-on-medical devices.
"The hip recalls worry me because their eventual costs are unknown," said Gabelli & Co analyst Jeff Jonas, who noted that the array of fourth-quarter charges include $800 million for medical costs of the recall.
The company forecast 2012 earnings of $5.05 to $5.15 per share, compared with the consensus Wall Street view of $5.21.
J&J spokesman William Price said most analysts had not yet factored the negative impact of the stronger dollar into their forecasts.
"Adjusting their estimates for the currency impact, 2012 guidance is in line with the analyst expectations," Price said.
Analysts said the company typically offers conservative forecasts at the start of the year, only to raise them as the year goes on.
The company reported better-than-expected fourth quarter earnings, helped by favorable taxes and sales of new prescription drugs, including its Zytiga treatment for prostate cancer and blood clot preventer Xarelto. Shares of J&J were little changed in afternoon trading, in line with the drug sector.
J&J Chief Financial Officer Dominic Caruso said special charges in the quarter also involve costs of litigation concerning its Risperdal schizophrenia drug.
The company last week said it would pay $158 million to settle a Texas lawsuit accusing it of improperly marketing Risperdal to its patients in the Medicaid health program for low-income Americans, including children. Similar lawsuits are pending in a number of other states.
PLANT OPENING DELAYED
Costly recalls of J&J's artificial hips took place about the same time J&J began recalls two years ago of dozens of consumer medicines, including its Tylenol and Motrin painkillers, due to quality lapses at its factories.
Shortages of the products continue as J&J, under close U.S. supervision, attempts to upgrade a key plant in Fort Washington, Pennsylvania. J&J, which previously had predicted the plant would re-open this year, on Tuesday said it will not be up and running until 2013.
But J&J said it expects many of its recalled consumer brands to be back on the U.S. market by late next year, coming off conveyor belts of other factories operated by its McNeil Consumer Healthcare unit.
"We feel positive about our consumer medicines going into 2012," company Chief Executive William Weldon told analysts on a conference call.
J&J earned $218 million, or 8 cents per share, in the quarter. That compares with $1.9 billion, or 70 cents per share, a year earlier, when the company also took charges for recalls of its hip-replacement devices.
Excluding special charges, J&J earned $1.13 per share. Analysts on average had expected $1.09, according to Thomson Reuters I/B/E/S.
J&J said global sales rose 3.9 percent in the fourth quarter to $16.26 billion, slightly below Wall Street's target.
Worldwide sales of over-the-counter medicines, shampoos and other consumer products edged up 1.6 percent to $3.67 billion, held back by continued shortages of consumer drugs that have been recalled.
Global sales of J&J prescription drugs rose 6.7 percent to $6.09 billion. But sales fell 8.3 percent in the United States, where the company's Levaquin antibiotic is now facing competition from cheaper generics.
Worldwide sales of medical devices rose 2.7 percent to $6.49 billion. U.S. sales edged down 0.4 percent, as a two-year slump in elective procedures due to the weak economy continued to hurt results.
However, company executives predicted a comeback for such non-emergency procedures, which involve use of numerous J&J medical devices.
"Elective procedures are getting close to the trough," Piper Jaffray analyst Matt Miksic said. "It's encouraging they're talking about a potential improvement in 2012."
(Reporting By Ransdell Pierson; editing by John Wallace, Lisa Von Ahn, Dave Zimmerman)