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UPDATE 3-J&J cuts profit view on recalls, discloses subpoena
July 20, 2010 / 12:40 PM / in 7 years

UPDATE 3-J&J cuts profit view on recalls, discloses subpoena

* Cuts 2010 profit view second time this year

* Cites recalls of Tylenol, other consumer brands

* Sales well below quarterly forecast

* Says cooperating with grand jury probe into recalls

* Shares down 2.4 percent (Adds analyst comments, updates shares)

By Ransdell Pierson

NEW YORK, July 20 (Reuters) - Massive recalls of Tylenol and other consumer medicines forced Johnson & Johnson (JNJ.N) to cut its 2010 profit forecast and the company said the repeated recalls were the subject of a U.S. criminal probe.

J&J, which is also being investigated by Congress, said it was cooperating with a grand jury subpoena from the U.S. attorney’s office in Philadelphia over the recalls. Officials at the company and the federal prosecutor’s office would not comment.

Shares in J&J fell 2.4 percent as the recalls proved to be more damaging to the company’s bottom line than many analysts had predicted. Some investors may also be concerned that manufacturing problems at J&J’s consumer unit could draw wider regulatory scrutiny to its other, more profitable prescription drug and medical device divisions.

Standard & Poors analyst Herman Saftlas on Tuesday cut his rating on J&J to “hold” from “buy,” saying the consumer products problems remained a major worry. In addition, he said, prescription drugs and medical devices are under pressure from government price controls in Europe and the weak economy.

“These (recalls) are scary and the subpoena is a concern for sure,” Saftlas said. “Once the government starts digging into you, they find all kinds of stuff. And even though J&J does have interesting drugs, they have yet to be approved.”

Morningstar’s Damien Conover maintained his top 5-star rating on J&J, saying new products should assure annual company profit growth in the 5 percent range for the next five years.

That compares with an average 2 percent annual growth rate projected for other large drugmakers, many of whom face looming generic competition for their biggest medicines, Conover said.

“We’ll see a few more quarters of weakness due to consumer products, but remain bullish on the company long term,” he said.

J&J is developing several potential blockbuster products, including a stent called Nevo, a blood clot preventer called Xarelto and a hepatitis C treatment called telaprevir, in partnership with Vertex Pharmaceuticals (VRTX.O).

PROFIT VIEW CUT TWICE THIS YEAR

The diversified healthcare company earned $3.45 billion, or $1.23 per share, in the quarter. That compared with $3.21 billion, or $1.15 per share, a year earlier.

Excluding items, J&J earned $1.21 per share, matching the average forecast of analysts polled by Thomson Reuters I/B/E/S.

J&J’s global quarterly sales edged up 0.6 percent to $15.33 billion, below the Thomson Reuters forecast of $15.64 billion.

Four recalls in the past year hurt the company, as did the late April closure of a plant in Fort Washington, Pennsylvania, where 40 children’s products ran afoul of U.S. regulators’ quality-control safeguards and were taken off the market.

The recalls crimped quarterly sales by $200 million, or about 5 cents per share, and the plant closing will likely undermine full-year sales by $600 million, Chief Financial Officer Dominic Caruso told investors on a conference call.

J&J cut its full-year 2010 profit view to between $4.65 and $4.75 per share, citing the closure of the plant -- now undergoing a costly upgrade -- and price pressures in Europe on its prescription drugs. The new forecast reflects profit growth of 0.4 percent to 2.5 percent, similar to 2009’s tepid growth.

In April, the company cut its full-year forecast to a range of $4.80 to $4.90, due to costs for U.S. healthcare reform.

Global sales of consumer products fell 5.4 percent in the second quarter to $3.6 billion, while sales of prescription drugs rose 1 percent to $5.6 billion.

Medical device sales rose 4.1 percent, a slowdown from the prior quarter’s 12.5 percent advance, partly due to waning demand for its Cypher heart stent.

Despite J&J’s repeated recalls and related harsh publicity, company shares are trading at a hefty premium to rival drugmakers -- 12 times expected 2010 per-share earnings, versus 10 times earnings for the drug group. (Reporting by Ransdell Pierson; Editing by Michele Gershberg, Robert MacMillan and Maureen Bavdek)

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