Johnson & Johnson Waiting to Exhale
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Johnson & Johnson (NYSE: JNJ) and investors take a deep breath and wait for Fort Washington to re-open, drugs to be approved and Synthes to recharge medical devices. In the meantime, things are a little slow.
Q1 was a nexus of bad news spanning all segments. Combined, they contributed to a first quarter that will not go down in history as one of their better efforts.
Global combined revenue for Q1 was $16.1 billion, down 0.2% year-over-year, and while that doesn’t look bad on the surface, the underlying plant problems, expiring drugs and ongoing slow medical device sales are keeping JNJ from being all it could be. One can only imagine what the company would be capable of if events conspired to get each business segment operating at their full potential. We might see glimmers of the great business they were.
Consumer
Global sales in consumer were down 0.6% forex adjusted. Most of the consumer business divisions saw positive sales with the exception of women’s health (-8.2%). They do have a valid excuse as divestitures make year-over-year comps meaningless. OTC meds has no excuse for its ongoing declining sales, except for gross negligence at the top -— the Weldon Effect. OTC meds are still seeing supply constraints as manufacturing facilities run slowly under a consent decree. The Fort Washington plant is still not open and the date it will be running keeps moving forward. It’s now slated to open in late 2013. This is not good news. The disrepair at Fort Washington has required almost three years of overhauling. The plant closed in 2010.
In Q4 2011, consumer sales were up 1.6% so JNJ lost ground sequentially.
Pharmaceuticals
Global sales showed positive growth at 1.2% (Q4 global sales were better and up 6.7%). The US market was stung by accelerating revenue declines from the patent expiration of Levaquin. Levaquin was the rare antibiotic blockbuster and at its peak in 2010 saw sales in excess of $1.3 billion. The patent was lost in the first half of 2011.
The following is the year-over-year comp for Levaquin and a perfect example of how a loss of patents can wipe out profits.
From $422 million down to $18 million is a significant loss in revenue. JNJ is nearly through the worst of expirations and has a strong pipeline and a group of new drugs helping to offset the losses.
The other bit of bad pharmaceutical news was the ongoing shortage of the cancer drug DOXIL/CAELYX. Third party Ben Venue is the manufacturer and has been shut down since last year for plant renovation/fixes. It’s not as big a loss as Levaquin, but every little bit hurts. JNJ is looking for a workaround and hopes to have full supplies later this year.
Doxil/Caelyx sales
Offsetting these losses is a strong immunology division that includes several important biologics. In Q3 JNJ began selling Remicade and Simponi directly into certain international territories -— Remicade territories formerly belonging to Merck. That did create lower export sales related to those territories, but it was more than offset by international sales. U.S. immunology sales increased over 13% led by Stelara up 22.9%, Simponi increased 20.8% and Remicade up 11.9%. International sales of immunology drugs tripled year-over-year, due primarily to the territories taken from Merck, along with strong growth of Stelara. Stelara is a once per quarter biologic injectable for psoriasis.
Zytiga for prostate cancer, approved in April 2011 continues to do well. Sales in Q1 2012 at $200 million worldwide have it on its way to blockbuster billion-dollar territory in the next two years.
Pharma pipeline
JNJ was able to unblind Phase 3 Zytiga for the treatment of asymptomatic or mildly symptomatic patients, with metastatic prostate cancer who were chemotherapy naive. This will speed up approval for the extended indication and if approved, it will increase the addressable market for Zytiga. They have a priority review for Xarelto to reduce the risk of blood clots in patients with acute coronary syndrome. XARELTO is already approved in the U.S. for hip and knee surgery to prevent post-op clots. Xarelto is in clinical trials for pulmonary embolism and venous thrombosis. If approved, this will sell into a much bigger market. The FDA also approved Intelence for pediatric HIV-1 patients.
Bapineuzumab (Alzheimer’s) North American Phase 3 studies will be released later this year. If results are good, this could be a very big drug. However, all Alzheimer’s treatments and trial to date across all drug companies have been disappointing and no effective treatment is available. Bapineuzumab is an anti-body to beta-amyloid and so far that has not been a fruitful avenue to attack Alzheimer’s.
Medical Devices and Diagnostics
Where are the hordes of baby boomer elderlies needing hips and knees that were predicted? They are still in absentia and the orthopedic device division continues to stall.
Hips were up 1% worldwide with 3% growth outside the US. In the US hips were flat. Knees worldwide increased 2% on an operational basis with U.S. up 2% and operational sales outside the U.S. up 1%. Worldwide spine was down 3% on an operational basis with the U.S. down 8% due to continued pressure on price. Orthopedics has been a poor performer for more than just JNJ with disappointing sales at most other device makers including Medtronic (NYSE: MDT), Zimmer(NYSE: ZMH) and Stryker(NYSE: SYK).
Medtronic's spine business was down 10% in the US in Q4 2011 and continues to lose share; Zimmer's spine segment in Q4 declined 5.9% with hips up 3.6% and knees increased only 0.2%; Stryker's Q1 2012 sale of hips and knees were up 3% and 5% respectively and spine was in positive territory by 12% with a small contribution from acquisitions. Geneally sales in implants anad spine have been slow during the recession for device makers and the days of double-digit growth are a fond memory.
After exiting the stent business, cardiac comps year-over-year remain in the red -— down 23% globally. By the third quarter, comps should improve but of course the revenue remains lost. Cordis sales were slipping badly, but the few hundred million it did manage to generate does impact results negatively. I would look for JNJ to make some acquisitions in cardiac to get this segment moving again. It will have to get the Synthes merger situated and paid for before it can take on another major acquisition.
Synthes should close in the second quarter of 2012. The merger requires regulatory clearance from five markets prior to closing. They have clearance from Japan, Canada, and China and still need the EU and US. Biomet will acquire the DePuy Orthopaedics trauma business to satisfy regulation governing monopoly of a sector. Synthes should be an excellent fit and highly profitable. Trauma is a much faster growing business than implants.
Cash flow, debt, and the dividend
Because we only have the 8-K available, cash flow and balance sheet numbers are not available yet. It is unlikely they are in worse financial shape than at the end of 2011. Debt was $19.6 billion with a debt/capital ratio of only 25.5%. JNJ was not overleveraged and is better capitalized than most of the Mediterranean EU countries. It has better credit.
Cash flow for 2011 was $14.3 billion and the Q4 dividend was 57¢. The annual dividend in 2011 was $2.25. It was raised in June 2011 from 54¢ to 57¢. At the current 57¢, the 2012 dividend yield will be 3.6% but I would be looking for a 3%-5% raise to around 59¢-60¢ sometime this year.
The best reason to buy JNJ is the dividend and the unstoppable cash flow the company generates even when it’s down and out as it has been for the last year. Weldon ran it into the rocks but did not manage to sink the company. I don’t think JNJ can be sunk and if you can get in for an acceptable yield (I tend to favor 4%) you could do worse even in those paragons of security -— US treasuries.
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