Valuentum Exclusive Analysis for the Discerning Investor

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In our latest article on Johnson & Johnson (JNJ), we indicated we’d like to see continued growth in international sales as well as some recovery in the OTC/nutritionals business (Tylenol, Motrin) in the U.S. Let’s see how J&J measured up in its second quarter.

The firm’s results were in line with our estimates, and the firm kept its full-year earnings guidance at $4.90-$5.00 per share.  Net earnings, excluding special items, were $3.5 billion, or $1.28 a share (the street was expecting $1.24 per share), which excludes one-time expenses related to restructuring Cordis, a company that makes drug-coated stents, and litigation surrounding the DePuy hip recalls. This reflects bottom-line growth of about 5% from the same period a year ago.

Sales in all three segments were up over the same quarter last year, led by pharmaceutical sales (over a 12% increase) which had strong international growth of 22.6%, including a positive currency impact of nearly 12%. As anticipated, Levaquin (a treatment for bacterial infections), which lost patent protection during the quarter, showed a decrease in sales of nearly 50%, but J&J’s pipeline filled the gap with strong performers, including Remicade (a treatment for immune mediated inflammatory diseases) and Stelara (a treatment for plaque psoriasis). We’re also quite bullish on J&J’s drug pipeline. During the quarter, the FDA approved Zytiga (a treatment for prostate cancer), Edurant (an HIV-1 drug), and Xarelto (an anticoagulant). 

The firm’s Medical Devices & Diagnostics segment (7.2% increase in sales) had essentially flat sales in the U.S., but got a boost from international sales (up 13.4%) that was mainly due to a currency impact of 11.2%. J&J showed strength in Ethicon’s surgical care and sterilization products, but experienced some weakness from competitive pressures in drug-eluting stents.

The Consumer Products segment still struggled in the US due to previously announced recalls and the temporary closure of its Pennsylvania manufacturing facility, delivering an 8.5% decrease in U.S. sales that was offset by a 12.4% increase in international sales. The problems in OTC/Nutritionals will continue to plague the company for the next few quarters as the company does not expect the impacted products to return to the shelves until mid-2012 and in the meantime consumers are turning to private label products to fill their needs.

We believe J&J will continue to rely on international sales to boost flatter domestic performance, relying on the strength in pharmaceuticals and medical devices to weather the storm in OTC/Nutritionals through the next year. We don’t expect the firm’s Consumer Products group to recover until early to mid- 2012, but if the hiccups continue there may be an opportunity to pick up shares below our $60 threshold.