J&J underwhelms with modest EPS forecast

However you slice it, J&J's prospect of earnings growth looks bleak as economic and competitive 'headwinds' continue.

By MSN Money Partner Jan 24, 2012 2:57PM

Minyanville on MSN MoneyBy Brett Chase


Johnson & Johnson (JNJ) followed Eli Lilly (LLY) Tuesday as the latest big drug maker to announce a lower-than-expected earnings forecast for this year.


The company said it expects earnings per share of $5.05 to $5.15 excluding costs of a major acquisition.


That estimate badly missed Wall Street expectations ($5.20) and would represent a measly gain on the adjusted EPS the company just reported ($5). The news sent the company’s stock down before markets opened today. The shares recovered, trading up less than 1% to $65.16 midday.


The company cited a stronger dollar, higher costs and pricing pressure as reason for the temperate forecast. Those challenges are on top of generic competition, a lagging US economy and two years of recalls, government investigations and sanctions on the company’s over-the-counter drug business.


J&J’s CEO William Weldon calls them "headwinds."


This is the pharmaceutical industry in 2012. Lilly blamed its weak outlook on rapid erosion of anti-psychotic drug Zyprexa, which began facing generic competition late last year.


J&J has some unique problems, including legal costs related to illegal marketing of its own anti-psychotic drug Risperdal and expenses related to product liability and the recall fiasco. (Those and other costs contributed to an almost 90% plunge in fourth-quarter income.)


And, to be sure, the company isn’t a pure pharmaceutical maker. It’s much more diverse with a sizable medical device business that’s about to get a whole lot bigger with the planned $20 billion takeover of Synthes. But J&J faces pressures seen in other big drug companies, most notably the patent expirations. J&J sales last year were hurt by generic competition for Levaquin, a treatment for bacterial infections, for instance. The US economy is hurting J&J’s orthopedics business as some patients put off elective surgeries.


While the various costs contributed to lower net income in 2011, sales rose 5.6% to $65 billion. US sales, however, declined almost 2%, the company said. (Sales in this country dropped more than 3% in the fourth quarter.)


"This weaker-than-expected operational quarter could confirm investor fears of a protracted and broad economic slowdown," says Leerink Swann analyst Rick Wise. He rates the stock a buy with a $70 price target.


In the past six months, J&J’s stock has declined almost 3%, which lags the share performance of rivals Pfizer (PFE), Merck (MRK), Bristol-Myers Squibb (BMY) and Lilly, which have all recorded gains in that period.

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