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J&J Sinks After Lowering Forecast on Medicine Recalls

Johnson & Johnson posts 2nd-qtr adjusted EPS $1.23
Johnson & Johnson CEO William Weldon. Photographer: Jay Mallin/Bloomberg

Johnson & Johnson fell the most in six weeks in New York trading after the company, the world’s largest maker of health products, lowered its full-year earnings forecast because of a series of over-the-counter drug recalls.

J&J dropped 99 cents, or 1.7 percent, to $58.58 at 4 p.m. in New York Stock Exchange composite trading, the biggest decline since June 4. The shares are down 9.1 percent this year.

Profit, excluding special items, will be $4.65 a share to $4.75 a share this year, J&J said today in a statement. That’s down from the company’s April projection of $4.80 to $4.90. J&J cited foreign currency exchange rates for the decrease and the effects of the recalls, including a withdrawal of more than 40 types of children’s drugs from shelves in April because of quality and potency that didn’t meet internal standards.

“J&J shares will likely be under pressure today, driven by an even more dramatic lowering of guidance than we -- and we believe the Street -- had anticipated,” Leerink Swann analyst Rick Wise wrote today research note. Wise had estimated earnings of $4.80. Based in New York, he recommends buying J&J shares.

Net income in the second quarter rose to $3.45 billion, or $1.23 a share, from $3.21 billion, or $1.15, a year earlier, the New Brunswick, New Jersey-based company said today in a statement. Profit excluding some items was $1.21, meeting the average estimate of 14 analysts surveyed by Bloomberg.

Sales Miss Estimates

Sales rose 0.6 percent to $15.3 billion, missing 12 analysts’ average $15.7 billion estimate. The company lowered its selling, marketing and administrative expenses by 0.9 percent, to $4.76 billion, and recorded an after-tax gain of $67 million from litigation.

“The results are solid, but in this market, satisfactory is not enough,” Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York, wrote today in an e-mail.

J&J derived 25 percent of its second-quarter sales from Europe. The euro weakened 6.6 percent against the dollar in that period, from the same one a year ago, according to Bloomberg data. One euro bought $1.27 from April 1 through June 30 this year, on average, while last year it bought $1.36.

U.S. sales declined 2.8 percent, while international sales increased 4.1 percent aided by a favorable currency impact of 1.1 percent, J&J said today. A year earlier, sales outside the U.S. fell 8 percent, pushed down by foreign exchange rates.

Investigation, Subpoena

The drugmaker is being investigated by the U.S. House Oversight and Government Reform Committee after its April recall. In January, J&J pulled 500 lots of drugs including Rolaids, Motrin and some forms of Tylenol because of possible contamination from a chemical on shipping and packing materials. The company said June 24 that products made at its Fort Washington, Pennsylvania, manufacturing facility, which produced some of the recalled medicines, had annual sales of about $650 million in the last three years.

J&J suspended operations in April at the facility, and said last week that the site will be closed until at least mid-2011. J&J will cut 300 positions, or about 75 percent of the jobs at the plant, as part of a reorganization plan submitted to the U.S. Food and Drug Administration July 15. The company also said yesterday that it received an FDA inspection report of another plant, in Lancaster, Pennsylvania, that it operates with Merck Consumer Pharmaceuticals Co., and that it “is fully committed to addressing their concerns as rapidly as possible.”

Sales Forecast

The recalls and suspension of manufacturing will hurt 2010 sales by about $600 million, J&J Chief Financial Officer Dominic Caruso said today on a conference call. The company lowered its sales forecast for 2010 to $62.5 billion from a previous projection of $63 billion to $64 billion.

In the second quarter, revenue from consumer products declined 5.4 percent to $3.65 billion, J&J said. Pharmaceutical sales worldwide rose 1 percent to $5.55 billion, while revenue from medical devices and diagnostics increased 4.1 percent to $6.13 billion.

In the consumer-products unit, sales from over-the-counter medicines and nutritionals declined 13 percent to $1.14 billion, hurt by the recalls.

J&J also said today it had received a grand jury subpoena from the U.S. Attorney’s Office for the Eastern District of Pennsylvania related to the pulled medicines.

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