McNeil Remediation Stretches Out, Dragging On J&J Consumer Sales

The latest delay in Johnson & Johnson’s remediation of its McNeil OTC manufacturing pushes back FDA’s review of the Fort Washington, Pa., facility to “late 2013.” The firm’s Q1 results saw the worldwide consumer business fall 2.4% to $3.60 billion, including negative currency exchange effects.

Johnson & Johnson continues nudging back the timetable for returning its OTC division to full strength, revealing that about 50% of the products recalled in 2009 and 2010 will not return until 2013.

Additionally, J&J expects its temporarily shuttered McNeil Consumer Healthcare facility in Fort Washington, Pa., will be ready for FDA’s certification review process in “late 2013,” as a consent decree with the agency continues to add to costs and delays there and at two other McNeil plants, in Lancaster, Pa., and Las Piedras, Puerto Rico.

Executives said previously they anticipated Fort Washington coming back online in 2013 at an unspecified point (Also see "J&J Extends Delay In Returning Some OTCs To Market" - Pink Sheet, 12 Mar, 2012.).

“We are in fact behind where we thought we might be at this point, and we expect a slower recovery throughout the year than we previously thought at the tail end of last year,” said J&J Chief Financial Officer Dominic Caruso during the firm’s first-quarter earnings call April 17.

“Operating under the consent decree, it’s difficult to predict the rate of recovery,” he said.

The OTC updates put a slight damper on J&J’s quarterly results. Worldwide OTCs and nutritionals dropped 2.2% to $1.10 billion while the overall consumer business dipped 2.4% to $3.60 billion, the New Brunswick, N.J., company reported. Operationally, those declines were 0.3% and 0.6%, respectively.

J&J’s consumer sales in the January-March period came up 5.7% short of the $3.81 billion estimate by Leerink Swann analysts and 2.1% short of Deutsche Bank’s $3.67 billion estimate.

Reclaiming Shelf Space … Eventually

Two years after the largest of J&J’s McNeil recalls – involving Children’s Tylenol, Benadryl, Motrin and Zyrtec liquids with particulate matter in suspension – Caruso sought to reassure analysts that consumers will accept the OTC brands once their missing stock-keeping units return to retail.

“We’re obviously disappointed that it’s taking a little longer to get back into the market,” he said. “But all indicators of the equity scores that we track with respect to the brands, Children’s Tylenol, even adult Tylenol … continue to score very highly compared to store brands, even though they're not available on the shelf.”

“We are in fact behind where we thought we might be at this point, and we expect a slower recovery throughout the year than we previously thought.”

– J&J CFO Dominic Caruso, on returning recalled OTCs to market

J&J’s findings that its brands have retained a high level of consumer trust and confidence seem consistent with a survey conducted on Tylenol in 2010, which found consumer goodwill toward the acetaminophen brand had not dissipated in the wake of manufacturing problems and multiple recalls (Also see "Tylenol Yields Positive Results In Consumer Perception Study Despite Recall" - Pink Sheet, 6 Sep, 2010.).

Even with some McNeil products now back on the market and a weak year-over-year comparison, J&J’s U.S. OTC/nutritional sales fell 4% in the first quarter. Caruso said OTCs in the U.S. likely will not be a growth driver for the firm in 2012.

Meanwhile, the additional McNeil remediation hold-up served as further good news for Perrigo Co. PLC, perhaps the biggest beneficiary of J&J’s recalls. UBS analysts, who had estimated Perrigo’s benefit from the missing McNeil products at $72 million in fiscal 2012 and $40 million in fiscal 2013, said the private labeler could see additional sales of $10 million to $20 million in light of the new delays.

Flat Q1 Belies Longer-Term Upside

With OTC drugs floundering, J&J found positive first-quarter news in its skin care business, up 6.3% to $453 million in the U.S., thanks to solid sales of the Neutrogena Naturals line extension. Still, the company’s international skin care sales declined and worldwide skin care grew a reported 0.9% to $907 million.

Oral care was the opposite story, with a U.S. sales contraction of 4.9% offsetting international growth of 4.7% on an operational basis. J&J’s worldwide oral care sales reached $387 million, down a reported 1.7% but up 0.7% with the effects of currency exchange excluded. Execs said strong international sales of Listerine countered weak floss sales in the U.S.

J&J’s flurry of acquisition and divestment activity in consumer health the past 12 months – the purchase of Doktor Mom and other OTCs in Russia, the sale of Monistat and e.p.t. women’s health brands, and the gain of Pepcid and other digestive health brands from a former joint venture with Merck & Co. Inc.– had little net effect in the first quarter. Caruso said the consumer business’ worldwide operational sales decline of 0.6% translates to a drop of about 0.5% net of those deals.

The company reported overall net sales down a slight 0.2% to $16.14 billion, but up 1% operationally. The flat quarter generally met expectations of analysts, many of whom see reason for longer-term optimism as the company maintains a solid pharmaceutical pipeline and Alex Gorsky succeeds William Weldon as J&J’s chief executive April 26 (Also see "J&J CEO Choice Likely Will Not Raise Consumer Business Profile" - Pink Sheet, 27 Feb, 2012.).

First-quarter net earnings climbed 12.5% to $3.91 billion, and the company tweaked its earnings guidance upward to a range of $5.07 to $5.17 per share, reflecting an expected positive impact of currency exchange. The previous guidance, set in January, called for an EPS of $5.05 to $5.15.

J&J’s gross margin of 69.5% in the quarter was down a full percentage point, attributable in part to the McNeil remediation costs. Caruso said the gross margin likely will remain under pressure the rest of 2012 and could fall further, though he added that consideration is reflected in the earnings guidance.