Over the past two years, Johnson & Johnson (JNJ) has struggled to get its act together. Many incidents have mired the company's once-powerful reputation, including a variety of manufacturing mistakes that have caused recalls of dozens of pharmaceutical and other products. Pepcid, Motrin, Tylenol, and the Neutrogena line of skincare products have all experienced recalls in the past two years, resulting in at least 288 million items recalled. The company continues to struggle to regain its reputation as a purveyor of quality pharmaceutical and home health products, especially in an economy where consumers are already looking for ways to cut costs and are all too happy to pay less for generic brands -- especially when the quality of premium brands like Johnson & Johnson have been called into question.
Unsurprisingly, Johnson & Johnson reported weak fourth-quarter performance in 2011. Johnson & Johnson's net income was just $218 million in the fourth quarter, earning just $0.08 per share. Place that in the context of a net income of $1.94 billion and earnings of $0.70 per share in the fourth quarter of 2010. The first quarter of 2012 looks no brighter. Since the beginning of 2012, stock has returned a little less than 0.6%, underperforming the rest of the market by more than 11 percentage points.
Not only has Johnson & Johnson's reputation been damaged in terms of the quality of its products, but also in the trustworthiness of its reporting. Johnson & Johnson and its subsidiary, Janssen Pharmaceuticals, were found guilty of downplaying risks associated with an antipsychotic drug, Risperdal, in an Arkansas Circuit court. The state is asking for $480 for each person prescribed Risperdal through the state's Medicaid program over a three-year period. At 250,000 patients, the total is $1.2 billion -- a staggering sum. Add this figure to the $327 million penalty in South Carolina and the $158 million penalty in Texas the company faces over the same issue. A judge will decide the suitability of the sentences in the next few weeks, but such a huge payout is sure to damage more than the company's reputation.
In early April, Johnson & Johnson suffered another setback when chairwoman of pharmaceuticals, executive Sherilyn S. McCoy, was hired as Avon's new CEO. Since 2009, McCoy has been working to overhaul the struggling pharmaceutical department as patents on important drugs began to expire. During her tenure, McCoy created new avenues within the pharmaceutical department at Johnson & Johnson, focusing on new products for strokes and cancer as well as battling the government inquiries that resulted from the recalls and manufacturing problems of 2010 and 2011.
Johnson & Johnson's struggles don't end there. Competitor Vivus, (VVUS) is waiting to hear from the FDA about the safety and suitability of its obesity drug, Qnexa. Although doubts as to Qnexa's safety -- or any diet pills' safety, for that matter -- remain (the FDA has not approved a diet pill since 1999), Qnexa received a 20-2 favorable vote from a board of medical supervisors when it submitted the drug for approval to the FDA in February. While Johnson & Johnson has developed new products for disease, none of these is poised to be as lucrative as an anti-obesity drug. Instead of focusing on creating new, innovative drugs as Qnexa, it would seem Johnson & Johnson has been more focused on reinvigorating its reputation and focusing on its expiring patents for existing drugs.
Covidien (COV) has also had a better year than Johnson & Johnson. It just received approval for a device that removes blood clots from blocked vessels and restores blood flow to the brain after an ischemic stroke. The device has been available in Europe since November 2011 and was made available in the U.S. in mid-April. Covidien also acquired Israeli medical systems provider Oridion, taking on all of its patents and products, which will expand Covidien's market share. Novartis (NVS) and Pfizer (PFE), two other major Johnson & Johnson competitors, have had struggles throughout the recession, but have not had the same reputation-damaging issues with which Johnson & Johnson has struggled. Despite a general lack of innovation or any real revenue-raising deals, both Pfizer and Novartis have remained relatively unscathed throughout the past five years.
Despite all this bad news, Johnson & Johnson shares are selling at just below the 52-week high at about $65 per share. This could be because analysts see Johnson & Johnson's woes as very temporary, and the data seems to back up this supposition. During the fourth quarter of 2011, Johnson & Johnson posted revenues of $16.3 billion, a more than 3% increase from the same quarter of 2010. Lower levels of net income could be due to the various legal issues, new marketing strategies and research and development initiatives the company is embarking upon. Legal issues notwithstanding, marketing and research and development initiatives will only increase revenue and performance in the future, so these costs could certainly be one-offs. Despite its recalls and manufacturing issues, I believe Johnson & Johnson is on track to break its 52-week high of $68.05 by the beginning to middle of next year. The company has been able to get past these hurdles while increasing revenues. Consumers have trusted Johnson & Johnson as a reliable brand for many years, and I expect investor sentiment will help support the stock.
This year, analysts predict each share to make $5.10 and $5.44 in 2013, a solid increase from the $5 profit per share in 2011. In addition, the company's earnings are projected to grow about 6% per year. At a shareholder conference in late April, new CEO Alex Gorsky committed to creating a new corporate environment in which customers are the "first priority." In front of 1,800 shareholders, Gorsky pledged to create a more adaptive company that focused on long-term profits rather than short-term payouts.
Despite some roadblocks, the future looks much brighter for the company and for investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.