Johnson & Johnson: Litigation Makes This Pharma A Pass In 2013

| About: Johnson & (JNJ)

Johnson & Johnson (NYSE:JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. JNJ's headquarters is in New Brunswick, New Jersey. The company has a market cap of $191.7 billion, and its stock price is around $70.

On October 16th, JNJ reported third quarter earnings. The company had revenues of $17.1 billion which was a 6.8% increase from the third quarter of 2011. The net income was $2.9 billion which was a 10% decrease from the third quarter of 2011. The earnings per share were $1.05 which was a 9.5% decrease from the third quarter of 2011. During the earnings call the company raised its earnings forecast to $5.05 to $5.10 per share from $5.00 to $5.07 per share. It should be mentioned that earnings were reduced by $553 million because of a onetime write off related to research and development costs from the discontinuation of phase III trials of bapineuzumab IV and costs associated with the acquisition of Synthes.

Investors seemed to be encouraged by JNJ's increase in revenues, and higher revenue forecast, because the stock price moved higher by 1.4% after the announcement. JNJ has three distinct business divisions: consumer products, pharmaceutical, and medical devices. The consumer products division saw its sales decrease by 4.3%. The consumer products division is still feeling the effects of a consent decree with the Food and Drug Administration, which caused it to overhaul three of its manufacturing plants due to product quality problems.

JNJ's pharmaceutical division was a bright spot for the company. Pharmaceutical sales rose 7% from the third quarter of 2011 to $6.4 billion. The increased sales were driven by three recently approved drugs: "Zytiga for prostate cancer, Xarelto for stroke prevention and Stelara for psoriasis".

The results from the medical device division were of particular interest to investors because of the purchase of Synthes in June of 2012. Synthes is "the world's largest maker of implants to mend bone fractures, and also produces surgical power tools and advanced biomaterials." The medical device division had sales of $7.1 billion which was a 12.5% increase from the third quarter of 2011. Synthes contributed 18% of the division's domestic sales and 12% of its international sales. I think that the Synthes contribution will be a positive towards JNJ's future earnings.

Recent news about Johnson & Johnson

On October 16th, it was reported that Johnson & Johnson's pharmaceutical sales in the U.S. rose 14.6% Y/Y to $3.288B. On a regional basis, gains in the Western Hemisphere and Asia-Pacific Africa helped to offset a 3.4% decline of revenue in Europe.

On October 9th, Johnson & Johnson's was cut to Sell with $72 price target at Goldman, which projects just 7% upside for the stock vs. double that for the rest of the pharmaceutical group (see Eli Lilly (NYSE:LLY) upgrade). "We see JNJ as lacking transformational pipeline opportunities."

On October 8th, Johnson & Johnson applied for U.S. and European regulatory approval of a new manufacturing process that would provide a short-term fix to the supply shortage of its Doxil cancer drug. Under JNJ's plan, existing contract manufacturer Ben Venue Labs would produce Doxil while a second supplier would handle other tasks such as ensuring the drug is sterile.

On September 25th, news came out that JNJ promoted illegal marketing of its antipsychotic drug Risperdal by paying physicians to give favorable speeches, subsidizing golf trips, and even having sales staff "butter up doctors" with bags of "Risperdal Popcorn," according to one of its managers in court testimony today. The testimony casts a pall over the company's marketing tactics, which, in addition to the 420 suits, currently filed against the company by individuals claiming to have been injured by the drug, are the subject of government probes and Medicare fraud lawsuits filed by state officials.

On September 18th, JNJ's Janssen Biotech unit requests FDA approval of Simponi, which is its investigational intravenous formulation for the treatment of adults with moderate to severely active rheumatoid arthritis.

On August 30th , Johnson & Johnson announced that its pharmaceutical unit had reached a $181 million consumer fraud settlement with 36 states and the District of Columbia over its marketing of Risperdal, an antipsychotic drug. Johnson & Johnson decided to settle the cases, after several other state settlements and court decisions in regards to Risperdal. In April, a judge in Arkansas ordered it to pay more than $1.2 billion in fines. Last year, a South Carolina judge levied civil penalties of $327 million. Janssen, which is a subsidiary of Johnson & Johnson, is appealing the fines from both of Arkansas and South Carolina. The August 30th announcement is not related to a larger pending settlement with the Federal Justice Department over three whistle-blower lawsuits that also involve sales of Risperdal. Johnson & Johnson announced earlier in August that it had reached an agreement in principle to settle the federal lawsuit. Some analysts feel that JNJ's stock has not performed well because investors are worried about the potential litigation cost that JNJ is facing.


JNJ's stock moved higher by 1.4% after it announced earnings on October 16th. This seems to be a pattern for JNJ's stock price. While the stock continues to move higher, it does so at a very slow pace. For the year, JNJ's stock price is up by 9%. The 9% increase is much less than its competitors. For instance, for the year Abbott Laboratories (NYSE:ABT) stock price is up by 30%, Sanofi (NYSE:SNY) stock price is up by 28.5% and Merck (MRK) stock price is up by 29.5%. I think that investors have been wary about investing in JNJ because of its legal problems and its inconsistent earnings. I think that the trend will continue, and I expect that JNJ's stock price will creep higher, but I do not think that it will keep pace with its competitors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.