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Johnson & Johnson (JNJ - Analyst Report) posted first quarter 2012 earnings (excluding special items) of $1.37 per share, a penny above the Zacks Consensus Estimate and 1.5% above the year-ago earnings of $1.35 per share.

Revenues, however, declined 0.2% year-over-year to $16.1 billion. Revenues were just shy of the Zacks Consensus Estimate of $16.3 billion. While operational factors favorably impacted sales by 1%, currency fluctuations had a negative impact of 1.2%.

Including one-time items, Johnson & Johnson reported first quarter earnings of $1.41 per share, 12.8% above the year-ago earnings of $1.25.

The Quarter in Detail

First quarter sales declined 5.1% in the domestic market. Meanwhile, international sales increased 4.1%, consisting of 6.4% operational growth and 2.3% negative currency impact. While both the Consumer and the Medical Devices & Diagnostics segments posted a decline in sales, the Pharmaceutical segment recorded a slight increase in sales.

The Medical Devices & Diagnostics segment posted sales of $6.4 billion, down 0.3% year-over year. While operational factors positively impacted Medical Devices & Diagnostics segment sales by 0.5%, foreign exchange movement negatively impacted sales by 0.8%. Sales in the domestic market increased 0.2% to $2.9 billion; international market sales declined 0.7% to $3.5 billion.

Primary contributors to growth included Biosense Webster's electrophysiology business, Diabetes Care, Vision Care, and specialty surgery. The Cardiovascular Care franchise continued to record a decline in sales reflecting the company’s exit from the drug-eluting stent market. Challenges in several Medical Devices & Diagnostics markets remain in the form of European austerity measures, pricing pressure, and a slowdown in elective surgeries which have all contributed to more tempered growth rates.

Pharmaceutical segment sales increased 1.2% year-over-year to $6.1 billion (operational growth of 2.6% and negative currency impact of 1.4%). Sales in the domestic market declined 10.8% to $3.0 billion whereas the international market grew 16.5% to $3.1 billion.

US sales were impacted by the genericization of Levaquin and supply issues regarding Doxil/Caelyx due to third-party manufacturing issues. We expect the company to provide an update on the Doxil/Caelyx situation. Johnson & Johnson will most likely find an alternative supply source.

Recently launched products like Zytiga, Stelara, Simponi and Invega Sustenna continued to perform well. Johnson & Johnson also recorded incremental sales due to the amendment of its distribution agreement with Merck (MRK - Analyst Report) for Remicade.

The Consumer segment recorded revenues of $3.6 billion in the reported quarter, down 2.4% from the first quarter of 2011. Operational factors and foreign currency movement negatively impacted sales in the segment by 0.6% and 1.8%, respectively. Sales in the domestic market declined 2.2% year-over-year to $1.3 billion, whereas the international market recorded a 2.5% year-over-year decline to $2.3 billion.

The series of OTC product recalls and the suspension of manufacturing at Fort Washington facility hampered US OTC/Nutritionals sales. First quarter 2012 OTC/Nutritionals sales declined 4.0% in the US most likely due to supply constraints on certain products. We expect product re-introductions to continue through 2012.

2012 Earnings Guidance Updated

Following the release of first quarter results, Johnson & Johnson updated its outlook for 2012. The company increased its earnings guidance by a couple of cents to $5.07 - $5.17 per share (old guidance: $5.05 to $5.15 per share). The guidance was increased to reflect the positive impact of current exchange rates. The Zacks Consensus Estimate for 2012 currently stands at $5.10 per share.

Earlier this month, Johnson & Johnson received a binding offer from Biomet, Inc. which is looking to acquire its worldwide DePuy Orthopaedics Trauma business for about $280 million.

Neutral on Johnson & Johnson

We currently have a Neutral recommendation on Johnson & Johnson, which carries a Zacks #3 Rank (short-term Hold rating). While we expect the company to continue facing headwinds in the form of pricing pressure, manufacturing issues and US healthcare reform, we believe Johnson & Johnson’s diversified business model, lack of cyclicality, and strong financial position will continue helping the company pave its way through tough situations.

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