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Currency Hits J&J, Outlook Down

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Johnson & Johnson (JNJ - Analyst Report) posted second quarter 2012 earnings (excluding special items) of $1.30 per share, a penny above the Zacks Consensus Estimate and 1.6% above the year-ago earnings of $1.28 per share. Results were impacted by negative currency fluctuation.

Revenues declined 0.7% year-over-year to $16.5 billion, just shy of the Zacks Consensus Estimate of $16.7 billion. While operational factors favorably impacted sales by 3.5%, currency fluctuations had a negative impact of 4.2%. Results included the impact of the recently completed Synthes acquisition, which contributed 1.2% to global operational sales growth.

Including one-time items, Johnson & Johnson reported second quarter earnings of 50 cents per share, 50.0% below the year-ago earnings of $1.00.

The Quarter in Detail

Second quarter sales declined 1.2% in the domestic market. Meanwhile, international sales declined 0.4%, consisting of 7.1% operational growth and 7.5% 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 $6.6 billion, down 0.1% year-over year. While operational factors positively impacted Medical Devices & Diagnostics segment sales by 3.4%, foreign exchange movement negatively impacted sales by 3.5%.

Sales in the domestic market increased 2.9% to $3.0 billion; international market sales declined 2.4% to $3.6 billion. Results included the impact of the recently concluded Synthes acquisition.

Primary contributors to growth included orthopedic sales from Synthes products, Biosense Webster's electrophysiology business, Ethicon's wound care products, LifeScan's blood glucose monitoring products, and international sales of energy products. 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 0.9% year-over-year to $6.3 billion (operational growth of 5.1% and negative currency impact of 4.2%). Sales in the domestic market declined 4.5% to $3.1 billion whereas the international market grew 6.8% to $3.2 billion.

US sales were impacted by the genericization of Levaquin and supply problem regarding Doxil/Caelyx due to third-party manufacturing issues. Johnson & Johnson is working on resuming supply of Doxil/Caelyx before late 2012 and is exploring several options.

Recently launched products like Zytiga, Incivo, 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 4.6% from the second quarter of 2011. Foreign currency movement negatively impacted sales in the segment by 5.2%. Sales in the domestic market declined 1.9% year-over-year to $1.3 billion, whereas the international market recorded a 6.0% year-over-year decline to $2.3 billion.

Cuts 2012 Earnings Guidance

Following the release of second quarter results, Johnson & Johnson cut its outlook for 2012. The company now expects earnings per share of $5.00 - $5.07 in 2012 (old guidance: $5.07 - $5.17 per share).

The guidance mainly reflects the negative impact of currency fluctuation, partially offset by the positive impact of the Synthes acquisition. The updated guidance was well below the Zacks Consensus Estimate of $5.14 per share.

Neutral on Johnson & Johnson

We currently have a Neutral recommendation on Johnson & Johnson, which carries a Zacks #2 Rank (short-term Buy rating). While we expect the Johnson & Johnson 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 Johnson & Johnson pave its way through tough situations.

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