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Johnson & Johnson’s (JNJ - Analyst Report) third quarter 2012 results exceeded expectations with earnings (excluding special items) coming in at $1.25 per share, 5 cents above the Zacks Consensus Estimate and 0.8% above the year-ago earnings of $1.24 per share.

Despite the negative impact of currency fluctuation, Johnson & Johnson recorded growth on the back of strong product sales.

Revenues increased 6.5% year-over-year to $17.1 billion, beating the Zacks Consensus Estimate of $16.9 billion. While operational factors favorably impacted sales by 10.8%, currency fluctuations had a negative impact of 4.3%. Results included the impact of the recently completed Synthes acquisition, which contributed 5.8% to global operational sales growth.

Including one-time items, Johnson & Johnson reported third quarter earnings of $1.05 per share, 8.7% below the year-ago earnings of $1.15.

The Quarter in Detail

Third quarter sales increased 13.4% in the domestic market. Meanwhile, international sales grew 1.4%, consisting of 8.9% operational growth and 7.5% negative currency impact. While both the Pharmaceutical and the Medical Devices & Diagnostics segments posted an increase in sales, the Consumer segment recorded a decline in sales.

The Medical Devices & Diagnostics segment posted sales of $7.1 billion, up 12.5% year-over year. While operational factors positively impacted Medical Devices & Diagnostics segment sales by 16.1%, foreign exchange movement negatively impacted sales by 3.6%.

Sales in the domestic market increased 18.3% year-over year to $3.3 billion; international market sales increased 7.9% year-over year to $3.8 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, Vistakon’s disposable contact lenses and some Specialty Surgery products. Orthopedics sales increased a whopping 65.5% to $2.3 billion thanks to the Synthes acquisition. The Cardiovascular Care franchise continued to record a decline in sales reflecting Johnson & Johnson’s exit from the drug-eluting stent market.

Several Medical Devices & Diagnostics markets have been facing challenges in the form of European austerity measures, pricing pressure and a slowdown in elective surgeries, which have all contributed to more tempered growth rates. However, there have been some signs of improvement in the rate of growth in hospital admissions and surgeries, including joint replacement.

Pharmaceutical segment sales increased 7.0% year-over-year to $6.4 billion (operational growth of 11.3% and negative currency impact of 4.3%). Sales in the domestic market increased 14.6% to $3.3 billion whereas international sales remained flat at $3.1 billion.

The company continued to face a supply problem regarding Doxil/Caelyx due to third-party manufacturing issues.

Recently launched products like Zytiga, Incivo, Stelara, Xarelto, 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. Other growth drivers include Prezista as well as Velcade. Third quarter Zytiga sales were $265 million, up 15.2% sequentially.

The Consumer segment recorded revenues of $3.6 billion in the reported quarter, down 4.3% from the third quarter of 2011. Foreign currency movement negatively impacted sales in the segment by 5.3%. Sales in the domestic market declined 0.4% year-over-year to $1.2 billion, whereas the international market recorded a 6.1% year-over-year decline to $2.4 billion.

OTC sales increased 5.7% in the US probably due to the re-launch of a few key products and the impact of the acquisition of full ownership rights to certain digestive health products.

2012 Earnings Guidance Up

Following the release of third quarter results, Johnson & Johnson raised its outlook for 2012. The company now expects earnings per share of $5.05 - $5.10 in 2012 (old guidance: $5.00 - $5.07 per share). The Zacks Consensus Estimate currently stands at $5.06 per share.

Neutral on Johnson & Johnson

We currently have a Neutral recommendation on Johnson & Johnson. The stock carries a Zacks #2 Rank (Buy rating) in the short run. Our long-term Neutral recommendation on the stock is based on the belief that Johnson and Johnson’s diversified business model, lack of cyclicality and strong financial position will help it in tough situations. Moreover, Johnson & Johnson has been signing deals, which should help boost its revenues in the long term.

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