Johnson & Johnson pushes back to 2012 the target for returning its full slate of recalled OTC drugs to market as it adjusts to operating under a consent decree with FDA and the Department of Justice.

During its first-quarter earnings call April 19, the New Brunswick, N.J., pharma giant also doubled – from 6 cents per share to 12 cents per share – the expected negative impact in 2011 from the remediation of its McNeil Consumer Healthcare manufacturing plants.

Despite that, J&J reported relatively strong overall results for the January-March period, with even the Consumer business showing signs of life by beating some analysts' sales expectations.

Chief Financial Officer Dominic Caruso said J&J witnessed sequential improvement in Consumer over the past two quarters, including "stronger market uptake in some of the products."

The company said overall worldwide sales rose 3.5% to $16.17 billion in the first quarter, thanks largely to international growth and the positive impact of currency exchange.

Net earnings fell 23.2% to $3.48 billion, reflecting a higher cost of goods sold attributable largely to the OTC manufacturing remediation.

Still, the firm raised its full-year earnings guidance to a range of $4.90 to $5 per share, compared to the previous projection of $4.80 to $4.90.

J&J doubled the projected drag from McNeil remediation due to slower sales from lower production volumes as third-party auditors check product quality.

J&J Consumer suffered in comparison to the year-ago quarter – which came before the largest of McNeil's 2010 OTC recalls – dropping 13.8% to $1.35 billion in the U.S. and down 2.2% to $3.68 billion globally.

Consumer's performance bested several analyst projections; UBS had estimated sales of $3.62 billion and Piper Jaffray forecasted $3.55 billion for the unit.

"Fears over negative guidance revisions due to continuing Consumer and Devices challenges were not realized," wrote Morgan Stanley analysts, while Leerink Swann suggested the OTC recalls are having "a less-bad-than-feared brand impact."

Remediation Process Slows Under Decree

Though J&J had hoped to return all recalled liquid OTCs – including Children's Tylenol, Benadryl, Motrin and Zyrtec – to stores by the end of 2011, the March consent decree will delay remediation efforts (Also see "FDA Enforces Consent Decree Over J&J/McNeil's OTC Manufacturing" - Pink Sheet, 14 March, 2011.).

The decree covers McNeil's operations at Las Piedras, Puerto Rico; Lancaster, Pa.; and Fort Washington, Pa., which remains shuttered for remediation and modernization. J&J is implementing its comprehensive action plan submitted last year to FDA and is working with third-party consultants on quality assurance.

Shifting production of some McNeil products to other facilities will allow limited quantities of certain stock-keeping units to reach market toward the end of 2011, but the majority will reemerge in 2012, Caruso said during the call. J&J plans to "spend in accordance with those launches," in terms of marketing, he added.

The firm doubled the projected impact on its earnings from the remediation due to slower sales, reflecting lower production volumes as the firm follows quality steps outlined in the decree, "as well as additional investments required in the remediation process," Caruso said.

The initial drag of 6 cents per share came from the action plan already in place, while the additional 6 cents comes from having third-party auditors in its OTC facilities sampling products and checking quality-control processes, he said.

By the time all recalled McNeil OTCs reappear on shelves, it may be close to two years since the April 2010 recall of 45 SKUs, some with particulate matter in suspension or with off-specification potency ([A#05180190003]).

Branded competitors such as Prestige Brands and private labeler Perrigo, which just resolved an FDA warning letter and is ramping up its OTC manufacturing, expect to gain additional market share as J&J's delays continue (Also see "Perrigo Takes Two Steps Forward: Generic Allegra Launch, Manufacturing Compliance" - Pink Sheet, 18 April, 2011.).

Only Baby Care, Oral Care Gain In Consumer

A 26.8% decline in first-quarter U.S. OTC/Nutritional sales to $397 million was a major contributor to the Consumer unit's dip. Internationally, the category was a bright spot for J&J, growing 10.1% to $732 million.

Meanwhile, brand divestments dragged down sales in other Consumer businesses. The Women's Health category was down 14.4% in the U.S. to $125 million, in part because J&J sold e.p.t. pregnancy tests to Insight Pharmaceuticals in February (Also see "Perrigo Takes Two Steps Forward: Generic Allegra Launch, Manufacturing Compliance" - Pink Sheet, 18 April, 2011.).

That divestment followed J&J's sale of retail distribution rights to Purell Hand Sanitizer in late 2010 ("Also see "J&J Washes Hands Of Purell As GOJO Eyes Consumer Segment Growth" - Pink Sheet, 8 November, 2010.). J&J's Wound Care/Other category slipped 9.8% to $129 million in the U.S. during the quarter.

Within Consumer, only Baby Care – up 6% to $561 million – and Oral Care – up 2.6% to $391 million – experienced positive first-quarter growth. J&J execs said Baby Care rose on higher international demand for cleansers, wipes and powders, while Listerine growth outside the U.S. helped Oral Care's performance.

By Dan Schiff

Under Consent Decree, J&J Delays Full Return Of Recalled OTCs Until 2012

More from Archive

More from Pink Sheet