(Reuters) - Declining sales dogged Johnson & Johnson (JNJ.N) in the first quarter, illustrating the company’s struggle to revive growth in all three of its main businesses and tough challenges ahead for incoming Chief Executive Officer Alex Gorsky.
Gorsky, a company vice president, on April 26 takes the helm of J&J, which for most of the past century has posted dependable double-digit annual profit growth.
“Gorsky’s toughest challenge will be to turn the corner on manufacturing issues,” said Morningstar analyst Damien Conover, referring to quality-control lapses at its factories that have sparked recalls of Tylenol and many other over-the counter products since 2010.
“J&J initially had high hopes of making a big dent in fixing the problems by 2011, but then pushed it back to 2012 and then 2013 and it could go to 2014.”
First quarter company revenue fell slightly on anemic sales of consumer medicines and its medical devices - another business that has been hit by costly recalls in the past two years.
Net earnings rose to $3.91 billion, or $1.41 per share, from $3.48 billion, or $1.25 per share, a year earlier. Excluding special items, J&J earned $1.37 per share, topping the analysts’ average forecast of $1.35 a share, according to Thomson Reuters I/B/E/S.
Revenue slipped 0.2 percent to $16.14 billion, while Wall Street expected $16.26 billion. J&J said sales would have risen 1 percent if not for the stronger dollar, which lowers the value of sales in overseas markets.
Company shares, which were little changed in afternoon trading, have barely budged in the past two years, amid moderate gains for the drug sector and 15 percent growth for the Standard & Poor’s 500 stock index .SPX.
Sales of J&J consumer products, including its over-the-counter medicines, slipped 2.4 percent to $3.6 billion in the first quarter.
Conover said the McNeil consumer healthcare unit that makes the OTC brands had peak sales of $5.9 billion in 2008, representing more than 9 percent of total company revenue. The unit’s sales last year dropped to $4.4 billion, or only 6 percent to 7 percent of company revenue, as a giant plant in Fort Washington, Pennsylvania remained down for repairs.
“Manufacturing problems always plague companies longer than they expect,” Conover said. “But once McNeil regains full capacity, if its products regain market share they could generate a 2 percent boost in company earnings.”
Profits have also been hurt by generic competition for its prescription drugs. The company has also had to grapple with a weak global economy that has cut demand for elective surgeries and therefore for its vast array of medical devices and diagnostics.
“Utilization of medical products has not been exactly robust for J&J or the (device) industry, and Gorsky can’t change the global economy,” said Les Funtleyder, portfolio manager for Miller Tabak & Co. “So if they don’t see a pickup, they’ll have to find other sources of growth — either expanding use of current products or finding new products.”
The quarter was “a little light on revenue, especially in the consumer and device businesses,” Gabelli & Co analyst Jeff Jonas said. But he added that the company had impressively controlled sales, general and administrative costs, as well as spending on research and development.
“That’s something they’ve been promising for a long time and we haven’t really seen until now,” Jonas said.
Jonas said the company’s new Zytiga prostate cancer treatment was a standout performer in the quarter.
“That’s definitely going to be a billion-dollar-plus drug,” he said, adding that HIV drugs also did well.
Global sales of prescription drugs rose 1.2 percent to $6.1 billion in the quarter, held back by generic competition for J&J’s Levaquin antibiotic and Concerta treatment for attention deficit disorder.
Medical device and diagnostic sales slipped 0.3 percent, weighed down by J&J’s discontinuation of drug-coated heart stents and widely publicized recalls of its faulty DePuy ASR hip replacement products.
J&J took charges of more than $3 billion in January, largely for recalls of the DePuy devices and also for litigation involving allegedly improper marketing of its Risperdal schizophrenia drug.
Citing positive current foreign exchange rates, J&J slightly lifted its full-year profit forecast, to between $5.07 and $5.17 per share, from its earlier view of $5.05 to $5.15 per share. The company earned $5.00 a share last year.
Reporting By Ransdell Pierson and Lewis Krauskopf; editing by Maureen Bavdek,Andre Grenon and Carol Bishopric