JNJ's Earnings Announcement
Board: Johnson & Johnson
Earlier this morning, JNJ announced their earnings for the second quarter of 2012, followed by a two hour conference call.
In general, we once again saw steady but a bit lackluster results from this healthcare giant. As this quarter effectively marked the beginning of the tenure of CEO Alex Gorsky, he was present on the call with a long position piece and to answer strategic questions.
First an overview of the results. The company reported total revenues of $16.5B in the quarter, below analysts estimates of $16.69B. Earnings came in at $0.50 per share, but with a slew of one time charges (more later). It could be argued that with everything backed out, they beat estimates on earnings (with $1.30/share) but with so many large charges, I think it safer to consider this a disappointment. We were aware of charges related to legal settlements of past marketing practices, but this quarter also saw a large write down on the intangible assets related to the Crucell acquisition of last year. Press reports are noting the reduction in guidance to $5.00 - $5.07, but this was due to currency issues i.e. the strength in the dollar of late. On a constant currency basis (compared to 2011), guidance was increased slightly, mostly due to the Synthes acquisition being modestly accretive in 2012 (and more so in 2013).
So overall, OK, but with an awful lot of charges, and a quite disappointing revaluation on Crucell. The top line did grow compared to Q1, so the ship may be turning, but there is still a lot of excess ballast dragging on JNJ. There was not a lot of talk in the call related to Crucell, but the write down seemed to mostly have to do with the value of the R&D (which is an expense generally, but is capitalized within an acquisition), and some new product delays and an overall decrease in the market appeal for vaccines caused this to be revalued down pretty substantially. I personally still like the Crucell addition long term, but one can certainly argue the the acquisition was not all that well timed (though earlier during the bird flu scare, vaccine companies were even more richly valued as I recall).
We only had a few weeks of Synthes reported in the quarter, so the revenue mix of the three segments will be more telling next quarter as the MD&D segment should grow beyond 40% of revenues. Each segment showed low single digit year over year operational growth, Consumer 0.6%, Pharmaceutical 5.1%, and MD&D 3.4%, but currency movement took those gains away from all but the pharmaceutical segment, which posted an overall 0.9% revenue growth on the strength of the recent product introductions. JNJ continues to aggressively pursue label expansion on some of these newer drugs, like Xarelto and Zytiga.
Alex Gorsky spent a few minutes laying out his strategy for the company. This was a bit dry (and I admit I zoned out at times), but did have a few insights. One key was a repeated emphasis on the Credo, in a likely effort to provide confidence that inattentions to detail of the recent past, should be past (I hope so, and am hopeful). The second was to note that JNJ did not intend to 'break up the company', emphasizing the long term strength in the diverse but related business operations, but would continue to evaluate the pieces within each segment strategically. A Goldman-Sachs analyst during Q&A tried to goad JNJ into the 'shorter term' rewards that a breakup could provide ('the market is embracing Abbott's decision'), but Alex effectively stayed on message ('not interested, thanks') again noting the current trends in care (emerging markets, accountable care organizations) are best addressed with strategies rather than products, with JNJ uniquely positioned due to its diversity.
I may warm to him yet : )
The company (Caruso) did not want to talk more on the financing of the Synthes acquisition, just noting that JNJ was uniquely enabled to do the way they did. He did note that JNJ was able to maintain its AAA rating post acquisition and would continue to view cash with a priority of 1. dividends, 2. value generation (R&D, acquisitions), 3. share repurchases. It was noted that some of the pressures from Southern Europe relaxed a bit in the past quarter (receivables and DSO improved, as Spain made a large payment), but pressures on pricing and procedure rates continues.
Overall, the company seemed cautious but optimistic that procedure rates and markets in general were improving slightly. The company is undergoing a review of its business segment pieces, as one would expect with a management change, so JNJ may be active in both acquisitions and divestitures in the coming months, but likely at modest levels for the latter. I'd like to see a bit more growth before I personally get more interested again (I do still own some, but did reduce recently).