Recalled OTC drugs took a $900 million bite out of Johnson & Johnson's fiscal 2010 sales, including $300 million in the fourth quarter, contributing to what the company and analysts labeled disappointing earnings.

Additionally, the firm is restoring certain McNeil Consumer Healthcare products to market more slowly than anticipated, J&J executives said during a Jan. 25 earnings call. The Fort Washington, Pa., facility that manufactures many McNeil OTCs remains shuttered for remediation.

J&J CEO William Weldon

While sales across J&J's consumer portfolio contracted in 2010, OTCs and nutritionals created the most significant drag on the business. U.S. sales of OTCs and nutritionals plummeted 37.1% to $1.85 billion for the year, according to the firm's same-day earnings statement.

The worldwide consumer segment, comprising 24% of J&J's overall business, dropped 15% to $3.61 billion in the fourth quarter and 7.7% to $14.59 billion in 2010.

"In a simple word, they underperformed in 2010, especially as you got to the latter part of the year," J&J CEO William Weldon said of the company's consumer brands.

"Part of it, I think, was a distraction on the whole consumer area with the OTC recalls and looking at resources and trying to address some of those areas," he added.

J&J's consumer unit also absorbed the year-over-year effects of brand divestments, including Purell hand sanitizer sold to GOJO Industries in October 2010 and five OTCs sold to Blacksmith Brands, now part of Prestige Brands, in late 2009 (Also see "J&J Washes Hands Of Purell As GOJO Eyes Consumer Segment Growth" - Pink Sheet, 8 November, 2010. and Also see "Startup Blacksmith Debuts With Luden's, PediaCare Acquisition From McNeil" - Pink Sheet, 9 November, 2009.).

The Efferdent and Effergrip brand sales to Blacksmith affected J&J's oral care sales comparatively, as did consumer trade-downs to lower-priced products, the firm said.

In 2010, J&J's oral care business, including Listerine, Reach and Rembrandt lines, fell 11.3% to $635 million in the U.S. and dipped 2.7% to $1.53 billion worldwide.

The company had a few consumer highlights, including hair-regrowth brand Rogaine and international sales of Nicorette smoking-cessation aids. Both brands generated double-digit sales growth in 2010 thanks to line extensions, J&J said.

Fourth-Quarter Nadir In Tough Year

J&J managed to achieve worldwide net earnings of $13.33 billion in 2010, up 8.7%, despite essentially flat sales of $61.59 billion. The firm said it pared its selling, marketing and administrative expenses 1.9% to $19.42 billion for the year.

In the final quarter of 2010, however, sales fell 5.5% to $15.64 billion and net earnings dropped 12% to $1.94 billion.

In the consumer product market, the damaged reputation of certain J&J brands along with lingering economic softness and the rise of private label all point to continued struggles for the business unit; a Morningstar research note predicts "consumer product growth will not return until 2012."

J&J's consumer sales in the October-December period fell 11.2% short of Credit Suisse's forecast. Additionally, Credit Suisse analysts said the company's 2011 earnings per share guidance of $4.80 to $4.90 is "well below the $4.97" a consensus of analysts projected. J&J's diluted EPS for 2010 was $4.76, up from $4.63 in 2009.

"In a simple word, [the consumer brands] underperformed in 2010, especially as you got to the latter part of the year."

– J&J CEO Weldon

Still, others foresee an upside in the diversified company's fiscal 2011.

Analysts from Leerink Swann said upcoming Rx launches and the eventual resolution of J&J's OTC issues should make 2011 comparatively strong year-over-year, and the EPS guidance range could prove conservative.

Remediation Costs Continue To Mount In 2011

Chief Financial Officer Dominic Caruso said J&J will suffer a negative impact of about 6 cents per share in 2011 attributable to the "significant costs" of correcting manufacturing issues at McNeil facilities.

Weldon previously cited a price tag of approximately $100 million to strengthen McNeil's quality control functions and oversight (Also see "J&J/McNeil Done With Post-Recall Personnel Changes - CEO Weldon" - Pink Sheet, 4 October, 2010.).

In October, McNeil began shipping a limited quantity of product from an alternate facility, but other key products typically made at Fort Washington will remain unavailable until the second half of 2011, said Louise Mehrotra, J&J's VP of investor relations.

"This is due to a decision to upgrade manufacturing and quality processes in the course of transferring the products to other sites, as a result of learning from reviews completed as part of our comprehensive action plan," she added.

McNeil's facility in Las Piedras, Puerto Rico – the origin of OTCs recalled in early 2010 due to contaminated and malodorous packaging – is back at full manufacturing strength, though the company is streamlining operations there by transferring certain products out and eliminating others, Mehrotra said (Also see "J&J Consumer Unit Underperforms In Q3 As Recall Aftereffects Linger" - Pink Sheet, 25 October, 2010.).

During the earnings call, Weldon avoided specifics on the McNeil remediation process.

"I think it was a myriad of issues [and] we really can't go into all of them at this point. But I think we've got them, A. under control, B. understand them, and C. are addressing them," the CEO said.

He said J&J has completed about 80% of its comprehensive action plan for McNeil, having reviewed the unit's internal manufacturing (Also see "J&J Must Lay Out Remediation Specifics To Regain Trust In OTCs – Expert" - Pink Sheet, 24 January, 2011.).

The remainder of the plan comprises reviewing McNeil's contract manufacturers, including a completed review of a third party that manufactured Rolaids products J&J recalled recently, Weldon said.

J&J in December announced the recall of Rolaids Softchews after some consumers found wood or metal fragments in the antacid products (Also see "Rolaids Recall Roils McNeil As Year Of OTC Manufacturing Errors Winds Down" - Pink Sheet, 13 December, 2010.).

By Dan Schiff

McNeil OTC Recalls Slice $900M From J&J's 2010 Sales

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