McNeil Recalls Cut J&J's Profits, Draw U.S. Attorney's Subpoena

Firm will not resume selling the OTC products that were the subject of the recall until 2011.

Johnson & Johnson slashes its full-year profit estimates beyond analyst expectations to reflect lost sales from recalls of children's OTCs and the temporary shuttering of the facility where the drugs are made.

Reporting its fiscal 2010 second-quarter earnings July 20, J&J also disclosed that federal prosecutors are investigating the firm in connection with the recalls.

J&J's 15-cent cut to its estimated 2010 earnings per share to a range of $4.65 to $4.75 "is somewhat larger than anticipated ... and will likely lead to weakness in [J&J's] share today," said analysts with Credit Suisse in a same-day note.

Indeed, shares fell 2.6 percent in early trading to $58, but recovered slightly to close at $58.58 - a 1.6 percent drop from the previous day's close.

J&J attributed the estimated profit decline partly to the approximately $200 million in sales it lost in the April-June period from the recall of 1,500 lots of Children's Tylenol , Motrin , Benadryl and Zyrtec in April and the related fallout.

J&J subsidiary McNeil Consumer Healthcare voluntarily recalled the products after an FDA inspection uncovered good manufacturing practice violations and possible raw material contamination at the Fort Washington, Pa., plant, where it made the products. J&J subsequently shut down the facility until it could address the violations .

J&J includes potential sales lost due to the production suspension at the Fort Washington plant in the $200 million hit.

It estimates suspending production at the plant will cost it approximately $600 million in annual sales of products not shipped from the facility, Finance VP and Chief Financial Officer Dominic Caruso said during a same-day earnings call.

The firm is transferring production of the products to other cites, but until that is completed it cannot make or sell the products, he explained. J&J expects to sell the drugs again by 2011, he added.

Firm Subpoenaed On Recalls

The U.S. Attorney's Office for the Eastern District of Pennsylvania delivered a grand jury subpoena to J&J related to McNeil's recalls, Investor Relations VP Louise Mehrotra said during the call.

Mehrotra did not provide further details about the subpoena, but noted there are "a variety of ongoing legal actions in connection with the recall."

Among those actions are consumer complaints that could become a class action lawsuit alleging McNeil violated consumer protection statutes and tried to cover up manufacturing shortcomings and defective products ('Health News Daily' July 13, 2010).

J&J also must answer to the House Oversight and Government Relations Committee, which is investigating the recent children's product recalls and an alleged "phantom recall" in 2008 of Motrin made in Fort Washington (Also see "Congress Hopes To Land J&J Chief Weldon For Second Recall Inquiry" - Pink Sheet, 28 Jun, 2010.).

Recall Drags Down Overall Consumer Sales

Lost sales related to the Fort Washington plant recall and closure also contributed to the 13.4 percent drop in J&J's overall OTC, pharmaceutical and nutritional sales during the quarter compared to the same period in 2009, Mehrotra said.

J&J's worldwide consumer segment sales for the period fell 5.4 percent to $3.6 billion, with domestic sales down 14.3 percent to $1.46 billion and international sales up 1.8 percent to $2.18 billion, according to a release.

Even without the McNeil recall-related problems, the consumer health care business would have been "flat to slightly down," Caruso said. He attributed the lack of organic growth to the slow economic recovery, including private label competition, the devaluation of the Venezuelan currency and several divestments.

Despite the hit to consumer sales, the New Brunswick, N.J.-based firm managed to grow overall sales 0.6 percent to $15.3 billion.

Pharma sales also declined, driven in large part by European pricing pressures (see (Also see "J&J Pharma Hit By EU Price Cuts, Weaker Euro" - Pink Sheet, 20 Jul, 2010.) ).

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-Elizabeth Crawford ([email protected])