Tylenol Trickles Back To Shelves As J&J Touts Consumer Turnaround
This article was originally published in The Tan Sheet
Executive Summary
J&J CEO William Weldon says the firm has “turned the corner on a particularly difficult period” that featured extensive OTC product recalls and QC issues. Worldwide consumer product sales grew slightly in the fourth quarter and full 2011.
After two years of struggles,Johnson & Johnson is regaining momentum in its consumer division, which tallied fourth-quarter sales higher than some analysts’ predictions and continues to improve manufacturing.
CEO William Weldon said during the firm’s full-year earnings call Jan. 24 that J&J has “turned the corner on a particularly difficult period” that featured quality control issues and extensive product recalls at the McNeil Consumer Healthcare subsidiary beginning in 2009.
In the fourth quarter, McNeil returned to market some of the recalled Children’s and Infants’ Tylenol products and Tylenol Cold & Flu Severe caplets, with plans to reintroduce more throughout 2012 (Also see "J&J Brand Revival Plan Relies On Marketing, Delivery Innovation" - Pink Sheet, 24 Oct, 2011.).
Johnson & Johnson CEO William Weldon
Photo courtesy of J&J
Weldon said New Brunswick, N.J.-based J&J is “focused on how we can improve the products we are bringing back.” Such improvements, along with aggressive marketing, likely will be essential in restoring consumer trust in long-absent drug products, many of which now face enhanced competition from other brands and a sizable private label presence.
Under a consent decree with FDA, McNeil’s OTC production facility in Fort Washington, Pa., remains shuttered and plants in Lancaster, Pa., and Las Piedras, Puerto Rico, are operating below maximum capacity due to additional review and approval processes. The firm continues to seek alternative sites for those facilities’ workloads, executives said.
J&J expects to reopen Fort Washington in 2013 when its remediation concludes.
OTCs Gain In Q4 On Inorganic Growth
J&J reported worldwide consumer unit growth of 1.6% to $3.67 billion in the fourth quarter and 2% to $14.88 billion in 2011. International expansion and 2.7 percentage points of currency exchange boosted full-year numbers, as U.S. consumer sales dipped 6.7% to $5.15 billion.
Particularly strong in the consumer segment during 2011 were skin care, up 7.6% worldwide to $3.72 billion and led by Neutrogena; oral care, up 6.4% to $1.62 billion thanks to Listerine line extensions; and baby care, up 5.9% to $2.34 billion.
Women’s health dipped 2.8% in the 12 months to $1.79 billion, reflecting the divestments of e.p.t. home pregnancy tests and Monistat yeast infection treatments in 2011 (Also see "Insight Acquires Monistat In Third Deal With McNeil For Women’s OTC Drugs" - Pink Sheet, 5 Sep, 2011.).
The OTC/nutritionals business also lagged, with sales down 3.2% to $4.4 billion for the year.
However, OTC/nutritional sales bounced back to 4% global growth in the fourth quarter, to $1.14 billion, as J&J expanded its presence in Russia and Eastern Europe by acquiring Doktor Mom cough remedies and other OTCs from JB Chemicals & Pharmaceuticals Ltd. (Also see "J&J Expands Russian OTC Foothold Via J.B. Chemicals Portfolio Acquisition" - Pink Sheet, 30 May, 2011.).
The October dissolution of J&J’s joint venture with Merck & Co. Inc, which gave J&J full marketing rights to digestive health OTCs Mylanta, Mylicon and Pepcid, also helped counterbalance lost sales from the McNeil recalls, said Louise Mehrotra, J&J’s VP of investor relations (Also see "Merck Looks To “Exploit” Switches With Exit From J&J Joint Venture" - Pink Sheet, 3 Oct, 2011.).
Consumer Surprises Some Analysts
Reintroducing all recalled OTCs, which includes products under the Benadryl, Motrin and Zyrtec brands, ultimately will return about $650 million in annual sales, Morningstar analysts said.
However, UBS expects only about 70% of the recalled McNeil stock-keeping units to return; the rest will be rationalized.
J&J’s fourth-quarter consumer sales edged out some analysts’ estimates, including Deutsche Bank by $15 million and Leerink Swann by $50 million – the Leerink analysts’ only underestimation among J&J’s business segments.
Companywide sales reached $16.26 billion in the fourth quarter, a 3.9% gain, and $65 billion for the year, up 5.6%. One-time costs, including those related to device recalls and related litigation, eroded J&J’s net earnings, which dropped 88.8% to $218 million in the fourth quarter and 27.5% to $9.67 billion in 2011.
Weldon Abides
Weldon appears to have outlasted the company’s OTC quality control problems, which ultimately may serve as little more than a footnote to his legacy at the firm’s helm.
In April, Weldon will mark 10 years as chairman and CEO of J&J, where he has worked since 1971. That milestone, coupled with McNeil’s recovery, could offer the 63-year-old an opportunity to retire on a high note.
Just more than a year ago, the firm elevated Alex Gorsky and Sheri McCoy to vice chairmen of J&J’s executive committee, a move that suggested one of them will succeed Weldon (Also see "J&J Fills Consumer Chief Post, Promotes Likely CEO Candidates" - Pink Sheet, 20 Dec, 2010.). McCoy is responsible for the pharmaceutical and consumer businesses and Gorsky oversees medical devices and diagnostics.
Some observers thought the McNeil recalls spelled the end for Weldon’s tenure, especially in late 2010 after a congressional committee grilled him and Colleen Goggins, who subsequently resigned as chairman of the worldwide consumer group. More recently, a federal judge dismissed a securities fraud lawsuit against Weldon, though the suit was allowed to proceed against Goggins and the firm (Also see "In Brief" - Pink Sheet, 2 Jan, 2012.).