Johnson & Johnson: Fort Washington plant troubles hurt earnings

Posted: April 20, 2011

Johnson & Johnson officials said Tuesday that the yearlong problems at the company's McNeil Consumer Healthcare plant in Fort Washington hurt first-quarter earnings, but they offered no specific comment on a possible merger with Synthes, which has facilities in West Chester.

Johnson & Johnson reported a 23.2 percent drop in earnings in the first quarter, compared with the same period in 2010.

Dominic Caruso, the company's vice president for finance and chief financial officer, said in a conference call with analysts that the company was doubling its projected cost per share from 6 cents to 12 cents to account for the effect of the problems at the McNeil facility. Besides the cost of cleanup and repair - and certifying the results with independent inspectors and the Food and Drug Administration - the plant remains off-line, so there is less over-the-counter product on the market.

Production is moving elsewhere temporarily to compensate, but plants in Lancaster and Puerto Rico also have to comply with FDA restrictions.

J&J reported $16.2 billion in overall first-quarter sales for 2011, a year-over-year increase of 3.5 percent. But under the topline figure, domestic consumer sales decreased 13.8 percent. Profit, or net income, was $3.48 billion, or $1.25 a share, down from $4.53 billion, or $1.62 a share, in the first quarter of 2010. During the last quarter, McNeil agreed to what the FDA calls a consent decree, which further lays out plans for fixing the problems – and potential financial penalties if milestones are not met.

"We accept responsibility," Caruso said in the conference call. "We are confident that what happened there was not representative of the vast majority of J&J employees around the world."

Meanwhile, J&J and Synthes Inc. are engaged in merger talks, according to a statement Monday by Synthes. Synthes has one headquarters in Switzerland, where the company was founded, and another in West Chester, with five other facilities in Chester County. Synthes is a global manufacturer of medical devices, especially those involved in treating traumatic injuries to bones and, specifically, spines. That could help J&J's portfolio in the medical-technical-device area.

"We are not commenting on the Synthes discussion [in the marketplace] and the statement they made," Caruso said. "But we are the largest med-tech business in the world. We certainly believe a med-tech business of scale is important. We are usually the preferred choice of hospitals and, more importantly, governments around the world. Where we don't have sufficient scale, we would like to increase the scale in the appropriate manner."

Despite the earnings dip, J&J's shares rose $2.23 to finish Tuesday at $62.69. Synthes, traded on the Swiss stock exchange, closed the day ahead slightly at 147.40 Swiss francs, which equates to $163.85. And the particular trading market might matter in a merger, which might be valued at up to $20 billion.

"J&J is looking for innovation," Morningstar Inc. analyst Damien Conover said. "Given that, Synthes makes sense. No. 1, it is known for innovation in devices. No. 2, Synthes has experience in emerging markets, especially in Eastern Europe. And No. 3, J&J has the cash and can make the deal outside the U.S., and you'd like to do that rather than bring it back here where you will be taxed at a higher rate."


Contact staff writer David Sell at 215-854-4506 or dsell@phillynews.com.

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