Highlights From JNJ's Q1 Conference Call: U.S. Sales Declined by 0.6%; Total Worldwide Revenues Increased 3.5%

This morning, Johnson & Johnson (NYSE: JNJ) reported Q1 EPS of $1.35 per share, 9 cents better than the analyst estimate of $1.26 per share. Revenues rose 3.5% to $16.2 billion, topping the market consensus of $15.83 billion. Shares are trading up 3.13% today.

Highlights From JNJ's Q1 Conference Call:

• (Louise Mehrotra, Vice President, Investor Relations) Worldwide sales to customers were $16.2 billion for the first quarter of 2011. Up 3.5% as compared to the first quarter of 2010. On an operational basis, sales were up 1.8%, and currency had a positive impact of 1.7%.
  
• In the U.S., sales declined 0.6%. In regions outside the U.S. operational growth was 4.1%, while the effective currency exchange rates positively impacted our reported results by 3.2 points.
  
• The western hemisphere excluding the U.S. grew by 7.3% operationally, while Asia Pacific Africa region grew by 6.3% on an operational basis.
  
• Europe grew 1.9% operationally. If you'll now turn to the Consolidated Statement of Earnings, net earnings were $3.5 billion, compared to $4.5 billion in the same period in 2010. Earnings per share were $1.25. Versus $1.62 a year ago.
  
• Net earnings on an adjusted basis were $3.7 billion, and earnings per share were $1.35. Up 3.6% and 4.7% respectively versus the first quarter of 2010.
  
• Our investment in research and development as a percent of sales was 10.8%. Up 80 basis points versus the first quarter of 2010, due primarily to the timing of milestone payments.
  
• Interest expense, net of interest income, of $104 million was up $23 million versus the first quarter of 2010 due to a higher average debt balance. Other income net of other expense was $13 million in the first quarter of 2011, compared to $1.6 billion in the same period last year.
  
• Excluding special items, net other income was $359 million, versus $97 million a year ago. Dominic will discuss this item during his remarks.
  
• Excluding special items, taxes were 22.8% in the first quarter of 2011, in line with our guidance.
  
• I'll begin with the Consumer segment. Worldwide Consumer segment sales for the first quarter of 2011 of $3.7 billion decreased 2.2% as compared to the same period last year.
  
• On an operational basis, sales declined 4.1% while the impact of currency was positive 1.9 points. U.S. sales were down 13.8%, while international sales grew 2.6% on an operational basis.
  
• Excluding the impact of lower over the counter or OTC revenues operational sales declined approximately 1%. For the first quarter of 2011, sales for the OTC Pharmaceuticals and Nutritionals decreased 8.2% on an operational basis compared to the same period in 2010 with U.S. sales down 26.8%.
  
• Regarding the products previously produced at this facility, we are in the process of transferring the production to other sites. We began shipping a small amount of product in the fourth quarter of 2010 and ultimate supply of certain key products will begin late in 2011.
  
• Sales of OTC and Nutritional products outside the U.S. were up 6.9% on an operational basis. Fluctuations in retail inventory levels, favorably impacted the quarterly comparisons. Additionally, strong market growth in certain regions positively impacted growth in the quarter.
  
• Our Skincare business declined on operational by 3.7% in the first quarter of 2011 with sales in the U.S. down 5.8% and sales outside the U.S. down 1.7% on an operational basis. As previously discussed sales have been impacted by lower production volumes due to the enhancements to equipment and manufacturing processes which began in the latter half of 2010.
  
• Baby Care products achieved operational growth of 3.1 % when compared to the first quarter of 2010 due primarily to growth in cleansers, wipes and powders outside the U.S. Women's health declined 4% on an operational basis. Sales in the U.S. were down 14.4%, while sales outside the U.S. were up on an operational basis by 0.7%.
  
• In the U.S., sales were down 6.3% reflecting the impact of competition, including private label for certain products. Sales outside the U.S. increased 5.6% operationally driven by strong growth for Listerine. Wound Care Other was down 8.4% on an operational basis compared to the same period last year due to increased competition compounded by the divestiture of Purell announced in first quarter of 2010.
  
• I'll review highlights for the Pharmaceutical segment. Worldwide sales for net sales of the first quarter of $6.1 billion were up 7.5% versus the same period last year. On an operational basis, sales were up 6.4% with a positive currency impact of 1.1 points.
  
• Sales in U.S. increased 5.8% while sales outside the U.S. increased on an operational basis by 7.3%. The first quarter sales comparisons were negatively impacted by approximately $60 million in incremental rebates due to the U.S. healthcare reform legislation implemented late in the first quarter of 2010.
  
• Sales of our key immunology products which include REMICADE, STELARA and SIMPONI were up nearly 18% versus 2010. Sales in the U.S. were up approximately 8% when compared to the first quarter of 2010, with REMICADE up 1%, STELARA up 88% and SIMPONI up 36%.
  
• With the strong growth achieved by STELARA and SIMPONI we continue to be the market leader in immunology in the U.S. Export sales of REMICADE were up 22.5% reflecting both double digit market growth as well as the expected increase in 2011 to 42% from 40% for the division of contribution income split per the previous distribution agreement.
  
• Sales of LEVAQUIN, our anti infective were up 19% on operational basis whether compared to the same period last year U.S. anti infective market was estimated to be up eight% over the quarter due to higher incidence of respiratory illness and flu. Of note, the U.S. marketing exclusivity for LEVAQUIN will expire on June 20th this year.
  
• Sales of RISPERDAL CONSTA outside the U.S. were up 9.1% operationally with strong growth in most major regions. PROCRIT EPREX declined operationally by 24.6% during the quarter as compared to the same period last year with PROCRIT down 34.5% and Eprex down 12.3% operationally.
  
• CONCERTA, a product for attention deficit hyperactivity disorder, increased 8.8% operationally in the first quarter as compared to the same period last year, with sales in the U.S. up 10% due to strong market growth partially offset by lower market share. Sales outside the U.S. were up 6.3% operationally with solid growth seen in most major regions.
  
• VELCADE, a treatment for multiple myeloma, is being co developed with Millennium Pharmaceuticals. We have commercialization rights in Europe and the rest of the world outside U.S. Operational sales growth was 5.6%. Slower sales in Europe due to price pressure and increased competition were offset by strong growth in other regions.
  
• Insulin and NNRTI for the treatment of HIV grew operationally 25.1% due to an increase in market share. INVEGA, an atypical antipsychotic, grew operationally 10.1% due to very strong growth outside the U.S. with the recent approval in Japan.
  
• The FDA approved INVEGA for the treatment of schizophrenia in adolescents 12 to 17 years of age, and SIMPONI received approval from the European Commission for structural damage in RA and a positive opinion from the CANGP for structural damage in psoriatic arthritis.
  
• Now turning to the franchises starting with Cordis. Cordis sales were down 7.5% operationally with the U.S. down 3.6%, and sales outside the U.S. down 9.9% operationally.
  
• Cordis results were impacted by lower sales of CYPHER. Our sirolimus eluting stent, partially offset by the strong growth in our Biosense Webster business.
  
• CYPHER sales were down 41% on an operational basis versus the prior year and estimated worldwide share for the quarter was 12%, down two points sequentially and down six points from the first quarter in 2010.
  
• The continued success of CARTO 3 and install base made strong results. The DePuy franchise operational growth of 1.7% when compared to the same period in 2010, with the U.S. down 0.4% and the business outside the U.S. growing by 4.2% operationally.
  
• Operationally, hips were down 2% on a worldwide basis with U.S. down 6% and sales outside the U.S. up 3%. Growth was impacted by lower volume of metal on metal bearings and continued pricing pressure on a sequential basis hips grew approximately 4% in the U.S. and 8% operationally outside the U.S. Mix positively impacted the sequential trends as well as the success of the cementless systems. Knees declined 4% on an operational basis with the U.S. down 6% and sales outside the U.S. down 1%.
  
• The diabetes franchise was up 6% operationally in the first quarter of 2011, with the U.S. business up 7.2% and the business outside the U.S. up 4.9% operationally. Increased market share was a major driver of growth.
  
• Ethicon worldwide sales grew operationally by 2.3% with the U.S. up 1.2% and sales outside the U.S. up 3.3% operationally. Sutures, Women's Health and Acclarent were the major growth drivers this quarter.
  
• Ethicon Endo Surgery achieved operational growth of 2.4% in the first quarter of 2011 with the U.S. sales down 2.5%, and sales outside the U.S. up 6% operationally.
  
• Growth was negatively impacted by the divestiture of the breast care business. Excluding this impact, worldwide sales grew approximately 5%. Growth was driven by increased market share for advanced sterilization products as well as Harmonic products and outside the U.S. endo and enseal products. Ortho clinical diagnostics declined 2.5% on an operational basis in the first quarter.
  
• Sales in the U.S. declined 8% while sales outside the U.S. were up 4.1% on an operational basis.
  
• Rounding out the review of the Medical Devices and Diagnostics, our vision care franchise achieved operational sales growth of 4.7% in the first quarter compared to the same period last year.
  
• Sales in the U.S. increased 2.8% while sales outside the U.S. increased 5.9% on an operational basis. Acuview TruEye and astigma lenses were strong contributors to the quarter.
  
• (Dominic Caruso, Vice President, Finance, and CFO) Although the utilization in the healthcare markets continues to be below prerecession levels, we are seeing some sequential improvements in the comparisons to prior year.
  
• Pharmaceutical business demonstrated strong operational growth this sales quarter of over 6%. Due to the success of our recently launched product such as STELARA and SIMPONI, and core medicine such as REMICADE and PREZISTA. Our medical device businesses saw modest sales growth in the first quarter which was in line with market expectations for this sector.
  
• Excluding the impact of the plant shut down in the lower production levels in our McNeil U.S. over the counter business where we're making good progress in addressing the manufacturing and quality issues in that business.
  
• We also received approval for [indiscernible] in Europe for the treatment of schizophrenia. This compound is currently marketed as INVEGA SYSTEMMA in the
  U.S. And in the infectious disease space we continued to expand our pipeline. We recently announced positive results from a study of Telaprevir and also initiated Phase III clinical trials of TMC435.
  
• In April, we announced the settlement with the U.S. Department of Justice, the U.S. Securities and Exchange Commission and the UK Fraud Office for matters related to Foreign Practices Act investigations and the United Nations Oil for Food program. We will pay nearly $80 million in connection with these matters, an amount that was previously reserved for.
  
• Details on these matters have been widely reported, and we have accepted full responsibility for the shortcomings in our McNeil consumer manufacturing operations and for the actions related to these other investigations. We are confident that these matters are not representative of the vast majority of the Johnson & Johnson employees around the world.
  
• And finally, just last week we reached an amended agreement with Merck (NYSE: MRK) concerning the distribution rights for REMICADE and SIMPONI, concluding the arbitration proceedings that began back in 2009. We are very pleased to have reached this agreement and are working very closely with Merck to make certain that this is a seamless transition for the patients and healthcare providers who rely on these treatments.
  
• And Merck will pay Johnson & Johnson $500 million. The distribution of contribution income will move to a 50/50 split effective July 1st, 2011. This was previously scheduled to reach that level in 2014. This compares to the current split of 42% to Johnson & Johnson and 58% to Merck, prior to the amendment.
  
• At the end of the first quarter we had over $9 billion of net cash. This consists of approximately $27 billion of cash in investments, and approximately $18 billion of debt.
  
• We used approximately $2.5 billion to fund the Crucell acquisition during the quarter and we continue to generate strong cash flows. For purposes of your models, assuming no additional major acquisitions during 2011, I suggest you consider modeling net interest expense of between 300 million and $400 million consistent with our previous guidance.
  
• Now a word on taxes. For the first three months of 2011, the company's effective tax rate excluding special items was 22.8%. We suggest that your models reflect an effective tax rate for 2011 in the range of 22% to 23%, consistent with our previous guidance.
  
• Our guidance continues to be based first on a constant currency basis, resulting from our operations and assuming average currency rates from 2011 would be the same as they were for 2010. This is the way we manage our business and we believe this operational view provides a good understanding of the underlying performance of our business.
  
• We will also continue to provide an estimate of our sales and EPS results for 2011 with the impact of current exchange rates could have using the Euro as an example.
  
• Turning to sales. We would be comfortable with your models reflecting an operational sales increase on a constant currency basis, of between 2.5% and 3.5% for the year.
  
• This would result in estimated sales for 2011 on a constant currency basis of approximately $63.5 billion. While we are not predicting impact of currency movements, to give you an idea of the potential impact, if currency exchange rates for the remainder of 2011 were to stay where they were as of last week, as an example with the Euro at approximately $1.44, then our sales growth rate would be positively impacted by approximately 3% for the year.
  
• Thus, under this scenario, we would expect reported sales growth to be between approximately 5.5% and 6.5% for the year for a total expected level of reported sales of $65.5 billion higher than our previous guidance.
  
• Now turning to earnings. I suggest that you consider full year 2011 operational EPS estimates of between $4.74 and $4.84 per share, excluding the impact of special items and assuming the same average exchange rates for 2011 as we saw in 2010.
  
• (Q&A) Dominic, a couple of questions first on the Merck settlement, can you give any idea why this split was Europe versus all the other countries, did that relate to kind of ease of transition or is there a particular reason you may have wanted some of those other markets? (A) Well, I think both companies believe these markets are attractive outside the U.S. [indiscernible] And we saw some positive trends in certain markets that we thought we would like to have total control of. Of course, Merck obviously is doing well in other markets around the world. And I think it was just really a settlement or agreement between the parties to divide the business and see where together we could make REMICADE and SIMPONI row optimally.
  
• Your sense is in the countries you've taken over there won't be any disruption switching over or minimal disruption? (A) I would say anytime you do such a transition that there may be some disruption but our plan is to make this as seamless as possible, and we've gotten the assurances of our partners at Merck that they will obviously cooperate with us and ensure that this is seamless and minimize any disruption.
  
• One more question on consumer. You doubled the impact this year from $0.06, I think $0.12. Is that all related to the consent decree, or is that things in addition that you're doing that you maybe weren't planning on doing to give guidance in January. (A) Well, the increase of $0.06, just to be clear, from six to $0.12, that additional $0.06 is in fact related to the consent decree in two main buckets. One is the shipments from the facilities will be slowed, if you will, or slowed down, as we implement the quality procedures and the reviews that the consent decree now requires. And in addition we have also we will also embark on additional remediation efforts. That doubles the initial estimate we made for that impact.
  
• One more quick one on that, do you still expect in the back half of the year to increase the marketing spend on those products? Is that still in the plan? (A) Well, as Louise mentioned we expect to begin launching the products towards the back half of the year but the majority of the products will be launched in 2012. And obviously we'll spend in accordance with those launches.

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