Highlights From JNJ's Q2 Conference Call: Worldwide Sales Increased 8.3%; Net Earnings Up 4.9%

Johnson & Johnson (NYSE: JNJ) reported Q2 EPS of $1.28, $0.05 better than the analyst estimate of $1.23. Revenue for the quarter came in at $16.6 billion versus the consensus estimate of $16.22 billion.

Highlights From JNJ's Q2 Conference Call:

• (Louise Mehrotra, Vice President of Investor Relations) Worldwide sales to customers were $16.6 billion for the second quarter of 2011, up 8.3% as compared to the second quarter of 2010.
  
• On an operational basis, sales were up 2.6% and currency had a positive impact of 5.7%. In the u.s., sales increased 0.1%. In the region's outside u.s., our operational growth was 4.9% while the effect of currency exchange rates positively impacted our reported results by 11 points. Europe grew 5.4% operationally.
  
• The western hemisphere, excluding the u.s., grew by 5.3% operationally while the asia pacific africa region grew on an operational basis f you will turn to the consolidated statement of earnings, net earnings were $2.8 billion compared to 3.4 billion in the same period of 2010. Earnings per share were $1 versus $1.23 a contrary ago.
  
• Net earnings on an adjusted basis were $3.5 billion and earnings per share was $1.28, up 4.9% and 5.8% respectively versus the second quarter of 2010.
  
• Cost of goods sold at 31.2% of sales was 100 basis points higher than the same period in 2010 primarily due to charges related to the restructuring of the cardiovascular care business, the ongoing remediation work in our otc business and the impact of integrating the crew sell business.
  
• Selling and marketing of 31.4% of sales were up 40 basis points due to investment spending in diagnostics business as well as the fee on our branded pharmaceutical products included as part of the u.s. Healthcare reform legislation.
  
• Our investment in research and development as a percent to sales was 11.3%, up 50 basis points versus the second quarter of 2010 due to a higher level of investment spending to advance our pharmaceutical pipe line.
  
• Excluding special items, taxes were 19.6 in the second quarter of 2011. Lower than our previous guidance.
  
• Now turning to the consolidated statement of earnings for the first half of 2011. Consolidated sales to customers for the first six months of 2011 were $32.8 billion, an increase of 5.8% as compared to the same period a year ago. On a year-to-date basis, sales were up 2.2 points operationally and currency had a positive impact of 3.6 points.
  
• Worldwide consumer segment sales for the second quarter of 2011 of 3.8 billion increased 4% as compared to the same period last year.
  
• On an operational basis, sales declined 1.8% while the impact of currency was positive 5.8 points. U.s. Sales were down 8.5% while international sales grew 2.8% on an operational basis.
  
• Excluding the impact of lower u.s. Over-the-counter, or otc revenues, as well as the impact of divestitures, operational sales grew approximately 2.5%.
  
• For the second quarter of 2011, sales for the over-the-counter pharmaceuticals and nutritionals decreased on an operational basis compared to the same period in 2010 with u.s. Sales down 32.9% primarily due to supply constraints.
  
• Sales of otc and nutritional products outside of the u.s. Were up 4.8% on an operational basis primarily due to a higher instance of respiratory and flu in europe.
  
• Women's health declined 4% on an operational basis. Sales in the u.s. Were down 11.7% while sales outside of the u.s. Were down 0.9% on an operational basis. Lower sales of ky products and the i did terrorist vestture of the ept pregnancy test earlier this year impacted growth in the quarter.
  
• Sales in the oral care business increased 1.5% on operational basis n the u.s., listerine and new product launches and strong sales of toothbrushes. Sales outside of the u.s. Decreased 2.1% operationally primarily in europe and venezuela which is partially offset by strong growth in asia. Wound care other was up 2.8% on an operational basis compared to the same period last year.
  
• Solid growth was achieved across most of the product lines partially offset by the divestiture of purell in the fourth quarter of 2010.
  
• On an operational basis, sales increased 7% with a positive currency impact of 5.2 points. Sales in the u.s. Increased 4.1% while sales outside of the u.s. Increased on an operational basis by 10.7%. The marketing exclusivitily for levaquin expired in june negatively impacting wordwide sales growth and u.s. Growth by approximately 5 points.
  
• Sales in the u.s. Of our key immunology products which include remicade, stelara and simponi were up 14% versus 2010 with growth for remicade at 6.8%, stelara at over 100% and simponi at 30%.
  
• Procrit eprex declined from the same quarter with procrit 14% and eprex down 32% operationally. A softening of the market and increased competition as contributed to the lower sales results.
  
• Risperdal consta, a long-standing antipsychotic, achieved sales growth of 4.5% on operational basis. Sales in the u.s. Were down 4.3% and total u.s. Sales of long-acting injectables, including invega sustenna had increase in combined market share. Shares of risperdal consta were up 8.7% with strong growth seen in most major regions.
  
• Concerta increased 4.5 operationally in the same quarter as last year with sales in the u.s. Up 4.9%. Sales outside of the u.s. Were up 3.6% operationally. The supply and distribution agreement with watson laboratories to distribute authorized generic version in the u.s. Became effective may 1st, 2011.
  
• Aciphex period is a pump inhibitor (inaudible). On an operational basis, sales were down 9.4% due to penetration of generic in the category. Doxil caelyx grew 50% in the quarter with the expiration of year end 2010 with the distribution agreement with merck, we're marketing doxil caelyx globally. Invega grew with the u.s. Up 11.8% due to market growth. Sales outside the u.s. Were up 52.9% with the recent approval in japan.
  
• Wordwide medical devices and diagnostic segment sales of $6.6 billion grew 1.3% operationally as compared to the same period in 2010. Currency had a positive impact of 5.9 points resulting in a total sales increase of 7.2%. Sales in the u.s. Were up 0.1% while sales outside the u.s. Increased from an operational basis by 2.2%.
  
• The depuy business had growth of 1.3% when compared to the same time period in 2010 and the business outside of the u.s. Growing by 4% operationally. Pressure on pricing and procedure volumes persisted as a result of the economic trends.
  
• The diabetes care business achieved operational sales growth of 5.3% in the second quarter of 2011, with the u.s. Business growing 6.4% and the business outside the u.s. Growing 4.1% operationally due to the combination of increased market share and market growth. Aseacon grew 5% with the u.s. Up 5% and sales outside 1.2% operationally.
  
• (Dominic Caruso, CFO and Vice President) Our pharmaceuticals business demonstrated strong operational sales growth this quarter of 7%. Due to the success of our recently launched products, such as stelara and vitega and core medicine such as remicade and persista.
  
• Excluding the impact of the otc recall related issue, the business saw operational sales growth of 2.5% which is improved over the first quarter of this year. As to earnings, we are very pleased to have reported solid earnings per share in the second quarter of $1.28 excluding special items.
  
• Now turning to earnings, I suggest you consider full-year 2011 operational eps estimates 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. This is consistent with our previous guidance as our lower effective tax rate will be offset by higher investment spending as I discussed earlier.
  
• (Alex Gorsky, Vice Chairman) First, populations in the developed world are aging rapidly. In large countries like japan, germany and italy, more than 20% of the total population is already over 65 years of age. That percentage is rising rapidly in other developmented nations including the u.s. With the first of approximately 77 million baby boomers began turning 65 this year at the astonishing rate of one person every eight seconds. As most of us know from personal experience, we consume more healthcare as we grow older. In fact, those over the age of 65 consume an average of seven times more healthcare per year than those under the age of 65.
  
• A second tailwind is the growing demand for healthcare that we're seeing in emerging markets. China, for example, has lifted more than 400 million people out of poverty in the last 20 years. As standards of living rise, people increasingly expect and are able to afford better healthcare. A third tailwind is the fact that significant, unmet medical needs remain in both the developed and the developing world.
  
• As we've said in the past, the global md & d mark set worth roughly $350 billion a year. From the pie chart on the left, you see the market is split about evenly between the u.s. And the rest of the world and we estimate that the total market will grow at a five-year compound annual growth rate at about 5%.
  
• We anticipate faster market growth as we move into the 2012-2015 timeframe as the global economy gradually improves, as more people come into the u.s. Healthcare system through healthcare reform, and as demand in emerging markets continues to rise.
  
• Md & d total sales for the first six months of the year were 13 billion, up 1.3% operationally from the prior year and 52.2 on a reported basis. Sales in the u.s. Were roughly flat operationally while sales outside of the understand increased on an operational basis by 2.5%. Excluding drug alluding accidents, total md & d sales increased about 3% operationally.
  
• Electrophysiology, biophysicals and infection prevention are some of the platforms in this category and they are the real growth engines for us today. And then we have some new platforms, businesses that we entered fairly recently, typically through an acquisition but a relatively small today but have the potential to be the real growth engines of tomorrow.
  
• We are promising a new device to treat stomich aneurysms, incraft which we plan to submit for approval. 27,000 people ab abdominal aneurysms, all will rupture resulting in death 80% of the time. The ultra low profile delivery system of incraft has the potential to make endovascular aneurysm repair a possible treatment for a wider range of patients. At the same time that we're bringing greater focus to our existing cardiovascular businesses, we'll also look for opportunities to enter new areas of the market where we can significantly improve patient care and drive growth.
  
• (Q&A) And touch on the guidance on the content for the quarter. Did you have some outperformance this quarter but you left guidance unchanged and could you add more to that? (A) Sure, mike. Well, as you saw, we did have some outperformance on the top line and so we're pleased with that. We also had the outperformance on the bottom line principally driven by the benefit from a lower tax rate. If i compare the tax rate that we experienced so far this year to the tax rate guidance i previously gave, the quarter was probably impacted by about 4 cents just from a lower tax rate from the previous guidance. We're pleased with that because look, i'd rather have lower taxes and be able to invest in the business and that's what you saw us start doing. You see that the second quarter cost of goods sold, sg&a and r&d are all up from the first quarter and as i said, during my prepared remarks that we would expect that trend to continue through the balance of the year. So in summary, we're going to take advantage of a lower tax rate to continue to invest behind the pipe line. Make sure the product launches are off to a great start and integrate obviously the crusell business as best we can. So we will take advantage of that and i think in these slower markets, we want to make sure that we can gain as much share as we can and we want to continue to invest behind our business. Our view at this point is our guidance for the year stays about the same in the bottom line despite a stronger quarter than perhaps wall street had estimated, but as i said, we're going to continue to invest and probably build some momentum in the expense line throughout the balance of the year to offset tax benefit.

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