A recall of Motrin , Tylenol and other OTC products linked to contaminated shipping pallets dashed Johnson & Johnson's expectations for launches and line extensions to drive consumer business sales growth in its most recent quarter.

J&J's global consumer sales were relatively flat in its fiscal 2010 first quarter, increasing 1.5 percent to $3.8 billion from the previous year, according to the firm's April 20 earnings release.

But sales for its OTC and nutritionals segment were down 15 percent on an operational basis, with U.S. sales falling 25.3 percent and international sales slipping 2.7 percent.

J&J's McNeil Consumer Healthcare division in January recalled 500 lots of products, including Motrin and Tylenolstock-keeping units, after consumers complained of musty odors.

During J&J's same-day earnings call, Investor Relations VP Louise Mehrotra said McNeil's response slowed product shipments throughout the January-March period.

"The company took a very comprehensive approach to the investigation, remediation and resumption of production to ensure these products met quality standards," she said.

But re-stocking is accelerating and McNeil is "approaching normal levels of production and shipment" for the products, Mehrotra added.

In a Jan. 15 warning letter, FDA noted McNeil's failure to investigate thoroughly consumer complaints of nausea, stomach pain and other adverse events allegedly linked to an odor from a chemical breakdown on a supplier's wooden pallets that contaminated some product containers.

The warning prompted McNeil to add executive posts for quality assurance and incorporate increased support from J&J's consumer quality resources (¹ Also see "McNeil Elevates Quality Management In Wake Of Tylenol, Motrin Recall" - Pink Sheet, 22 March, 2010.).

Chief Financial Officer Dominic Caruso said while the OTC recall will have "some impact" during the second quarter, but the firm predicts "some improvement."

Caruso said the recall "has not really impacted" physicians' recommendations to patients or consumers' preferences for J&J's OTC drugs.

"Our ratings on these types of things that we consistently monitor remain high as they have always been," he added.

In its report to FDA on the recall, McNeil said it received complaints or adverse event reports of nausea, stomach pain, vomiting and diarrhea possibly linked to the recalled products. But the firm added that such reactions are temporary and no known serious events from the chemical used in the pallets are documented in literature.

OTC Impact From More Than Recall

In addition to the voluntary recall, "a less severe cold and flu season," impacted OTC sales, Mehrotra said

The devaluation of the Venezuelan currency also cut into J&J's consumer business revenues, the firm said.

Venezuela President Hugo Chavez devalued the country's currency in January, and J&J is not alone among consumer product firms incurring Latin American revenue slumps due to the move.

Firms including Colgate-Palmolive, Procter & Gamble and Burt's Bees owner Clorox Co. have stated they expected effects from Venezuela's devaluation. The country reportedly represents about 9 percent of Colgate's profits (² 'The Rose Sheet' Jan. 18, 2010, In Brief).

Skin Care Up, Oral Care Down

J&J's skin care business grew 4.6 percent in terms of operational growth, with U.S. sales growing 6.9 percent and sales outside the U.S. growing 2.4 percent. Aveeno , Neutrogena and Le Petit Marseillais products were particular skin care drivers.

Caruso noted J&J's anti-aging Cytomimic technology is an example of innovation in the consumer arena and is being well received by customers. Products made with the technology also figured in skin care sales growth.

Mehrotra pointed out Zyrtec (cetirizine) allergy medication achieved strong sales growth due to line extensions, such as liquid gels.

On an operational basis, baby products were up 1.2 percent, which the firm attributed to hair care products.

A 7.4 percent decline in oral-care sales in the U.S. brought the overall segment down 1.3 percent. International sales, driven by Listerine , grew 5.1 percent.

J&J attributed the U.S. oral care slump to its 2009 fourth quarter divestiture of Efferdent and Effergrip brands and to "slower category growth in mouth rinses" (³ Also see "Startup Blacksmith Debuts With Luden's, PediaCare Acquisition From McNeil" - Pink Sheet, 9 November, 2009.).

The New Brunswick, N.J.-based firm's worldwide sales were up 4 percent to $15.6 billion although pharmaceutical sales fell 2.5 percent to $5.6 billion.

J&J Readies For Health Care Reform Blow

The executives also discussed the impact from health care reform already felt on J&J's business as well as readying for its impact on the rest of the year.

J&J said its first-quarter revenues were cut by approximately $60 million related to impacts from the health care reform law, and it expects its 2010 revenues to be cut by $400 million to $500 million. The firm reduced its 2010 earnings guidance by 10 cents a share in line with health reform costs.

J&J executives also pointed to movements in foreign currencies as a reason for the guidance adjustment.

Caruso also predicted the impact of health reform would be greater in 2010 than in 2011.

Benefits to the firm stemming from health reform provisions that will increase access for the uninsured likely will not kick in until 2014.

Health care equity research firm Leerink Swan says J&J executives appear to be positioning the firm for continued growth.

"We believe a conservative management team is resetting the bar lower in response to clearly visible challenges to include health care reform" and positioning the firm "to outperform going forward," Leerink Swan analysts said in an April 20 research note.

- Katie Stevenson ( ⁴ k.stevenson@elsevier.com )

Recall Stifles J&J's Consumer Product Sales Growth

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