Johnson & Johnson CEO Alex Gorsky expects the firm to have 75% of its recalled OTC products back at retail in 2013 and to ramp up marketing behind long-delayed Tylenol, Benadryl, Motrin and Zyrtec relaunches.

A spokeswoman said the Fort Washington, Pa., manufacturing facility operated by J&J subsidiary McNeil Consumer Healthcareis on track to be certified by FDA this year and restart commercial production in 2014.

The plant has been offline since 2010 and is included under a consent decree J&J entered into with FDA in 2011. J&J/McNeil previously expected Fort Washington to return to production in 2013 Also see "Andrx Concerta" - Pink Sheet, 29 March, 2004..

Children's Tylenol oral suspension

Image courtesy of J&J

During J&J’s fiscal 2012 fourth-quarter and full-year earnings call Jan. 22, Gorsky noted McNeil will “continue to take a prudent approach to production volumes” with its Lancaster, Pa., and Las Piedras, Puerto Rico, OTC facilities, which are operational but also subject to the consent decree’s oversight requirements.

Once a reliable supply of product has been restored, however, marketing will again become a priority.

J&J/McNeil will “begin shifting our focus … so that we can truly relaunch” the products initially recalled in 2009 and 2010, Gorsky said.

The firm will be “working with our trade partners, working with our great marketing teams to reestablish those brands and their leadership positions in the market. And we’ll do that as the brands reenter over the course of 2013,” he added.

U.S. Consumer Segment Still Soft

Though McNeil returned some big-ticket products to store shelves in 2012, including Children’s Tylenol and Children’s Motrin oral suspensions, J&J’s consumer business continues to face headwinds. In the fourth quarter, consumer sales dropped a reported 0.4% to $3.65 billion, and in 2012 fell 2.9% to $14.45 billion, though the division grew a slight 0.5% at constant currency for the full year.

In the U.S., sales in the OTC/nutritionals business declined 3.8% in the October-December period to $356 million, with the full-year figure essentially flat at $1.42 billion. J&J executives said sales of products for upper respiratory relief were strong, while analgesics struggled due to continuing supply constraints and nutritionals faced competitive pressures.

For 2012, no J&J worldwide consumer business grew on a reported basis, and in the U.S. only skin care increased sales, up 2.7% to $1.70 billion, according to the firm’s earnings release.

J&J will be “working with our trade partners, working with our great marketing teams to reestablish those [OTC] brands and their leadership positions in the market. And we’ll do that as the brands reenter over the course of 2013.”

– CEO Alex Gorsky

Gorsky attributed softness in U.S. consumer products broadly to the depressed macroeconomic environment, and specifically cited “some regulatory actions that were earlier in the year, related to our Skillman facility” in New Jersey. FDA in May sent a warning letter to J&J Consumer Products headquarters citing the firm’s inadequate oversight of consumer devices, including K-Y brand moisturizers, O.B. tampons and Reach dental floss Also see "FDA Flags J&J For Inadequate Oversight Of Consumer Devices" - Pink Sheet, 4 June, 2012..

J&J also divested a number of consumer brands in the past two years, skewing year-over-year comparisons for some segments. Most recently, it sold McNeil’s Rolaids heartburn relief line to Sanofisubsidiary Chattem Inc., and also divested six skin care brands, including Caladryl and Cortaid, to Valeant Pharmaceuticals International Inc. (Also see "Chattem To Revive Rolaids Line Bought From J&J" - Pink Sheet, 14 January, 2013. and Also see "In Brief" - Pink Sheet, 12 November, 2012.).

Attuned To International Markets

Growth of the New Brunswick, N.J., company’s international consumer products business continues to outpace the U.S. side, with sales increasing 3.2% to $2.45 billion in the fourth quarter and 1.9% to $9.40 billion in 2012, both at constant currency.

Gorsky highlighted the natural shift of J&J’s overall focus to markets outside the U.S., which now account for 56% of the firm’s revenues, compared to about 40% a decade ago. A large part of its international success stems from developing products and building operations to meet the needs and preferences of local consumers.

For example, since 2011 the Listerine line has extended with a Green Tea variety in Asia and Listerine Essencial in Latin America, while alcohol-free Listerine Zero has expanded from an initial U.S. launch into Europe and the Middle East. The mouthwash brand helped J&J grow its worldwide oral care business 3.2% operationally, to $1.62 billion in 2012.

However, Gorsky noted, “if we only rely on endogenous growth in some of those markets, we won’t accelerate at the rate we’re hoping for.”

For this reason, J&J continues evaluating possible pick-ups of market-specific consumer businesses and brands, to follow its 2011 acquisition of Doktor Mom herbal cough remedies and other Russian and Eastern European OTCs from J.B. Chemicals & Pharmaceuticals Also see "J&J Expands Russian OTC Foothold Via J.B. Chemicals Portfolio Acquisition" - Pink Sheet, 30 May, 2011..

Consumer Share Of J&J Shrinks

J&J’s fourth-quarter consumer business sales came in about $50 million short of Wall Street expectations, though the company’s overall revenue of $17.56 billion, up a reported 8%, was in line with projections, Barclays Capital analysts said. Net earnings in the quarter were $2.58 billion compared to $218 million in the year-ago period, when J&J incurred one-time expenses related to litigation and medical device recalls.

For the year, J&J sales increased 3.4% to $67.22 billion, including 2.7 percentage points of negative foreign exchange effects. Net earnings gained 8.7% to reach $10.51 billion in 2012.

The company’s $19.7 billion acquisition of orthopedic device maker Synthes Inc. contributed 3.1% to operational sales growth in 2012 and helped shrink consumer as a share of J&J’s overall business to 21.5% from 22.9% a year ago.

Still, Gorsky remains a booster of the consumer division, pointing out J&J is the sixth-largest consumer health care company in the world. He said Sandra Peterson, who took over in December as group worldwide chairman of J&J’s consumer group of companies, information technology and global supply chain, “is focusing on returning our consumer segment to growth” ([A#05120917007]).

For 2013, J&J’s guidance projects reported sales growth between 5.5% and 6.5%, which would result in net sales between $70.9 billion and $71.6 billion. Earnings per share are expected between $5.35 and $5.45, which would represent growth of 5% to 7%.

Chief Financial Officer Dominic Caruso said costs related to remediating the McNeil facilities under the consent decree are expected to remain comparable to 2012 and continue to exert a slight drag on EPS.

Analysts regarded J&J’s guidance as conservative. But “given that this is CEO Alex Gorsky’s first full year at the helm, conservative guidance likely provides him greater flexibility in more proactively guiding JNJ’s agenda,” Credit Suisse analysts said.

Leerink Swann projects J&J’s consumer business to expand a modest 1.8% to $14.71 billion in 2013, and then accelerate to 4.3% growth in 2014, bringing expected consumer sales to $15.35 billion.

J&J Will Boost OTC Marketing Once Reliable Production Returns

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