01—Abstract
Summary
Summary of the 10-K filed March 11, 2004. Cited figures are marked; the original filing is the authoritative source.
Johnson & Johnson's fiscal 2003 10-K shows a company that grew sales 15.3% to $41.9 billiona, driven by 9.4% volume growth and a 4.6% currency tailwind.
Net earnings rose 9.1% to $7.2 billionb, and diluted EPS reached $2.40, up 11.1%. Growth was broad: the Pharmaceutical segment reached $19.5 billion, Medical Devices and Diagnostics $14.9 billion (led by the CYPHER drug-eluting stent and DePuy orthopaedics), and Consumer $7.4 billion. Reported earnings were held back by $918 million of acquired in-process R&D charges, mainly from the Scios acquisition, though a $230 million stent-patent arbitration gain partly offset them.
Operating cash flow rose to $10.6 billionc, and the company held $9.5 billion in cash and current marketable securities against $4.1 billion of borrowings. The key risk for investors is revenue concentration in drugs facing patent expiry or competition. PROCRIT/EPREX sales fell 6.7% on competition and a label change, and the filing flags that EPREX, DURAGESIC and certain contraceptives will face generic competition within about two years, with Mylan planning a DURAGESIC generic launch as early as July 2004.
Litigation exposure is also significant, including PROPULSID product liability claims, the VICRYL suture claims, and multiple FCPA and Medicaid/AWP investigations. Management describes the company as one of the few industrial companies with a Triple A credit rating and says it expects to keep paying regular dividends, which rose to $0.925d per share in 2003. Looking ahead, the February 2004 Guidant alliance on the CYPHER stent and the pending competing drug-eluting stent approval are the main near-term swing factors for the Medical Devices segment.
The Medicare Prescription Drug Act and pricing pressure from managed care add policy uncertainty for the Pharmaceutical and Consumer businesses. The filing itself does not provide 2004 guidance.
02—Key points
Key Highlights
- Worldwide sales rose 15.3% to $41.86 billion, with volume contributing 9.4%, price 1.3% and currency 4.6%.
- Net earnings increased 9.1% to $7.2 billion, and diluted EPS rose 11.1% to $2.40, though results absorbed $918 million of pre-tax acquired IPR&D charges.
- Medical Devices and Diagnostics grew 18.5% to $14.9 billion, led by the CYPHER stent (Cordis sales up 65%) and DePuy (up 18.6%).
- Pharmaceutical sales reached $19.5 billion (+13.8%), with RISPERDAL, REMICADE, DURAGESIC and TOPAMAX each growing more than 17%, while PROCRIT/EPREX declined 6.7%.
- Patent expirations are a major risk: EPREX, DURAGESIC and certain contraceptives (about 6% of sales) face generic competition within roughly two years.
- Operating cash flow reached $10.6 billion, and cash plus current marketable securities of $9.5 billion exceeded total borrowings of $4.1 billion.
- Significant litigation and regulatory exposure includes PROPULSID product liability cases, VICRYL suture class actions, FCPA and Medicaid/AWP investigations, and stent patent disputes.
03—Questions
Frequently Asked Questions
How much did Johnson & Johnson grow in 2003, and what drove it?
Worldwide sales grew 15.3% to $41.9 billion. Volume contributed 9.4 percentage points, price 1.3 points and favorable currency movements 4.6 points. Growth was broad across all three segments, with the Pharmaceutical segment adding the most dollars and the Medical Devices segment growing fastest, driven by the CYPHER stent and DePuy orthopaedics.
Why did reported earnings growth lag the sales growth?
Net earnings rose 9.1%, below the 15.3% sales growth, mainly because of $918 million in pre-tax in-process R&D charges from acquisitions such as Scios ($730 million) and Link Spine ($170 million). The effective tax rate also rose to 30.2% from 29.0%, partly because IPR&D charges are non-deductible. A $230 million stent-patent arbitration gain partly offset these charges.
Which products face the greatest near-term revenue risk?
PROCRIT/EPREX sales fell 6.7% in 2003 due to competition, a label change and loss of market share. EPREX, DURAGESIC and certain contraceptive products face generic competition within about two years, and these products represent roughly 6% of worldwide sales. Mylan has said it may launch a DURAGESIC generic as early as July 2004, even if it loses the patent case in district court.
How strong is the company's balance sheet and capital return program?
At year-end 2003, cash and current marketable securities were $9.5 billion against total borrowings of $4.1 billion, giving net cash of $5.4 billion. Total debt was 13.2% of total capital. The company held a Triple A credit rating and paid $0.925 per share in dividends in 2003, its 41st consecutive annual increase. Shares repurchased in 2003 totaled $1.2 billion, down from $6.4 billion in 2002.
What are the most significant legal and regulatory risks disclosed?
Key risks include PROPULSID product liability suits, with about 5,850 plaintiffs and a tentative settlement of $69.5 to $90 million, and VICRYL suture claims, where a West Virginia class was certified. The company also faces a Medicaid rebate inquiry on REMICADE, an SEC Foreign Corrupt Practices Act investigation tied to Poland, and government subpoenas on TOPAMAX and RISPERDAL marketing. Management believes that none of these matters is likely to have a material adverse effect on consolidated financial position, although any single resolution could affect results in a given period.
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