01—Abstract
Summary
Summary of the 10-K filed February 26, 2008. Cited figures are marked; the original filing is the authoritative source.
Johnson & Johnson's fiscal 2007 10-K (filed February 26, 2008) reports worldwide sales up 14.6% to $61.1 billiona, driven largely by the late-2006 acquisition of Pfizer's Consumer Healthcare business (volume +10.1%, price +1.4%, currency +3.1%).
Diluted EPS fell 2.7% to $3.63, and pre-tax earnings declined to $13.3 billionb from $14.6 billion, as the company absorbed an $807 million in-process R&D charge (Conor Medsystems), $745 million in restructuring charges, and a $678 million write-down of the NATRECOR intangible asset. Net earnings were $10.6 billion, and the effective tax rate fell to 20.4% from 24.2%, partly due to a one-time $267 million benefit. Excluding these items, underlying profitability held up reasonably well, though segment margins were pressured.
The Pharmaceutical segment faces the most significant forward-looking risk. RISPERDAL lost U.S. patent protection in December 2007 (pediatric exclusivity runs to June 2008), and TOPAMAX faces U.S. patent expiry in September 2008. Combined with eroding ESA (PROCRIT/EPREX) sales, DURAGESIC generic competition, and a drug-eluting stent market contraction hurting Cordis (sales down 16.2%), management announced restructuring initiatives targeting $1.3c–$1.6 billion in annual savings for 2008 and elimination of roughly 4,400 positions.
Management is planning for a meaningful sales decline from the RISPERDAL and TOPAMAX patent expirations. Balance sheet and capital allocation remain strong. The company retains its AAA credit rating, operating cash flow reached $15.2 billiond, and the board authorized a $10 billion share repurchase program in July 2007 (about 86.5 million shares were repurchased in 2007 for $5.6 billion).
The dividend was raised for the 45th consecutive year to $1.620 per share, with $0.415 declared for Q1 2008. Total debt rose to $9.5 billion to fund the Pfizer acquisition and buybacks. Note that the filing reports Item 1A Risk Factors as 'Not applicable,' so the patent and generic risks are disclosed mainly through MD&A and the legal proceedings notes rather than a dedicated risk factor section.
02—Key points
Key Highlights
- Worldwide sales rose 14.6% to $61.1 billion, with the Pfizer Consumer Healthcare acquisition contributing roughly 40% of Consumer segment growth and about 7.4% of total company growth.
- Diluted EPS declined 2.7% to $3.63 as pre-tax earnings fell to $13.3 billion from $14.6 billion, weighed down by a $807M IPR&D charge, $745M restructuring, and a $678M NATRECOR intangible write-down.
- Pharmaceutical segment faces patent cliffs: RISPERDAL U.S. patent expired December 2007 (about 6% of 2007 revenue), and TOPAMAX expires September 2008 (about $2.5B in sales, 21% growth in 2007).
- Restructuring program targets $1.3–$1.6 billion in pre-tax annual savings for 2008, with approximately 4,400 positions to be eliminated.
- Cash flow from operations reached $15.2 billion, and the company retains its AAA credit rating despite net debt rising to $9.5 billion to fund acquisitions and buybacks.
- A $10 billion share repurchase authorization is in place; about 86.5 million shares were repurchased in 2007 for $5.6 billion, and the dividend was raised to $1.620 per share (45th consecutive annual increase).
- Medical Devices and Diagnostics sales grew 7.2% to $21.7 billion, but segment operating margin declined to 22.3% from 30.2%, and Cordis sales fell 16.2% amid drug-eluting stent market contraction.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 26, 2008Financial Statements
| Revenue | $61.09B |
| Cost of Revenue | $17.75B |
| Gross Profit | $43.34B |
| SG&A Expenses | $20.45B |
| Interest Expense | $296.00M |
| Net Income | $10.58B |
| EPS (Basic) | $3.67 |
| EPS (Diluted) | $3.63 |
| Shares Outstanding (Basic) | 2.88B |
| Shares Outstanding (Diluted) | 2.91B |
05—Questions
Frequently Asked Questions
Why did earnings decline in 2007 despite strong sales growth?
Pre-tax earnings fell $1.3 billion to $13.3 billion because of one-time charges totaling roughly $2.2 billion pre-tax: $807 million in IPR&D for Conor Medsystems, $745 million in restructuring, and a $678 million NATRECOR intangible write-down. Excluding these items, earnings would have been higher, though the Pfizer Consumer business also carried integration costs and lower margins.
How significant is the loss of RISPERDAL and TOPAMAX exclusivity?
RISPERDAL, the company's largest product at about 6% of total revenue, lost U.S. patent protection in December 2007, with pediatric exclusivity extending to June 2008. TOPAMAX, with about $2.5 billion in 2007 sales, faces expiration in September 2008 (potentially March 2009 with a pediatric extension). Management states that loss of exclusivity is likely to result in a significant reduction in U.S. sales for both products, and the restructuring program is designed to offset these impacts.
Is the company's financial position still strong?
Yes. Johnson & Johnson retained its AAA credit rating, generated $15.2 billion in operating cash flow, and had shareholder equity of $43.3 billion. Total debt increased to $9.5 billion, representing 18% of total capital, mainly to finance the Pfizer Consumer acquisition and share buybacks. The company also maintains about $8 billion in committed credit facilities.
What is the company's capital return policy?
The company increased its dividend for the 45th consecutive year, paying $1.620 per share in 2007 (up from $1.455), and declared a $0.415 quarterly dividend for Q1 2008. A $10 billion share repurchase program was authorized in July 2007; the company repurchased 55.8 million shares under it at a cost of $3.6 billion during 2007, with additional shares bought under compensation programs.
What are the main legal and regulatory risks disclosed?
Key exposures include product liability claims (about 4,000 ORTHO EVRA claimants and 613 RISPERDAL claimants), state Attorney General actions over RISPERDAL off-label marketing, AWP pricing litigation, patent disputes with Boston Scientific over CYPHER stents, and ANDA generic challenges for several key products. Multiple federal investigations (DOJ, SEC, FCPA-related disclosures) are ongoing. Management believes none will have a material adverse effect on financial position, though outcomes in any given period could affect results of operations.
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