01—Abstract
Summary
Summary of the 10-K filed February 20, 2009. Cited figures are marked; the original filing is the authoritative source.
Johnson & Johnson's fiscal 2008 Form 10-K (filed February 2009) shows a company that grew sales 4.3% to $63.7 billiona and expanded operating margins despite a difficult pharmaceutical franchise.
Net earnings rose 22.4% to $12.9 billionb and diluted EPS reached $4.57, up from $3.63. Earnings before taxes were $16.9 billion, or 26.5% of sales, versus 21.7% in 2007. The improvement was helped by the absence of 2007 charges (the $807 million IPR&D charge and the $745 million restructuring charge), by a $1.5 billion favorable swing in other income (including a $536 million gain on the sale of Ethicon's Professional Wound Care business and a $379 million net litigation gain), and by cost containment.
Growth was uneven across segments. Consumer sales rose 10.8% to $16.0 billionc, Medical Devices and Diagnostics rose 6.4% to $23.1 billion, and Pharmaceutical sales fell 1.2% to $24.6 billion as RISPERDAL® lost exclusivity and PROCRIT®/EPREX® declined 14.7%. The balance sheet and cash generation remain strong.
Operating cash flow was $15.0 billiond, the company paid $5.0 billion in dividends and repurchased $6.7 billion of stock, and it ended the year with $10.8 billion in cash and equivalents. Management reports that cash and current marketable securities exceeded debt by $1.0 billion, and it retained its AAA credit rating. The principal investor concern is patent expiry.
TOPAMAX® lost U.S. patent protection in September 2008, and LEVAQUIN® faces expiry in December 2010, with pediatric extension protection through June 2011. Several legal matters remain open, including product liability claims, Risperdal-related state actions, and FCPA-related disclosures.
Management says none are expected to have a material adverse effect on financial condition. Note that Item 1A Risk Factors is marked 'Not applicable' in this filing, so the risk discussion is limited to the cautionary statements and the MD&A.
02—Key points
Key Highlights
- Worldwide sales rose 4.3% to $63.7 billion, driven mainly by currency (+2.4 pts) and volume (+1.1 pts). Five-year sales CAGR was 8.8%.
- Diluted EPS increased 25.9% to $4.57, and net earnings rose 22.4% to $12.9 billion. Pre-tax margin widened to 26.5% from 21.7%, partly because 2007 had large one-time charges.
- Consumer segment grew 10.8% to $16.0 billion, led by OTC products (ZYRTEC® switch) and Skin Care. Medical Devices & Diagnostics grew 6.4% to $23.1 billion, with Ethicon Endo-Surgery up 11.8% and Vision Care up 13.2%.
- Pharmaceutical sales fell 1.2% to $24.6 billion. RISPERDAL® dropped 37.8% after U.S. exclusivity ended, while REMICADE® rose 12.7% to $3.7 billion and was the largest product at about 6% of revenue.
- Operating cash flow was $15.0 billion. Capital spending was $3.1 billion, dividends were $5.0 billion ($1.795 per share, a 46th consecutive annual increase), and share buybacks were $6.7 billion. The $10 billion program was 124.9 million shares ($8.1 billion) complete as of year-end.
- Patent cliff exposure: TOPAMAX® (about 4% of revenue) lost U.S. exclusivity in 2008, and LEVAQUIN® (2.5% of 2008 sales) faces expiry in 2010–2011. Management expects significant sales reductions for these products.
- Balance sheet remains strong, with $12.8 billion of cash and marketable securities against $11.9 billion of total borrowings, a AAA credit rating, and $7.7 billion of committed credit facilities. The company also agreed to acquire Mentor Corporation for $1.1 billion after year-end.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 20, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $63.75B$61.09B | +4.3% |
| Cost of Revenue | $18.51B$17.75B | +4.3% |
| Gross Profit | $45.24B$43.34B | +4.4% |
| SG&A Expenses | $21.49B$20.45B | +5.1% |
| Interest Expense | $435.00M$296.00M | +47.0% |
| Net Income | $12.95B$10.58B | +22.4% |
| EPS (Basic) | $4.62$3.67 | +25.9% |
| EPS (Diluted) | $4.57$3.63 | +25.9% |
| Shares Outstanding (Basic) | 2.80B2.88B | −2.8% |
| Shares Outstanding (Diluted) | 2.84B2.91B | −2.6% |
05—Questions
Frequently Asked Questions
How much of 2008's earnings growth came from operations versus one-time items?
Part of the growth reflects the absence of large 2007 charges, not only improved operations. 2007 included an $807 million IPR&D charge (Conor Medsystems), $745 million of restructuring charges, and a $678 million NATRECOR® intangible write-down. In 2008, IPR&D was $181 million, and there was no restructuring charge. Other income was favorable by about $1.5 billion, including a $536 million gain on the Professional Wound Care divestiture and a $379 million net litigation gain. Investors should treat these gains as non-recurring when judging the underlying run rate.
What is the biggest risk to future revenue?
Loss of exclusivity on key pharmaceutical products. TOPAMAX® lost U.S. patent protection in September 2008, and RISPERDAL® oral sales fell 37.8% after generic entry. LEVAQUIN® is next, with patent expiry in December 2010 and pediatric exclusivity to June 2011. REMICADE®, the largest product, faces growing competition from new entrants. Management says generic filers are challenging most key pharmaceutical patents. The filing does not quantify the total revenue at risk.
How is the company returning cash to shareholders, and how sustainable is it?
In 2008 the company paid $5.0 billion in dividends and repurchased $6.7 billion of stock, which together exceeded free cash flow of about $11.9 billion (operating cash flow of $15.0 billion less $3.1 billion of capex). It funded the gap partly with about $2.7 billion of net new debt. Management expects to keep paying regular dividends and says the buyback will be funded from cash and debt while preserving the AAA rating. Borrowings rose to $11.9 billion from $9.5 billion, so the buyback is increasingly debt-financed.
Are there material legal or regulatory exposures?
Yes, several are significant even though management does not expect them to have a material adverse effect on financial condition. These include RISPERDAL® lawsuits from eight state attorneys general and more than 40 other states that may bring similar claims, product liability suits (about 900 ORTHO EVRA® claimants), and government investigations into marketing practices for RISPERDAL®, TOPAMAX® and NATRECOR®. The company also disclosed FCPA-related voluntary disclosures and an EC pharmaceutical sector inquiry. Patent litigation is ongoing on CYPHER® stent and other products, including a $702 million judgment against Boston Scientific that it has appealed. Outcomes could affect quarterly results even if the total is not material.
What growth drivers should investors focus on?
Consumer (up 10.8%) and Medical Devices and Diagnostics (up 6.4%) delivered most of the growth. Within Consumer, OTC products (up 14.6%, including the ZYRTEC® switch) and Skin Care (up 10.8%) led. In Devices, DePuy, Ethicon Endo-Surgery (HARMONIC®), Vision Care (ACUVUE®) and Diabetes Care (Animas) grew at high single-digit to double-digit rates. Pharmaceutical growth came from newer products such as VELCADE®, PREZISTA®, INVEGA® and INTELENCE®, which together offset the decline of ESAs and RISPERDAL®. Investors should watch whether these launches can keep offsetting the patent expiries.
06—Continue