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J&J Posts Strong 1Q, Boosted by Solid Drug Sales and Low Tax Rate


 Johnson & Johnson (JNJ) reported strong first-quarter results that slightly exceeded our expectations. However, we don't expect any changes to our fair value estimate based on the minor outperformance. Total sales increased 2% operationally, with strong growth from the drug division offsetting continuing weakness in the consumer business. On the bottom line, earnings per share increased 4%, supported by a lower tax rate. The company increased its full-year earnings per share forecast to $4.90-$5.00, up $0.10, partly based on the change in foreign exchange rates. We also believe the favorable settlement with  Merck (MRK), which increased J&J's rights to immunology drugs Remicade and Simponi, gave management increased confidence in full-year results.

Johnson & Johnson's drug division posted 6% operational growth versus the prior-year period, supported by several new product launches. Psoriasis drug Stelara continues to outperform our expectations, and we now expect it will reach $1 billion in sales by 2012. With several new product launches coming in the next few quarters, we believe the drug division is well positioned for growth. We believe hepatitis C drug telaprevir and cardiovascular disease drug Xarelto (both with blockbuster potential) represent the largest near-term drug launches.

In the consumer business, manufacturing problems continued to weigh on growth, which declined operationally 4% year over year. Further, J&J now expects manufacturing problems will be resolved in 2012, later than the late-2011 guidance issued earlier in the year. We believe most companies tend to be overly optimistic about remedies to manufacturing problems, and we had already projected that the consumer manufacturing probably wouldn't return to normal until 2012.

On the device front, growth continues to be stagnant, up 1% operationally from the prior-year period. We expect this division will increase to mid-single-digit growth in the remainder of the year as the worldwide economy improves and year-over-year comparisons become easier in mid- to late 2011.

Despite strong cost-cutting efforts, the operating margin declined in the quarter. As a percentage of total sales, operating costs increased just over 100 basis points versus the prior-year period as the company continues to deal with the costs of fixing the consumer division as well as increased costs from U.S. health-care reform. While operating costs were higher year over year, a 160-basis-point drop in the tax rate helped the earnings growth.

Damien Conover does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.