Johnson & Johnson’s Q3 Profit Hurt by Stronger Dollar

Earnings drop 29 percent from Q3 2014; company arranging $10-billion share buyback

Johnson & Johnson reported last week that both its sales and profit dropped in the third quarter of 2015, largely due to the stronger dollar and weakened demand for its key pharmaceutical drugs.

J&J brought in $17.1 billion of revenue in the third quarter of 2015, down 7.4 percent from the same period last year and missing analysts’ average forecast of $17.45 billion, according to Reuters. The company earned $3.35 billion, or $1.20 per share — a 29-percent drop from the third quarter of 2014, when it made $4.74 billion, or $1.66 per share.

Despite the sharp drop in net earnings, J&J’s adjusted earnings, which excludes amortization expenses and special items, came in at $4.17 billion, or $1.49 per share. This beat analysts’ projections of $1.45 per share, according to a Bloomberg poll. Bloomberg Intelligence analyst Sam Fazeli said in a memo that J&J was able to top forecasts mainly because it benefited from a lower effective tax rate this year.

Q3 marks the third consecutive quarter that the diversified health care giant based in New Brunswick, N.J., posted lower revenues.

Johnson & Johnson products on the shelves of a store. (Photo courtesy of Wikipedia)

The strengthening dollar is responsible for much of the company’s revenue loss, as it has devalued international sales that account for close to half of J&J’s total revenue. Without the negative impact from foreign exchange rates, J&J’s revenue would have increased by 0.8 percent in the third quarter, according to its earnings statement.

Dwindling demand across all three of J&J’s divisions also contributed to the company’s struggling growth.

Consumer sales fell by 7.7 percent compared to the prior-year period, with the highest drop coming from baby care and wound care, offset by slightly stronger sales in over-the-counter drugs such as Tylenol and Motrin, and skin care products from Aveeno and Neutrogena.

Pharmaceutical sales declined 7.4 percent, primarily because of a 90-percent plunge in hepatitis C drug Olysio as a result of increased competition. This was offset by higher sales in Invokana, a treatment for type 2 diabetes; Imbruvica, an oral therapy for treating blood cancer; and Xarelto, an oral anti-coagulant.

Medical device sales shrank by 7.3 percent, largely because the company closed the $2-million divestiture of its Cordis heart devices unit, which accounts for about a quarter of all sales in the category.

In all three divisions, lower international sales was responsible for the majority of the decline.

Company executives expressed little concern however over the dismal figures in its earnings call with analysts, choosing instead to highlight the “underlying growth” of products and J&J’s improved market share.

Demonstrating its optimism, the company is buying back $10 billion worth of its shares. The buyback, which will remove about 3.8 percent of its common stock from the market, will have no time limit, and is expected to be financed through new debt.

J&J also increased its full-year 2015 adjusted earnings guidance to $6.15 to $6.20 per share, up from its previous forecast in July of $6.10 to $6.20 per share.

In spite of the positive announcements, J&J shares dropped 54 cents to $95.45 on Oct. 13, the day of the earnings release, after a four-day rally that brought the shares up by $1.

Unperturbed by its deteriorating bottom line, J&J said it is poised to make new acquisitions in the increasingly competitive and consolidated pharmaceutical industry.

As of June 28, the company had about 2.77 billion shares outstanding and $36.5 billion in working capital.

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