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JNJ Trims Workforce

[Declining sales of the top-3 drugs and the Cypher stent do not paint a pretty picture.]

http://online.wsj.com/article/SB118588088022183302.html

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Confirms 2007 Earnings Forecast

By PETER LOFTUS
July 31, 2007 1:30 p.m.

Johnson & Johnson, bracing itself for the loss of market exclusivity for blockbuster drugs and adjusting to a downturn in its drug-coated stent business, said Tuesday it would cut its global work force by 3% to 4%, or up to 4,820 jobs.

The health-care giant said the plan is designed to generate pretax annual cost savings of $1.3 billion to $1.6 billion for 2008. The cost cuts primarily will affect J&J's drugs unit and its Cordis unit, which makes stent devices for heart-disease patients. J&J said it will try to minimize the number of workers affected through the use of attrition and hiring freezes.

J&J becomes the latest large pharmaceutical company to tighten its belt amid pressure from generic competition and a shortfall of new products. Last week, AstraZeneca PLC and Bristol-Myers Squibb Co. announced plans for job cuts, and over the past two years, giants such as Pfizer Inc. and Merck & Co. have let thousands of employees go.

J&J, New Brunswick, N.J., is set to lose U.S. patent protection in 2008 for its best-selling drug, the Risperdal antipsychotic, and in 2009 for Topamax, a treatment for migraines and epilepsy, assuming certain extensions. Together, these drugs generated $6.2 billion in revenue last year, or about one-fourth of J&J's pharmaceutical sales.

The problem is J&J doesn't have sufficient new products to fill the near-term sales void created when Risperdal and Topamax are exposed to cheaper, generic competition. J&J plans to file for approval of several experimental drugs in coming years, but none is guaranteed to be an immediate success. Some new products, including the Invega antipsychotic, have gotten off to slow starts.

So cost cuts appear to be J&J's solution for now. J&J has already made some small work-force reductions in recent periods. This year, J&J has trimmed its work force to about 120,500 from 122,200, which was partly related to the integration of the consumer-health-care business J&J acquired from Pfizer last year for $16.6 billion.

Just two weeks ago, J&J tempered its 2007 sales outlook. Its drug-coated stent franchise is under pressure due to increased competition and recent questions about the devices' safety and effectiveness. Also, sales of its Procrit anti-anemia drugs are under pressure due to recent safety concerns. On Monday the government announced new restrictions on Medicare reimbursement for the use of Procrit and drugs made by Amgen Inc. in cancer patients.

The job cuts comprise only one component of J&J's cost-savings plan -- J&J executives said certain facilities would be closed. In connection with the cuts, J&J will book pretax restructuring charges of $550 million to $750 million in the second half of 2007.

"We recognize the challenges," J&J Chief Executive William Weldon told analysts on a conference call. "In our pharmaceutical segment, we will have significant patent expirations in the next few years, which will put additional pressure on these businesses to grow."

He acknowledged that new products won't be sufficient to offset these losses. To meet the challenge, J&J said some of its pharmaceutical operations will be consolidated while the company continues to invest in newly launched products and its late-stage pipeline. From 2008 through 2010, J&J plans to file applications for regulatory approval of seven to 10 new compounds.

Also targeted for cuts is J&J's Cordis coronary stent business, which is facing increasing competition from the likes of Boston Scientific Corp., Medtronic Inc. and Abbott Laboratories mainly the latter two].. J&J's stent franchise suffered an added blow in May when a product acquired in J&J's $1.4 billion purchase of Conor Medsystems failed a key clinical trial.

J&J has "seen significant compression in the market due to shifts in the medical community's approach to cardiovascular disease," Mr. Weldon said of drug-eluting stents. Studies have linked drug-coated stents to increased risk of blood clots, and a separate study released in March suggested stent procedures were no better than medical therapy for certain patients.

J&J said Cordis will move "to a more integrated business model to address the market changes under way with drug-eluting stents..."

J&J said it also plans to streamline some back-office operations, such as human resources, finance and information technology.

Wall Street reacted favorably to the news. J&J shares rose $1, or 1.7%, to $61.07. Marc Davis, portfolio manager at J&J shareholder Tradition Capital Management, said the job cuts would help J&J's profit growth. "It certainly makes sense to cut costs," he said.

Wachovia analyst Larry Biegelsen said the cuts were needed because J&J's operating profit margins are coming under increasing pressure. Still, "it is not clear yet whether these cuts announced today are large enough to make J&J an attractive investment at this point," he wrote in a note to clients. He sees sluggish sales and earnings growth through 2009.

J&J Chief Financial Officer Dominic Caruso said there were no current plans for additional cost cuts of the magnitude announced Tuesday.

The new cost-savings plan doesn't include the previously announced cuts associated with the integration of Pfizer's consumer health-care unit, which J&J said were on track to achieve $500 million to $600 million in "synergies" by 2009. J&J reiterated its 2007 earnings forecast, excluding charges, of $4.02 to $4.07 a share. In 2006, J&J earned $3.73 a share, or $3.76 a share excluding one-time items.
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