J&J sales up, but earnings wiped out by settlements, product liability and recall costs

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Days after a $158 million settlement of charges that its Janssen unit fraudulently marketed Risperdal in Texas, Johnson & Johnson forecast fourth-quarter net earnings of just $218 million due to settlement costs and the recall of its DePuy ASR artificial hip.

That compares to net earnings of nearly $2 billion ($1.942 billion, to be precise) for the fourth quarter of 2010—a whopping 88.7% drop. The drop, said J&J, reflects after-tax charges of $2.9 billion, including product liability expenses of $1.2 billion for the quarter, net litigation settlements loss of $1 billion and a charge of $336 million for the hip recall.

“During the fourth quarter, we recorded several special items on a pre-tax basis,” said J&J VP, CFO Dominic Caruso. “We recorded costs associated with ongoing litigation, primarily related to Risperdal. We increased accrual for product liability costs, primarily related to DePuy ASR Hip Recall. We also increased the accrual for costs associated with the DePuy ASR Hip Recall Program.”

The earnings hit offset news of modest $3.9 billion sales growth for the quarter, driven by strong international sales growth of 10.2% which offset a 3.4% decline in domestic sales. Across all divisions and markets, sales were up 5.6% for the full year to $65 billion. Worldwide pharmaceutical sales for 2011 rose 8.8%, while domestic sales slid 1.1% and international sales jumped 21.3%.

Domestic sales for the company's consumer division fell 6.7%, in large part due to the suspension of manufacturing at the firm's McNeil Consumer plant in Fort Washington, PA, along with other quality-related measures.
J&J announced last week that its Janssen Pharmaceuticals unit would pay $158 million to settle a Medicaid fraud case brought by the State of Texas in 2004. In that case, the Texas Attorney General argued that Janssen “launched a campaign promoting Risperdal as the superior drug of choice” and marketed the antipsychotic for off-label uses while downplaying side effects, notably weight gain and diabetes.

“Settlements frequently are reached to bring to a conclusion a long-standing litigation where the potential financial exposure to the company is significant, the outcome is uncertain despite the facts and where there are likely to be long and expensive appellate activities regardless of the outcome at trial,” said Janssen in a statement. “Janssen is committed to ethical business practices, and has policies in place to ensure its products are only promoted for their FDA-approved indications.”  
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