J&J Ft. Washington Plant Won’t Reopen Until 2014

J&J Ft. Washington Plant Won’t Reopen Until 2014

April 19th, 2012 // 12:55 pm @

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If you were wondering why the befuddled Johnson & Johnson executive team had to postpone the rebirth of its troubled Fort Washington, Pennsylvania, facility, consider this simple analogy. Imagine an old kitchen that was used to make great food, but once-exquisite meals gradually became horrible – tasty dishes began smelling funny and looking bad on the plate. You sometimes got the runs or, still worse, food poisoning.

To remedy the problem, the kitchen undergoes more than an expensive remodeling; the equivalent of a culinary teardown takes place. The end result is a shiny new bistro ready for an Iron Chef showdown. But after all the time, expense and fuss, some of the same recipes are, more or less, still used. This creates a conundrum as both processes and equipment must be re-examined before everything can be considered kosher, so to speak.

This may oversimplify things a bit and certainly not explain all of the problems that J&J is confronting at its key over-the-counter manufacturing plant, which contributed greatly to numerous product recalls and an embarassing consent decree (see here). But rebuilding an entire plant takes a lot of effort and tech transfer can be an imperfect science if the underlying processes were problematic in the first place.

Of course, hindsight, as the cliche goes, is a wonderful thing. But the J&J team was displaying what can only be considered corporate hubris when they promised that the Fort Washington plant would be back in business later this year. Unfortunately, investors wanted to believe that J&J execs – who have generally exhibited impressive skills for managing financial results as needed – would have the same ability to make facts on the ground go their way.

Wall Street is now facing the sober reality. “The closed Ft. Washington plant is not expected to re-open until 2014, assuming successful FDA inspection starting later 2013. Additionally, remediation cost are higher than anticipated,” writes Wells Fargo Securities analyst Larry Biegelsen in an investor note this morning. “We note the slow recovery is somewhat disappointing and likely remains an overhang” on the stock.

The extent of the remediation costs are unclear, but J&J has had a small army of consultants, including experts from the Quantic Group, on the premises for quite some time. Meanwhile, sales of the McNeil Consumer Healthcare business are falling – a 2.4 percent drop was registered in the first quarter and every product segment in the unit experienced revenue setbacks .

Nonetheless, J&J still managed to beat Wall Street expectations when earnings were released yesterday. Even though companywide sales slipped, there are various reasons for this accomplishment. J&J, after all, is much more than a consumer goods purveyor. Beigelsen, for instance, pointed to “organic” sales growth in the pharmaceuticals business. There was also lower-than-expected R&D spending overall, reportedly due to the timing of milestone payments to others.

But the results underscore how J&J execs can manage the numbers to compensate for faulty predictions. “We always believe that quarterly J&J numbers are not meant to be looked at too closely given the company’s amazing reporting flexibility, many moving pieces, and the resulting ability to ‘make numbers,’ writes Leerink Swann analyst Rick Wise in an investor note. “Lower spending in one period may be accelerated later. But clearly taken in isolation, (earnings per share) would have been markedly different without the low R&D spend.”

Meanwhile, the longer it takes to rework the Fort Washington plant, the more difficult it will become to regain lost shelf space. And that further depresses the sales outlook. This will be a key priority, of course, for Alex Gorsky, who was just promoted to succeed the embattled Bill Weldon as ceo. Whether Gorsky can resurrect McNeil remains to be seen. Unfortunately for him, Gorsky may be distracted by depositions involving yet another J&J scandal – his managerial responsibility for a widely publicized kickback case involving the Omnicare nursing home pharmacy


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