J&J Keeps Troubled Consumer Unit

J&J Keeps Troubled Consumer Unit

January 24th, 2013 // 3:48 pm @

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In case anyone was wondering, Johnson & Johnson ceo Alex Gorsky is trying to make clear that the healthcare giant has no intention of unloading its troubled McNeil Consumer Healthcare unit. In remarks to Wall Street analysts this morning to discuss earnings, Gorsky says that J&J is “absolutely committed” to the struggling unit, which has recalled millions of products and is retooling a key plant that is taking longer than expected to fix.

The remarks were made shortly after J&J prompted speculation about the fate of the McNeil unit by selling the Rolaids antacid brand to Sanofi (SNY), which owns Chattem, another player in the over-the-counter business. Initially, the only information about the deal was simply that the US Federal Trade Commission had approved a sale of something, suggesting to some wags that J&J may consider selling much larger chunks of the McNeil operation (back story).

For awhile last year, in fact, there was chatter among some Wall Streeters that J&J may want to consider such a move, although the healthcare giant has long considered its consumer healthcare business to generated dependable cash flow to smooth out the highs and lows caused by the unpredictable failures associated with prescription medicines and devices.

The consumer business, however, is not performing as well over the past two years, thanks to the many quality control problems that caused the FDA to issue a consent decree (back story). Last year, sales generated by the US consumer healthcare unit fell 2 percent. Overall, the worldwide consumer business fell 2.9 percent, although J&J maintained this decline was largely due to the impact of currency fluctuations (see this).

To recap, the McNeil unit issued countless product recalls; closure of a key plant in Pennsylvania; hundreds of job losses; a congressional probe; lost consumer confidence and shelf space; shareholder lawsuits and a managerial shake-up. The manufacturing issues were so severe that J&J management mistakenly hoped its Pennsylvania plant would have been operating by now (see here and here).

Now, J&J hopes that its plant will get back on track by next year, although Gorsky is understandably hesitant to offer any predictions. Meanwhile, The Philadelphia Inquirer reports that he does say “we are taking a prudent approach to production volume” in reference to production at plants in Pennsylvania and Puerto Rico, where production problems also surfaced.

The problems are taking a toll. Earlier this month, the CVS pharmacy chain changed how it stocks Tylenol as a result of the J&J (JNJ) manufacturing problems. Under the new plan, CVS (CVS) will try to have Tylenol in stores in each market, but will not have it in every store, according to Reuters. The retailer is getting enough Tylenol to stock about half of its 7,400 U.S. stores, and changed the stocking of Tylenol to eliminate empty space.

Such decisions underscore the challenges J&J has in regaining lost sales. Just the same, analysts believe J&J will continue to prune its product portfolio, rather than abandon the McNeil unit. At the same time, J&J may sell other businessess. One such operation is the Ortho Clinical Diagnostics unit, which analysts estimated generated $2.16 billion last year, or about 3.3 percent of overall sales


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