Johnson & Johnson said Tuesday it would cut up to 4,800 jobs in hopes the savings will offset declining sales of its stents, its anemia drug Procrit, and two blockbuster medicines that will soon face generic competition.
The diversified health-care company, whose shares rose 1.8 percent, said it expects the plan to generate pretax savings of $1.3 billion to $1.6 billion in 2008, or about 3 percent of its current cost base.
J&J -- which has 120,500 employees worldwide and makes a vast array of prescription drugs, medical devices and consumer products -- said it would cut 3 percent to 4 percent of its work force, or 3,600 to 4,800 jobs. Many of the cuts will be accomplished through attrition and hiring freezes.
"I think they will be able to incrementally increase profit (through 2010) thanks to the cost cuts," said Morningstar analyst Heather Brilliant. Strong demand for medical devices and consumer products should also help offset weakening drug sales, she said.
J&J Chief Executive William Weldon said the initiative follows declining sales this year of Procrit and J&J's Cypher stent, used to prop open heart arteries that have been cleared of plaque.
Procrit and Cypher, along with similar products sold by other companies, have been hurt by concerns that they increase the risk of heart attack.
J&J shares fell earlier this month when the company trimmed its 2007 sales growth forecast amid a 14 percent decline in U.S. sales of Procrit in the second quarter and 13 percent fewer U.S. procedures using its stents.
J&J said the cost-savings are also needed to preserve earnings growth when its schizophrenia treatment Risperdal and epilepsy drug Topamax face generic competition in 2008 and 2009. The two medicines have combined annual sales of more than $6 billion.
"I look at this as a pro-active approach to address the challenges ahead of us and feel we will be in a stronger position than we are today," Weldon told analysts in a conference call, referring to the planned cost cuts.
J&J said much of the savings will come from its pharmaceuticals division, its biggest operation. The restructuring follows similar programs at Pfizer Inc. and Merck & Co., also motivated by generic competition for major drugs.
J&J will also focus on cutting costs at its Cordis unit, which makes stents. Weak demand for stents contrasts with growing demand for other heart devices made by the unit.
Jeff Jonas, a portfolio manager with Gamco Investors, called the restructuring "very positive," noting it follows a $10 billion stock buyback plan announced by the company earlier this month.
"I don't think it's a sign of desperation at all," Jonas said. "It's really just a matter of responding to the reality that's out there in the marketplace."
J&J, which said the cost-savings plan will include consolidation of operations at some of its factories, expects to take related pretax charges of $550 million to $750 million in the second half of this year.
It stood by its prior 2007 earnings forecast of $4.02 to $4.07 per share, which excludes such charges. That represents growth of 6.9 percent to 8.2 percent from 2006, in line with 2006 profit growth but a slowdown from double-digit growth routinely seen in earlier years.
"It's time to go back and take a look at the cost structure, recognizing that maybe the fat years are over and the lean years are starting," said Bart Geer, lead manager of the Putnam Equity Income Fund, referring to J&J and other pharmaceutical companies.
J&J is trying to reduce its cost base while continuing to invest in newly launched products and its late-stage research pipeline.
J&J said it plans to seek approval for seven to 10 new drugs between 2008 and the end of 2010, and remains interested in buying other products or companies if worthwhile deals appear.
J&J shares were up $1.09 at $61.16 in midday trading on the New York Stock Exchange.