J&J 'Disaster' Unfolding

Whatever you do, protect the brand name. I've been pushing the creeping inflation story all day, but a different disaster is playing out at Johnson & Johnson, down 2 percent today.

At heart, J&J is a simple story because there are only 3 segments: Consumer (about 26 percent of sales), Pharmaceutical (about 36 percent), and Medical Devices/Diagnostics (about 38%).

Pharmaceutical sales were down 4.7 percent. That is a disappointment — one key product, Remicade (rheumatoid arthritis), saw sales decline 6 percent, and elsewhere competing products are taking market share.

But the big story is at the Consumer segment. Consumer sales last quarter dropped 15 percent. That is not a typo. Fifteen percent. Fifteen percent is a lot of money when we are talking about over $3.6 billion in sales.

The problem was mostly due to the ongoing product recall, largely at the old McNeil division — think Tylenol, Benadryl, Sudafed, Rolaids — recalls that cost the company $300 million in Q4 and more than $900 million for the full year.

This may not be a one- or two-quarter story. The recalls have clearly damaged the company's brands. Buyers have turned to other, often lower-cost, products. The question is, can they be enticed back, or will they be happy with their new products?

This is not something analysts or traders can quantify, and indeed there is little discussion about this reputational damage on the Street — even if analysts express surprise at the magnitude of the sales drop. But it is real, and it could be a drag on JNJ for years.

Johnson & Johnson Peers/Rivals:

Abbott Laboratories

Eli Lilly


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