J&J mulls sale of diagnostics unit

Johnson & Johnson may sell or spin off its slow-growing $2 billion-a-year diagnostics business, the company said on Tuesday when it reported quarterly earnings.

The diversified healthcare company said it may sell the Ortho Clinical Diagnostics business - whose products include equipment for laboratory diagnostics and blood transfusion screening - or turn it into a stand-alone company.

The decision comes as drugmakers are shedding businesses and cutting costs due to overseas price controls and pressure on payments from insurers and the government. Pfizer Inc, for instance, is spinning off its animal health products business, and Abbott Laboratories has split off its drugs unit.

Debbie Wang, an analyst with Morningstar, said the J&J diagnostics unit “is a slower grower, and if you’re not one of the leaders, it’s very difficult to compete in that area.”

Les Funtleyder, a fund manager at Poliwogg, said the company is wise to consider exiting this low-tech diagnostic business.

J&J should target the more high-tech, high-profit molecular diagnostics business, which entails sophisticated genetic analysis used by physicians to tailor treatment to individual patients, he said. This is becoming more of a mainstay in medical treatment, especially in cancer, where numerous gene mutations make patients vulnerable to disease.

“If you look five years down the road, we are going to see molecular diagnostics and gene sequencing converge,” Funtleyder said in an interview at the J&J analyst meeting in New York. He added that gene sequencing - a process that looks for certain genes, and gene mutations especially, that predispose a person to certain diseases - will become the main determinant of how physicians treat patients.

Funtleyder said he thinks J&J should consider acquiring companies like Illumina Inc or Life Technologies Corp, both engaged in genetic analysis.

But Andy Busser, a fund manager for Symphony Capital in New York, thinks moving into molecular diagnostics may not be likely. “At the end of the day, they might prefer to invest that capital elsewhere.”

Ortho Clinical Diagnostics, whose revenue growth has been relatively flat, is No. 5 in the clinical diagnostics market, as measured in sales. Typically, J&J’s businesses rank first or second in their respective markets.

Clinical diagnostics is less attractive than molecular diagnostics, which might see near double-digit revenue growth in coming years, according to analysts.

It might be easier to sell Ortho Clinical Diagnostics to a private equity buyer, Funtleyder said. “They might be satisfied with a dependable if not an exciting business.”

J&J, which made the disclosure as it reported stronger-than-expected earnings, said it was in the very early stages of examining options.

J&J said it earned $1.19 per share, excluding one-time items, in the fourth quarter, beating analysts’ average estimate of $1.17.

A favorable tax rate and cost controls boosted results, according to Piper Jaffray analyst Matt Miksic. He also cited very strong growth in sales of J&J’s traditional artificial hips and of artificial knees, whose combined U.S. sales rose 7 percent despite disruptions from Superstorm Sandy in the quarter.

CHARGES FOR HIP IMPLANTS

Including a charge of $800 million, related mostly to recalls of defective “metal-on-metal” hip replacement devices made by its DePuy Orthopedics unit, J&J earned $2.6 billion, or 91 cents per share. That compared with $218 million, or 8 cents per share, a year earlier, when the company took charges of more than $3 billion, including $800 million for medical costs related to the same recalls.

All-metal hip implants were developed to be more durable than traditional implants but have failed at a high rate. In some cases, they have shed metal fragments that have disabled patients. Traditional implants combine a ceramic or metal ball with a plastic socket.

As many as 500,000 Americans are estimated to have received metal-on-metal hip replacements in the last five years, with J&J the largest manufacturer of such products.

The company withdrew its ASR metal-on-metal hip system in 2010 and faces more than 2,000 lawsuits from patients claiming to have been harmed by it.

REVENUE UP BUT MISSES

J&J said global revenue rose 8 percent to $17.56 billion in the fourth quarter, below Wall Street expectations of $17.7 billion.

“The sales miss was driven by lower-than-expected medical device and consumer sales,” RBC Capital Markets analyst Glenn Novarro said in a research note.

Sales of prescription drugs jumped 7 percent to $6.52 billion, helped by strong sales of its treatments for arthritis, psoriasis and HIV.

“By any measure, we have transformed our pharmaceuticals business,” Chief Executive Alex Gorsky told analysts on a conference call. The business is bouncing back after several years of anemic sales due to generic competition for some of its top medicines.

But J&J said it expects its blockbuster Concerta treatment for attention deficit disorder to face pressure from cheaper generics early this year.

Fourth-quarter sales of medical devices rose almost 14 percent to $7.38 billion, boosted by the company’s recent acquisition of trauma-device maker Synthes.

Sales of J&J’s array of consumer products fell almost 3 percent to $14.4 billion, hurt by the stronger dollar and recalls of Tylenol and other over-the-counter medicines that have curtailed availability of the brands.

The company forecast full-year 2013 earnings of $5.35 to $5.45 per share, excluding special items. Analysts, on average, expected $5.49, according to Thomson Reuters I/B/E/S. The company is known for making conservative forecasts at the beginning of the year.

J&J shares were down 0.8 percent at $72.66 on Tuesday afternoon.

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By Ransdell Pierson