(Updates with comments from CEO interview beginning in 5th paragraph; updates stock price.)
By Peter Loftus
Of DOW JONES NEWSWIRES
Health-care giant Johnson & Johnson (JNJ) announced plans to lay off as many as 8,200 employees worldwide as part of a plan to save up to $1.7 billion in 2011, citing economic and regulatory challenges.
The New Brunswick, N.J., company said it would achieve the cost savings by reducing layers of management and simplifying business structures. The job cuts, which represent 6% to 7% of J&J's work force, will be across all of its diverse lineup of businesses--prescription drugs, medical devices and consumer health products. They'll be "skewed" to outside the U.S., said Chief Executive William Weldon.
J&J shares fell 35 cents to $59.14.
Weldon cited several factors behind the cutbacks: persistent unemployment in the U.S., which is limiting growth in personal health-care spending; a higher bar for regulatory approval of new drugs and devices; higher costs of developing new products; and the need to prioritize resources for opportunities such as developing new drugs for Alzheimer's disease.
"As you look at the economy and especially unemployment, it's going to take awhile before people start to" accelerate spending on things like branded health-care products and elective surgeries, Weldon said in an interview.
J&J said the prospect of U.S. health-care reform wasn't directly behind the cuts, but executives held that out as another uncertainty, and one that could hurt J&J's financial results. The pharmaceutical industry has pledged drug discounts to help fund U.S. reform, and medical devices makers would face fees under some proposals. In addition, Weldon said national health systems outside the U.S. were likely to impose price reductions for drugs and other health products.
Internal factors played less of a role than they did in J&J's last major restructuring, in 2007. At that time J&J said it would reduce its work force by up to 4% to brace for the effect of looming patent expirations for blockbuster drugs. That helped J&J bolster earnings while patent expirations cleared the way for generic competition for its Risperdal antipsychotic and Topamax for epilepsy.
Patent expirations, drug-research setbacks and other challenges have been behind job cuts at other drug makers, including Eli Lilly & Co. (LLY), Pfizer Inc. (PFE) and Merck & Co. Inc. (MRK).
But it appeared more recently that J&J had gotten through the worst of its internal challenges. The company recently reported better-than-expected third-quarter earnings and boosted its outlook for 2009. It has launched several new drugs and analysts expect a big-selling anti-clotting drug to hit the market next year. CEO Weldon even said Tuesday the company was "coming out into the sunshine after the cloud that's been over us" for the past 18 months or so.
So some analysts were somewhat surprised that J&J would be making further cuts now. Wells Fargo analyst Larry Biegelsen said the rationale for the latest restructuring was "less clear" than the 2007 program.
Weldon emphasized the rising costs of product development. "The competitive environment has gotten such that the ability to launch products in some areas has become much more crowded and costly," he said.
J&J earlier this year cut about 900 jobs from its U.S. pharmaceutical unit, and in August it consolidated its management structure. When the company released its third-quarter results last month, Chief Financial Officer Dominic Caruso left open the possibility of further cost cutting, saying the company was evaluating its plans for next year.
J&J said it would take a fourth-quarter restructuring charge of up to $1.3 billion. The company, a member of the Dow Jones Industrial Average, reiterated its 2009 earnings target excluding items such as that charge.
Caruso advised analysts not to change their 2010 earnings estimates to reflect Tuesday's news, saying the estimates appeared to already factor in some cost savings. The mean 2010 estimate of analysts surveyed by Thomson Reuters is $4.92 a share, versus $4.58 per share this year.
Caruso did say that 2010 Street estimates don't appear to factor in any impact of potential U.S. health-care reform. He said the company hoped to have more clarity on the impact in January.
-By Peter Loftus, Dow Jones Newswires; 215-656-8289; peter.loftus@dowjones.com
(Kevin Kingsbury and Jon Kamp contributed to this report.)