Johnson & Johnson said Wednesday that it will write down and sell its two struggling diagnostic imaging businesses to General Electric and take other write-downs that will bring first-quarter charges to $600 million.
The charges will inflict the first-ever quarterly loss on the largest U.S. health products firm, which in February stopped selling non-prescription drug capsules after the death of a Westchester County, N.Y., woman who had taken cyanide-laced Tylenol.
The New Brunswick, N.J., company also announced plans to buy back 10 million shares, or about 5.5%, of its stock.
Johnson & Johnson said it will take a $230-million charge in connection with the write-down and sale of the Technicare and Ultrasound subsidiaries. It will take another $220-million charge for the write-down of other “assets no longer expected to provide economic benefit and for certain consolidations.”
Out of Capsule Business
The company wouldn’t give any further breakdown of the $220-million charge, but analysts said it included costs of several disappointing research and development efforts.
Another $150-million charge will be assessed in the first quarter in connection with the company’s withdrawal from the non-prescription capsule business.
The Technicare and Ultrasound diagnostic imaging units have recently been profitable, but they lost money for years in bruising competition, and many on Wall Street cheered the decision. Several analysts said the company was wise to take all of its write-offs in one quarter, thus increasing the likelihood of steady earnings growth in the upcoming quarters.
“The company made a strategic decision to move away from a business where it had problems for some time,” said Paul A. Brooke, an analyst with the Morgan Stanley investment banking firm in New York. “The effect should be to let them focus better on their stronger businesses.”
Wall Street Applauds Moves
Wall Street viewed the moves favorably. Johnson & Johnson’s stock rose $2.75 to $58.37 1/2 on trading of 2.29 million shares on the New York Stock Exchange.
The sale price for the two units was not disclosed.
Robert Kniffin, a Johnson & Johnson spokesman, said the buy-back was intended to increase the value of the company’s stock, which company officials “feel is still quite undevalued.” He noted that J&J; also bought back shares in 1984 and 1985.
Fear of a possible takeover was not a consideration, he said.
The company said in a statement that the stock buy-back would be made “over time through open market transactions.”
Johnson & Johnson bought Technicare, then an independent company based in Solon, Ohio, in 1979. The company markets to hospitals several lines of high-priced equipment used to diagnose illnesses, including $1-million-plus CAT scanners, magnetic resonance and nuclear imaging systems.
The Ultrasound unit, spun off in 1980, markets equipment that uses high-frequency sound to diagnose illnesses.
The businesses once offered a high rate of return, but recently they have suffered increasingly from federal efforts to cut hospitals’ spending and from a simultaneous growth in competition from General Electric and Siemens AG, the big European manufacturer.
The toughest competitor was General Electric, which controls about 50% of the market “and has been best able to convince hospital people that if the machines broke down, they’d come out at 4 a.m. to fix them,” said Raul P. Esquivel, an analyst with the F. Eberstadt & Co. brokerage in New York.
The diagnostic imaging units lost $30 million last year, including non-recurring charges, and the company had announced several layoffs, Esquivel said.
J&J; spokesman Kniffin said the two companies now employ 2,700, but he declined to provide figures on how the work force has been reduced by layoffs or attrition.
Robert Benezra, an analyst with Alex. Brown & Sons in Boston, said there has been a trend among health products makers to focus on their highest-margin businesses in the face of health-care spending cuts.
Johnson & Johnson intends to concentrate on prescription pharmaceuticals and certain of its lines of consumer products, such as its baby products and Band-Aids, he said.