The main reason for the staff cut is that consumers have started spending less on items related to health care due to the financial crisis. The cut will save company $1.7 billion by 2011.
“The weak economy is taking its toll on Johnson & Johnson,” said Mike Krensavage, a money manager with Krensavage Partners, which owns J&J shares. “The company is hunkering down, bracing for more difficult times.”
Sales and market unfavorable
J&J posted a small profit in the third quarter and faced a drop in sales by 2.6 percent. There was also a decline of less than 1 percent in the share prices on the New York Stock Exchange. The company’s shares went down by 1.5 percent this year.
“The stock market may be balancing the fact that J&J had a very pessimistic tone about its business, versus the fact that it’s doing something about it,” said Krensavage. “Generally Wall Street likes cost cuts because they boost earnings. In this situation, you have the fact that J&J sounded a very pessimistic tone on the economy.”
The majority of J&J’s job cuts will occur outside the U.S., says William Weldon, chief executive, J&J. He did not specify where the cuts will take place in U.S.
Most difficult environment for J&J
Drug makers around the world have been reducing researches to lower the cost of their respective products.
“We want to make sure we can fully capitalize on investments to drive new products,” Weldon said.
“We’re going to continue to look at internal R&D being the best driver that we have,” he said. He also said that J&J will also seek licensing opportunities and acquisitions to gain new products.
According to Weldon, this is the toughest environment to live in. “If you go back and look at the last five or six recessions and we've done that, health care is somewhat recession-proof," Weldon said during an interview.
"I think this is different. This is the most difficult environment in my lifetime."
J&J recently bought Cougar Biotechnology Inc. and a stake in Elan Corp. for $1 billion each.
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