J&J's Troubles Gather Faster Than It Can Cut Jobs to Deal With Them

Employees of Johnson & Johnson should look at today's Q4 earnings announcement and prepare for layoffs at the company. Although J&J increased its net income by 14.3 percent to $2.7 billion, everything else on its income statement was down: Sales fell 4.9 percent to $15.2 billion, indicating that the overall health of J&J is in decline. To deal with that, the company cut R&D by 9.5 percent and manufacturing costs by 7.6 percent.

Those cuts allowed J&J to eke out a larger profit on smaller sales. You do not need to be a spreadsheet jockey to know that this situation cannot last forever -- at some point sales need to rise again. And if R&D doesn't increase, at some point J&J will run out of new products to sell.

Troubles at J&J aren't over yet. Remicade sales declined 2.4 percent from increased competition from Abott Labs' Humira and Amgen's Enbrel. And its epilepsy drug Topamax loses patent exclusivity later in 2009, and its sales will surely decline as a result.

What does this mean for jobs? The company laid off 4,280 people last year, and its sales and marketing expenses decreased by 1 percent. But compare that to Pfizer, which has laid of 16,400 workers over the last two years, and more cuts are allegedly coming at the end of the month.

On J&J's own numbers, its layoffs have not produced the desired effect. For every dollar it spent on sales and marketing, it earned only $2.68 back in sales. That's the lowest return on its manpower expenses in the last two years. That statistic alone tells you that J&J needs to extract more sales from employee, and the easiest way to do that is to lay off staff, particularly drug reps.

If you want to see this in terms of a graphic, here's a chart that tracks percentage growth in revenues and gross profit yielded by every dollar J&J spent on selling, general and admin expenses. If J&J were becoming a more productive company, the lines would be above 0% and pointing up. They're not. They're in the minuses and pointing down.