Vol. 2, Issue 27, July 13, 2004
Education for the Otiose
Perplexing Times

Johnson & Johnson Scrambles to Explain Rise in Profits

Johnson & Johnson, the world's biggest maker of medical devices, said second-quarter profits doubled due to unspecified failures on the part of its accounting division, and that under no circumstances should investors expect a windfall.

"Rest assured that we are in fact hemorrhaging cash, and that sadly this unexpected fluke in the numbers will not translate into higher dividends," said Chief Executive William Weldon in a press conference.

Sales rose 11 percent to $11.5 billion, the New Brunswick, New Jersey-based company reluctantly said in a statement, and net income climbed to $2.46 billion, or 82 cents a share, from $1.21 billion, or 40 cents, a year earlier.

"The bar has now been raised," said Carl Brandon, a fund manager at HW&B Asset Management Incorporated, which owns about 1 million Johnson & Johnson shares. "With the public already sensitized to higher medical costs overall, the last thing a company like Johnson & Johnson wants to be reporting is a massive rise in earnings. But on the other hand, investors will be demanding comparable performance in the year to come. I don't envy Weldon at this point."

Johnson & Johnson's products range from artificial knees to Band-Aids. Despite recent challenges to key products, such as the company's Procrit anemia drug and Cypher drug- coated heart stent, annual profit has increased by at least 10 percent for 19 years.

"It's part of a broader problem," said Fred Meyers of the Brookings Institution. "Health costs keep rising in America because a dysfunctional market creates few incentives for any of its participants to deliver efficient care. But Johnson & Johnson's conspicuous success makes it a glaring target for groups trying to attack fraudulent medical costs. I'm surprised their accountants weren't able to hide this profitability better."

The AARP, a powerful lobby for older Americans, has already been incensed with the fiasco of the new Medicare discount card program, which was supposed to reduce out-of-pocket expenses for prescription medications. Most drug companies quietly raised prices on key medications to offset the discounts. Consequently, the announcement of the rise in earnings at Johnson & Johnson has led to a call to arms.

"Make no mistake, Weldon: this is the final straw," AARP policy director John Rother said at a press conference on Monday, pounding the podium with his cane. "We are sending our people down to D.C. by the busload even as I speak. We're parking our people in every office of every legislator in that town, and we've brought sandwiches, so we're not going anywhere until our displeasure with you is heard by every Congressman and Senator."

Weldon offered an apology to the AARP and promised that he would be initiating "drastic measures" to compensate for the embarrassing profitability of his company.

"Perhaps we can report ourselves to the Securities and Exchange Commission for fraud," he announced. "I'll bet a nice, lengthy investigation with a sprinkling of key indictments would balance our bottom line nicely. Or at the very least, it would give the media something better to write about than our quarterly profits."

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