Device Makers Are Picking Up the Pace

Next week will be busy for the sector as J&J, St. Jude and Abbott post earnings.
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Although the long-term outlook is a bit hazy for the medical-device sector, at least the nearer future should become a little more clear next week when

Johnson & Johnson

(JNJ) - Get Report

,

St. Jude Medical

(STJ)

and

Abbott Laboratories

(ABT) - Get Report

report their quarterly results.

The somewhat cloudy extended forecast can be attributed largely to Johnson & Johnson's battle with

Boston Scientific

(BSX) - Get Report

, its main competitor in the drug-coated stent business, to acquire the troubled heart-device company

Guidant

(GDT)

. For now, Boston is the favorite to win, but considering the history here, nothing can be ruled out yet.

While Johnson & Johnson, a health care behemoth with around 200 companies under its umbrella, will likely affirm its vitality by delivering strong earnings, there are questions about the ability of St. Jude and Abbott to hit their targets further out.

Despite the distraction of an ongoing fight for Guidant, Johnson & Johnson is expected to remain strong, at least in terms of its fourth-quarter earnings. The New Jersey-based company has been investing considerable time and money in the proposed acquisition since 2004, and lately its efforts

appear to have been in vain.

Stalwart

However, Johnson & Johnson's earnings report, set for Tuesday, "should serve to remind investors of the sustained earnings power at J&J, which in our view lies above current Street expectations," says Mike Weinstein of J.P. Morgan.

Robust results could ease some of the strain on the company's shares and on its shareholders, who have been taken on a wild ride in recent weeks with the Guidant mess.

On average, analysts are expecting earnings of 73 cents a share, up about 9% from a year earlier, on revenue of $13.2 billion.

Cordis, Johnson & Johnson's medical device company under which its stent business operates, is expected again to be the company's primary growth driver, with notable sales increases in Japan. The DePuy orthopedics franchise is also positioned to post strong sales.

Weinstein expects Johnson & Johnson to continue to report slower pharmaceutical sales, largely because of generic competition against its Duragesic pain patch and concerns that its heart drug Natrecor could cause kidney damage. Still, the negatives should be tempered by solid showings by the schizophrenia drug Risperdal, the Crohn's disease drug Remicade and the migraine drug Topamax, he says.

J.P. Morgan has provided investment banking services for both Guidant and Johnson & Johnson.

Question of Timing

Throughout the Guidant tug-of-war, the name St. Jude Medical has popped up from time to time as a potential -- and

possibly better -- acquisition for whichever company loses the Guidant fight.

Guidant, St. Jude and fellow medical-device company

Medtronic

(MDT) - Get Report

are the major makers of heart-rhythm devices such as pacemakers and defibrillators. Between Guidant, with a recent price of $76, and St. Jude at $54, some analysts say St. Jude is a better takeover target.

When Guidant recalled tens of thousands of its heart devices last year, there was no denying that St. Jude stood to benefit. The St. Paul, Minn., company saw its share price soar 20% over the year, and its product sales grow. Once again, the company is expected to say that its quarterly results benefited from its increased share of the heart-device market.

For the fourth quarter of 2005, analysts surveyed by Thomson First Call expect St. Jude to report $762.6 million in sales, compared with $611 million a year earlier. The consensus earnings projections are 40 cents a share for the quarter and $1.53 for the full year, up 21% and 32% from the same periods in 2004.

Eli Kammerman, a medical-devices analyst at Cathay Financial, believes sales could be even stronger than the average estimate and far exceed the company's own estimate of about $755 million. Cathay hasn't provided investment banking services for St. Jude. Kammerman says St. Jude's top line might reach $794 million, including defibrillator sales of $285 million, a 64% increase, and pacemaker sales of $228 million, up 2.5%.

The question is, how long can the run-up last? "We believe that St. Jude will retain most of the share gained from Guidant's woes, but it will become increasingly difficult for St. Jude to continue gaining share," Larry Biegelsen, a medical-devices analyst at Prudential Equity Group, wrote in a recent research report.

Though Biegelsen is eager to hear an update on St. Jude's own market-share expectations and 2006 guidance on Jan. 25, he says the company's growth rate is set to slow in the latter half of this year. St. Jude previously said it expects a 15% EPS growth rate in 2006.

Abbott's Odds

Abbott Laboratories, a drugmaker as well as a stent player, has been looking to broaden its horizons. But when the company reports its sales and quarterly earnings, scheduled for Wednesday, investors will really want to hear more about the leftovers Abbott can potentially grab from the J&J-Boston Scientific duel for Guidant.

If Johnson & Johnson ultimately wins Guidant, Abbott would have access to a chunk of the health care giant's catheter technology through a licensing agreement, thereby adding significantly to its vascular business.

However, should Guidant shareholders agree with their board that Boston Scientific's higher acquisition offer is the better of the two, Abbott plans to buy Guidant's entire vascular-device segment, including its stents, pay Boston Scientific regulatory milestones, and help fund the deal through a $900 million interest-bearing loan.

Abbott also agreed to buy $1.4 billion in Boston's common stock if it takes over Guidant. Abbott has said the acquisition would be slightly dilutive to earnings per share in 2006, but that it should add to its bottom line thereafter.

Possible slumps this year aside, there remains the matter of the fiscal fourth quarter. Analysts estimate that Abbott's earnings will reach $1.2 billion, or 76 cents a share, in the fourth quarter, on sales of $6.2 billion.

Last month, though, before the fiscal year ended, Abbott said it would take a charge of 20 cents in the fourth quarter for cost reductions and other items. Including these charges, the company expects to report earnings between 55 cents and 57 cents a share.