J&J Girds for Grilling

Analysts will likely want more Guidant gossip than earnings talk on Tuesday.
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When it comes to

Johnson & Johnson's

(JNJ) - Get Report

second-quarter report due Tuesday, some analysts are hopeful about its pharmaceutical and medical device operations -- but there are risks that may limit the company's results for the quarter and for the rest of the year.

Much of the recent talk about J&J has centered around the medical products and drug giant's planned acquisition of

Guidant

(GDT)

, specifically speculation as to whether the terms of the deal will remain intact. As such, questions about Guidant's various product recalls could take up a substantial chunk of the company's earnings call.

"Bringing Guidant into the Johnson & Johnson family of companies builds on our history of strategic acquisitions and partnerships that provide a foundation for sustained leadership and growth," said William C. Weldon, J&J chairman and CEO, at the acquisition announcement in December. At that time, the deal was valued at $25.4 billion, or $76 a share.

When asked for an update on the status of the acquisition, J&J refused to comment beyond reiterating its June 17 statement that the recalls reported by Guidant are "serious matters," and that the company is working with the medical-device maker to "understand the issues."

Next Topic

Sara Michelmore, an analyst with SG Cowen, doesn't expect to hear anything about the Guidant acquisition other than a confirmation that the transaction is expected to close in August or September.

"We do not expect management to comment on the recent ICD product issues Guidant has faced and whether or not that alters their view of the value of the transaction in any way," Michelmore wrote in a July 7 research report previewing J&J's earnings. "Near term, we continue to believe the pending close of the Guidant transaction will represent an overhang on JNJ shares," she wrote.

Bruce Cranna of Leerink Swann said in an interview that he believes "Guidant as a topic of discussion will be brought up ad nauseum" on the conference call. The question is whether the company will actually address analysts' questions.

According to Cowen estimates, J&J should report worldwide medical-device and diagnostics sales of $4.6 billion in the second quarter, up 14% from a year earlier. The pharmaceutical division is expected to have sales of about $5.7 billion, up 5% from last year. The firm expects $12.5 billion in worldwide sales for the quarter. Michelmore sees J&J earning 93 cents for the quarter, compared with 82 cents a year earlier.

Katherine Martinelli of Merrill Lynch raised her profit estimate by a penny to 92 cents after revising her domestic pharmaceutical estimate based on better-than-expected prescription trends for J&J's oral contraceptives, the antibiotic drug Levaquin and the epilepsy drug Topamax. Merrill Lynch doesn't have an investment banking relationship with J&J.

On average, analysts surveyed by Thomson First Call expect earnings of 91 cents a share on sales of $12.6 billion for the quarter.

Shelf Life

In the pharmaceutical segment, Cowen's Michelmore sees competition and price erosion as continued problems for the Procrit/Eprex anemia treatment, J&J's largest franchise, with estimated 2005 sales of $3.6 billion. Generic competition for Concerta is also a threat, despite recent Food and Drug Administration warnings on attention deficit-hyperactivity disorder drugs, the analyst says.

Last month, the FDA issued cautionary comments about Concerta and other ADHD drugs, citing a link to adverse psychiatric and cardiovascular events. However, second-quarter Concerta sales could still outpace expectations, according to Michelmore. In the earnings preview earlier this month, Michelmore also said J&J could report stronger-than-expected sales in the medical diagnostics and devices segment, with solid sales of Cordis vascular products and Lifescan diabetes-diagnostic devices.

Michelmore believes the company may report disappointing sales of Natrecor for congestive heart failure, after an article published in the

Journal of the American Medical Association

in May raised questions about kidney failure and deaths related to use of the drug. Still, Michelmore remains positive on Natrecor as a part of the overall pharmaceutical business.

While the company awaits review by an FDA panel for its premature ejaculation drug Dapoxetine by year-end, investors will need to watch any possible evolving threats, says Leerink's Cranna, who cited patent disputes with

Mylan Labs

(MYL) - Get Report

and

Teva

(TEVA) - Get Report

.

Also, a jury recently found that J&J's Cypher stent infringed on a

Boston Scientific

(BSX) - Get Report

patent protecting the process of coating a stent with a drug that prevents arteries from reclogging.

In May, the FDA approved extending the shelf life of Boston Scientific's Taxus Express 2 drug-eluting stent to 12 months, while J&J's Cypher stent has a six-month shelf life.

"Current FDA issues continue to represent a stumbling block for Cypher," Michelmore wrote in a research note. "We believe share gains will be limited should the company not be able to extend the shelf dating of the product near term. The FDA will not review the data until current plant issues meet their requirements, which continues to be a process with no clear timeline."

Cranna expects good results for the quarter from orthopedics, Cordis and Lifescan, while Michelmore thinks the company will report negative effects from foreign exchange, but reiterate its guidance for the year.

Neither Leerink Swann nor SG Cowen have an investment banking relationship with J&J.