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J&J's Defenses Still Intact

The health-goods giant might even say something about Guidant when it posts earnings Tuesday.

There are big companies, there are diverse companies, and there's

Johnson & Johnson

(JNJ) - Get Free Report


Although it isn't the only company to have wide and varied operations, J&J certainly holds its own in terms of bulk -- more than 200 operating companies, revenue of $47.3 billion last year, and a market cap of nearly $190 billion.

Now the time has come again for investors and Wall Street to wade through the numbers of this vast health-products empire. The New Brunswick, N.J., company reports third-quarter earnings Oct. 18, and analysts surveyed by Thomson First Call will be looking for a profit of 86 cents a share on sales of $12.5 billion. A year ago, the company earned 78 cents a share and had sales of $11.6 billion.

Almost assuredly, J&J's massive scale means that some areas will lead while others lag. Plus, its assorted business lines have plenty of competitors out there hoping to nibble at its market share when they can.

For instance, some J&J drugs with generic or brand-name competition are feeling a pinch. Generic versions of the pain patch Duragesic are set to lop off 72% of the product's U.S. sales in the third quarter, according to analyst Glenn Novarro of Banc of America Securities. Sales of the patch should be down 29% worldwide because of generic competition, and oral-contraceptive sales will take a hit as well, he says.

Band-Aids and Tylenol

Elsewhere, global sales of the anemia drug Procrit will be down 2% to $867 million in the third quarter, according to Rick Wise of Bear Stearns. Procrit competes with Epogen,


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version of the same drug, and Aranesp, another Amgen drug for treating anemia in kidney-disease and cancer patients.

Also, the company's Alzheimer's drug Razadyne, heart-failure drug Natrecor, painkiller Ultracet and anti-infective drug Sporanox are all expected to be a drag on sales growth, Wise says.

J&J, of course, is far from the only big pharmaceutical company taking blows to its drug segment because of expiring patents and increasing competition. And because of its array of product lines, one might be tempted to think the maker of household staples like Band-Aids and Tylenol could simply fall back on its consumer and medical-devices segments.

To a degree that's true, but pharmaceutical sales made up a significant chunk of revenue at the company last year, accounting for $22.1 billion, or about 47%, of the total.

Broken down by segment, Wise sees pharmaceutical sales totaling $5.54 billion in the third quarter, up 2% year over year, while medical devices and diagnostics should bring in $4.83 billion, up 19%. Consumer products should account for about $2.26 billion, up 13% for the quarter, he says.

Optimistic analysts expect any shortcomings in pharmaceuticals to be made up for with strong sales of the Cypher drug-eluting stent, made by J&J's Cordis unit. The Cypher stent is a small mesh-like tube used to hold open clogged arteries. The stent is coated with a drug that prevents arteries from reclogging.

Wise believes Cypher sales have been helped by further market penetration in Japan, fueling a 43% increase in Cordis' sales to an estimated $1.1 billion in the most recent quarter. Bear Stearns has received noninvestment banking compensation from J&J.

Banc of America's Novarro raised his Cypher market share forecast for the quarter by 3 percentage points to 44%, and his U.S. sales forecast by $10 million to $345 million. The Cypher also probably cost J&J competitor

Boston Scientific

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part of the market.

Guidant Light

Novarro projects Remicade sales will be up 22%, Topamax sales will rise 19.2% and Risperdal sales will increase 20.6%. Risperdal, a treatment for schizophrenia, is J&J's biggest drug, with revenue of $1.74 billion in the first half of the year.

Still, he's maintaining his neutral rating and $72 price target on J&J, for now at least, as he waits for more information on the company's planned acquisition of medical-device maker



, as well as ongoing patent challenges.

Banc of America Securities has provided investment banking services for J&J in the last 12 months.

What's really been on investors' minds, and what J&J has refused to discuss, is the deal for Guidant, a company that's recalled a number of product lines in recent months. J&J hasn't suggested it might walk away from the pact or alter the $76-a-share terms.

"At this point in time, we are two separate companies," said Brian Firth, Cordis' vice president of medical affairs, in an interview. "We're working on the process for determining what we'll do after the acquisition, but we can't decide on what to do until the

Federal Trade Commission decision."

An FTC determination on whether to approve the deal is expected later this month. The acquisition has been cleared in Europe and Canada on the condition that Cordis shed some business lines, including steerable guidewires, which are used in performing heart surgery.

During J&J's earnings call Tuesday, Wise expects to hear a status update on the acquisition and comments on the long-term impact of Guidant's defibrillator and pacemaker recalls.

As a result of those recalls, Kenneth R. Weakley of UBS thinks its possible J&J might take a hit of 1 cent to 2 cents a share, though that could be offset by a better performance in other segments or by cost reductions.

When the acquisition closes, Weakley expects J&J's operating margin to decline, but notes that longer term, "we expect the Guidant franchise to positively affect margins." J&J's medical devices and diagnostics segment recorded sales of $16.9 billion last year.

Weakley says the acquisition will ease the effects of competition from generic pharmaceuticals, and with efficient management, Guidant's longer-term core growth could accelerate. UBS makes a market in J&J's shares.

J&J's Cordis unit will be presenting data from 40 different trials of its Cypher stent at the Transcatheter Cardiovascular Therapeutics conference this week in Washington.