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Johnson & Johnson Remains on Target While It Deals

Analysts expect the earnings machine to keep firing as it works on the Guidant acquisition.

Johnson & Johnson


approaches its fourth-quarter financial report on Tuesday with many of the same financial pros and cons from recent quarters -- plus, of course, one giant $23.9 billion headline.

The headline is



, which remains such a good takeover idea to Wall Street that J&J's stock still is higher than the day before the deal was announced.

Tuesday's report may not shed much more light on the impact of the deal, which J&J executives have said they hope to complete by July 1. One key issue is how the

Federal Trade Commission will respond to potential antitrust issues, "which we believe is likely to represent an overhang on J&J shares prior to the close" of the deal, said Sara Michelmore, of S.G. Cowen, in a recent report to clients.

On Jan. 19, analysts got a hint about how J&J might help pay for the deal when the company said it would repatriate about $11 billion from foreign subsidiaries for domestic use to benefit from a one-time tax holiday.

Although J&J didn't say how it would use the money, mergers and acquisitions are one of the Treasury Department-endorsed uses of these repatriated funds. Thanks to a law signed by President Bush in October, companies have a one-year window to repatriate earnings of foreign subsidiaries at a 5.25% tax rate instead of a 35% rate. Those repatriated earnings, for which J&J will take a roughly $800 million tax charge in the fourth quarter, would certainly help cover the 40%-cash portion of the cash-and-stock purchase of Guidant.

The deal, which prompted Standard & Poor's to keep its AAA credit rating on J&J, hasn't discouraged analysts' predictions for the fourth quarter, the 2004 fiscal year or the 2005 fiscal year.

The analysts polled by Thomson First Call are sticking with their consensus estimates of a 64-cent EPS for the fourth quarter and a fiscal-2004 EPS of $3.07. For fiscal 2005, the consensus EPS is up to $3.35. When J&J announced in mid-December that it was buying Guidant, the company's CFO, Robert J. Darretta, said he was comfortable with the consensus view of $3.34 a share for 2005. This figure excluded noncash charges, which will be about $9 billion and which will be amortized over 12 years.

For the fourth quarter, analysts expect J&J to earn $1.92 billion, or 64 cents a share, on revenue of $12 billion. For the same period in 2003, the company earned $1.85 billion, or 62 cents a share, on revenue of $11.25 billion.

For the full year, the consensus prediction is for a profit of $9.22 billion, or $3.07 a share, on revenue of $46.67 billion. For 2003, J&J earned $7.2 billion, or $2.40 a share, on revenue of $41.86 billion.

There's more to J&J than the Guidant acquisition, and SG Cowen's Michelmore sees "some opportunity for sales upside" for the fourth quarter. Still, she expects J&J to achieve the consensus EPS estimates for 2004, and she doubts management will change its 2005 guidance.

This year, "we do see more products with the potential to outperform current Wall Street views and expect increased visibility" on drug R&D efforts, Michelmore said in her Jan. 20 report to clients. (Her firm doesn't provide stock ratings. She doesn't own shares, but her firm says it does and seeks to do business with companies profiled in research reports.)

She predicts that J&J will continue to have problems with its anemia drug franchise. Losing more market share "will make positive revenue growth a challenge," she said. The drug, sold as Procrit in the U.S. and as Eprex overseas, continues to be hit by competition from



Aranesp, forcing J&J to cut prices.

Procrit remains J&J's largest-selling drug, whose sales, Michelmore predicts, will reach $3.6 billion for 2004. That would be about $400 million less than in 2003 and nearly $700 million less than in 2002.

Michelmore said one positive product performance belongs to Risperdal Consta, an injectable version of the antipsychotic Risperdal. The Consta version is administered once every two weeks instead of the daily Risperdal pills. "Coming off a better-than-expected third quarter, we believe Risperdal Consta sales continued their positive momentum in the fourth quarter," Michelmore said.

She said the 2005 sales outlook appears promising "and we expect to adjust our forecast upward" after J&J's teleconference with analysts on Tuesday. She predicts Consta could represent 10% of total Risperdal sales of $3.1 billion by year-end. She estimates that sales for all of the Risperdal products are expected to reach $2.9 billion for 2004, a gain of $400 million from 2003. Risperdal is J&J's second-largest-selling drug.