Johnson & Johnson

(JNJ) - Get Report

approaches its next quarterly financial news release on Tuesday, leading the pack of Big Pharma companies in stock-price appreciation this year.

That's sort of a backhanded compliment, because only two of 15 members of the Amex Pharmaceutical Index are in positive territory this year: J&J, whose stock is up 6.8%, and

Schering-Plough

(SGP)

, whose shares have gained 1%. The drug index is down 10.5%, while the

S&P 500

index is up 1.1%.

By midday Monday, J&J's shares were off 39 cents, or 0.7%, to $54.93, about 6.5% below their 52-week high of $58.80, touched Sept. 17.

Analysts, who admire J&J's financial foundation but worry about its near-term performance, expect the company to produce third-quarter earnings of $2.26 billion, or 76 cents a share, on revenue of $11.3 billion, according to the consensus calculated by Thomson First Call. For the same period last year, J&J earned $2.1 billion, or 69 cents a share, on revenue of $10.5 billion.

Even though equity analysts aren't quite sure about J&J -- eight buy ratings, 13 hold ratings, one sell recommendation -- bond-rating firms still give the company top marks. Perhaps the true test of J&J's financial strength will be revealed during Tuesday's investor conference call by how many analysts ask executives if J&J plans to buy

Guidant

(GDT)

or

Merck

(MRK) - Get Report

, the usual suspects in the Wall Street takeover rumor mill.

After executives likely dismiss those questions, they'll address more immediate issues such as the expected slower growth for the pharmaceutical division, which contributes 47% of corporate sales and 60% of corporate profits, according to Michael Weinstein, who follows the company for J.P. Morgan. "Growth began to slow last year in pharmaceuticals as competition increased across some of the company's leading products" such as the anemia drug Procrit and the antipsychotic drug Risperdal, Weinstein said in a Monday report to clients.

The next 18 months "may prove J&J's most difficult period in some time," said Weinstein, who has a neutral rating on the stock. He expects annual drug-business revenue growth to drop from its pace of 15% to 16% in 2002 to less than 8% in the 2004-06 period, unless J&J makes acquisitions. Sales growth will take a big hit in early 2005, as generic competition starts eroding sales of the painkiller Duragesic, which is J&J's fourth-largest-selling drug.

"Add in declining currency gains, and the result is an overall revenue growth rate for J&J that drops from 18% in the first quarter of 2004 to mid-single digits by 2005," said Weinstein. (The analyst doesn't own shares, but his firm has had an investment banking relationship with J&J in the last 12 months.)

"Sustaining double-digit earnings growth in face of this slowdown will not be easy," said Weinstein, who added that he expects J&J "to pursue meaningful, pipeline-rebuilding acquisitions." What J&J acquires and how its big drugs fare vs. increased competition "will likely dictate the stock's performance in 2005."

Another cautious view comes from Bruce Cranna of Leerrink Swann, who has a market perform rating on the stock. "We find it hard to identify any obvious positive catalysts for 2005, and with the stock trading at or above its peers on a valuation basis, we believe constructing a premium multiple argument too challenging at present," he said in a report to clients last week.

Like others on Wall Street, he worries about "the growing threat" to Procrit from competition from Aranesp, made by

Amgen

(AMGN) - Get Report

, and from expected changes in Medicare-reimbursement policies next year. Aranesp, he said, has the advantage of lower frequency of dosing as well as "higher profitability per practice" for oncologists.

Revenue gains for the Cypher drug-coated stent following the July and August recalls of some of a competitor's stent were short-lived. The competitor,

Boston Scientific

(BSX) - Get Report

, has recovered from the recalls of its Taxus stent and has reasserted its dominance in the market for drug-coated stents, which are meshlike metal tubes inserted into arteries to improve blood flow.

The introduction of J&J's next generation of drug-coated stents "is unclear" until the company's Cordis unit resolves manufacturing issues with the FDA, Cranna said. (He doesn't own shares, and his firm doesn't have an investment banking relationship.)