Analysts Have J&J in a Holding Pattern

Johnson & Johnson ( JNJ) unveils its first-quarter earnings Tuesday with most analysts in a holding pattern, saying they are more concerned about long-term growth prospects than the January-through-March period results.

The consensus of analysts polled by Thomson First Call calls for first-quarter earnings of $2.39 billion, or 80 cents a share, on revenue of $11.36 billion, compared to $2.1 billion, or 69 cents a share, on revenue of $9.8 billion a year ago.

Wall Street predictions for J&J reveal mushy support for the company. Twelve analysts have hold ratings on the stock, according to Thomson First Call. Seven recommend buying shares; one analyst says sell.

The company's share price reflects those views: it's been easing downward for most of the last 12 months. On Monday, the stock gained 33 cents, or 0.6%, to $51.20, much closer to its 52-week low of $48.05 than its 52-week high of $57.99.

One analyst with a so-so view of J&J is Tao Levy of Deutsche Bank Securities, who has a hold rating on the stock and an 81-cent earnings-per-share estimate for the first quarter. Levy expects first-quarter sales of $11.37 billion.

The first quarter should be OK but J&J's growth "should begin to materially slow down" during the second half of 2004 and in 2005 and 2006 due to increased competition for its Cypher drug-coated stent for heart disease patients as well as for its major drugs, including the Procrit/Eprex franchise for anemia, and Remicade for both rheumatoid arthritis and Crohn's Disease. (Levy doesn't own shares, but Deutsche Bank Securities has had an investment banking relationship with J&J in the last 12 months.)

Another lukewarm view comes from J.P. Morgan's Michael Weinstein, who reaffirmed his neutral rating in a Monday research note. He likes the first quarter, predicting an 81-cent EPS, but as the year unfolds, "J&J's outlook turns notably less appealing," he said.

Two products vulnerable to competition, he noted, are Cypher, which had U.S. sales of $1.4 billion last year, and the painkiller Duragesic, which had $1 billion in domestic sales. Weinstein said Duragesic could come under attack from a generic version in late July. Next year, he added, could be the company's "most difficult year in quite some time." (He doesn't own shares, but his firm has had an investment banking relationship within the last 12 months.)

Analysts will probably question management Tuesday about a recent warning letter from the Food and Drug Administration about manufacturing practices at plants making the Cypher drug-coated stent, a mesh-like tube inserted into the arteries after fatty deposits have been cleared away, which allows for freer blood flow and reduces the risk of arteries reclogging.

J&J's Cypher was the first drug-coated stent to reach the U.S. market. J&J started selling it in April 2003. But last month, Boston Scientific ( BSX) entered the market with its Taxus drug-coated stent. Both Cypher and Taxus are sold in many foreign markets.

The FDA routinely checks plants to make sure they meet good manufacturing practices (GMP) guidelines for production, storage, packing and record-keeping. Failure to meet the FDA guidelines could result in fines or, in extreme instances, an agency-ordered halt to production.

J&J announced receipt of the FDA letter 10 days ago, saying that its Cordis unit, which makes the stents, is "working aggressively" to address the agency's concerns. "All products for release to the market for use in patients meet product specifications approved by the FDA," the company said.

Daniel T. Lemaitre, who follows J&J for Merrill Lynch, said the manufacturing issues cited by the FDA are "manageable," but he added in a Monday research note to clients that the agency's demands for improvements could slow the company's efforts to produce a second-generation drug-coated stent. J&J experienced some manufacturing and distribution problems last year, which caused a shortage of stents for several months.

Lemaitre quoted the FDA letter as saying the agency had detected "serious underlying problems" at several Cordis manufacturing plants.

"While we believe the language in warning letters is often inflammatory, it appears to us that the majority of issues are manageable and related to 'fixable' procedures and reporting mechanisms," said Lemaitre, who has a neutral rating on J&J. He said J&J has moved some people from its pharmaceutical operations to "beef up regulatory expertise" at Cordis and has hired an independent consultant to evaluate Cordis' response to the FDA.

He added, however, that it is unclear how long it will take until the FDA's concerns are resolved, and that delay "may make it difficult" for J&J "to move forward from a regulatory standpoint" on an improved version of Cypher, as well as other stent-related improvements. Lemaitre anticipates first-quarter earnings of 79 cents a share. (He doesn't own shares, but his firm is a market maker in J&J's stock and expects to receive or seek investment banking compensation within the next three months.)

For the fourth quarter ended Dec. 31, J&J earned 57 cents a share, beating the consensus estimate by a penny.

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