Johnson & Johnson makes 4 deals, awaits new product approvals amid slumping sales

J&J wheels and deals, awaits new product approvals

NEW BRUNSWICK, N.J. — Johnson & Johnson, the world’s biggest healthcare company and a Dow Jones industrial average component, reports earnings for the third quarter Tuesday morning. Here’s a summary of key developments and analyst opinion related to the period.

OVERVIEW: A household name for its Band-Aids, “No More Tears” baby shampoo and Acuvue contact lenses, Johnson & Johnson has been adding to its already-impressive biotech business as it tries to reverse a sales decline driven by generic competition and the global recession.

The company made four significant deals in the quarter, most notably its first moves into the vaccines business.

J&J paid $440 million for a stake in Dutch biotechnology company Crucell NV, which is working on developing an antibody-based vaccine and a drug that would target all types of influenza. It also invested nearly $1.4 billion in Irish biotech company Elan Corp., which it will help to develop two experimental drugs for Alzheimer’s disease and a vaccine to prevent it.

Johnson & Johnson also completed an $894 million acquisition of Cougar Biotechnology, which is testing a potential treatment for prostate cancer. And it announced a partnership with Gilead Sciences Inc., a top maker of AIDS drugs, to develop a single daily HIV pill; most patients now take multiple pills.

Johnson & Johnson’s revenue has fallen, mainly because of recent generic competition to two blockbuster brands, the antipsychotic drug Risperdal and epilepsy treatment Topamax. Together, they were responsible for most of a $1.2 billion drop in the company’s overall sales in the second quarter — the third straight quarter in which revenue fell significantly, after years of reliable increases in both sales and profit.

In the past quarter, however, J&J secured some important U.S. approvals for new drugs, including Stelara for moderate and severe psoriasis. The Food and Drug Administration also approved a once-monthly injectable version of J&J’s schizophrenia treatment Invega, and it approved Invega pills for a new use, schizoaffective disorder — mania or depression on top of schizophrenia symptoms such as delusions and hallucinations.

Earlier this month, the European Union approved Simponi, a successor drug to the blockbuster biotech treatment Remicade for rheumatoid arthritis and other immune disorders. Partner Schering-Plough Corp. has rights to most foreign sales of the two products, but J&J is now seeking that revenue on top of the U.S. sales it gets, claiming their contract allows that because Schering-Plough is about to undergo a change of control: It’s being acquired by Merck & Co.

Meanwhile, the FDA in August required stronger warnings on Remicade, Simponi and some similar drugs, stating they can increase risk of cancer in children and adolescents.

In August, the company said it is consolidating management, starting by eliminating executive posts at its comprehensive care division, whose sales have been falling.

BY THE NUMBERS: Analysts polled by Thomson Financial expect, on average, earnings per share of $1.13 and revenue of $15.2 billion. A year earlier, it earned $1.17 a share on revenue of $15.9 billion.

ANALYST TAKE: The company likely will have the best results in the pharmaceutical industry, said Steve Brozak of WBB Securities. He likes both the Cougar and Crucell deals, but is concerned Johnson & Johnson has departed from its standard practice of buying entire companies with established products for three times their revenues. All the recent deals have been for products in testing, which might not pan out.

“This leads me to believe they are seeing declines in earnings,” although perhaps not in the immediate future, Brozak said.

“The critical keys are going to be how much of that decline you see in their gross revenue in the pharmaceutical and medical device businesses,” Brozak said.

Les Funtleyder of Miller Tabak & Co. is expecting weak pharmaceutical results, “choppy” returns from the medical devices business but strong consumer sales. He notes J&J usually is conservative in its guidance, so bottom-line results could be a little better than expected.

WHAT’S AHEAD: J&J is awaiting possible U.S. approval of several products, including the Pinnacle Complete hip implant system, the first with a ceramic-on-metal design meant to last longer and give freer motion than metal-on-metal artificial joints.

Other products include Xarelto, a pill to prevent blood clots, and the antibiotic ceftobiprole, for complicated skin infections like MRSA. Xarelto got a favorable review from FDA advisers in March. The FDA has twice delayed approval of ceftobiprole, saying the company did not properly monitor two human tests of the drug. That drug is also under review in the European Union.

The FDA has delayed decisions on two other experimental drugs. The agency has become increasingly cautious amid blistering criticism the last couple years. It is requiring more data on patient survival from studies of Yondelis for ovarian cancer. J&J has not disclosed why the FDA held up a decision on its experimental seizure drug Comfyde, or carisbamate.

STOCK PERFORMANCE: Shares rose 4.1 percent to $60.89 during the third quarter. In the first nine months of 2009, shares rose 1.1 percent.