Johnson & Johnson (JNJ) reported a 14% increase in fourth-quarter profit, as cost cuts and one-time gains helped offset declines in sales of its pharmaceuticals and medical devices, as well as a marked slowdown in sales of consumer products.

The New Brunswick, N.J., health-care giant, which makes the pain reliever Tylenol, also issued a forecast of 2009 earnings that fell short of Wall Street expectations.

J&J shares rose 28 cents to $57.72 late morning, rebounding from a decline earlier in the day.

The economic recession, unfavorable currency-exchange rates and generic-drug competition hurt fourth-quarter revenue and factored into the 2009 outlook, which left open the possibility of a decline from 2008 earnings.

J&J's diversified business model has served it well in comparison to rivals more concentrated in the pharmaceutical industry, such as Pfizer Inc. (PFE) and Merck & Co. (MRK). But challenges including the weak economy are clearly slowing down sales and profit growth.

"We are seeing some signs that consumers and patients are becoming more frugal," Chief Executive William Weldon said in a presentation to analysts Tuesday morning.

Specifically, J&J sees the economic weakness hurting sales of diabetes-care products, contact lenses and gastric-band surgical products. Weldon also said the economy was hurting the U.S. pharmaceuticals market partly because layoffs are leaving more people without drug-benefit plans.

Weldon added, however, that he is optimistic J&J can adjust to evolving economic conditions. What's more, the cash-rich company may exploit the market weakness - which has hurt valuations and finances of smaller health-care companies - by making acquisitions that wouldn't have been as attractive when times were better. "This economic environment creates opportunities we may never see again, so we need to be in a position to go after them," he said.

In an interview, Weldon said two of the most "fertile areas" J&J is sizing up for deals are health information-technology companies and companies that specialize in wellness and disease prevention.

Despite the near-term challenges, the company's long-term prospects remain strong, some analysts and investors say. "Their strength lies in innovation and diversification, and I think they're in a good position to get through the current weakness in the economy," said Marc Davis, equity analyst at Tradition Capital Management, which owns J&J shares.

J&J said fourth-quarter net income rose 14% to $2.71 billion, or 97 cents a share, from $2.37 billion, or 82 cents, a year earlier. The latest quarter included gains from a divestiture and litigation settlements and acquisition-related charges; excluding these, earnings would have been 94 cents a share, or 2 cents ahead of the mean estimate of analysts surveyed by Thomson Reuters.

Sales declined 4.9% to $15.18 billion from $15.96 billion a year earlier, and fell short of the Thomson estimate of $15.97 billion.

Unfavorable currency-exchange rates reduced sales by 3.9%, a greater impact than the company had predicted in October. During most of 2008, currency-exchange rates were helping earnings at J&J, but the trend began to reverse a few months ago with the strengthening of the dollar.

J&J's biggest unit, pharmaceuticals, posted fourth-quarter sales of $5.69 billion, down 11.1% from a year earlier. J&J's previous top-selling drug, the antipsychotic Risperdal, lost its U.S. patent protection last year, and generic competition caused sales to decline 67% to $285 million for the fourth quarter.

The anti-inflammatory drug Remicade posted sales of $886 million, off 2.4% from a year earlier due to lower customer inventory levels and increased competition. Remicade competes with Abbott Laboratories' (ABT) Humira and Amgen Inc.'s (AMGN) Enbrel.

Combined sales of J&J's anti-anemia drugs Procrit and Eprex fell 10.8% to $560 million, continuing to be hurt by patient studies that raised safety concerns about certain uses of anti-anemia drugs.

J&J will face heightened pressure from generic competition later this year when it loses U.S. market exclusivity for epilepsy drug Topamax, whose sales rose 4.3% in the fourth quarter to $680 million.

J&J's device and diagnostics unit posted sales of $5.64 billion, down 1.9% from a year earlier. The Cordis device unit, which sells drug-eluting stent Cypher, continued to post declines, hurt by competition from newer stents such as Abbott's Xience. Cordis sales fell 16.8% to $722 million.

In other device and diagnostics businesses, diabetes care and certain surgical products also posted sales declines. On the positive side, sales for its vision-care and spinal and orthopedics units increased.

J&J's consumer unit posted sales of $3.86 billion, up 1.2% from a year earlier, a slower increase than in recent quarters. The consumer unit has benefited from last year's launch of an over-the-counter version of the allergy drug Zyrtec. J&J's skin- and oral-care products and over-the-counter drugs posted sales gains, while women's health, baby-care and wound-care products experienced sales declines.

To offset some of the revenue pressures, J&J has cut costs. For the fourth quarter, research spending declined 9.5% to $2.1 billion. In 2007, J&J said it would cut up to 4% of its work force, which has resulted in about $1.6 billion in annual savings.

For 2009, J&J expects earnings of $4.45 to $4.55 a share, excluding one-time items, compared with $4.55 a share in 2008 on the same basis. The forecast includes anticipated reduction to earnings of 3 cents to 5 cents a share from J&J's planned acquisition of Mentor Corp. (MNT), a maker of breast implants, for about $1 billion in cash.

But even excluding the Mentor dilution, J&J's forecast fell short of the mean estimate of $4.61 a share of analysts surveyed by Thomson Reuters.

J&J Chief Financial Officer Dominic Caruso said the outlook is based on last week's currency-exchange rates, which would reduce earnings by about 15 cents a share.

J&J's various challenges haven't stopped it from making deals to further diversify its business mix. In addition to the Mentor deal, J&J recently closed its $438 million acquisition of Omrix Biopharmaceuticals, an Israeli maker of surgical products and immune-disease drugs. In a smaller deal, J&J said last month it acquired a privately held employee-wellness training firm, LGE Performance Institute, for undisclosed terms.

-By Peter Loftus, Dow Jones Newswires; 215-656-8289; peter.loftus@dowjones.com

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