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 consumer products sales.

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. Unfavorable currency-exchange rates and continued generic-drug competition factored into the outlook, which left open the possibility of a decline from 2008 earnings.

J&J shares fell 27 cents, or 0.5%, to $57.17.

J&J's results and outlook illustrate that while its diversified business model has served it well in recent periods, forces such as generic-drug competition, currency-exchange rates and weakness in the broader economy could pressure the company's financial performance.

"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. He added, however, that he is optimistic J&J can adjust to evolving economic conditions.

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. Previously, during most of 2008, currency-exchange rates were helping earnings at J&J and other U.S.-based multinationals, 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. Sales were hurt by lower customer inventory levels and lower market shares due to 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. Sales of these and other anemia drugs continue to be hurt by patient studies that raised safety concerns about certain uses of the 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. Though the unit posted an increase, the growth rate slowed from the third quarter's 13% rise. 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, for example. In 2007, J&J said it was cutting up to 4,820 jobs, or up to 4% of its work force at that time, 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.

"We suspect they are taking a conservative stance regarding a strong dollar next year," Miller Tabak analyst Les Funtleyder said in a research note.

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.

Some analysts had trimmed their 2009 estimates in recent weeks due to expected pressures on the pharmaceutical unit from generic competition, as well as new competition for its drug-eluting stent business. Analysts also have worried that various pieces of J&J's business are vulnerable to the economic recession, including device divisions and the consumer-healthcare unit.

J&J had said in October that the economy had a limited impact on the company - including on J&J products used in sports medicine and women's health care - but it wasn't broad-based. Weldon said Tuesday the economic weakness appeared to be hurting "a few parts of our business," including diabetes test strips and contact lenses.

The various challenges haven't stopped J&J 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.

Weldon signaled Tuesday that J&J may consider further acquisitions of wellness-and-prevention companies.

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

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