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Under The Weather At J&J


There are advantages to being a health-care juggernaut like Johnson & Johnson (JNJ). With more than 200 different operating companies, weakness in one unit rarely causes more than a tremor on the bottom line. But it's a different story when three big products run into trouble simultaneously. That's the worry on Wall Street as J&J gets ready to announce its first-quarter earnings on Apr. 17. Fears that J&J could temper its profit estimates for the remainder of this year have pushed the company's shares down 7% since its last earnings announcement--the stock's biggest drop in over 12 months.

The jitters center around three of J&J's most profitable products. Safety concerns have dampened demand for coronary stents and the anemia drug Procrit. Meanwhile, J&J's new schizophrenia drug--one it's counting on to replace lost revenues from an older drug that's going off-patent next year--isn't catching on as quickly as some Wall Street analysts had hoped.

Together, the three product franchises made up 19% of J&J's $53.3 billion in 2006 sales, but they contributed almost 40% of the company's $13.7 billion in operating profit, estimates Credit Suisse First Boston (CS) analyst Catherine J. Arnold. On Mar. 29, Arnold issued a report predicting J&J might backpedal on its earlier estimates that it would earn a net profit of at least $11.4 billion in 2007, up from $11 billion last year. J&J declined to comment, citing a pre-earnings quiet period.

Of J&J's three challenges, the schizophrenia shortfall is causing the most hand-wringing. In January, J&J launched a new anti-psychosis drug called Invega, which is derived from its older drug, Risperdal. In 2006, Risperdal was J&J's top-selling product, with $4.2 billion in sales, and J&J has positioned Invega as a potential improvement. But analysts such as Michael Krensavage of Raymond James suspect J&J is having trouble making a convincing marketing pitch. "I'm not sure how much better a drug it is than Risperdal," he says.

Some psychiatrists are wondering the same thing. Because Invega is a controlled-release drug, patients may be able to take it less frequently than they take Risperdal, which could be a benefit in a segment where patients often fail to stick to their medication schedules. But when patients are psychologically unstable, changing their meds for the sake of convenience isn't necessarily a good strategy. "When we don't see a clear advantage of a new drug, we're less likely to want to rock the boat," says Dr. Joseph Friedman, associate professor of psychiatry at the Mount Sinai School of Medicine in New York.

Insurance companies might also be balking at Invega. On Mar. 20, J&J Vice-Chairman Christine A. Poon told attendees of the Lehman Brothers (LEH) Global Healthcare Conference that J&J still had some work to do to get Invega prime placement in Medicare drug plans run by private insurance companies. On the drug "formularies" that dictate which products patients have access to and what co-pays they'll have to shell out, "we're not completely satisfied" with Invega's status, Poon said. "We believe there are still too many restrictions." While she didn't elaborate, such restrictions often include requiring doctors to get permission from a patient's insurance company before prescribing a new drug. The hassle could well add to doctors' hesitation in embracing J&J's new treatment.

BAD VIBES

Invega's slow takeoff would be a mere blip on J&J's balance sheet if not for weaknesses in two other big products. The anemia drug Procrit, which has been steadily losing market share to a competing drug from Amgen Inc. (AMGN), suffered another blow on Mar. 9. The Food & Drug Administration added a dreaded "black box" warning to the labels of all the drugs in the class. On May 10, an FDA advisory committee will meet to discuss new data on the use of anemia drugs in cancer patients. "We look at this whole issue as a process of reevaluating this class of agents," said Dr. Karen Weiss, deputy director of the FDA's Office of Oncology Drug Products, in February. Even if the agency doesn't issue further warnings, the attention will only intensify the bad vibes surrounding Procrit. Credit Suisse analyst Arnold estimates sales of the drug, which hit $3.2 billion in 2006, will fall nearly 9% a year through 2011.

Then there are drug-coated stents, the tiny tubes used to prop open clogged arteries. Over the past few months, several studies have raised concerns that the stents may cause dangerous blood clots in some patients. Even though the data are far from conclusive, the damage has already been done. In February drug-coated stents were used in 70% of artery-opening procedures, down from 90% a year ago, according to Toronto's Millennium Research Group. In the fourth quarter, sales of J&J's cypher stent fell 15% year-over-year, to $580 million. During the Apr. 17 earnings call, investors will be eager for hints about the stent outlook for this year.

J&J hopes its aging franchises will be bolstered by new products coming from its labs, where scientists are working on treatments for diseases ranging from HIV to psoriasis. "We don't commit to double-digit growth every single year, but we do have this goal of delivering that kind of growth over long periods of time," Poon said during the Lehman conference. Still, the company continues to get unpleasant reminders of just how difficult it can be to translate scientific discovery into blockbusters. On Apr. 4, J&J partner Icagen Inc. (ICGN) halted a clinical trial of a treatment for sickle-cell anemia that the two companies planned to market together. The data suggested the drug wouldn't pass muster with the FDA.

By Arlene Weintraub


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