3rd UPDATE: J&J's 2Q Profit Down 3.6% On Forex, Generics

Johnson & Johnson's (JNJ) second-quarter profit declined nearly 4%, with sales hurt by unfavorable currency rates, generic competition for prescription drugs and tighter consumer spending.

In a sign of how badly generics and other challenges have hurt J&J's drug business - usually J&J's largest division - the unit's quarterly sales were eclipsed by J&J's medical-device unit for the first time in 10 years.

Analysts and investors knew it would be a difficult quarter for the New Brunswick, N.J., maker of Tylenol and Band-Aid, but the results turned out better than Wall Street expected, helped by cost cuts and higher sales of some products. And J&J reiterated its full-year profit forecast despite incurring costs from recent acquisitions.

J&J shares rose 49 cents, or 0.8%, to $58.21 late morning Tuesday.

"This was one of the most challenging quarters for year-over-year comparisons in our history," J&J Chief Financial Officer Dominic Caruso told analysts on a conference call. But he said the company was financially strong and well-positioned for long-term profitable growth.

Earnings upside came from cost controls and higher-than-expected sales for some products, including the blockbuster drug Remicade for arthritis and other conditions. Leerink Swann analyst Rick Wise said results reflected "a very strong operational quarter."

J&J reported second-quarter net income of $3.2 billion, or $1.15 a share, compared with $3.3 billion, or $1.17 a share, a year earlier. Analysts surveyed by Thomson Reuters expected J&J to post second-quarter earnings of $1.11 a share.

Second-quarter sales declined 7.4% to $15.24 billion, but exceeded the Thomson estimate by about $200 million. The relatively stronger U.S. dollar accounted for 6 percentage points of the decline.

Pharmaceutical sales dropped 13% to $5.5 billion. The pharma division was hurt by J&J's loss of market exclusivity for two of its top sellers, the antipsychotic Risperdal and epilepsy and migraine treatment Topamax. Anti-anemia drugs Procrit and Eprex continuing a two-year trend of weakness sparked by safety concerns.

But arthritis drug Remicade saw second-quarter sales rise 24% to $1.1 billion. Sales growth had slipped in the first quarter amid signs that high-priced biologics were feeling the pinch of tighter spending by patients. The second quarter's gain could be a good sign for rival biologics such as Abbott Laboratories' (ABT) Humira and Enbrel from Wyeth (WYE) and Amgen Inc. (AMGN). Schering-Plough Corp. (SGP) markets Remicade outside the U.S.

The device unit's sales dropped 3.1% to $5.89 billion. The DePuy division, which makes joint-reconstruction and other products, had roughly flat sales of $1.3 billion. The Ethicon surgical-products unit saw sales rise 2.1% to $1.04 billion. Increased competition from Abbott and Boston Scientific Corp. (BSX) continued to hurt sales of J&J's drug-eluting stents.

Sales of replacement hips and knees grew in a mid single-digit range excluding currency, consistent with signs people are deferring replacement joint surgery during the recession. J&J officials also said that hospitals are putting some pressure on product prices - a long-running investor worry in orthopedics - but that a sales shift to more expensive products mostly offset this effect.

J&J's consumer unit sales fell 4.5% to $3.85 billion. Sales dropped for baby care, oral care and skin-care products. But sales increased for wound care products. Store-brand items appear to have gained share among over-the-counter medicines.

Caruso said it was too early to tell whether sales of the popular pain reliever Tylenol would be substantially hurt by recent recommendations of a U.S. Food and Drug Administration advisory panel to lower dose limits for the pill's active ingredient in order to avoid liver injuries. Tylenol products for adults generate about $1 billion in annual sales.

J&J hopes an economic recovery and new pharmaceutical products will help it return to solid sales and earnings growth in future years. The company has had a flurry of new drug applications - with some approvals but other applications still pending.

And J&J continues to try to beef up its drug pipeline with acquisitions. This month, J&J has agreed to pay $1.5 billion for a minority stake in Elan Corp. (ELN) and control of Elan's rights to experimental Alzheimer's-disease drugs, and it closed its $1 billion acquisition of Cougar Biotechnology Inc., which is developing cancer drugs.

Despite these efforts, J&J continues to run into some roadblocks bringing successful new products to market. On Tuesday, the company signaled that FDA action on an experimental anti-clotting drug, rivaroxaban, could come later than some analysts had expected. The FDA has asked J&J for more information, including data from ongoing clinical trials.

J&J said Tuesday it was unlikely to submit all of the requested data before the fourth quarter. J&J is co-developing the drug, which some analysts estimate could generate more than $1 billion in annual sales, with Bayer AG (BAYRY). FDA approval of the drug is unlikely before 2010.

-By Peter Loftus, Dow Jones Newswires; 215-656-8289; [e-mail]

(Jon Kamp contributed to this report.)