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Johnson & Johnson (JNJ) eked out a 1.1% increase in third-quarter profit, as cost cuts and easing currency headwinds helped offset generic competition for big-selling drugs, which pushed revenue below expectations.

Earnings beat Wall Street's views, prompting the health-care-products maker to boost its 2009 target. But J&J shares fell 2.6% to $60.90 Tuesday on disappointment over the company's weaker-than-expected pharmaceutical sales.

"We believe that a more competitive payer environment likely led to J&J providing greater rebates to payers, thereby reducing their top-line sales," Credit Suisse analyst Catherine Arnold wrote in a research note.

The weakness in J&J's pharmaceutical unit was partially offset by sales growth in the company's medical-device unit. For the second quarter in a row, sales of J&J's medical devices and diagnostics were higher than prescription-drug sales, previously J&J's biggest business. Last quarter was the first time in about 10 years that had happened.

The diversified business model of J&J - which sells everything from Band-Aids to artery-opening devices to the Procrit anemia drug - has proved to be a buffer against some of the negative trends that have hurt competitors more concentrated in the pharmaceutical industry.

Still, 2009 has shaped up to be one of the New Brunswick, N.J., company's more difficult years due partly to the economic downturn. Also, heightened generic competition has hurt its prescription-drug business, while unfavorable currency-exchange rates have pulled down sales growth for consumer-healthcare and medical-device products as well.

"This year continues to present challenges to certain parts of our business due to the ongoing impact of the economy" as well as generic drug competition, Chief Financial Officer Dominic Caruso told analysts on a conference call Tuesday.

Caruso also highlighted the potential challenge posed by U.S. health-care reform legislation in Washington. One proposal would seek fees from medical-device makers, which Caruso characterized as "onerous" and potentially hurting J&J profits.

J&J has tried to offset its challenges by trying to bring new drugs to market - with successes and setbacks alike - and by acquiring or licensing experimental drugs that could hit the market in the future. For example, J&J paid $885 million for an 18% stake in Elan Corp. (ELN).

The company also has tried to cut costs. Earlier this year J&J cut about 900 jobs from its U.S. pharmaceuticals unit, and in August the company consolidated its management structure.

In an interview, Caruso left open the possibility of further cost-cutting moves, saying the company was evaluating its plans for 2010. "What we want to do is make sure we preserve our ability to invest in growth" and that could mean "reducing costs in other areas that don't impact growth."

J&J said third-quarter profit rose to $3.35 billion, or $1.20 a share, from $3.31 billion, or $1.17 a share, a year earlier, and well above the mean estimate of $1.13 a share of analysts surveyed by Thomson Reuters. J&J said a better-than-expected tax rate contributed to the improvement.

Revenue fell 5.3% to $15.08 billion, below the Thomson estimate of $15.2 billion, with 2.5 percentage points of the decline coming from currency changes. The currency drag wasn't as pronounced as it was earlier this year, however.

Drug sales remained a laggard, falling 14% on the impact from generics. That included a 19% drop in the U.S. The declines included antipsychotic Risperdal and epilepsy and migraine treatment Topamax, both of which lost patent exclusivity over the past 18 months. On the positive side, sales of arthritis drug Remicade rose 6% to $1.04 billion.

The latest quarter saw the formerly fast-growing consumer health-care unit post a 2.7% sales drop; excluding currency changes it would have reported 1.1% growth. Sales of skin care, baby care and oral care products declined.

The device unit, which includes contact lenses and diabetes test strips, saw sales rise 2.3%; excluding currency impacts, sales would have risen 4.1%.

Drug-coated stent sales remained weak, however, with worldwide sales dropping 27%. J&J late last month said it wrung a $716 million payment from Boston Scientific Corp. (BSX) to settle more than a dozen stent patent-infringement lawsuits, much of which will be recorded in the fourth quarter.

J&J boosted its 2009 earnings target to $4.54 to $4.59 a share, excluding certain items. The prior target was $4.45 to $4.55.

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

(Mike Barris and Jon Kamp contributed to this article.)