July 14 (Bloomberg) -- Johnson & Johnson’s profit fell less than analysts estimated as sales of Listerine mouthwash and Neutrogena skin cleaners helped offset the loss of drug revenue to generic competition.

Net income dropped 3.6 percent to $3.21 billion, or $1.15 a share, in the second quarter from $3.33 billion, or $1.17, a year earlier, the New Brunswick, New Jersey-based company said today in a statement. Adjusted earnings of $1.15 a share beat by 3 cents the average forecast in a survey of 14 analysts.

J&J, the world’s largest maker of health-care products, is cutting payrolls and trying to reverse declining revenue after cheaper copies of the migraine treatment Topamax and the mood- stabilizer Risperdal entered the market. J&J agreed to buy Cougar Biotechnology Inc. in May and a stake in Elan Corp. in July for about $1 billion each to add potential new drugs. Selling, marketing and administrative expenses fell 13 percent.

“The company did an excellent job of managing its costs to help offset declines in mature pharma products,” said Joel Levington, director of corporate credit for Hyperion Brookfield Asset Management Inc. in New York, in an e-mail. “The company’s balance sheet strength will provide it opportunities to continue making select acquisitions.”

J&J affirmed its 2009 earnings forecast of $4.45 to $4.55 a share, excluding adjustments from special items.

J&J rose 51 cents, or less than 1 percent, to $58.23 at 4 p.m. in New York Stock Exchange composite trading. The stock has declined 12 percent in the past 12 months.

‘Solid Operational Results’

J&J continues “to deliver very solid operational results in light of the significant impacts of patent expirations and the economic environment,” said William Weldon, J&J’s chairman and chief executive officer, in a statement. “We will continue to invest in our portfolio of innovative products to meet the needs of patients and consumers around the world.”

Revenue sank 7.4 percent in the second quarter to $15.2 billion, led by a 13 percent decline in the company’s pharmaceutical unit, its largest, J&J said.

The second quarter was the first full reporting period in which J&J faced generic competition to Topamax and Risperdal. The two drugs had combined revenue of $4.86 billion last year, compared with $5.87 billion in 2007.

Topamax, Risperdal

Sales tumbled 73 percent for Topamax, which lost patent protection in March. The antipsychotic drug Risperdal, the company’s best-seller a year ago, lost two-thirds of its revenue after lower-cost generic versions entered the market in June 2008. Sales of the arthritis drug Remicade, J&J’s biggest product, rose 24 percent to $1.1 billion.

A cost-saving agreement that the hospital industry negotiated with the Obama administration and the Senate Finance Committee may also hurt revenue, said Dominic Caruso, J&J’s chief financial officer, in an interview today.

The agreement, announced July 8, calls for the $155 billion in savings over 10 years. Hospitals buy medical devices, including J&J’s artificial hips and stents to prop open clogged arteries, directly from the manufacturer, Caruso said. The hospitals are reimbursed by government-run health plans for the cost of a procedure regardless of the price of the equipment, pressuring hospitals to cut purchases of the latest technologies, he said today in an interview with Bloomberg News.

“The deal that the hospital industry struck will obviously have an impact on the medical-device business,” Caruso said. “Medicare reimburses the hospital for a basket of costs related to a procedure, of which medical devices are included.”

J&J reported a 0.8 percent increase in U.S. sales of consumer products including Listerine, Neutrogena soaps and skin-care products.

Devices, Diagnostics, Payrolls

“People are switching to cheaper store brands instead of the brand-name products, and the market overall for consumer products has slowed down,” Caruso said. “Skin care has done really well -- innovations that consumers like will continue to be appreciated.”

The strengthening dollar pared the value of all revenue outside the U.S., lowering total sales by 6 percentage points, J&J said. The dollar gained 11 percent against six major world currencies over the last 12 months, according to Bloomberg data.

Sales in the company’s medical device and diagnostics business fell 3.1 percent to $5.89 billion, again the result of currency differences. Sales at the DePuy unit, maker of artificial hips and knees, slipped by $5 million to $1.32 billion.

J&J began paring as many as 4,400 jobs in 2007 and said in April it would eliminate about 900 jobs in its pharmaceutical unit to reduce costs. Research and development expenses fell 14 percent in the second quarter, J&J reported today.

To contact the reporter on this story: Tom Randall in New York trandall6@bloomberg.net.

Last Updated: July 14, 2009 16:46 EDT