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4Q:05 Earnings Season Begins: DePuy Down; Stryker In-Line BY JOHN CHOPACK, JANUARY 27, 2006

Johnson & Johnson began the earnings season earlier this week and disappointed investors with a rather strange phenomenon. Every one of JNJ's reporting divisions' revenue growth rates were significantly lower than their year-end growth rates. DePuy was no exception. DePuy revenues totaled $977 million for the 4Q:05 which was a 3% as reported and a 5% excluding currency effects. However, DePuy's 2005 revenues totaled $3.8 billion which was a 13% increase over 2004 as reported and a 12% increase excluding currency.

The lack of growth in DePuy's business scared some orthopedic investors who feared similar reports out of the stand-alone orthopedic companies. This caused a significant sell-off in Zimmer shares on Tuesday. However, Stryker's report yesterday, while not fantastic, should solidify investor's confidence in the orthopedic sector.

Stryker reported 4Q:05 revenues of $1.28 billion which was an 11% increase over the 4Q:04 as reported and a 13% excluding currency. This was slightly below analyst's estimates of $1.28 billion but Stryker's diluted EPS of $0.48 for the 4Q:05 was in-line with analyst's expectations.

Orthopedic revenues totaled $738 million which was an 11% increase over the 4Q:04 as reported and a 13% increase excluding currency. Hips continue to disappoint, increasing only 3% during the 4Q:05. Analysts, including Raj Denhoy of Piper Jaffrey, stated that the poor performance is a consequence of "negative growth in the U.S. ceramic sales". We believe this is a consequence of increased competition as Zimmer and Biomet recently entered the market with ceramic-on-ceramic offerings. Knees, spine and trauma revenues continue to be strong.

Most analysts are less concerned about slowing growth as a consequence of pricing pressures. Denhoy stated that "the rhetoric around future growth seems to be improving" and Katherine Martinelli of Merrill Lynch commented that they have "confidence in a recon sales acceleration in 2006".