Johnson & Johnson (NYSE:JNJ) will release its quarterly report on Tuesday, and after setting new all-time highs in August, the stock has pulled back somewhat. Even though J&J has a well-balanced business that includes medical device manufacturing and sales of consumer over-the-counter health-care products, the company's pharmaceutical division arguably has the best potential to produce blockbuster growth that can drive Johnson & Johnson earnings higher.

Johnson & Johnson has been a household name in the U.S. for decades, with well-known products like Band-Aids and its namesake baby shampoo setting the stage to create lifelong relationships with consumers at an early age. Yet while J&J's consumer business provides reliable cash flow, the pharmaceutical segment gives investors the chance to reap big benefits from promising prescription drug discoveries. The trade-off, though, is that J&J faces more competition in the pharma space. In particular, Merck (NYSE:MRK) has a well-established diabetes drug that could stand in the way of a newly approved treatment from J&J. Pfizer (NYSE:PFE) is also working hard in the diabetes space, working with Merck on a drug candidate that could either stand alone or work along with Merck's current offering. Let's take an early look at what's been happening with Johnson & Johnson over the past quarter and what we're likely to see in its report.

Stats on Johnson & Johnson

Analyst EPS Estimate

$1.32

Change From Year-Ago EPS

5.6%

Revenue Estimate

$17.43 billion

Change From Year-Ago Revenue

2.2%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

What's next for Johnson & Johnson earnings?
In recent months, analysts have had mixed views about the prospects for Johnson & Johnson earnings. They trimmed their third-quarter estimates by a penny per share, but they've boosted their full-year 2014 projections by $0.03 per share. The stock hasn't moved much in either direction, falling just 1% since early July.

J&J carried substantial strength into the third quarter, as its second-quarter report was encouraging for investors. Revenue jumped a better-than-expected 8.5%, with adjusted earnings climbing almost 18%. The company showed solid growth both domestically and internationally, and although the consumer products division didn't produce very much of the company's revenue gains, pharmaceuticals provided double-digit sales gains that drove overall growth. Blockbuster arthritis drug Remicade saw almost a 10% sales increase, while promising candidates like immune-treatment Symponi and cancer drug Zytiga saw even larger gains from 2012's levels.

But the future of J&J's pharma segment involves dealing with increased competition. J&J got its Invokana type-2 diabetes drug approved by the European Union's regulatory body overseeing pharmaceuticals back in September, marking what could become a blockbuster drug for the company. But Merck already has a huge vested interest in the space with its Januvia diabetes drug, and even though studies showed advantages to Invokana over Januvia, Merck will work hard to defend its strong position. One area where Pfizer is getting involved is with ertugliflozin, an SGLT-2 inhibitor that could potentially work as a diabetes treatment in its own right or in conjunction with Merck's Januvia. The two companies are collaborating on the drug, but with it still in the trial stage, Invokana will have a huge head-start.

J&J's pharma growth has left Merck and Pfizer in the dust, as both of J&J's rivals have seen sales declines over the past year as they struggle with patent-cliff issues. J&J has to worry about Remicade's coming European patent expiration in 2015, but a solid stable of fast-growing drugs gives it an edge over competitors with more dubious drug pipelines.

In the Johnson & Johnson earnings report, watch to see how the company positions itself on the pharmaceutical front. With increasing calls from private-equity investors to break up the company into component parts, J&J could face a major strategic decision about its future that could have a lasting impact for years to come.

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Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.