UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 for the
quarterly period ended July 2, 2006
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 for the
transition period from to
Commission file number 1-3215
JOHNSON & JOHNSON
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-1024240
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
(Address of principal executive offices)
Registrant's telephone number, including area code
(732) 524-0400
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter
period that the registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days. (X) Yes ( )No
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, or a non-
accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. Large accelerated filer (X)
Accelerated filer ( ) Non-accelerated filer ( )
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange
Act). ( ) Yes (X) No
Indicate the number of shares outstanding of
each of the issuer's classes of common stock, as of
the latest practicable date.
On July 30, 2006 2,925,021,833 shares of Common
Stock, $1.00 par value, were outstanding.
JOHNSON & JOHNSON AND SUBSIDIARIES
TABLE OF CONTENTS
Part I - Financial Information Page No.
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets -
July 2, 2006 and January 1, 2006 3
Consolidated Statements of Earnings for the Fiscal
Second Quarters Ended July 2, 2006 and
July 3, 2005 5
Consolidated Statements of Earnings for the Fiscal
Six Months Ended July 2, 2006 and
July 3, 2005 6
Consolidated Statements of Cash Flows for the Fiscal
Six Months Ended July 2, 2006 and
July 3, 2005 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 31
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 42
Item 4. Controls and Procedures 42
Part II - Other Information
Item 1 - Legal Proceedings 43
Item 1A - Risk Factors 43
Item 2 - Unregistered Sales of Equity Securities
and Use of Proceeds 43
Item 4 - Submission of Matters to a Vote of Security
Holders 44
Item 6 - Exhibits 45
Signatures 46
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
ASSETS
July 2, 2006 January 1, 2006*
Current Assets:
Cash & cash equivalents $14,647 $16,055
Marketable securities 78 83
Accounts receivable, trade,
less allowances for doubtful
accounts
$163 (2005,$164) 8,162 7,010
Inventories (note 4) 4,313 3,959
Deferred taxes on income 2,091 1,931
Prepaid expenses and other
receivables 2,223 2,442
Total current assets 31,514 31,480
Marketable securities,
non-current 21 20
Property, plant and equipment
at cost 20,965 19,716
Less: accumulated
depreciation (9,678) (8,886)
Property, plant and
equipment, net 11,287 10,830
Intangible assets, net
(note 5) 6,617 6,185
Goodwill, net (note 5) 6,657 5,990
Deferred taxes on income 1,683 1,138
Other assets 3,211 3,221
Total Assets $60,990 $58,864
* Restated to include the impact of share based
compensation expense; see Notes 1 and 10 for additional
information.
See Notes to Consolidated Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
July 2, 2006 January 1, 2006*
Current Liabilities:
Loans and notes payable $654 $668
Accounts payable 4,089 4,315
Accrued liabilities 3,286 3,529
Accrued rebates, returns and
promotions 1,948 2,017
Accrued salaries, wages and
commissions 985 1,166
Accrued taxes on income 1,227 940
Total current Liabilities 12,189 12,635
Long-term debt 1,981 2,017
Deferred taxes on income 322 211
Employee related obligations 3,456 3,065
Other liabilities 2,300 2,226
Total liabilities 20,248 20,154
Shareholders' Equity:
Common stock - par value
$1.00 per share (authorized
4,320,000,000 shares; issued
3,119,842,000 shares) 3,120 3,120
Accumulated other comprehensive
income (note 8) (550) (755)
Retained earnings 46,530 42,310
Less: common stock held in
treasury, at cost
(185,855,000 and 145,364,000
shares) 8,358 5,965
Total shareholders' equity 40,742 38,710
Total liabilities and
shareholders' equity $60,990 $58,864
* Restated to include the impact of share based
compensation expense; see Notes 1 and 10 for additional
information.
See Notes to Consolidated Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; dollars & shares in millions
except per share figures)
Fiscal Quarters Ended
July 2, Percent July 3, Percent
2006 to 2005* to
Sales Sales
Sales to customers
(Note 6) $13,363 100.0% $12,762 100.0%
Cost of products sold 3,788 28.3 3,522 27.6
Gross profit 9,575 71.7 9,240 72.4
Selling, marketing and
administrative expenses 4,351 32.6 4,278 33.5
Research expense 1,828 13.7 1,525 11.9
In-process research &
development 87 0.6 353 2.8
Interest income (209) (1.6) (109) (0.8)
Interest expense, net
of portion capitalized 13 0.1 15 0.1
Other income, net (98) (0.7) (88) (0.7)
Earnings before
provision for taxes on
income 3,603 27.0 3,266 25.6
Provision for taxes on
income (Note 3) 783 5.9 678 5.3
NET EARNINGS $2,820 21.1% $2,588 20.3%
`
NET EARNINGS PER SHARE
Basic $0.96 $0.87
Diluted $0.95 $0.86
CASH DIVIDENDS PER
SHARE $0.375 $0.33
AVG. SHARES OUTSTANDING
Basic 2,954.0 2,973.7
Diluted 2,974.4 3,024.7
* Restated to include the impact of share based
compensation expense; see Notes 1 and 10 for additional
information.
See Notes to Consolidated Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; dollars & shares in millions
except per share figures)
Fiscal Six Months Ended
July 2, Percent July 3, Percent
2006 to 2005* to
Sales Sales
Sales to customers
(Note 6) $26,355 100.0% $25,594 100.0%
Cost of products sold 7,400 28.1 7,018 27.4
Gross profit 18,955 71.9 18,576 72.6
Selling, marketing and
administrative expenses 8,446 32.0 8,405 32.8
Research expense 3,360 12.7 2,909 11.4
In-process research &
development 124 0.5 353 1.4
Interest income (406) (1.5) (193) (0.7)
Interest expense, net
of portion capitalized 29 0.1 30 0.1
Other income, net (816) (3.1) (121) (0.5)
Earnings before
provision for taxes on
income 8,218 31.2 7,193 28.1
Provision for taxes on
income (Note 3) 2,093 8.0 1,766 6.9
NET EARNINGS $6,125 23.2% $5,427 21.2%
`
NET EARNINGS PER SHARE
Basic $2.07 $1.83
Diluted $2.05 $1.80
CASH DIVIDENDS PER
SHARE $0.705 $0.615
AVG. SHARES OUTSTANDING
Basic 2,963.0 2,973.0
Diluted 2,982.5 3,021.8
* Restated to include the impact of share based
compensation expense; see Notes 1 and 10 for additional
information.
See Notes to Consolidated Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
Fiscal Six Months Ended
July 2, 2006 July 3, 2005*
CASH FLOW FROM OPERATING
ACTIVITIES
Net earnings $6,125 $5,427
Adjustment to reconcile net
earnings to cash flow:
Depreciation and
amortization of property
and intangibles 1,067 1,063
Stock based compensation 340 271
Purchased in-process
research and development 124 353
Deferred tax provision (628) (212)
Accounts receivable
allowances (5) (17)
Changes in assets and
liabilities, net of effects
from acquisitions:
Increase in accounts
receivable (949) (876)
Increase in inventories (229) (380)
Decrease in accounts payable
and accrued liabilities (794) (1,651)
Decrease in other current
and non-current assets 83 578
Increase in other current
and non-current liabilities 696 93
NET CASH FLOWS FROM OPERATING
ACTIVITIES 5,830 4,649
CASH FLOWS FROM INVESTING
ACTIVITIES
Additions to property, plant
and equipment (1,034) (874)
Proceeds from the disposal of
assets 1 77
Acquisitions, net of cash
acquired (1,218) (693)
Purchases of investments (396) (4,999)
Sales of investments 322 7,611
Other (primarily intangibles) (37) (282)
NET CASH (USED)/PROVIDED BY
INVESTING ACTIVITIES (2,362) 840
CASH FLOWS FROM FINANCING
ACTIVITIES
Dividends to shareholders (2,089) (1,829)
Repurchase of common stock (2,968) (988)
Proceeds from short-term debt 500 351
Retirement of short-term debt (723) (314)
Proceeds from long-term debt - 4
Retirement of long-term debt (10) (20)
Proceeds from the exercise of stock
options/excess tax benefits 332 455
(4,958) (2,341)
NET CASH USED BY FINANCING
ACTIVITIES
Effect of exchange rate
changes on cash and cash
equivalents 82 (195)
(Decrease)/increase in cash
and cash equivalents (1,408) 2,953
Cash and Cash equivalents,
beginning of period 16,055 9,203
CASH AND CASH EQUIVALENTS,
END OF PERIOD $14,647 $12,156
Acquisitions
Fair value of assets acquired $1,392 $854
Fair value of liabilities
assumed (174) (161)
Net cash paid for
acquisitions $1,218 $693
* Restated to include the impact of share based
compensation expense; see Notes 1 and 10 for additional
information.
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - The accompanying unaudited interim financial
statements and related notes should be read in
conjunction with the Consolidated Financial Statements
of Johnson & Johnson and Subsidiaries (the "Company")
and related notes as contained in the Company's Annual
Report on Form 10-K for the fiscal year ended January
1, 2006. The unaudited interim financial statements
include all adjustments (consisting only of normal
recurring adjustments) and accruals necessary in the
judgment of management for a fair statement of the
results for the periods presented.
During the fiscal first quarter of 2006, the Company
elected to adopt SFAS 123(R), Share Based Payment,
under the modified retrospective application method.
Accordingly, financial statement amounts for the prior
periods presented in this Form 10-Q have been restated
to reflect the fair value method of expensing
prescribed by SFAS 123(R).
NOTE 2 - FINANCIAL INSTRUMENTS
The Company follows the provisions of Statement of
Financial Accounting Standards (SFAS) 133, SFAS 138 and
SFAS 149 requiring that all derivative instruments be
recorded on the balance sheet at fair value.
As of July 2, 2006, the balance of deferred net losses
on derivatives included in accumulated other
comprehensive income was $2 million after-tax. For
additional information, see Note 8. The Company expects
that substantially all of this amount will be
reclassified into earnings over the next 12 months as a
result of transactions that are expected to occur over
that period. The amount ultimately realized in earnings
will differ as foreign exchange rates change. Realized
gains and losses are ultimately determined by actual
exchange rates at maturity of the derivative.
Transactions with third parties will cause the amount
in accumulated other comprehensive income to affect net
earnings. The maximum length of time over which the
Company is hedging is 18 months. The Company also uses
currency swaps to manage currency risk primarily
related to borrowings, which may exceed 18 months.
For the fiscal second quarters ended July 2, 2006 and
July 3, 2005, the net impact of the hedges'
ineffectiveness, transactions not qualifying for hedge
accounting and discontinuance of hedges, to the
Company's financial statements was insignificant. Refer
to Note 8 for disclosures of movements in Accumulated
Other Comprehensive Income.
NOTE 3 - INCOME TAXES
The worldwide effective income tax rates for the first
fiscal six months of 2006 and 2005 were 25.5% and
24.6%, respectively, an increase of 0.9% primarily due
to the expiration of the U.S. research and development
tax credit at the end of fiscal 2005, and the net
effect of the following items. The tax rate for the
first fiscal six months of 2006 benefited from a
reversal of tax allowances of $134 million associated
with the Tibotec business. This benefit was offset by
acquisition-related IPR&D charges of $124 million, for
which there was a minimal tax benefit. Additionally,
the first fiscal six months of 2006 includes the gain
associated with the Guidant termination fee, less
associated expenses, of $622 million before tax
recorded at a 40.8% tax rate.
The first fiscal six months of 2005 included a benefit
of $225 million, due to the reversal of a tax liability
previously recorded during the fiscal fourth quarter of
2004, associated with a technical correction made to
the American Jobs Creation Act of 2004, in May 2005, as
well as, the impact of acquisition-related IPR&D
charges of $353 million that are non-deductible for tax
purposes.
NOTE 4 - INVENTORIES
(Dollars in Millions)
July 2, 2006 January 1, 2006
Raw materials and supplies $1,124 $931
Goods in process 1,067 1,073
Finished goods 2,122 1,955
$4,313 $3,959
NOTE 5 - INTANGIBLE ASSETS AND GOODWILL
Intangible assets that have finite useful lives are
amortized over their estimated useful lives. Goodwill
and indefinite lived intangible assets are assessed
annually for impairment. The latest impairment
assessment of goodwill and indefinite lived intangible
assets was completed in the fiscal fourth quarter of
2005 and no impairment was determined. Future
impairment tests will be performed annually in the
fiscal fourth quarter, or sooner if warranted by
economic conditions.
(Dollars in Millions)
July 2, 2006 January 1, 2006
Trademarks (non-amortizable) $1,565 $1,400
Less accumulated amortization 134 134
Trademarks (non-amortizable)-net 1,431 1,266
Patents and trademarks 4,445 4,128
Less accumulated amortization 1,524 1,370
Patents and trademarks - net 2,921 2,758
Other amortizable intangibles 3,773 3,544
Less accumulated amortization 1,508 1,383
Other intangibles - net 2,265 2,161
Total intangible assets - gross 9,783 9,072
Less accumulated amortization 3,166 2,887
Total intangible assets - net 6,617 6,185
Goodwill - gross 7,381 6,703
Less accumulated amortization 724 713
Goodwill - net $6,657 $5,990
Goodwill as of July 2, 2006 as allocated by segment of
business is as follows:
(Dollars in Millions)
Consumer Pharm Med Dev Total
& Diag
Goodwill, net of
accumulated
amortization at
January 1, 2006 $1,090 $874 $4,026 $5,990
Acquisitions 153 - 455 608
Translation & Other 30 17 12 59
Goodwill as of
July 2, 2006 $1,273 $891 $4,493 $6,657
The weighted average amortization periods for patents
and trademarks and other intangible assets are 15 years
and 17 years, respectively. The amortization expense
of amortizable intangible assets for the fiscal six
months ended July 2, 2006 was $268 million and the
estimated amortization expense for the five succeeding
years approximates $565 million, per year.
NOTE 6 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
(Dollars in Millions)
SALES BY SEGMENT OF BUSINESS (1)
Fiscal Quarters Ended
July 2, July 3, Percent
2006 2005 Change
Consumer
U.S. $1,103 $1,092 1.0%
International 1,295 1,186 9.2
2,398 2,278 5.3
Pharmaceutical
U.S. 3,682 3,595 2.4
International 2,128 2,033 4.7
5,810 5,628 3.2
Medical Devices &
Diagnostics
U.S. 2,590 2,378 8.9
International 2,565 2,478 3.5
5,155 4,856 6.2
U.S. 7,375 7,065 4.4
International 5,988 5,697 5.1
Worldwide $13,363 $12,762 4.7%
Fiscal Six Months Ended
July 2, July 3, Percent
2006 2005 Change
Consumer
U.S. $2,253 $2,206 2.1%
International 2,500 2,352 6.3
4,753 4,558 4.3
Pharmaceutical
U.S. 7,383 7,378 0.1
International 4,053 4,005 1.2
11,436 11,383 0.5
Medical Devices &
Diagnostics
U.S. 5,110 4,739 7.8
International 5,056 4,914 2.9
10,166 9,653 5.3
U.S. 14,746 14,323 3.0
International 11,609 11,271 3.0
Worldwide $26,355 $25,594 3.0%
(1) Export and intersegment sales are not significant.
OPERATING PROFIT BY SEGMENT OF BUSINESS
(Dollars in Millions)
Fiscal Quarters Ended
July 2, July 3, Percent
2006 2005 Change
Consumer $439 $399 10.0%
Pharmaceutical(1) 1,697 1,524 11.4
Medical Devices &
Diagnostics (2) 1,435 1,364 5.2
Segments total 3,571 3,287 8.6
Income/(expense)
not allocated to
segments 32 (21)
Worldwide total $3,603 $3,266 10.3%
Fiscal Six Months Ended
July 2, July 3, Percent
2006 2005 Change
Consumer $904 $837 8.0%
Pharmaceutical(1) 3,624 3,600 0.7
Medical Devices &
Diagnostics(3) 3,595 2,812 27.8
Segments total 8,123 7,249 12.1
Income/(expense)
not allocated to
segments 95 (56)
Worldwide total $8,218 $7,193 14.2%
(1) Includes $302 million of IPR&D charges related
to acquisitions completed in the fiscal second
quarter of 2005.
(2) Includes $87 million and $51 million of IPR&D
charges related to acquisitions completed in the
fiscal second quarter of 2006 and fiscal second
quarter of 2005, respectively.
(3) Includes $124 million and $51 million of IPR&D
charges related to acquisitions completed in the
first fiscal six months of 2006 and first fiscal
six months of 2005, respectively. The first fiscal
six months of 2006 also includes the gain
associated with the Guidant termination fee, less
associated expenses, of $622 million before tax.
Excluding the Guidant termination fee operating
profit growth for the first fiscal six months of
2006 versus the same period last year was 5.7%.
SALES BY GEOGRAPHIC AREA
(Dollars in Millions)
Fiscal Quarters Ended
July 2, July 3, Percent
2006 2005 Change
U.S. $7,375 $7,065 4.4%
Europe 3,295 3,186 3.4
Western Hemisphere,
excluding U.S. 876 751 16.6
Asia-Pacific, 1,817 1,760 3.2
Africa
Total $13,363 $12,762 4.7%
Fiscal Six Months Ended
July 2, July 3, Percent
2006 2005 Change
U.S. $14,746 $14,323 3.0%
Europe 6,366 6,362 0.1
Western Hemisphere,
excluding U.S. 1,698 1,477 15.0
Asia-Pacific, 3,545 3,432 3.3
Africa
Total $26,355 $25,594 3.0%
NOTE 7 - EARNINGS PER SHARE
The following is a reconciliation of basic net
earnings per share to diluted net earnings per share
for the fiscal second quarters ended July 2, 2006 and
July 3, 2005.
(Shares in Millions) Fiscal Quarters Ended
July 2, July 3,
2006 2005
Basic net earnings per share $0.96 $0.87
Average shares outstanding -
basic 2,954.0 2,973.7
Potential shares exercisable
under stock option plans 227.5 260.2
Less: shares which could be
repurchased under treasury
stock method (211.0) (216.6)
Convertible debt shares 3.9 7.4
Adjusted average shares
outstanding - diluted 2,974.4 3,024.7
Diluted earnings per share $0.95 $0.86
The diluted earnings per share calculation included the
dilutive effect of convertible debt that was offset by
the related reduction in interest expense of $1 million
and $3 million for the fiscal second quarters ended
July 2, 2006 and July 3, 2005, respectively.
The diluted earnings per share calculation excluded 45
million and 0.4 million shares related to options for
the fiscal second quarters ended July 2, 2006 and July
3, 2005, respectively, as the exercise price per share
of these options was greater than the average market
value. If these shares were included it would result
in an anti-dilutive effect on diluted earnings per
share.
The following is a reconciliation of basic net earnings
per share to diluted net earnings per share for the
fiscal six months ended July 2, 2006 and July 3, 2005.
(Shares in Millions)
Fiscal Six Months Ended
July 2, July 3,
2006 2005
Basic net earnings
per share $2.07 $1.83
Average shares outstanding
- basic 2,963.0 2,973.0
Potential shares
exercisable under
stock option plans 227.4 214.3
Less: shares which could be
repurchased under treasury
stock method (211.8) (172.9)
Convertible debt shares 3.9 7.4
Average shares
outstanding - diluted 2,982.5 3,021.8
Diluted earnings per share $2.05 $1.80
The diluted earnings per share calculation included the
dilutive effect of convertible debt that was offset by
the related reduction in interest expense of $2 million
and $7 million for the first fiscal six months ended
July 2, 2006 and July 3, 2005, respectively.
The diluted earnings per share calculation excluded 45
million and 46 million shares related to options for
the first fiscal six months ended July 2, 2006 and July
3, 2005, respectively, as the exercise price per share
of these options was greater than the average market
value. If these shares were included it would result
in an anti-dilutive effect on diluted earnings per
share.
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The total comprehensive income for the first fiscal six
months ended July 2, 2006 was $6.3 billion, compared
with $5.1 billion for the same period a year ago.
The total comprehensive income for the fiscal second
quarter ended July 2, 2006 was $2.9 billion, compared
with $2.4 billion for the same period a year ago.
Total comprehensive income included net earnings, net
unrealized currency gains and losses on translation,
net unrealized gains and losses on securities available
for sale and net gains and losses on derivative
instruments qualifying and designated as cash flow
hedges. The following table sets forth the
components of accumulated other comprehensive income.
(Dollars in Millions)
Total
Unrld Gains/ Accum
For. Gains/ Pens (Losses) Other
Cur. (Losses) Liab on Deriv Comp
Trans. on Sec Adj. & Hedg Inc/
(Loss)
January 1, 2006 $(520) 70 (320) 15 (755)
2006 six months changes:
Net change associated
with current period
hedging transactions - - - 7
Net amount reclassed to
net earnings - - - (24)*
Net six months
changes 246 (24) - (17) 205
July 2, 2006 $(274) 46 (320) (2) (550)
Amounts in accumulated other comprehensive income are
presented net of the related tax impact. Foreign
currency translation adjustments are not currently
adjusted for income taxes, as they relate to permanent
investments in international subsidiaries.
*Primarily offset in net earnings by changes in value
of the underlying transactions.
NOTE 9 - MERGERS, ACQUISITIONS AND DIVESTITURES
On June 25, 2006 the Company entered into a definitive
agreement to acquire the Consumer Healthcare business
of Pfizer Inc. for a purchase price of $16.6 billion in
cash. The transaction is expected to close by the end
of 2006 and is subject to customary clearances,
including the Hart-Scott-Rodino Antitrust Improvements
Act and European Union merger control regulation.
During the fiscal second quarter of 2006, the following
companies were acquired: Vascular Control Systems,
Inc., a privately held company focused on developing
medical devices to treat fibroids and to control
bleeding in obstetric and gynecologic applications and
Groupe Vendome S.A., a privately held French marketer
of adult and baby skin care products.
During the fiscal first quarter of 2006, the following
companies were acquired: Animas Corporation, a leading
maker of insulin infusion pumps and related products;
Hand Innovations LLC, a privately held manufacturer of
fracture fixation products for the upper extremities;
and Future Medical Systems S.A., a privately held
company that primarily develops, manufactures and
markets arthroscopic fluid management systems.
On January 25, 2006 the definitive agreement to acquire
Guidant Corporation was terminated by Guidant in
accordance with its terms. Pursuant to the terms of
the agreement, Guidant paid the Company a fee of $705
million. The Company recorded a gain associated with
the Guidant termination fee, less associated expenses,
of $622 million before tax in other income during the
fiscal first quarter of 2006.
The 2005 acquisitions included: TransForm
Pharmaceuticals, Inc., a company specializing in the
discovery of superior formulations and novel
crystalline forms of drug molecules; Closure Medical
Corporation, a company with expertise and intellectual
property in the biosurgicals market; Peninsula
Pharmaceuticals, Inc., a biopharmaceutical company
focused on developing and commercializing antibiotics
to treat life-threatening infections; and rights to all
consumer and professionally dispensed REMBRANDT(R)
Brand of oral care products, such as whitening
toothpastes, strips, systems and mouth rinses.
NOTE 10 - SHARE BASED COMPENSATION
At July 2, 2006, the Company had 16 share based
compensation plans. The shares outstanding are for
contracts under the Company's 1995 and 2000 Stock
Option Plans, the 2005 Long Term Incentive Plan, the
1997 Non-Employee Director's Plan and the Centocor,
Innovasive Devices, ALZA, Inverness and Scios Stock
Option Plans. During 2006, no options were granted
under any of these plans except the 2005 Long Term
Incentive Plan. The compensation cost that has been
charged against income for these plans was $187 million
for the fiscal second quarter of 2006 and $136 million
for the fiscal second quarter of 2005. The total
income tax benefit recognized in the income statement
for share based compensation arrangements was $65
million and $48 million for the fiscal second quarters
of 2006 and 2005, respectively. The compensation cost
that has been charged against income for these plans
was $340 million for the first fiscal six months of
2006 and $271 million for the first fiscal six months
of 2005. The total income tax benefit recognized in
the income statement for share based compensation
arrangements was $119 million and $95 million for the
first fiscal six months of 2006 and 2005, respectively.
Share based compensation costs capitalized as part of
inventory were insignificant in all periods.
Stock options expire 10 years from the date they are
granted and vest over periods that range from one to
five years. All options are granted at current market
price on the date of grant. Under the 2005 Long Term
Incentive Plan, the Company may issue up to 260 million
shares of common stock. Shares available for future
grants under the 2005 Long Term Incentive Plan were
223.4 million at July 2, 2006.
The Company settles employee stock option exercises
with treasury shares. Treasury shares are replenished
throughout the year for the number of shares used to
settle employee stock option exercises.
The fair value of each option award is estimated on the
date of grant using the Black Scholes option valuation
model that uses the assumptions noted in the following
table. Starting in 2006, expected volatility
represents a blended rate of 4-year daily historical
average volatility rate, and 5-week average implied
volatility rate based on at-the-money traded Johnson &
Johnson options, with a life of 2 years. Prior to 2006,
expected volatility was based on 5-year weekly
historical volatility rate. Historical data is used to
determine the expected life of the option. The risk-
free rate is based on the U.S. Treasury yield curve in
effect at the time of grant.
The weighted average fair value of options granted was
$12.22 for fiscal year to date 2006, $15.48 in 2005,
and $13.11 in 2004. The fair value was estimated based
on the weighted average assumptions of:
Fiscal YTD Fiscal Year Fiscal Year
2006 2005 2004
Risk Free Rate 4.60% 3.72% 3.15%
Expected
Volatility 19.6% 25.0% 27.0%
Expected Life 6 yrs 5 yrs 5 yrs
Dividend Yield 2.50% 1.93% 1.76%
A summary of option activity under the Plan as of
January 2, 2006, and changes during the year then ended
is presented below.
Weighted
Weighted Avg Aggregate
Average Remaining Intrinsic
Shares Exercise Contractual Value
(000's) Price Term (000's)
Outstanding at January 2, 2006 248,542 $53.05
Options granted 28,895 $58.37
Options exercised (8,054) $41.48
Options canceled/forfeited (4,152) $58.98
Outstanding at July 2, 2006 265,231 $53.89 6.28 $1,877,175
Exercisable at July 2, 2006 148,859 $49.39 $1,567,740
The total intrinsic value of options exercised during
2006 was $148.9 million. As of July 2, 2006, the total
unrecognized compensation cost was $964.5 million,
which has a weighted average period of 1.41 years to be
recognized.
During 2006, the Company granted 7.3 million shares of
Restricted Stock Units, at an average fair value of
$54.15, using the fair market value at the date of
grant. The fair value of Restricted Stock Units is
discounted for dividends, which are not paid on
Restricted Stock Units during the vesting period. The
outstanding shares of Restricted Stock Units as of July
2, 2006 were 7.2 million. The fair value of Restricted
Stock Units vested during the fiscal year-to-date 2006
was $1.7 million.
The Company settles employee stock issuances with
treasury shares. Treasury shares are replenished
throughout the year for the number of shares used for
employee stock issuances.
As previously discussed, the Company elected to adopt
SFAS 123(R) under the modified retrospective
application method. The Company believes that the
modified retrospective application of this standard
achieves the highest level of clarity and comparability
among the presented periods. Accordingly, financial
statement amounts for the prior period presented in
this Form 10-Q have been restated to reflect the fair
value method of expensing prescribed by SFAS 123(R).
The Company has filed a Current Report on Form 8-K on
April 17, 2006 with restated data to reflect the
modified retrospective application.
The following table details the retroactive application
impact of SFAS 123(R) on previously reported results.
(Dollars in millions, except per share amounts)
As Previously
For the quarter ended July 3, 2005 Restated Reported
Earnings before provision for taxes
on income $ 3,266 $ 3,402
Net earnings 2,588 2,676
Basic net earnings per share 0.87 0.90
Diluted net earnings per share 0.86 0.89
For the six months ended July 3, 2005:
Earnings before provision for taxes
on income $ 7,193 $ 7,464
Net earnings 5,427 5,603
Basic net earnings per share 1.83 1.88
Diluted net earnings per share 1.80 1.86
Net cash flows from operating
activities 4,649 4,687
Net cash used by financing
activities $(2,341) $(2,379)
NOTE 11 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Components of Net Periodic Benefit Cost
Net periodic benefit cost for the Company's defined
benefit retirement plans and other benefit plans for
the fiscal second quarters of 2006 and 2005 include the
following components:
(Dollars in Millions)
Retirement Plans Other Benefit Plans
July 2, July 3, July 2, July 3,
2006 2005 2006 2005
Service cost $ 136 $106 $19 $15
Interest cost 144 128 26 18
Expected return on
plan assets (177) (159) (1) (1)
Amortization of prior
service cost 3 3 (1) (2)
Amortization of net
transition asset - - - -
Recognized actuarial
losses 64 54 10 2
Net periodic benefit cost $ 170 $132 $53 $32
Net periodic benefit cost for the Company's defined
benefit retirement plans and other benefit plans for
the first fiscal six months of 2006 and 2005 include
the following components:
(Dollars in Millions)
Retirement Plans Other Benefit Plans
July 2, July 3, July 2, July 3,
2006 2005 2006 2005
Service cost $ 262 $216 $37 $28
Interest cost 284 246 52 44
Expected return on
plan assets (350) (291) (2) (2)
Amortization of prior
service cost 6 6 (3) (3)
Amortization of net
transition asset - (1) - -
Recognized actuarial
losses 127 111 20 13
Net periodic benefit cost $ 329 $287 $104 $80
Company Contributions
For the fiscal six months ended July 2, 2006, the Company
contributed $11 million and $13 million to its U.S. and
international retirement plans, respectively. The
Company does not anticipate a minimum statutory funding
requirement for its U.S. retirement plans in 2006.
International plans will be funded in accordance with
local regulations.
NOTE 12 - LEGAL PROCEEDINGS
PRODUCT LIABILITY
The Company is involved in numerous product liability
cases in the United States, many of which concern
adverse reactions to drugs and medical devices. The
damages claimed are substantial, and while the Company
is confident of the adequacy of the warnings and
instructions for use that accompany such products, it
is not feasible to predict the ultimate outcome of
litigation. However, the Company believes that if any
liability results from such cases, it will be
substantially covered by existing amounts accrued in
the Company's balance sheet and, where available, by
third-party product liability insurance. One group of
cases against the Company concerns a product of the
Company's subsidiary, Janssen Pharmaceutica Inc.
(Janssen), PROPULSID(R) (cisapride), which was withdrawn
from general sale and restricted to limited use in
2000. In the wake of publicity about those events,
numerous lawsuits were filed against Janssen and the
Company regarding PROPULSID(R) in state and federal
courts across the country.
In February 2004, Janssen reached an agreement with the
Plaintiffs' Steering Committee (PSC) of the PROPULSID(R)
Federal Multi-District Litigation (MDL), to resolve
federal lawsuits related to PROPULSID(R). The agreement
was to become effective once 85% of the death
claimants, and 75% of the remainder, agreed to the
terms of the settlement. In addition, 12,000
individuals who had not filed lawsuits, but whose
claims were the subject of tolling agreements
suspending the running of the statutes of limitations
against those claims, also had to agree to participate
in the settlement before it became effective.
In March 2005, it was confirmed that the PSC of the MDL
had enrolled enough plaintiffs and claimants in the
settlement program to make the agreement effective.
Those participating in the settlement submit medical
records to an independent panel of physicians who
determine whether the claimed injuries were caused by
PROPULSID(R) and otherwise meet the standards for
compensation. If those standards are met, a court-
appointed special master determines compensatory
damages. Janssen has paid into a compensation escrow
account $77.6 million, established an administrative
fund of $15 million, and paid legal fees to the PSC of
$22.5 million, which amount was approved by the court.
No additional funds will be contributed to the first
settlement program.
In December 2005, Janssen reached agreement with the
MDL PSC and the plaintiffs' State Liaison Committee
(SLC) to create a second settlement program for
resolving the state and federal lawsuits not subject
to, or not participating in, the first settlement
program, as well as the remaining unfiled claims
subject to tolling agreements. The new program becomes
effective once 90% of the plaintiffs representing
decedents, 95% of the other plaintiffs and 5,000 of the
remaining tolled claims, agree to the terms of the
settlement. Janssen will pay as compensation a minimum
of $14.5 million and a maximum of $15 million into the
second settlement program, depending upon the
percentage of enrollment above the 90% and 95%
thresholds. Janssen will also establish an
administrative fund not to exceed $3 million and pay
legal fees not to exceed $4 million subject to court
approval. Funds remaining in the compensation account,
after resolution of all filed claims, will be returned
to Janssen and the Company.
Janssen and the Company believe they have adequate self-
insurance accruals and third-party product liability
insurance with respect to these cases. In
communications to the Company, the excess insurance
carriers raised certain defenses to their liability
under the policies and to date have declined
voluntarily to reimburse Janssen and the Company for
PROPULSID(R)-related costs despite demand for payment.
In May 2005, hearings were held in London in the
arbitration proceeding commenced by Janssen and the
Company against Allianz Underwriters Insurance Company,
which issued the first layer of applicable excess
insurance coverage, to obtain reimbursement of
PROPULSID(R)-related costs. That proceeding was resolved
in a fashion satisfactory to Janssen and the Company in
November 2005. In May 2005, the Company commenced
arbitration against Lexington Insurance Company, which
issued the second layer of excess insurance coverage
and, in March 2006, against SR International Business
Insurance Co., LTD., which issued the third. In the
opinion of the Company, the excess carriers remain
legally obligated to provide coverage for the PROPULSID(R)-
related losses at issue.
A number of other products of Johnson & Johnson
subsidiaries are subject to numerous product liability
claims and lawsuits, including ORTHO EVRA(R), RISPERDAL(R)
and DURAGESIC(R). There are approximately 500 claimants
who have filed lawsuits or made claims regarding
injuries allegedly due to ORTHO EVRA(R), 300 claimants
with respect to RISPERDAL(R) and 100 with respect to
DURAGESIC(R). These claimants seek substantial
compensatory and, where available, punitive damages.
The Johnson & Johnson subsidiary responsible for
marketing the product at issue is vigorously defending
against these claims.
AFFIRMATIVE STENT PATENT LITIGATION
In patent infringement actions tried in Delaware
Federal District Court in late 2000, Cordis Corporation
(Cordis), a subsidiary of Johnson & Johnson, obtained
verdicts of infringement and patent validity, and
damage awards against Boston Scientific Corporation
(Boston Scientific) and Medtronic AVE, Inc.
(Medtronic) based on a number of Cordis vascular stent
patents. In December 2000, the jury in the damage
action against Boston Scientific returned a verdict of
$324 million and the jury in the Medtronic action
returned a verdict of $271 million. These sums
represent lost profit and reasonable royalty damages to
compensate Cordis for infringement but do not include
pre or post judgment interest.
In March and May 2002, the district judge granted
Boston Scientific a new trial on liability and damages
and vacated the verdict against Medtronic on legal
grounds. In August 2003, the Court of Appeals for the
Federal Circuit found the trial judge erred in vacating
the verdict against Medtronic and remanded the case to
the trial judge for further proceedings. In March
2005, the remaining issues were tried in the remanded
case against Medtronic and the retrial proceeded
against Boston Scientific. Juries returned verdicts of
infringement and patent validity in favor of Cordis in
both retrials. In March 2006, the district judge
entered judgment on liability for Cordis, but deferred
deciding on damages pending appeal to the Court of
Appeals for the Federal Circuit. Those appeals will
now follow. Cordis also has an arbitration claim
against Medtronic AVE accusing Medtronic of
infringement by sale of stent products introduced by
Medtronic subsequent to its GFX(R) and MicroStent(R)
products, the subject of the earlier action referenced
above. Those products were found to have been licensed
pursuant to a 1997 license by an arbitration panel in
March 2005. Further arbitration proceedings will
determine whether royalties are owed for those
products.
In January 2003, Cordis filed a patent infringement
action against Boston Scientific in Delaware Federal
District Court accusing its Express2(TM),Taxus(R) and
Liberte(R) stents of infringing the Palmaz patent that
expired in November 2005. The Liberte(R) stent was also
accused of infringing Cordis' Gray patent that expires
in 2016. In June 2005, a jury found that the
Express2(TM), Taxus(R) and Liberte(R) stents infringed the
Palmaz patent and that the Liberte(R) stent also infringed
the Gray patent. Motions filed by Boston Scientific
seeking to vacate the verdict or obtain a new trial
were denied in June 2006. Appeals to the U.S. Court of
Appeals for the Federal Circuit will now proceed.
PATENT LITIGATION AGAINST VARIOUS JOHNSON & JOHNSON
SUBSIDIARIES
The products of various Johnson & Johnson subsidiaries
are the subject of various patent lawsuits, the
outcomes of which could potentially adversely affect
the ability of those subsidiaries to sell those
products, or require the payment of past damages and
future royalties. With respect to all of these
matters, the Johnson & Johnson subsidiary involved is
vigorously defending against the claims of infringement
and disputing, where appropriate, the validity and
enforceability of the patent claims asserted against
it.
In July 2005, a jury in Federal District Court in
Delaware found that the Cordis CYPHER(R) stent infringed
Boston Scientific's Ding `536 patent and that the
Cordis CYPHER(R) and BX VELOCITY(R) stents also infringed
Boston Scientific's Jang `021 patent. The jury also
found both of those patents valid. Boston Scientific
seeks substantial damages and an injunction in that
action. In June 2006, the District Court denied motions
by Cordis to overturn the jury verdicts or grant a new
trial. Cordis will appeal the jury verdicts to the
Court of Appeals for the Federal Circuit.
Trial of Boston Scientific's case asserting
infringement by the CYPHER(R) stent of another Boston
Scientific patent, which had been scheduled for trial
in March 2006, has been adjourned without a new date.
In that case as well, Boston Scientific seeks an
injunction and substantial damages.
In an action filed in Belgium by Boston Scientific
under its Kastenhofer patent, Boston Scientific is
seeking a pan-European injunction against the sale of
infringing catheters, i.e., an injunction that would be
effective in all of the
countries served by the European Patent Office. Trial
has not been scheduled but could occur during 2006. In
Germany, Boston Scientific has several actions based on
Ding patents pending against the Cordis CYPHER(R) stent.
No trial has been scheduled in those cases.
The following chart summarizes various patent lawsuits
concerning products of Johnson & Johnson subsidiaries.
J&J Plaintiff/
Product Company Patents Patent Holder Court Trial Date Filed
Drug Eluting Cordis Grainger Boston Scientific D. Del. * 12/03
Stents Corp.
Drug Eluting Cordis Ding Boston Scientific Germany * 04/04
Stents Corp. 11/04
Two-layer Cordis Kasten- Boston Scientific N.D. Cal * 02/02
Catheters hofer Corp. Belgium * 12/03
Forman
Stents Cordis Israel Medinol Multiple E.U. * 05/03
jurisdictions
Contact Lenses Vision Nicolson CIBA Vision M.D. Fla. * 09/03
Care
* Trial date to be established.
LITIGATION AGAINST FILERS OF ABBREVIATED NEW DRUG
APPLICATIONS (ANDAS)
The following chart indicates lawsuits pending against
generic firms that filed Abbreviated New Drug
Applications seeking to market generic forms of
products sold by various subsidiaries of the Company
prior to expiration of the applicable patents covering
those products. These ANDAs typically include
allegations of non-infringement, invalidity and
unenforceability of these patents. In the event the
subsidiary of the Company involved is not successful in
these actions, or the 30-month stay expires before a
ruling from the district court is obtained, the firms
involved will have the ability to introduce generic
versions of the product at issue resulting in very
substantial market share and revenue losses for the
product of the Company's subsidiary.
As previously communicated and noted from the following
chart, 30-month stays have or are scheduled to expire
during 2006 with respect to ANDA challenges regarding
ORTHO TRI-CYCLEN(R) LO, RISPERDAL(R) and TOPAMAX(R).
Trial did not occur before the expiration of the stays
with respect to ORTHO TRI-CYCLEN(R) LO and RISPERDAL(R),
but could occur in the case of TOPAMAX(R). Unless
30-month stays are extended or preliminary injunctions
granted, outcomes which are uncertain, final FDA approval
to market will usually occur shortly after expiration of
the 30-month stays. Because a firm that launches an
ANDA product before trial would be liable potentially
for lost profits if found at trial to infringe a valid
patent, typically ANDA products are not launched under
such circumstances. Nonetheless, such "at risk"
launches have occurred in cases involving drugs of
Johnson & Johnson subsidiaries, and the risk of such a
launch cannot be ruled out.
Brand Name Patent/NDA Generic Trial Date 30-Month
Product Holder Challenger Court Date Filed Stay Expires
ACIPHEX(R) 20 Eisai Teva S.D.N.Y. * 11/03 02/07
mg delay (for Janssen) Dr. Reddy's S.D.N.Y. * 11/03 02/07
release
tablet Mylan S.D.N.Y. * 01/04 02/07
AXERT(R) 6.25 Almirall Teva S.D.N.Y. * 03/06 11/08
and 12.5 mg Ortho-McNeil
Neurologics
CONCERTA(R) McNeil-PPC Impax D.Del. * 09/05 None
18,27,36
and 54 mg ALZA Andrx
controlled
release tablet
DITROPAN XL(R) Ortho-McNeil Mylan D.W.V. 02/05 05/03 09/05
5, 10, 15 mg ALZA Impax N.D.Cal. 12/05 09/03 01/06
controlled
release tablet
LEVAQUIN(R)
Injectable Daiichi,JJPRD Sicor(Teva) D.N.J. * 12/03 05/06
Single use
vials Ortho-McNeil
and 5 mg/ml
premix
LEVAQUIN(R)
Injectable Daiichi,JJPRD American D.N.J. * 12/03 05/06
Single use
vials Ortho-McNeil Pharmaceutical
Partners
QUIXIN(R)
Ophthalmic Daiichi, Hi-Tech D.N.J. * 12/03 05/06
Solution
(Levo-
floxacin) Ortho-McNeil Pharmacal
Ophthalmic
solution
ORTHO TRI CYCLEN(R)
LO Ortho-McNeil Barr D.N.J. * 10/03 02/06
0.18 mg/
0.025 mg
0.215 mg/
0.025 mg
and 0.25 mg/
0.025 mg
PEPCID(R)
Complete McNeil-PPC Perrigo S.D.N.Y. 10/06 02/05 06/07
RAZADYNE(TM) Janssen Teva D. Del 06/07 07/05 01/08
Mylan D. Del 06/07 07/05 01/08
Dr. Reddy's D. Del 06/07 07/05 01/08
Purepac D. Del 06/07 07/05 01/08
Barr D. Del 06/07 07/05 01/08
Par D. Del 06/07 07/05 01/08
AlphaPharm D. Del 06/07 07/05 01/08
RAZADYNE(TM)
ER Janssen Barr D.N.J. * 06/06 11/08
RISPERDAL(R)
Tablets Janssen Mylan D.N.J. 06/06 12/03 05/06
..25, 0.5, 1,
2, 3, 4 Dr. Reddy's D.N.J. 06/06 12/03 06/06
mg tablets Apotex D.N.J. * 06/06 11/08
RISPERDAL(R)
M-Tab Janssen Dr. Reddy's D.N.J. 06/06 02/05 07/07
0.5,1,2,3,
4 mg Barr D.N.J. * 10/05 02/08
RISPERDAL(R)
Oral Janssen Apotex D.N.J. * 03/06 08/08
Solution,
1 mg/ml
TOPAMAX(R) Ortho-McNeil Mylan D.N.J. * 04/04 09/06
25,50,100,
200 mg tablet Cobalt D.N.J. * 10/05 03/08
TOPAMAX(R)
SPRINKLE Ortho-McNeil Cobalt D.N.J. * 12/05 05/08
25,50 mg
capsule
ULTRACET(R) Ortho-McNeil Kali (Par) D.N.J. * 11/02 04/05
37.5 tram/ Teva D.N.J. * 02/04 07/06
325 apap tablet Caraco E.D. Mich * 09/04 *
* Trial date to be established
In the action against Mylan and Dr. Reddy's
Laboratories regarding RISPERDAL(R) tablets, trial on the
merits was heard by the district court in New Jersey
between June 28 and July 5, 2006. At the court's
direction, defendants have agreed not to launch pending
the court's decision which is expected in the fourth
quarter of 2006.
In the action against Mylan involving the Company's
subsidiary Ortho-McNeil Pharmaceutical, Inc.'s (Ortho-
McNeil) product, DITROPAN XL(R) (oxybutynin chloride),
the court in September 2005 found the DITROPAN XL(R)
patent invalid and not infringed by Mylan's ANDA
product. Ortho-McNeil and ALZA Corporation (ALZA), a
subsidiary of the Company, have appealed. In the
action against Impax, Impax also received judgment of
invalidity based on the decision in the Mylan suit and
Ortho-McNeil and ALZA have appealed that decision.
Both appeals have been consolidated. Neither Mylan nor
Impax has received final FDA approval to launch its
ANDA product, but such approval could come at any
point.
In December 2005, Mylan announced that it had entered
into two agreements with Ortho-McNeil regarding
oxybutynin chloride extended release tablets. One
agreement relates to Ortho-McNeil's supply of certain
dosages of oxybutynin chloride extended release tablets
and the second relates to a patent license to ALZA
intellectual property regarding DITROPAN XL(R). These
agreements, which are confidential, have been submitted
to the Federal Trade Commission.
In the weeks following the adverse ruling in the
DITROPAN XL(R) ANDA litigation against Mylan in September
2005, Ortho-McNeil and ALZA received seven antitrust
class action complaints filed by purchasers of the
product. The complaints were filed in various federal
courts, but all claim damages based on the laws of over
25 states. They allege that Ortho-McNeil and ALZA
violated the antitrust laws of the various states by
knowingly pursuing baseless patent litigation, and
thereby delaying entry into the market by Mylan and
Impax.
In the action against Mylan involving its ANDA for Ortho-
McNeil's product LEVAQUIN(R) (levofloxacin), the trial
judge in December 2004 found the patent at issue valid,
enforceable and infringed by Mylan's ANDA product and
issued an injunction precluding sale of the product until
patent expiration in late 2010. In December 2005, the
Court of Appeals for the Federal Circuit affirmed
the judgment of validity, enforceability and infringement.
Mylan filed a motion for rehearing by the Court of
Appeals, which has been denied.
In the consolidated actions against Teva, Sicor, Hi-
Tech Pharmacal, and American Pharmaceutical Partners
involving the ANDAs for various levofloxacin
preparations, summary judgment was granted for Ortho-
McNeil and ALZA in March 2006 on the claim that the
LEVAQUIN(R) patent was obtained by inequitable conduct
and was therefore unenforceable.
In the action against Mylan involving Ortho-McNeil's
TOPAMAX(R) tablets, Ortho-McNeil has moved for a
preliminary injunction to prevent launch of Mylan's
generic copy upon expiration of the 30-month stay in
September 2006. Mylan has agreed not to launch pending
outcome of the motion.
In the action against Kali involving Ortho-McNeil's
ULTRACETr (tramadol hydrochloride/acetaminophen), Kali
moved for summary judgment on the issues of
infringement and invalidity in October 2004 and a
decision is expected anytime. With respect to claims
other than that at issue in the litigation against
Kali, Ortho-McNeil has filed a reissue application in
the U.S. Patent and Trademark Office seeking to narrow
the scope of the claims. That patent issued August 1,
2006. Kali obtained final approval of its ANDA at
expiration of the 30-month stay in April 2005, and
launched its generic product the same day. If Ortho-
McNeil ultimately prevails in its patent infringement
action against Kali, Kali could be subject to an
injunction and damages.
In the action against Teva Pharmaceuticals USA (Teva)
involving Ortho-McNeil's ULTRACET(R)(tramadol
hydrocholoride/acetaminophen), Teva has moved for
summary judgment on the issues of infringement and
validity. The briefing on that motion was completed in
March 2005. A ruling could issue at any point. Barr
Laboratories has been joined in the suit as a
codefendant as the successor to Teva's ANDA.
In the action against Caraco involving Ortho-McNeil's
ULTRACET(R) (tramadol hydrocholoride/acetaminophen),
Caraco's motion for summary judgment of non-
infringement was granted in October 2005. Ortho-McNeil
has appealed that decision. Caraco launched its
generic ULTRACET(R) "at risk" in December 2005.
With respect to all of the above matters, the Johnson &
Johnson subsidiary involved is vigorously defending the
validity and enforceability and asserting the
infringement of its own or its licensor's patents.
AVERAGE WHOLESALE PRICE (AWP) LITIGATION
Johnson & Johnson and its pharmaceutical subsidiaries,
along with numerous other pharmaceutical companies, are
defendants in a series of lawsuits in state and federal
courts involving allegations that the pricing and
marketing of certain pharmaceutical products amounted
to fraudulent and otherwise actionable conduct because,
among other things, the companies allegedly reported an
inflated Average Wholesale Price (AWP) for the drugs at
issue. Most of these cases, both federal actions and
state actions removed to federal court, have been
consolidated for pre-trial purposes in a Multi-District
Litigation (MDL) in Federal District Court in Boston,
Massachusetts. The plaintiffs in these cases include
classes of private persons or entities that paid for
any portion of the purchase of the drugs at issue based
on AWP, and state government entities that made
Medicaid payments for the drugs at issue based on AWP.
In the MDL proceeding in Boston, plaintiffs moved for
class certification of all or some portion of their
claims. On August 16, 2005, the trial judge certified
Massachusetts-only classes of private insurers
providing "Medi-gap" insurance coverage and private
payers for physician-administered drugs where payments
were based on AWP. The judge also allowed plaintiffs
to file a new complaint seeking to name proper parties
to represent a national class of individuals who made
co-payments for physician-administered drugs covered by
Medicare. The Court of Appeals declined to allow an
appeal of those issues and in January 2006, the court
certified the national class as noted above. A trial
of some or all of the issues in the Massachusetts or
the national class actions could occur before the end
of 2006.
OTHER
In June 2003, the Company received a request for
records and information from the U.S. House of
Representatives' Committee on Energy and Commerce in
connection with its investigation into pharmaceutical
reimbursements and rebates under Medicaid. The
Committee's request focuses on the drug REMICADEr
(infliximab), marketed by the Company's Centocor, Inc.
(Centocor) subsidiary. In July 2003, Centocor received
a request that it voluntarily provide documents and
information to the criminal division of the U.S.
Attorney's Office, District of New Jersey, in
connection with its investigation into various Centocor
marketing practices. Subsequent requests for documents
have been received from the U.S. Attorney's Office.
Both the Company and Centocor responded, or are in the
process of responding, to these requests for documents
and information.
In December 2003, Ortho-McNeil received a subpoena from
the U.S. Attorney's Office in Boston, Massachusetts
seeking documents relating to the marketing, including
alleged off-label marketing, of the drug TOPAMAX(R)
(topiramate). An additional subpoena for documents was
served in June 2006. Ortho-McNeil is cooperating in
responding to the subpoenas. In October 2004, the U.S.
Attorney's Office in Boston asked attorneys for Ortho-
McNeil to cooperate in facilitating the subpoenaed
testimony of several present and former Ortho-McNeil
employees before a federal grand jury in Boston.
Cooperation in securing the testimony of additional
witnesses before the grand jury has been requested and
is being provided.
In January 2004, Janssen received a subpoena from the
Office of the Inspector General of the U.S. Office of
Personnel Management seeking documents concerning sales
and marketing of, any and all payments to physicians in
connection with sales and marketing of, and clinical
trials for, RISPERDAL(R) (risperidone) from 1997 to 2002.
Documents subsequent to 2002 have also been requested.
An additional subpoena seeking information about
marketing of and adverse reactions to RISPERDAL(R) was
received from the U.S. Attorney's Office for the
Eastern District of Pennsylvania in November 2005.
Janssen is cooperating in responding to these
subpoenas.
In April 2004, the Company's pharmaceutical companies
were requested to submit information to the U.S.
Senate Finance Committee on their use of the "nominal
pricing exception" in calculating Best Price under the
Medicaid Rebate Program. This request was sent to
manufacturers for the top twenty drugs reimbursed under
the Medicaid Program. The Company's pharmaceutical
companies have responded to the request. In February
2005 a request for supplemental information was
received from the Senate Finance Committee, which has
been responded to by the Company's pharmaceutical
companies.
In August 2004, Johnson & Johnson Health Care Systems,
Inc. (HCS), a Johnson & Johnson subsidiary, received a
subpoena from the Dallas, Texas U. S. Attorney's
Office seeking documents relating to the relationships
between the group purchasing organization Novation and
HCS and other Johnson & Johnson subsidiaries. The
Company's subsidiaries involved have responded to the
subpoena.
In September 2004, Ortho Biotech Inc. (Ortho Biotech),
a Johnson & Johnson subsidiary, received a subpoena
from the U.S. Office of Inspector General's Denver,
Colorado field office seeking documents directed to
sales and marketing of PROCRIT(R) (Epoetin alfa) from
1997 to the present, as well as to dealings with U.S.
Oncology Inc., a healthcare services network for
oncologists. Ortho Biotech has responded to the
subpoena.
In March 2005, DePuy Orthopaedics, Inc. (DePuy
Orthopaedics), a Johnson & Johnson subsidiary, received
a subpoena from the U.S. Attorney's Office, District of
New Jersey, seeking records concerning contractual
relationships between DePuy Orthopaedics and surgeons
or surgeons-in-training involved in hip and knee
replacement and reconstructive surgery. Other leading
orthopaedic companies are known to have received the
same subpoena. DePuy Orthopaedics is responding to the
subpoena.
In June 2005, the U.S. Senate Committee on Finance
requested the Company to produce information regarding
use by its pharmaceutical subsidiaries of educational
grants. A similar request was sent to other major
pharmaceutical companies. In July 2005, the Committee
specifically requested information about educational
grants in connection with the drug PROPULSID(R). A
follow up request was received from the Committee for
additional information in January 2006.
In July 2005, Scios Inc. (Scios), a Johnson & Johnson
subsidiary, received a subpoena from the U.S.
Attorney's Office, District of Massachusetts, seeking
documents related to the sales and marketing of
NATRECOR(R). Scios is responding to the subpoena. In
early August 2005, Scios was advised that the
investigation would be handled by the U.S. Attorney's
Office for the Northern District of California in San
Francisco.
In September 2005, Johnson & Johnson received a
subpoena from the U.S. Attorney's Office, District of
Massachusetts, seeking documents related to sales and
marketing of eight drugs to Omnicare, Inc., a manager
of pharmaceutical benefits for long-term care
facilities. The Johnson & Johnson subsidiaries
involved are in the process of responding to the
subpoena.
In January 2006, Janssen received a civil investigative
demand from the Texas Attorney General seeking broad
categories of documents related to sales and marketing
of RISPERDAL(R). Janssen is in the process of responding
to the request.
In February 2006, Johnson & Johnson received a subpoena
from the Securities & Exchange Commission requesting
documents relating to the participation by several
Johnson & Johnson subsidiaries in the United Nations
Iraq Oil For Food Program. The subsidiaries are
cooperating with the SEC in producing responsive documents.
In June 2006, DePuy, Inc. (DePuy), a Johnson & Johnson
subsidiary, received a subpoena from the U.S.
Department of Justice, Antitrust Division, requesting
documents related to the manufacture and sale of
orthopaedic devices, and had search warrants executed
in connection with the investigation. DePuy is
cooperating in responding to the request for documents.
In September 2004, plaintiffs in an employment
discrimination litigation initiated against the Company
in 2001 in Federal District Court in New Jersey moved
to certify a class of all African American and Hispanic
salaried employees of the Company and its affiliates in
the U.S., who were employed at any time from November
1997 to the present. Plaintiffs seek monetary damages
for the period 1997 through the present (including
punitive damages) and equitable relief. The Company
filed its response to plaintiffs' class certification
motion in May 2005. The Company disputes the
allegations in the lawsuit and is vigorously defending
against them.
The Company, along with its wholly owned Ethicon and
Ethicon Endo-Surgery subsidiaries, are defendants in
three federal antitrust actions challenging suture and
endo-mechanical contracts with group purchasing
organizations and hospitals in which discounts are
predicated on a hospital achieving specified market
share targets for both categories of products. In each
case, plaintiffs seek substantial monetary damages and
injunctive relief. These actions are: Applied Medical
v. Ethicon Inc. et al. (C.D.CA, filed September 5,
2003); Conmed v. Johnson & Johnson et al. (S.D.N.Y.,
filed November 6, 2003); and Genico v. Ethicon, Inc.
et al. (E.D. TX, filed October 15, 2004). Trial in
the Applied Medical case commenced July 11, 2006 and is
expected to last five weeks. In December 2005, two
purported class actions were filed on behalf of
purchasers of endo-mechanical instruments. These
actions, captioned Delaware Valley Surgical Supply Co.,
Inc. v. Johnson & Johnson et al. and Niagara Falls
Memorial Medical Center v. Johnson & Johnson et al.,
were both filed in the Federal District Court for the
Central District of California.
After a remand from the Federal Circuit Court of
Appeals in January 2003, a partial retrial was
commenced in October and concluded in November 2003 in
Federal District Court in Boston, Massachusetts in the
action Amgen, Inc. (Amgen) v. Transkaryotic Therapies, Inc.
(TKT) and Aventis Pharmaceutical, Inc. (Aventis). The
matter is a patent infringement action brought by Amgen
against TKT, the developer of a gene-activated EPO
product, and Aventis, which held marketing rights to
the TKT product, asserting that TKT's product infringes
various Amgen patent claims. TKT and Aventis dispute
infringement and are seeking to invalidate the Amgen
patents asserted against them. On October 15, 2004,
the District Court issued rulings that upheld its
initial findings in 2001 that Amgen's patent claims
were valid and infringed. The Court of Appeals for the
Federal Circuit affirmed in part those rulings in August
2006, finding certain claims infringed, but reversing and
remanding as to other claims. The Amgen patents at issue
in the case are exclusively licensed to Ortho Biotech in
the U.S. for non-dialysis indications. Ortho Biotech is
not a party to the action.
In November 2005, Amgen filed suit against Hoffmann-
LaRoche, Inc. in the U.S. District Court for the
District of Massachusetts seeking a declaration that
the Roche product CERA, which Roche has indicated it
will seek to introduce into the United States,
infringes a number of Amgen patents concerning EPO.
Ortho Biotech has sought to intervene in the case. The
suit is in its preliminary stages.
The Company is also involved in a number of other
patent, trademark and other lawsuits incidental to its
business. The ultimate legal and financial liability
of the Company in respect to all claims, lawsuits and
proceedings referred to above cannot be estimated with
any certainty. However, in the Company's opinion,
based on its examination of these matters, its
experience to date and discussions with counsel, the
ultimate outcome of legal proceedings, net of
liabilities already accrued in the Company's balance
sheet, is not expected to have a material adverse
effect on the Company's financial position, although
the resolution in any reporting period of one or more
of these matters could have a significant impact on the
Company's results of operations and cash flows for that
period.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Analysis of Consolidated Sales
For the first fiscal six months of 2006, worldwide
sales were $26.4 billion, a total increase of 3.0% and
an operational increase of 4.2% over 2005 first fiscal
six months sales of $25.6 billion. Currency
fluctuations negatively impacted sales by 1.2% for the
period.
Sales by U.S. companies were $14.7 billion in the first
fiscal six months of 2006, which represented an
increase of 3.0% over the same period last year. Sales
by international companies were $11.6 billion, which
represented a total increase of 3.0%, an operational
increase of 5.7%, and a negative impact from currency
of 2.7% over the first fiscal six months of 2005.
Sales by companies in Europe experienced an increase of
0.1%, with operational growth of 4.8% and a negative
impact from currency of 4.7%. Sales by companies in
the Western Hemisphere, excluding the U.S., experienced
total growth of 15.0%, operational growth of 7.5% and a
positive impact from currency of 7.5%. Sales by
companies in the Asia-Pacific, Africa region posted
sales growth of 3.3%, with operational growth of 6.7%
and a negative impact from currency of 3.4%.
For the fiscal second quarter of 2006, worldwide sales
were $13.4 billion, a total increase of 4.7% and an
operational increase of 4.8%, over 2005 fiscal second
quarter sales of $12.8 billion. Currency fluctuations
negatively impacted sales by 0.1% for the period.
Sales by U.S. companies were $7.4 billion in the fiscal
second quarter of 2006, which represented an increase
of 4.4%. Sales by international companies were $6.0
billion, which represented a total increase of 5.1%, an
operational increase of 5.2%, and a negative impact
from currency of 0.1% over the fiscal second quarter of
2005.
Sales by companies in Europe experienced a total
increase of 3.4%, with operational growth of 4.3% and a
negative impact from currency of 0.9%. Sales by
companies in the Western Hemisphere, excluding the
U.S., experienced total growth of 16.6%, operational
growth of 9.4% and a positive impact from currency of
7.2%. Sales by companies in the Asia-Pacific, Africa
region posted sales growth of 3.2%, with operational
growth of 5.2% and a negative impact from currency of
2.0%.
Analysis of Sales by Business Segments
Consumer
Consumer segment sales in the first fiscal six months
of 2006 were $4.8 billion, an increase of 4.3% over
the same period a year ago, with 4.5% of operational
growth and a negative currency impact of 0.2%. U.S.
Consumer segment sales increased by 2.1% while
international sales experienced a total increase of
6.3%, an operational increase of 6.7%, with a negative
currency impact of 0.4%.
Major Consumer Franchise Sales
(Dollars in Millions)
First Fiscal Six Months
July 2, July 3, Total Operations Currency
2006 2005 Change Change Change
Skin Care $1,313 $1,223 7.4% 8.4% (1.0)%
OTC Pharm & Nutr 1,286 1,313 (2.1) (2.1) -
Baby & Kids Care 827 772 7.2 7.0 0.2
Women's Health 814 782 4.0 3.7 0.3
Other 513 468 9.6 9.8 (0.2)
Total $4,753 $4,558 4.3% 4.5% (0.2)%
Consumer segment sales in the fiscal second quarter of
2006 were $2.4 billion, an increase of 5.3% over the
same period a year ago with 4.5% of operational growth
and a positive currency impact of 0.8%. U.S. Consumer
segment sales increased by 1.0% while international
sales experienced a total increase of 9.2%, an
operational increase of 7.7%, with a positive currency
impact of 1.5%.
Major Consumer Franchise Sales
(Dollars in Millions)
Fiscal Second Quarter
July 2, July 3, Total Operations Currency
2006 2005 Change Change Change
Skin Care $654 $602 8.6% 8.1% 0.5%
OTC Pharm & Nutr 633 628 0.7 (0.2) 0.9
Baby & Kids Care 421 393 7.2 6.1 1.1
Women's Health 415 406 2.4 1.4 1.0
Other 275 249 10.4 10.0 0.4
Total $2,398 $2,278 5.3% 4.5% 0.8%
Consumer segment sales growth in the fiscal second
quarter of 2006 was attributable to strong sales
performance in Skin Care and Baby & Kids Care. The Skin
Care franchise operational sales growth of 8.1% was
attributed to sales of products in the AVEENO(R),
JOHNSON'S(R) adult, suncare, CLEAN AND CLEAR(R) lines and
the newly acquired Groupe Vendome product line,
partially offset by a sales decline in ROC(R) products.
The OTC Pharmaceuticals and Nutritionals franchise
experienced an operational decline of 0.2%, primarily
due to a decline in demand for Adult TYLENOL(R) products,
partially offset by strong growth from SPLENDAr No
Calorie Sweeteners. The Baby & Kids Care franchise
achieved operational sales growth of 6.1%, which
resulted from continued success of cleanser, lotion and
cream product lines in international markets, partially
offset by declines in U.S. sales. BABYCENTER(R) revenue
was also a growth contributor in this franchise. The
Women's Health franchise achieved operational growth of
1.4% resulting from contributions from STAYFREE(R)
product lines.
Pharmaceutical
Pharmaceutical segment sales in the first fiscal six
months of 2006 were $11.4 billion, a total increase of
0.5% over the same period a year ago with 1.4% of this
change due to operational increases and the remaining
0.9% decrease related to the negative impact of
currency. The U.S. Pharmaceutical sales increase was
0.1% and the total growth in international
Pharmaceutical sales was 1.2%, with 3.8% of this change
due to operational increases and the remaining 2.6%
decrease related to the negative impact of currency.
Major Pharmaceutical Product Revenues
(Dollars in Millions)
First Fiscal Six Months
July 2, July 3, Total Operations Currency
2006 2005 Change Change Change
RISPERDAL(R)/
RISPERDAL(R)
CONSTA(R) $2,055 $1,738 18.2% 20.3% (2.1)%
PROCRIT(R)/
EPREX(R) 1,594 1,682 (5.2) (4.4) (0.8)
REMICADE(R) 1,457 1,219 19.6 19.6 -
TOPAMAX(R) 965 837 15.3 15.8 (0.5)
LEVAQUIN(R)/
FLOXIN(R) 744 760 (2.1) (2.2) 0.1
DURAGESIC(R)/
Fentany
Transdermal 661 832 (20.5) (18.6) (1.9)
ACIPHEX(R)/
PARIET(TM) 614 559 9.9 11.0 (1.1)
Hormonal
Contraceptives 501 598 (16.2) (16.4) 0.2
Other 2,845 3,158 (9.9) (9.0) (0.9)
Total $11,436 $11,383 0.5% 1.4% (0.9)%
Pharmaceutical segment sales in the fiscal second
quarter of 2006 were $5.8 billion, a total and
operational increase of 3.2% over the same period a
year ago, with a neutral year over year currency
comparison. The U.S. Pharmaceutical sales increase was
2.4% and the growth in international Pharmaceutical
sales was 4.7%, with no net impact from currency.
Major Pharmaceutical Product Revenues
(Dollars in Millions)
Fiscal Second Quarter
July 2, July 3, Total Operations Currency
2006 2005 Change Change Change
RISPERDAL(R)/
RISPERDAL(R)
CONSTRA(R) $1,036 $894 16.0% 16.6% (0.6)%
PROCRIT(R)/
EPREX(R) 808 846 (4.5) (4.7) 0.2
REMICADE(R) 777 642 21.0 21.0 -
TOPAMAX(R) 495 431 14.8 14.7 0.1
LEVAQUIN(R)/
FLOXIN(R) 343 320 7.2 7.2 -
DURAGESIC(R)/
Fentanyl
Transdermal 336 382 (12.0) (11.9) (0.1)
ACIPHEX(R)/
PARIET(TM) 308 281 9.8 9.1 0.7
Hormonal
Contraceptives 247 296 (16.4) (17.1) 0.7
Other 1,460 1,536 (4.9) (4.9) -
Total $5,810 $5,628 3.2% 3.2% -%
Sales growth within the segment was led by strong
performances from RISPERDAL(R)/RISPERDAL(R) CONSTA(R)
(risperidone), REMICADE(R) (infliximab) and TOPAMAX(R)
(topiramate). Generic competition related to
DURAGESIC(R) (fentanyl transdermal system),
ULTRACET(R)(tramadol hydrochloride/acetaminophen),
SPORANOX(R) (itraconazole) and hormonal contraceptives
continued to negatively impact sales during the fiscal
second quarter of 2006.
RISPERDAL(R) (risperidone), a medication that treats the
symptoms of schizophrenia and bipolar mania, and
RISPERDALr CONSTAr (risperidone) long acting injection
that treats the symptoms of schizophrenia, achieved
operational growth of 16.6% in the fiscal second
quarter of 2006. Sales growth was positively impacted
by increases in the net pricing of RISPERDAL(R) and
demand of RISPERDAL(R) CONSTA(R).
PROCRIT(R) (Epoetin alfa) and EPREX(R) (Epoetin alfa)
performance combined had an operational sales decline
of 4.7%, as compared to prior year fiscal second
quarter. PROCRITr experienced an operational decline
of 7.4% due to competitive pressure, while EPREXr had
operational growth of 0.7%. The approval of the once
weekly administration for EPREX(R) in Europe contributed
to stabilizing EPREX(R) sales. Although the EPREX(R)
patent has expired in most major European markets, an
erythropoietin biosimilar has not yet been approved.
REMICADE(R) (infliximab), a biologic approved for the
treatment of Crohn's disease, ankylosing spondylitis,
psoriasis, psoriatic arthritis, ulcerative colitis and
use in the treatment of rheumatoid arthritis,
experienced strong operational growth of 21.0% over
prior year fiscal second quarter. This continued
growth was driven by increased demand due to expanded
indications. During the fiscal second quarter of 2006,
REMICADE(R) received approval for the pediatric Crohn's
disease indications.
TOPAMAX(R) (topiramate), which has been approved for
adjunctive and monotherapy use in epilepsy, as well as,
for the prophylactic treatment of migraines,
experienced strong operational growth of 14.7%.
LEVAQUIN(R) (levofloxacin) experienced operational sales
growth of 7.2% over prior year, primarily due to
increased volume.
DURAGESIC(R)/Fentanyl Transdermal (fentanyl transdermal
system) experienced an operational sales decline of
11.9%, primarily driven by the negative impact of
generic competition in the U.S. beginning in January
2005. Additionally, generic versions of DURAGESIC(R)
have been launched in Europe.
The hormonal contraceptive franchise experienced an
operational sales decline of 17.1% primarily resulting
from generic competition in oral contraceptives. This
was partially offset by strong growth in ORTHO TRI-
CYCLEN(R) LO (norgestimate/ethinyl estradiol), a low
dose oral contraceptive. ORTHO EVRA(R)
(norelgestromin/ethinyl estradiol), the first contraceptive
patch approved by the FDA, experienced a significant
decline in sales as a result of labeling changes and
negative media coverage concerning product safety.
CONCERTA(R) (methylphenidate HCl), a product for the
treatment of attention deficit hyperactivity disorder,
achieved operational sales growth of 9.0% over the
fiscal second quarter of 2005. At present, the FDA has
not approved any generic version that is substitutable
for CONCERTA(R). Abbreviated New Drug Applications
(ANDAs) for generic versions of CONCERTA(R) are pending
and may be approved at any time. Recent negative
publicity and FDA activities concerning attention
deficit hyperactivity products may impact CONCERTA(R)
sales in 2006.
NATRECOR(R) (nesiritide), a product for the treatment
of patients with acutely decompensated congestive heart
failure who have dyspnea at rest or with minimal
activity, has experienced a significant decline in
demand due to past negative media coverage regarding a
meta analysis of selected historical clinical trials.
The Company believes that there is no new data
supporting the conclusions of these medical and
consumer publications and the currently approved label
for NATRECOR(R) reflects all available data to date.
On June 23, 2006 the FDA granted accelerated approval
to the anti-HIV medication PREZISTAT (darunavir)
tablets. PREZISTAT, co-administered with 100 mg
ritonavir (PREZISTA/rtv) and with other antiretroviral
agents, is indicated for the treatment of human
immunodeficiency virus (HIV) infection in
antiretroviral treatment-experienced adult patients,
such as those with HIV-1 strains resistant to more than
one protease inhibitor.
Medical Devices and Diagnostics
Medical Devices and Diagnostics segment sales in the
first fiscal six months of 2006 were $10.2 billion, an
increase of 5.3% over the same period a year ago, with
7.3% of this change due to operational increases and
the remaining 2.0% decrease related to the negative
impact of currency. The U.S. Medical Devices and
Diagnostics sales increase was 7.8% and the growth in
international Medical Devices and Diagnostics sales was
2.9%, which included operational increases of 6.8% and
a decrease of 3.9% related to the negative impact of
currency.
Major Medical Devices and Diagnostics Franchise Sales
(Dollars in Millions)
First Fiscal Six Months
July 2, July 3, Total Operations Currency
2006 2005 Change Change Change
CORDIS(R) $2,143 $1,983 8.1% 10.4% (2.3)%
DEPUY(R) 2,074 1,973 5.1 6.7 (1.6)
ETHICON ENDO-
SURGERY(R) 1,651 1,553 6.3 8.3 (2.0)
ETHICON(R) 1,590 1,584 0.4 2.3 (1.9)
LIFESCAN(R) 1,027 975 5.4 6.4 (1.0)
Vision Care 915 833 9.9 13.3 (3.4)
ORTHO-CLINICAL
DIAGNOSTICS(R) 738 721 2.4 4.2 (1.8)
Other 28 31 (9.7) (9.7) -
Total $10,166 $9,653 5.3% 7.3% (2.0)%
Medical Devices and Diagnostics segment sales in the
fiscal second quarter of 2006 were $5.2 billion, an
increase of 6.2% over the same period a year ago, with
6.7% of this change due to operational growth and the
remaining 0.5% decrease related to the negative impact
of currency. The U.S. Medical Devices and Diagnostics
sales increase was 8.9% and the growth in international
Medical Devices and Diagnostics sales was 3.5%, which
included operational growth of 4.6% and a decrease of
1.1% related to the negative impact of currency.
Major Medical Devices and Diagnostics Franchise SaleS
(Dollars in Millions)
Fiscal Second Quarter
July 2, July 3, Total Operations Currency
2006 2005 Change Change Change
CORDIS(R) $1,068 $1,014 5.4% 6.2% (0.8)%
DEPUY(R) 1,035 980 5.6 5.9 (0.3)
ETHICON ENDO-
SURGERY(R) 857 786 9.0 9.5 (0.5)
ETHICON(R) 816 797 2.4 2.7 (0.3)
LIFESCAN(R) 522 474 10.3 10.0 0.3
Vision Care 474 426 11.5 13.4 (1.9)
ORTHO-CLINICAL
DIAGNOSTICS(R) 368 366 0.5 1.0 (0.5)
Other 15 13 15.4 15.9 (0.5)
Total $5,155 $4,856 6.2% 6.7% (0.5)%
The Cordis franchise was a key contributor to the
Medical Devices and Diagnostics segment results, with
operational growth of 6.2% over the fiscal second
quarter of 2005. The primary growth driver of the
Cordis franchise was the CYPHER(R) Sirolimus-eluting
Stent in both U.S. and international markets. Strong
performance was also achieved by Biosense Webster and
the endovascular business.
In April and July of 2004, the Cordis Cardiology
Division of Cordis Corporation received Warning Letters
from the FDA regarding Good Manufacturing Practice
regulations and Good Clinical Practice regulations. In
response to the Warning Letters, Cordis has made
improvements to its quality systems and has provided
periodic updates to the FDA. The Clinical Warning
Letter issues have been resolved to the FDA's
satisfaction. With respect to the Quality System
Warning Letter,in addition to the improvement updates,
the Cordis Juarez and stent supplier locations were
inspected with acceptable results. Cordis is preparing
for third quarter re-inspections in the Miami Lakes and
Puerto Rico locations and possible re-inspection of
Warren.
The DePuy franchise's operational growth of 5.9% was
primarily due to DePuy's orthopaedic joint
reconstruction products. Strong performance was
reported in Mitek sports medicine products and the
trauma business, with the combined impact of the Hand
Innovations acquisition and strong growth in the base
business.
The Ethicon Endo-Surgery franchise experienced
operational growth of 9.5% over prior year. A major
contributor of growth continues to be endocutter sales,
which include products used in performing bariatric
procedures for the treatment of obesity, an important
focus area for the franchise. Strong results were
achieved with the success of the HARMONIC SCALPEL(R), an
ultrasonic cutting and coagulating surgical device,
which received approval in January 2006 for expanded
indications to include plastic surgery, as well as,
continued growth in advanced sterilization products.
Ethicon worldwide sales grew operationally by 2.7% from
the same period in the prior year, resulting from solid
growth in wound management and women's health and
urology, partially offset by challenging conditions
with several European health care systems. Sales of
both GYNECARE products and DERMABOND(R) had strong
results in the fiscal second quarter of 2006 as
compared to the same period in the prior year.
The LifeScan franchise experienced operational growth
of 10.0%. Strong performance was achieved in the
ONETOUCH(R) ULTRA(R) product line. An additional
contributor was Animas Corporation, acquired in the
fiscal first quarter of 2006, providing LifeScan with a
platform for entry into the insulin pump segment of the
diabetes market.
The Vision Care franchise operational sales growth of
13.4% was led by the continued success of ACUVUE(R)
ADVANCE(TM) Brand Contact Lenses with HYDRACLEAR(TM),
ACUVUE(R) ADVANCE(TM) Brand Contact Lenses for ASTIGMATISM,
ACUVUE(R) OASYS(TM) Brand Contact Lenses with HYDRACLEAR(TM)
PLUS and 1-DAY ACUVUE(R).
The Ortho-Clinical Diagnostics franchise achieved
operational growth of 1.0% over prior year.
Competitive pricing pressure was the major contributor
to the modest results in the fiscal second quarter of
2006.
Cost of Products Sold and Selling, Marketing and
Administrative Expenses
Consolidated costs of products sold for the first
fiscal six months of 2006 increased to 28.1% from 27.4%
of sales over the same period a year ago. The cost of
products sold for the fiscal second quarter of 2006
increased to 28.3% from 27.6% of sales. The increase
resulted from unfavorable product mix, primarily in the
Pharmaceutical segment.
Consolidated selling, marketing and administrative
expenses for the first fiscal six months of 2006
increased 0.5% over the same period a year ago.
Consolidated selling, marketing and administrative
expenses as a percent to sales for the first fiscal six
months of 2006 were 32.0% versus 32.8% for the same
period a year ago. Consolidated selling, marketing and
administrative expenses for the fiscal second quarter
of 2006 increased 1.7% over the same period a year ago.
As a percent to sales, consolidated selling, marketing
and administrative expenses were 32.6% versus 33.5% for
the same period a year ago. Decreases in the quarterly
and six month periods were primarily associated with
cost containment efforts across many of the Company's
businesses.
Research & Development
Research activities represent a significant part of the
Company's business. These expenditures relate to the
development of new products, improvement of existing
products, technical support of products and compliance
with governmental regulations for the protection of the
consumer. Worldwide costs of research activities, for
the first fiscal six months of 2006 were $3.4
billion, an increase of 15.5% over the same period a
year ago. Research and development spending in the
fiscal second quarter of 2006 was $1.8 billion, an
increase of 19.9% over the fiscal second quarter of
2005. The major factors contributing to this increase
were the $165 million up front payment to Vertex
Pharmaceuticals for the rights to develop and
commercialize VX-950 for Hepatitis C in selected
regions, as well as, higher levels of investment in
research projects in the Medical Devices and
Diagnostics segment and a significant number of
pharmaceutical projects in late stage development.
In-Process Research & Development(IPR&D)
In the fiscal second quarter of 2006, the Company
recorded IPR&D charges of $87 million before tax, with
no tax benefit, related to the acquisition of Vascular
Control Systems, Inc.
In the fiscal second quarter of 2005, the Company
recorded IPR&D charges of $353 million before tax, with
no tax benefit, related to acquisitions in the
Pharmaceutical and Medical Devices and Diagnostics
segments. These acquisitions included TransForm
Pharmaceuticals, Inc., Peninsula Pharmaceuticals, Inc.
and Closure Medical Corporation.
Other (Income) Expense, Net
Other (income) expense, net is the account where the
Company records gains and losses related to the sale
and write-down of certain equity securities of the
Johnson & Johnson Development Corporation, gains and
losses on the disposal of fixed assets, currency gains
and losses, minority interests, litigation settlements,
royalty income, as well as, certain miscellaneous one
time events. The favorable change in other (income)
expense for the first fiscal six months of 2006 of $695
million, as compared to the same period a year ago, was
primarily due to the gain associated with the Guidant
termination fee, less associated expenses, of $622
million before tax recorded in the fiscal first quarter
of 2006.
OPERATING PROFIT BY SEGMENT
Consumer Segment
Operating profit for the Consumer segment as a percent
to sales in the first fiscal six months of 2006 was
19.0% versus 18.4% over the same period a year ago.
Operating profit as a percent to sales in the fiscal
second quarter of 2006 was 18.3% versus 17.5% over the
same period a year ago. This increase was related to
advertising and promotions spending in fiscal 2006 as
compared to fiscal 2005.
Pharmaceutical Segment
Operating profit for the Pharmaceutical segment as a
percent to sales in the first fiscal six months of 2006
was 31.7% versus 31.6% over the same period a year ago.
Operating profit as a percent to sales in the fiscal
second quarter of 2006 was 29.2% versus 27.1% over the
same period a year ago. For both periods in 2006,
operating profit was favorable, as compared to the same
periods a year ago, due to the acquisition-related
IPR&D charges incurred during the first fiscal six
months of 2005 and the fiscal second quarter of 2005 of
$302 million. However, this favorability was partially
offset in both periods of 2006 by increased research
and development spending, including the $165 million up
front payment to Vertex Pharmaceuticals in the fiscal
second quarter of 2006 for the rights to develop and
commercialize VX-950 for Hepatitis C in selected
regions.
Medical Devices and Diagnostics Segment
Operating profit for the Medical Devices and
Diagnostics segment as a percent to sales in the first
fiscal six months of 2006 was 35.4% versus 29.1% over
the same period a year ago. Operating profit as a
percent to sales in the fiscal second quarter of 2006
was 27.8% versus 28.1% over the same period a year ago.
The primary driver of the improved operating profit in
the Medical Devices and Diagnostics segment for the
fiscal six months over the same period a year ago was
the gain associated with the Guidant termination fee,
less associated expenses, of $622 million before tax.
Additionally, gross profit for the first fiscal six
months of 2006 was enhanced by cost reduction programs,
and favorable product mix, which offset increased
research and development spending and IPR&D charges.
Interest (Income) Expense
Interest income increased in both the first fiscal six
months and fiscal second quarter of 2006 as compared to
the same periods a year ago. The increase reflected an
improved cash position, as well as, higher rates of
interest being earned on cash holdings. The cash
balance including marketable securities at the end of
the fiscal second quarter of 2006 was $14.7 billion,
which was $1.6 billion higher than the same period a
year ago.
Interest expense decreased in both the first fiscal six
months and fiscal second quarter of 2006 as compared to
the same periods a year ago, resulting from lower
average debt balances.
Provision For Taxes on Income
The worldwide effective income tax rates for the first
fiscal six months of 2006 and 2005 were 25.5% and
24.6%, respectively, an increase of 0.9% primarily due
to the expiration of the U.S. research and development
tax credit at the end of fiscal 2005, and the net
effect of the following items. The tax rate for the
first fiscal six months of 2006 benefited from a
reversal of tax allowances of $134 million associated
with the Tibotec business. This benefit was offset by
acquisition-related IPR&D charges of $124 million, for
which there was a minimal tax benefit. Additionally,
the first fiscal six months of 2006 includes the gain
associated with the Guidant termination fee, less
associated expenses, of $622 million before tax
recorded at a 40.8% tax rate.
The first fiscal six months of 2005 included a benefit
of $225 million, due to the reversal of a tax liability
previously recorded during the fiscal fourth quarter of
2004, associated with a technical correction made to
the American Jobs Creation Act of 2004, in May 2005, as
well as, the impact of acquisition-related IPR&D
charges of $353 million that are non-deductible for tax
purposes.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash generated from operations provided the major
sources of funds for the growth of the business,
including working capital, capital expenditures, and
acquisitions. Other uses of cash included share
repurchases, dividends and debt repayments. In the
first fiscal six months of 2006, cash flow from
operations was $5.8 billion, an increase of $1.2
billion over the same period a year ago. This was a
result of growth in net income of $0.5 billion, net of
the non-cash impact of IPR&D charges. This increase in
net income includes the gain associated with the
Guidant termination fee, less associated expenses, of
$368 million after tax. A $0.9 increase in accounts
payable and accrued liabilities was also a key driver
of the increase in cash flow from operations. Net cash
used by investing activities increased by $3.2 billion
due to a $2.7 billion net decrease in sales of
investments and a $0.5 billion increase in acquisition
activity. Net cash used by financing activities
increased by $2.6 billion due primarily to a $2.0
billion increase in the repurchase of common stock.
During the first fiscal six months of 2006 $2.7 billion
was utilized for the stock repurchase program. Cash
and current marketable securities were $14.7 billion at
the end of the fiscal second quarter of 2006 as
compared with $16.1 billion at fiscal year end 2005.
Dividends
On April 27, 2006, the Board of Directors declared a
regular cash dividend of $0.375 per share, payable on
June 13, 2006 to shareholders of record as of May 30,
2006. This represented an increase of 13.6% in the
quarterly dividend rate and was the 44th consecutive
year of cash dividend increases.
On July 17, 2006, the Board of Directors declared a
regular cash dividend of $0.375 per share, payable on
September 12, 2006 to shareholders of record as of
August 29, 2006.
The Company expects to continue the practice of paying
regular cash dividends.
OTHER INFORMATION
New Accounting Standards
In June 2006, the FASB issued FASB Interpretation 48
[FIN 48], Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No 109. This
interpretation prescribes a recognition threshold and
measurement attribute for the financial statement
recognition and measurement of a tax position taken or
expected to be taken in a tax return. The
interpretation also provides guidance on derecognition,
classification and other matters. FIN 48 is effective
for the fiscal year 2007 and the Company plans to adopt
the Interpretation at that time. The Company is
currently evaluating the impact of the adoption of FIN
48 on its results of operations, cash flows and
financial position.
The Company implemented SFAS 123(R), Share Based
Payment, in the fiscal first quarter of 2006. The
Company applied the modified retrospective transition
method to implement SFAS No. 123(R). Previously
reported financial statements were restated to reflect
SFAS No. 123 disclosure amounts. See Note 1 included in
Item 1. Financial Statements (unaudited)- Notes to
Consolidated Financial Statements.
The Company implemented SFAS 151, Inventory Costs, an
amendment of ARB No. 43 in the fiscal first quarter of
2006. The adoption of this statement did not have a
material effect on the Company's results of operations,
cash flows or financial position.
Economic and Market Factors
Johnson & Johnson is aware that its products are used
in an environment where, for more than a decade,
policymakers, consumers and businesses have expressed
concern about the rising cost of health care. Johnson
& Johnson has a long-standing policy of pricing
products responsibly. For the period 1995 through 2005
in the United States, the weighted average compound
annual growth rate of Johnson & Johnson price increases
for health care products (prescription and over-the-
counter drugs, hospital and professional products) was
below the U.S. Consumer Price Index (CPI).
Inflation rates, even though moderate in many parts of
the world during 2005, continue to have an effect on
worldwide economies and, consequently, on the way
companies operate. In the face of increasing costs, the
Company strives to maintain its profit margins through
cost reduction programs, productivity improvements and
periodic price increases. The Company faces various
worldwide health care changes that may result in
pricing pressures that include health care cost
containment and government legislation relating to
sales, promotions and reimbursement.
The Company also operates in an environment
increasingly hostile to intellectual property rights.
Generic drug firms have filed Abbreviated New Drug
Applications seeking to market generic forms of most of
the Company's key pharmaceutical products, prior to
expiration of the applicable patents covering those
products. In the event the Company is not successful in
defending a lawsuit resulting from an Abbreviated New
Drug Application filing, the generic firms will then
introduce generic versions of the product at issue,
resulting in very substantial market share and revenue
losses. For further information see the discussion on
"Litigation Against Filers of Abbreviated New Drug
Applications" in Note 12 included in Item 1. Financial
Statements (unaudited)- Notes to Consolidated Financial
Statements.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-Q contains forward-looking statements.
Forward- looking statements do not relate strictly to
historical or current facts and anticipate results
based on management's plans that are subject to
uncertainty. Forward-looking statements may be
identified by the use of words like "plans," "expects,"
"will," "anticipates," "estimates" and other words of
similar meaning in conjunction with, among other
things, discussions of future operations, financial
performance, the Company's strategy for growth, product
development, regulatory approval, market position and
expenditures.
Forward-looking statements are based on current
expectations of future events. The Company cannot
guarantee that any forward- looking statement will be
accurate, although the Company believes that it has
been reasonable in its expectations and assumptions.
Investors should realize that if underlying assumptions
prove inaccurate or that unknown risks or uncertainties
materialize, actual results could vary materially from
the Company's expectations and projections. Investors
are therefore cautioned not to place undue reliance on
any forward-looking statements. The Company assumes no
obligation to update any forward-looking statements
as a result of new information or future events or
developments.
Risks and uncertainties include general industry
conditions and competition; economic conditions, such
as interest rate and currency exchange rate
fluctuations; technological advances, new products and
patents attained by competitors; challenges inherent in
new product development, including obtaining regulatory
approvals; challenges to patents; U.S. and foreign
health care reforms and governmental laws and
regulations; trends toward health care cost
containment; increased scrutiny of the health care
industry by government agencies; product efficacy or
safety concerns resulting in product recalls or
regulatory action.
The Company's Annual Report on Form 10-K for the fiscal
year ended January 1, 2006 contains, as an Exhibit, a
discussion of additional factors that could cause
actual results to differ from expectations. The Company
notes these factors as permitted by the Private
Securities Litigation Reform Act of 1995.
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
There has been no material change in the Company's
assessment of its sensitivity to market risk since its
presentation set forth in Item 7A, "Quantitative and
Qualitative Disclosures About Market Risk," in its
Annual Report on Form 10-K for the fiscal year ended
January 1, 2006.
Item 4 - CONTROLS AND PROCEDURES
Disclosure controls and procedures. At the end of the
period covered by this report, the Company evaluated
the effectiveness of the design and operation of its
disclosure controls and procedures. The Company's
disclosure controls and procedures are designed to
ensure that information required to be disclosed by the
Company in the reports that it files or submits under
the Securities Exchange Act is recorded, processed,
summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure
controls and procedures include, without limitation,
controls and procedures designed to ensure that
information required to be disclosed by the Company in
the reports that it files or submits under the
Securities Exchange Act is accumulated and communicated
to the Company's management, including its principal
executive and principal financial officers, or persons
performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
William C. Weldon, Chairman and Chief Executive
Officer, and Robert J. Darretta, Vice Chairman and
Chief Financial Officer, reviewed and participated in
this evaluation. Based on this evaluation, Messrs.
Weldon and Darretta concluded that, as of the date of
their evaluation, the Company's disclosure controls and
procedures were effective.
Internal control. During the period covered by this
report, there were no changes in the Company's internal
control over financial reporting that have materially
affected, or are reasonably likely to materially
affect, the Company's internal control over financial
reporting.
Part II - OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS
The information called for by this item is incorporated
herein by reference to Note 12 included in Part I, Item
1. Financial Statements (unaudited) - Notes to
Consolidated Financial Statements.
Item 1A - RISK FACTORS
Not applicable.
Item 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS
(c) Purchases of Equity Securities by the Issuer and
Affiliated Purchasers.
Common Stock purchases on the open market are made as
part of a systematic plan to meet the Company's
compensation programs. On March 8, 2006, the Company
announced that its Board of Directors approved a stock
repurchase program, authorizing the Company to buy back
up to $5 billion of the Company's common stock. The
program has no time limit and may be suspended for
periods or discontinued.
The following table provides information with respect
to Common Stock purchases by the Company during the
fiscal second quarter of 2006.
Fiscal Month Total Average Total Number Remaining
Number of Price of Shares Maximum
Shares Paid per Purchased as Number of
Purchased(1)Share Part of Shares that
Publicly May Be
Announced Purchased
Plans or Under the
Programs Plans or
Programs (2)
April 3, 2006
through
April 30, 2006 12,209,400 $58.29 11,312,600
May 1, 2006
through
May 28, 2006 14,487,200 $59.46 14,487,200
May 29, 2006
through
July 2, 2006 16,368,000 $60.74 14,088,900
Total 43,064,600 39,888,700 38,723,685
(1) During the fiscal second quarter of 2006, the
Company repurchased an aggregate of 39,888,700 shares
of Johnson & Johnson Common Stock pursuant to the
repurchase program that was publicly announced on March
8, 2006 and an aggregate of 3,175,900 shares in open-
market transactions outside of the program.
(2) As of July 2, 2006, based on the closing price of
the Company's Common Stock on the New York Stock
Exchange on June 30, 2006 of $59.92 per share.
Item 4 - Submission of Matters to a Vote of Security
Holders
(a) The annual meeting of the shareholders of the
Company was held on April 27, 2006.
(b) Election of the directors is set forth in (c)
below.
(c) The shareholders elected all the Company's
nominees for director and ratified the appointment of
PricewaterhouseCoopers LLP as the Company's independent
registered accounting firm for the fiscal year 2006.
The shareholders also approved of the amendments to the
Restated Certificate of Incorporation, as proposed by
management, and defeated the shareholder proposals on
charitable contributions and majority voting
requirements for director nominees.
1. Election of Directors:
Shares For Shares Withheld
M. S. Coleman 2,493,523,726 50,198,917
J. G. Cullen 2,472,303,251 71,419,392
R. J. Darretta 2,412,508,484 131,214,159
M. M. E. Johns 2,506,812,713 36,909,930
A. D. Jordan 2,477,391,237 66,331,406
A. G. Langbo 2,484,553,445 59,169,198
S. L. Lindquist 2,507,139,743 36,582,900
L. F. Mullin 2,490,905,545 52,817,098
C. A. Poon 2,479,441,418 64,281,225
C. Prince 2,406,966,830 136,755,813
S. S Reinemund 2,506,672,307 37,050,336
D. Satcher 2,506,540,877 37,181,766
W. C. Weldon 2,482,692,868 61,029,775
Abstain 35,576,608
Broker Non-vote -
2. Amendments to the Restated Certificate of
Incorporation:
For 2,496,705,505
Against 19,668,147
Abstain 27,348,991
Broker Non-vote -
3. Ratification of Appointment of
PricewaterhouseCoopers LLP:
For 2,465,908,496
Against 53,156,383
Abstain 24,657,764
Broker Non-vote -
4. Shareholder proposal on charitable contributions:
For 113,838,488
Against 1,714,896,357
Abstain 169,068,896
5. Shareholder proposal on majority voting
requirements for director nominees:
For 762,845,143
Against 1,192,219,145
Abstain 42,739,453
Item 6 - EXHIBITS
Exhibit 31.1 Certifications under Rule 13a-
14(a) of the Securities Exchange Act pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 -
Filed with this document.
Exhibit 32.1 Certifications pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 - Furnished
with this document.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
JOHNSON & JOHNSON
(Registrant)
Date: August 8, 2006 By ___________________
R. J. DARRETTA
Vice Chairman, Board of
Directors; Chief Financial
Officer and Director
(Principal Financial Officer)
Date: August 8, 2006 By ___________________
S. J. COSGROVE
Controller
(Principal Accounting Officer)