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 September 30, 2007
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 October 28, 2007 2,861,749,911 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 -
September 30, 2007 and December 31, 2006 3
Consolidated Statements of Earnings for the Fiscal
Third Quarters Ended September 30, 2007 and
October 1, 2006 5
Consolidated Statements of Earnings for the Fiscal
Nine Months Ended September 30, 2007 and
October 1, 2006 6
Consolidated Statements of Cash Flows for the Fiscal
Nine Months Ended September 30, 2007 and
October 1, 2006 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 30
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 44
Item 4. Controls and Procedures 44
Part II - Other Information
Item 1 - Legal Proceedings 45
Item 2 - Unregistered Sales of Equity Securities
and Use of Proceeds 45
Item 6 - Exhibits 46
Signatures 47
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
ASSETS
September 30, December 31,
2007 2006
Current Assets:
Cash & cash equivalents $6,640 $4,083
Marketable securities 1,680 1
Accounts receivable, trade,
less allowances for doubtful
accounts
$181 (2006, $154) 9,384 8,712
Inventories (Note 4) 5,414 4,889
Deferred taxes on income 2,594 2,094
Prepaid expenses and other
receivables 3,229 3,196
Total current assets 28,941 22,975
Marketable securities, non-
current 8 16
Property, plant and equipment
at cost 25,699 24,028
Less: accumulated
depreciation (12,086) (10,984)
Property, plant and
equipment, net 13,613 13,044
Intangible assets, net (Note 5) 15,468 15,348
Goodwill, net (Note 5) 14,040 13,340
Deferred taxes on income 3,808 3,210
Other assets 2,787 2,623
Total Assets $78,665 $70,556
See Notes to Consolidated Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
2007 2006
Current Liabilities:
Loans and notes payable $3,264 $4,579
Accounts payable 5,963 5,691
Accrued liabilities 5,076 4,587
Accrued rebates, returns and
promotions 2,519 2,189
Accrued salaries, wages and
commissions 1,474 1,391
Accrued taxes on income 1,032 724
Total current liabilities 19,328 19,161
Long-term debt 4,633 2,014
Deferred taxes on income 1,386 1,319
Employee related obligations 6,082 5,584
Other liabilities 3,663 3,160
Total liabilities 35,092 31,238
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) (1,534) (2,118)
Retained earnings 54,197 49,290
Less: common stock held in
treasury, at cost
(246,836,000 and 226,612,000
shares) 12,210 10,974
Total shareholders' equity 43,573 39,318
Total liabilities and
shareholders' equity $78,665 $70,556
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
Sept. 30, Percent Oct. 1, Percent
2007 to 2006 to
Sales Sales
Sales to customers
(Note 6) $14,970 100.0% $13,287 100.0%
Cost of products sold 4,274 28.5 3,650 27.5
Gross profit 10,696 71.5 9,637 72.5
Selling, marketing and
administrative expenses 4,899 32.7 4,291 32.3
Research & development
expense 1,834 12.3 1,719 12.9
In-process research &
development - - 115 0.9
Restructuring (Note 11) 745 5.0 - -
Interest income (134) (0.9) (207) (1.6)
Interest expense, net
of portion capitalized 82 0.6 13 0.1
Other expense (income),
net 2 - 45 0.3
Earnings before
provision for taxes on
income 3,268 21.8 3,661 27.6
Provision for taxes on
income (Note 3) 720 4.8 901 6.8
NET EARNINGS $2,548 17.0% $2,760 20.8%
NET EARNINGS PER SHARE
Basic $0.88 $0.95
Diluted $0.88 $0.94
CASH DIVIDENDS PER SHARE $0.415 $0.375
AVG. SHARES OUTSTANDING
Basic 2,887.7 2,920.0
Diluted 2,912.9 2,948.1
See Notes to Consolidated Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; dollars & shares in millions
except per share figures)
Fiscal Nine Months Ended
Sept. 30, Percent Oct. 1, Percent
2007 to 2006 to
Sales Sales
Sales to customers
(Note 6) $45,138 100.0% $39,642 100.0%
Cost of products sold 13,017 28.8 11,050 27.9
Gross profit 32,121 71.2 28,592 72.1
Selling, marketing and
administrative expenses 14,730 32.6 12,737 32.1
Research & development
expense 5,352 11.9 5,079 12.8
In-process research &
development 807 1.8 239 0.6
Restructuring (Note 11) 745 1.7 - -
Interest income (324) (0.7) (613) (1.5)
Interest expense, net
of portion capitalized 203 0.4 42 0.1
Other income, net (343) (0.8) (771) (2.0)
Earnings before
provision for taxes on
income 10,951 24.3 11,879 30.0
Provision for taxes on
income (Note 3) 2,749 6.1 2,994 7.6
NET EARNINGS $8,202 18.2% $8,885 22.4%
`
NET EARNINGS PER SHARE
Basic $2.84 $3.01
Diluted $2.81 $2.99
CASH DIVIDENDS PER SHARE $1.205 $1.08
AVG. SHARES OUTSTANDING
Basic 2,892.0 2,948.7
Diluted 2,919.3 2,971.3
See Notes to Consolidated Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
Fiscal Nine Months Ended
September 30, October 1,
2007 2006
CASH FLOW FROM OPERATING
ACTIVITIES
Net earnings $8,202 $8,885
Adjustment to reconcile net
earnings to cash flow:
Depreciation and
amortization of property
and intangibles 1,902 1,606
Stock based compensation 537 511
Purchased in-process
research and development 807 239
Deferred tax provision (900) (681)
Accounts receivable allowances 13 (16)
Changes in assets and
liabilities, net of effects
from acquisitions:
Increase in accounts receivable (407) (714)
Increase in inventories (309) (339)
Increase/(Decrease) in accounts
payable and accrued liabilities 933 (398)
(Increase)/Decrease in other
current and non-current assets (1,007) 79
Increase in other current
and non-current liabilities 1,154 793
NET CASH FLOWS FROM OPERATING
ACTIVITIES 10,925 9,965
CASH FLOWS FROM INVESTING
ACTIVITIES
Additions to property, plant
and equipment (1,704) (1,607)
Proceeds from the disposal of assets 214 2
Acquisitions, net of cash acquired (1,378) (1,377)
Purchases of marketable securities (8,475) (452)
Sales of marketable securities 6,706 324
Other (primarily intangibles) (101) (124)
NET CASH USED BY INVESTING
ACTIVITIES (4,738) (3,234)
CASH FLOWS FROM FINANCING
ACTIVITIES
Dividends to shareholders (3,486) (3,182)
Repurchase of common stock (2,581) (5,371)
Proceeds from short-term debt 20,124 599
Retirement of short-term debt (21,461) (1,139)
Proceeds from long-term debt 2,605 1
Retirement of long-term debt (12) (12)
Proceeds from the exercise of stock
options/excess tax benefits 961 692
NET CASH USED BY FINANCING
ACTIVITIES (3,850) (8,412)
Effect of exchange rate
changes on cash and cash
equivalents 220 117
Increase/(Decrease) in cash
and cash equivalents 2,557 (1,564)
Cash and Cash equivalents,
beginning of period 4,083 16,055
CASH AND CASH EQUIVALENTS,
END OF PERIOD $6,640 $14,491
Acquisitions
Fair value of assets acquired $1,609 $1,627
Fair value of liabilities assumed (231) (250)
Net cash paid for
acquisitions $1,378 $1,377
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 December
31, 2006. The unaudited interim financial statements
include all adjustments (consisting only of normal
recurring adjustments except for the restructuring
charge in note 11) 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 2007, the Company
adopted 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. See
note 3 for more details.
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 September 30, 2007, the balance of deferred net
losses on derivatives included in accumulated other
comprehensive income was $118 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 third quarters ended September 30, 2007
and October 1, 2006, 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 nine months of 2007 and 2006 were 25.1% and
25.2%, respectively, a decrease of 0.1%. This was
primarily due to increases in taxable income in lower
tax jurisdictions relative to taxable income in higher
tax jurisdictions and the Research and Development
(R&D) tax credit, which was not in effect in the first
fiscal nine months of 2006. This was partially offset
by higher IPR&D charges recorded in the fiscal nine
months of 2007 versus 2006, which was non-deductible
for tax purposes. The tax rate for the first fiscal
nine months of 2006 benefited from a reversal of
deferred tax valuation allowances associated with the
Tibotec business.
The Company adopted FIN No 48, "Accounting for
Uncertainty in Income Taxes" effective January 1, 2007
which resulted in the recognition of an additional $19
million of previously unrecognized tax benefits, with
the corresponding adjustment to retained earnings. The
Company had $1.1 billion of unrecognized tax benefits
as of January 1, 2007 including the previous adjustment
mentioned above. The Company classifies interest
expense and penalties related to unrecognized tax
benefits as income tax expense. The total amount of
accrued interest on January 1, 2007 was $0.2 billion.
The Company conducts business and files tax returns in
numerous countries and currently has tax audits in
progress with a number of tax authorities. The U.S.
Internal Revenue Service (IRS)has completed their audit
for tax years through 1999; however, the years 1996
through 1999 remain open while a limited number of
issues are being considered at the IRS appeals level.
In other major jurisdictions where the Company conducts
business, the tax years remain open generally back to
the year 2000 with some jurisdictions remaining open
back to 1995.
NOTE 4 - INVENTORIES
(Dollars in Millions)
September 30, December 31,
2007 2006
Raw materials and supplies $891 $980
Goods in process 1,887 1,253
Finished goods 2,636 2,656
Total $5,414 $4,889
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
2006 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)
September 30, December 31,
2007 2006
Trademarks (non-amortizable) $6,754 $6,609
Less accumulated amortization 144 134
Trademarks (non-amortizable)-net 6,610 6,475
Patents and trademarks 5,394 5,282
Less accumulated amortization 1,994 1,695
Patents and trademarks - net 3,400 3,587
Other amortizable intangibles 7,303 6,923
Less accumulated amortization 1,845 1,637
Other intangibles - net 5,458 5,286
Total intangible assets - gross 19,451 18,814
Less accumulated amortization 3,983 3,466
Total intangible assets - net 15,468 15,348
Goodwill - gross 14,777 14,075
Less accumulated amortization 737 735
Goodwill - net $14,040 $13,340
Goodwill as of September 30, 2007 as allocated by
segment of business is as follows:
(Dollars in Millions)
Consumer Pharm Med Dev Total
& Diag
Goodwill, net of
accumulated
amortization at
December 31, 2006 $7,866 $902 $4,572 $13,340
Acquisitions 3 - 439 442
Translation & Other 241 16 1 258
Goodwill as of
September 30, 2007 $8,110 $918 $5,012 $14,040
The weighted average amortization periods for patents
and trademarks and other intangible assets are 15 years
and 27 years, respectively. The amortization expense
of amortizable intangible assets for the fiscal nine
months ended September 30, 2007 was $556 million and
the estimated amortization expense for the five
succeeding years approximates $740 million, per year.
NOTE 6 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
SALES BY SEGMENT OF BUSINESS (1)
(Dollars in Millions)
Fiscal Quarters Ended
Sept. 30, Oct. 1, Percent
2007 2006 Change
Consumer
U.S. $1,591 $1,138 39.8%
International 2,032 1,318 54.2
Worldwide 3,623 2,456 47.5
Pharmaceutical
U.S. 3,765 3,841 (2.0)
International 2,334 2,040 14.4
Worldwide 6,099 5,881 3.7
Medical Devices &
Diagnostics
U.S. 2,569 2,509 2.4
International 2,679 2,441 9.8
Worldwide 5,248 4,950 6.0
U.S. 7,925 7,488 5.8
International 7,045 5,799 21.5
Worldwide $14,970 $13,287 12.7%
Fiscal Nine Months Ended
Sept. 30, Oct. 1, Percent
2007 2006 Change
Consumer
U.S. $4,782 $3,391 41.0%
International 5,901 3,818 54.6
Worldwide 10,683 7,209 48.2
Pharmaceutical
U.S. 11,659 11,224 3.9
International 6,810 6,093 11.8
Worldwide 18,469 17,317 6.7
Medical Devices &
Diagnostics
U.S. 7,772 7,619 2.0
International 8,214 7,497 9.6
Worldwide 15,986 15,116 5.8
U.S. 24,213 22,234 8.9
International 20,925 17,408 20.2
Worldwide $45,138 $39,642 13.9%
(1) Export and intersegment sales are not significant.
OPERATING PROFIT BY SEGMENT OF BUSINESS
(Dollars in Millions)
Fiscal Quarters Ended
Sept. 30, Oct. 1, Percent
2007 2006 Change
Consumer (1) $586 $455 28.8%
Pharmaceutical(2) 1,594 1,814 (12.1)
Medical Devices & 1,140 1,339 (14.9)
Diagnostics (3)
Segments total 3,320 3,608 (8.0)
Income/(expense) not
allocated to
segments (4) (52) 53
Worldwide total $3,268 $3,661 (10.7)%
Fiscal Nine Months Ended
Sept. 30, Oct. 1, Percent
2007 2006 Change
Consumer (5) $1,828 $1,359 34.5%
Pharmaceutical (6) 6,006 5,438 10.4
Medical Devices & 3,378 4,934 (31.5)
Diagnostics(7)
Segments total 11,212 11,731 (4.4)
Income/(expense) not
allocated to
segments (4) (261) 148
Worldwide total $10,951 $11,879 (7.8)%
(1)Includes restructuring charges of $15 million
recorded in the fiscal third quarter of 2007.
(2)Includes restructuring charges of $429 million
recorded in the fiscal third quarter of 2007.
(3)Includes restructuring charges of $301 million
recorded in the fiscal third quarter of 2007.
Also includes $115 million of IPR&D charges related
to acquisitions completed in the fiscal third quarter
of 2006.
(4)Amounts not allocated to segments include interest
income/(expense), minority interest and general
corporate income/(expense).
(5)Includes restructuring charges of $15 million
recorded in the first fiscal nine months of 2007.
(6)Includes restructuring charges of $429 million
recorded in the first fiscal nine months of 2007.
(7)Includes restructuring charges of $301 million
recorded in the first fiscal nine months of 2007.
Includes $807 million and $239 million of IPR&D
charges related to acquisitions completed in the first
fiscal nine months of 2007 and first fiscal nine
months of 2006, respectively. The first fiscal nine
months of 2006 also includes the gain associated with
the Guidant acquisition agreement termination fee,
less associated expenses, of $622 million before tax.
SALES BY GEOGRAPHIC AREA
(Dollars in Millions)
Fiscal Quarters Ended
Sept. 30, Oct. 1, Percent
2007 2006 Change
U.S. $7,925 $7,488 5.8%
Europe 3,765 3,098 21.5
Western Hemisphere,
excluding U.S. 1,195 901 32.6
Asia-Pacific,
Africa 2,085 1,800 15.8
Total $14,970 $13,287 12.7%
Fiscal Nine Months Ended
Sept. 30, Oct. 1, Percent
2007 2006 Change
U.S. $24,213 $22,234 8.9%
Europe 11,485 9,464 21.4
Western Hemisphere,
excluding U.S. 3,372 2,599 29.7
Asia-Pacific,
Africa 6,068 5,345 13.5
Total $45,138 $39,642 13.9%
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 third quarters ended September 30, 2007 and
October 1, 2006.
(Shares in Millions) Fiscal Quarters Ended
Sept. 30, Oct. 1,
2007 2006
Basic net earnings per share $0.88 $0.95
Average shares outstanding -
basic 2,887.7 2,920.0
Potential shares exercisable
under stock option plans 192.0 218.0
Less: shares which could be
repurchased under treasury
stock method (170.6) (193.8)
Convertible debt shares 3.8 3.9
Adjusted average shares
outstanding - diluted 2,912.9 2,948.1
Diluted earnings per share $0.88 $0.94
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
for both the fiscal third quarters ended September 30,
2007 and October 1, 2006.
The diluted earnings per share calculation excluded 66
million and 43 million shares related to options and
restricted stock units for the fiscal third quarters
ended September 30, 2007 and October 1, 2006,
respectively, due to the 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
nine months ended September 30, 2007 and October 1, 2006.
(Shares in Millions) Fiscal Nine Months Ended
Sept. 30, Oct. 1,
2007 2006
Basic net earnings per share $2.84 $3.01
Average shares outstanding -
basic 2,892.0 2,948.7
Potential shares exercisable
under stock option plans 192.3 217.6
Less: shares which could be
repurchased under treasury
stock method (168.8) (198.9)
Convertible debt shares 3.8 3.9
Adjusted average shares
outstanding - diluted 2,919.3 2,971.3
Diluted earnings per share $2.81 $2.99
The diluted earnings per share calculation included the
dilutive effect of convertible debt that was offset by
the related reduction in interest expense of $3 million
for both the first fiscal nine months ended September
30, 2007 and October 1, 2006.
The diluted earnings per share calculation excluded 65
million and 44 million shares related to options and
restricted stock units for the first fiscal nine months
ended September 30, 2007 and October 1, 2006,
respectively, due to the anti-dilutive effect on
diluted earnings per share.
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The total comprehensive income for the first fiscal
nine months ended September 30, 2007 was $8.8 billion,
compared with $9.1 billion for the same period a year
ago. The total comprehensive income for the fiscal
third quarter ended September 30, 2007 was $2.9
billion, compared with $2.8 billion for the same period
a year ago. Total comprehensive income included net
earnings, net unrealized currency gains and losses on
translation, adjustments related to Employee Benefit
Plans, 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/ Employ (Losses) Other
Cur. (Losses) Benefit on Deriv Comp
Trans. on Sec Plans & Hedg Inc/
(Loss)
December 31, 2006 $ (158) 61 (2,030) 9 (2,118)
2007 Nine Months
changes:
Net change
associated
with current
period
hedging
transactions (107)
Net amount reclassed
to net earnings (20)*
Net nine months changes 570 28 113 (127) 584
September 30, 2007 $ 412 89 (1,917) (118) (1,534)
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
There were no acquisitions completed during the fiscal
third quarter or fiscal second quarter of 2007. During
the fiscal first quarter of 2007, the Company acquired
Conor Medsystems, Inc. for a purchase price of $1.4
billion in cash. Conor Medsystems, Inc., is a
cardiovascular device company, with new drug delivery
technology.
During the fiscal first quarter of 2007, the Company
completed the divestiture of the KAOPECTATE(R), UNISOM(R),
CORTIZONE(R), BALMEX(R) and ACT(R) consumer products to Chattem,
Inc. for $410 million in cash.
The Company is in the process of finalizing the
allocation of the purchase price to the individual
assets acquired and liabilities assumed for the
acquisition of the Consumer Healthcare business of
Pfizer Inc. Preliminary allocation of the purchase
price included in the current period balance sheet is
based on the best estimates of management. The
completion of the purchase price allocation may result
in adjustments to the carrying value of the recorded
assets and liabilities, revisions of the useful lives
of intangible assets and the determination of any
residual amount that will be allocated to goodwill. The
related depreciation and amortization from the acquired
assets is also subject to revision based on the final
allocation. The final allocation will be completed in
the fiscal fourth quarter of 2007.
The 2006 acquisitions included Animas Corporation, a
leading maker of insulin infusion pumps and related
products; Hand Innovations LLC, a manufacturer of
fracture fixation products for the upper extremities;
Future Medical Systems S.A., a company that primarily
develops, manufactures and markets arthroscopic fluid
management systems; Vascular Control Systems, Inc., a
company focused on developing medical devices to treat
fibroids and to control bleeding in obstetric and
gynecologic applications; Groupe Vendome S.A., a French
marketer of adult and baby skin care products; ColBar
LifeScience Ltd., a company specializing in
reconstructive medicine and tissue engineering; Ensure
Medical, Inc., a company that develops devices for post-
catheterization closure of the femoral artery; and the
Consumer Healthcare business of Pfizer Inc., which
included brands such as LISTERINE(R), NICORETTE(R),
NEOSPORIN(R), SUDAFED(R), BENADRYL(R) and VISINE(R).
As a result of the Guidant acquisition termination the
Company recorded the Guidant acquisition agreement
termination fee, less associated expenses, of $622
million before tax in other income during the fiscal
first quarter of 2006.
NOTE 10 - 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 third quarters of 2007 and 2006 include the
following components:
(Dollars in Millions)
Retirement Plans Other Benefit Plans
Fiscal Quarters Ended
Sept. 20, Oct. 1, Sept. 30, Oct. 1,
2007 2006 2007* 2006
Service cost $148 $131 $34 $16
Interest cost 169 142 37 26
Expected return on
plan assets (208) (174) (1) -
Amortization of prior
service cost 2 1 (1) (2)
Amortization of net
transition asset 1 (1) - -
Recognized actuarial
losses 45 61 17 9
Net periodic benefit cost $157 $160 $86 $49
*Includes other post employment benefits as per the
adoption of SFAS No. 158.
Net periodic benefit cost for the Company's defined
benefit retirement plans and other benefit plans for
the first fiscal nine months of 2007 and 2006 include
the following components:
(Dollars in Millions)
Retirement Plans Other Benefit Plans
Fiscal Nine Months Ended
Sept. 20, Oct. 1, Sept. 30, Oct. 1,
2007 2006 2007* 2006
Service cost $417 $393 $104 $53
Interest cost 489 426 111 78
Expected return on
plan assets (603) (524) (2) (2)
Amortization of prior
service cost 7 7 (4) (5)
Amortization of net
transition asset 1 (1) - -
Recognized actuarial
losses 140 188 50 29
Net periodic benefit cost $451 $489 $259 $153
*Includes other post employment benefits as per the
adoption of SFAS No. 158.
Company Contributions
For the fiscal nine months ended September 30, 2007,
the Company contributed $16 million and $15 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 2007. International plans will be
funded in accordance with local regulations.
NOTE 11 - RESTRUCTURING
In the third quarter of 2007, the Company announced
restructuring initiatives in an effort to improve its
overall cost structure. This action was taken to offset
the anticipated negative impacts associated with
generic competition in the Pharmaceutical segment and
challenges in the Drug-Eluting stent market. As part of
this program the Company will eliminate approximately
4,400 positions and consolidate certain facilities in
operations, primarily impacting the Pharmaceutical
segment and the Cordis franchise of the Medical Devices
and Diagnostics segment.
During the fiscal third quarter of 2007, the Company
recorded $745 million in pre-tax charges of which,
approximately, $500 million of the pre-tax
restructuring charges are expected to require cash
payments. The $745 million of restructuring charges
consists of severance costs of $450 million, asset
write offs of $272 million and $23 million related to
leasehold obligations. The $272 million of asset write
offs relate to property, plant and equipment of $166
million, intangible assets of $48 million and other
assets of $58 million.
The following table summarizes the severance charges
and the associated spending for the fiscal third
quarter of 2007:
(Dollars in Millions) Severance
3Q 2007 severance charge $450
Cash outlays* (8)
Reserve balance,
Sept. 30, 2007 $442
*Cash outlays for severance are expected to be paid out
over the next 12 to 18 months.
For additional information on the restructuring as it
relates to the segments see note 6.
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.
Multiple products of Johnson & Johnson subsidiaries are
subject to numerous product liability claims and
lawsuits, including ORTHO EVRA(R), RISPERDAL(R), DURAGESIC(R)
and the CHARITE(TM) Artificial Disc. There are
approximately 3,000 claimants who have filed lawsuits
or made claims regarding injuries allegedly due to
ORTHO EVRA(R), 620 claimants with respect to RISPERDAL(R),
250 with respect to CHARITE(TM) and 72 with respect to
DURAGESIC(R). These claimants seek substantial
compensatory and, where available, punitive damages.
With respect to RISPERDAL(R), the Attorneys General of
four states and the Office of General Counsel of the
Commonwealth of Pennsylvania have filed actions seeking
reimbursement of Medicaid or other public funds for
RISPERDAL(R) prescriptions written for off-label use,
compensation for treating their citizens for alleged
adverse reactions to RISPERDAL(R), civil fines or
penalties, punitive damages, or other relief. The
Attorney General of Texas has joined a qui tam action
in that state seeking similar relief. Certain of these
actions also seek injunctive relief relating to the
promotion of RISPERDAL(R). In addition, there are six
cases filed by union health plans seeking damages for
alleged overpayments for RISPERDAL(R), several of which
seek certification as class actions.
Numerous claims and lawsuits in the United States
relating to the drug PROPULSID(R), withdrawn from general
sale by the Company's Janssen Pharmaceutica Inc.
(Janssen) subsidiary in 2000, have been resolved or are
currently enrolled in settlement programs with an
aggregate cap below $100 million in payments by the
Company. Litigation concerning PROPULSID(R) is pending in
Canada, where a class action of persons alleging
adverse reactions to the drug has been certified.
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. Multiple post-trial proceedings and
appeals have ensued with respect to these verdicts,
with the ultimate outcome still subject to uncertainty.
Cordis also has an arbitration claim against Medtronic
accusing Medtronic of infringement by sale of stent
products introduced by Medtronic subsequent to its
products subject to the earlier action referenced
above. Those subsequent products were found to have
been licensed to Medtronic 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 Express2TM, 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
Express2TM, Taxus(R) and Liberte(R) stents infringed the
Palmaz patent and that the Liberte(R) stent also
infringed the Gray patent. Boston Scientific has
appealed to the U.S. Court of Appeals for the Federal
Circuit.
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.
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. The District Court denied motions by Cordis to
overturn the jury verdicts or grant a new trial. Cordis
has appealed to the Court of Appeals for the Federal
Circuit. The District Court indicated it will consider
damages, willfulness and injunctive relief after the
appeals have been decided.
Boston Scientific has brought actions in Belgium, the
Netherlands and Germany under its Kastenhofer patent,
which purports to cover two layer catheters such as
those used to deliver the Cypher Stent, to enjoin the
manufacture and sale of allegedly infringing catheters
in those countries, and to recover damages. The hearing
in the Belgian case took place in September 2007. A
decision by the lower court in the Netherlands in
Boston Scientific's favor was reversed on appeal in
April 2007. Boston Scientific has filed an appeal to
the Dutch Supreme Court. In October 2007, Boston
Scientific prevailed in the nullity action challenging
the validity of the Kastenhofer patent filed by Cordis
in Germany.
Trial in Boston Scientific's U.S. case based on the
Kastenhofer patent concluded in Federal Court in
California on October 31, 2007, with a jury verdict in
favor of Cordis. The jury found the Kastenhofer patent
invalid and found for Cordis with respect to
infringement of the patent asserted by Cordis in its
counterclaim. Post trial motions and appeals are
anticipated.
In Germany, Boston Scientific has several actions based
on its Ding patents pending against the Cordis CYPHER(R)
stent. Cordis was successful in these actions at the
trial level, but Boston Scientific has appealed.
The following chart summarizes various patent lawsuits
concerning products of Johnson & Johnson subsidiaries
that have yet to proceed to trial:
J&J Plaintiff/
Product Company Patents Patent Holder Court Trial Date Filed
Two-layer Cordis Kasten- Boston Scientific Germany * 09/07
Catheters hofer Corp.
Forman
Catheters Cordis Fitzmau- Medtronic AVE E.D. Tex 01/08 06/03
stent delivery rice
systems
Contact Lenses Vision Nicolson CIBA Vision M.D. Fla. * 09/03
Care
Multiple * 09/07
European
Stents Cordis Ricci Medtronic and E.D. Tex * 03/07
Evysio
* Trial date to be established.
LITIGATION AGAINST FILERS OF ABBREVIATED NEW DRUG
APPLICATIONS (ANDA)
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 statutory 30-month stay expires
before a ruling from the district court is obtained,
the firms involved will have the ability, upon FDA
approval, 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 noted in the following chart, 30-month stays expired
during 2006 and will expire in 2007 or 2008 with
respect to ANDA challenges regarding various products:
Brand Name Patent/NDA Generic Trial Date 30-Month
Product Holder Challenger Court Date Filed Stay Expiration
ACIPHEX(R) 20 Eisai Teva S.D.N.Y. 03/07 11/03 02/07
mg delay (for Janssen) Dr. Reddy's S.D.N.Y. 03/07 11/03 02/07
release Mylan S.D.N.Y. 03/07 01/04 02/07
tablet
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 Andrx D.Del. 12/07 09/05 None
18,27,36
and 54 mg ALZA
controlled
release tablet
ORTHO TRI CYCLEN(R)
LO Ortho-McNeil Barr D.N.J. 01/08 10/03 02/06
0.18 mg/
0.025 mg
0.215 mg/
0.025 mg
and 0.25 mg/
0.025 mg
PEPCID
COMPLETE(R) McNeil-PPC Perrigo S.D.N.Y. 02/07 02/05 06/07
RAZADYNE(TM) Janssen Teva D. Del 05/07 07/05 08/08
Mylan D. Del 05/07 07/05 08/08
Dr. Reddy's D. Del 05/07 07/05 08/08
Purepac D. Del 05/07 07/05 08/08
Barr D. Del 05/07 07/05 08/08
Par D. Del 05/07 07/05 08/08
AlphaPharm D. Del 05/07 07/05 08/08
RAZADYNE(TM)
ER Janssen Barr D.N.J. * 06/06 11/08
Sandoz D.N.J. * 05/07 07/09
RISPERDAL(R)
Tablets Janssen Mylan D.N.J. 06/06 12/03 05/06
..25, 0.5, 1,
2, 3, 4 Apotex D.N.J. * 06/06 11/08
mg tablets
RISPERDAL(R)
Oral
Solution Janssen Apotex D.N.J. * 03/06 08/08
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
15,25 mg Mylan
capsule D.N.J. * 10/06 03/09
ULTRACET(R) Ortho-McNeil Apotex N.D. III. * 07/07 12/09
ULTRAM ER(R) Ortho-McNeil Par D. Del. 11/08 05/07 09/09
100,200 mg
tablet
* Trial date to be established.
Trial in the action against Teva, Dr. Reddy's and Mylan
with respect to their ANDA challenges to the patent on
ACIPHEX(R) of Eisai Inc., Ortho McNeil Pharmaceutical's
marketing partner, proceeded before the district court
in New York in March 2007. On May 11, 2007, the Court
held that the ACIPHEX(R) compound patent is enforceable.
The Court had previously held that the patent is valid.
Teva, Dr. Reddy's and Mylan have appealed both
decisions to the Court of Appeals for the Federal
Circuit.
In the action against Mylan and Dr. Reddy's
Laboratories regarding RISPERDAL(R) (risperidone) tablets
and M-Tabs, the District Court in New Jersey ruled, on
October 13, 2006, that the RISPERDAL(R) patent was valid,
enforceable, and infringed by the generic products at
issue, and entered an injunction prohibiting Mylan and
Dr. Reddy's from marketing their generic risperidone
products until a date no earlier than patent expiration
in December 2007. Mylan appealed that ruling. On May
11, 2007, the Court of Appeals affirmed the District
Court's judgment of patent validity and enforceability.
Mylan did not seek further review of the decision and
this matter is concluded.
In the action against Apotex regarding RISPERDAL(R)
(risperidone) tablets, the District Court in New Jersey
entered judgment for Janssen on October 2, 2007,
pursuant to Apotex's stipulation to be bound by the
outcome of the Mylan litigation. On October 12, 2007,
the court also dismissed a second suit relating to the
Oral Solution in which Apotex challenged the validity
and infringement of two patents relating to
formulations for an oral solution product. Apotex
appealed this decision on October 19, 2007.
In the actions against Mylan with respect to the patent
on TOPAMAX(R), the District Court in New Jersey, on
October 24, 2006, granted the motion of the Company's
subsidiary Ortho-McNeil Pharmaceutical, Inc. (Ortho-
McNeil) for a preliminary injunction barring launch by
Mylan of its generic versions of TOPAMAX(R). On
February 2, 2007, the District Court granted Ortho-
McNeil's motion for summary judgment dismissing Mylan's
claim the patent was obvious, the only remaining issue
in the case. The Court entered judgment in the case for
Ortho-McNeil, and entered an injunction prohibiting
Mylan from marketing its generic topiramate products
until a date no earlier than patent expiration in
September 2008. Mylan has appealed this ruling. On
April 2, 2007, the District Court entered judgment
against Cobalt pursuant to its stipulation to be bound
by the outcome in the Mylan suit. Cobalt appealed this
ruling. The Court of Appeals will hear argument on both
appeals on November 9, 2007.
In the action against Perrigo regarding a patent for
PEPCID COMPLETE(R), the District Court for the Southern
District of New York, on June 5, 2007, held that the
patent was invalid as obvious. The Company's
subsidiary McNEIL-PPC, Inc. has appealed the decision
with its partners, Merck & Co., Inc., and Johnson &
Johnson*Merck Consumer Pharmaceuticals Co.
In the action against Barr and AlphaPharm with respect
to their ANDA challenges to the RAZADYNE(R) patent that
Janssen licenses from Synaptech, Inc., a four-day non-
jury trial was held in the District Court in Delaware
in May 2007. The Court has yet to issue its ruling in
that action.
In the weeks following the adverse ruling in the
DITROPAN XL(R) ANDA litigation against Mylan in September
2005, Johnson & Johnson and ALZA received seven
antitrust class action complaints filed by purchasers
of the product. They allege that Johnson & Johnson and
ALZA violated federal and state antitrust laws by
knowingly pursuing baseless patent litigation, and
thereby delaying entry into the market by Mylan and
Impax.
AVERAGE WHOLESALE PRICE (AWP) LITIGATION
Johnson & Johnson and several of 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.
The MDL Court identified classes of Massachusetts-only
private insurers providing "Medi-gap" insurance
coverage and private payers for physician-administered
drugs where payments were based on AWP ("Class 2" and
"Class 3"), and a national class of individuals who
made co-payments for physician-administered drugs
covered by Medicare ("Class 1"). A trial of the two
Massachusetts-only class actions concluded before the
MDL Court in December 2006. On June 21, 2007, the MDL
Court issued post-trial rulings, dismissing the Johnson
& Johnson defendants from the case regarding all claims
of Classes 2 and 3. The MDL Court subsequently
indicated it would dismiss against the Johnson &
Johnson defendants all claims by the Class 1 plaintiffs
as well. Trial in the action brought by the Attorney
General of the State of Alabama making allegations
related to AWP is set for the first quarter of 2008.
Additional AWP cases brought by various Attorneys
General are expected to be set for trial in 2008.
OTHER
In July 2003, Centocor Corporation 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). Additional subpoenas for documents have
been received. 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.
Subpoenas seeking testimony from various witnesses
before a grand jury have also been received. Janssen
is cooperating in responding to these subpoenas.
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),
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), 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. This investigation was
resolved by DePuy and the four other leading suppliers
of hip and knee implants in late September 2007 by
agreements with the U.S. Attorney's Office for the
District of New Jersey. The settlements include an 18-
month Deferred Prosecution Agreement (DPA), acceptance
by each company of a monitor to assure compliance with
the DPA and, with respect to four of the five
companies, payment of settlement monies and entry into
five year Corporate Integrity Agreements. DePuy paid
$85 million as its settlement.
In June 2005, the U.S. Senate Committee on Finance
requested the Company to produce information regarding
use by several of 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.
On October 30, 2007 another letter was received from
the U.S. Senate Committee on Finance requesting
information concerning payments to a list of
physicians, and specification as to whether any such
payments were for continuing medical education,
honoraria, research support, etc.
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 responding to the subpoena. Several employees of
the Company's pharmaceutical subsidiaries have been
subpoenaed to testify before a grand jury in connection
with this investigation.
In February 2006, Johnson & Johnson received a subpoena
from the U.S. Securities & Exchange Commission (SEC)
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 and DOJ in producing
responsive documents.
In June 2006, DePuy received a subpoena from the U.S.
Department of Justice, Antitrust Division, requesting
documents related to the manufacture, marketing and
sale of orthopaedic devices, and had search warrants
executed in connection with the investigation. DePuy
has responded to the request for documents. In the wake
of publicity about the subpoena, DePuy was served with
five civil antitrust class actions. All of those cases
have been dismissed without prejudice to the right to
file them in the future.
In September 2006, Janssen received a subpoena from the
Attorney General of the State of California seeking
documents regarding sales and marketing and side-
effects of RISPERDAL(R), as well as interactions with
State officials regarding the State's formulary for
Medicaid-reimbursed drugs. Janssen is in the process of
responding to the subpoena.
In November 2006, Centocor received a subpoena seeking
documents in connection with an investigation being
conducted by the Office of the United States Attorney
for the Central District of California regarding
Centocor's Average Selling Price (ASP) calculations for
REMICADE(R) under the company's Contract Purchase
Program. Centocor produced material responsive to the
subpoena. Centocor has been advised that this
investigation has been closed.
In February 2007, Johnson & Johnson voluntarily
disclosed to the U.S. Department of Justice (DOJ) and
the U.S. Securities and Exchange Commission (SEC) that
subsidiaries outside the United States are believed to
have made improper payments in connection with the sale
of medical devices in two small-market countries, which
payments may fall within the jurisdiction of the
Foreign Corrupt Practices Act (FCPA). In the course of
continuing dialogues with the agencies, other issues
potentially rising to the level of FCPA violations in
additional markets have been brought to the attention
of the agencies by the Company. The Company has
provided and will continue to provide additional
information to DOJ and SEC, and will cooperate with the
agencies' reviews of these matters.
On March 5, 2007, Cordis Corporation received a letter
request for documents from the Committee on Oversight
and Government Reform of the U.S. House of
Representatives regarding marketing and safety of drug-
eluting stents. Cordis is cooperating in responding to
the request.
On March 12, 2007, the Company announced that it had
received separate subpoenas from the U.S. Attorney's
Office in Philadelphia, the U.S. Attorney's Office in
Boston and the U.S. Attorney's Office in San Francisco.
The subpoenas relate to investigations by these three
offices referenced above concerning, respectively,
sales and marketing of RISPERDAL(R) by Janssen, TOPAMAX(R)
by Ortho-McNeil and NATRECOR(R) by Scios. The subpoenas
request information regarding the Company's corporate
supervision and oversight of these three subsidiaries,
including their sales and marketing of these drugs.
The Company is cooperating in responding to these
requests. In addition, the U.S. Attorney's office in
Boston has issued subpoenas to several employees of
Johnson & Johnson.
On March 21, 2007, the Company received a letter from
the Committee on Energy and Commerce of the U.S. House
of Representatives seeking answers to several questions
regarding marketing and safety of PROCRIT(R), the
erythropoietin product sold by the Company's Ortho-
Biotech subsidiary. On May 30, 2007, Senator
Grassley, the ranking member of the United States
Senate Committee on Finance, sent the Company a letter
seeking information relating to PROCRIT(R). Although
there are some differences between the two letters, the
Senate request in large measure overlaps the House
request. The Company provided its initial response on
July 9, 2007. On May 10, 2007, the New York State
Attorney General issued a subpoena seeking information
relating to PROCRIT(R). Like the House and Senate
requests, the subpoena asks for materials relating to
PROCRIT(R) safety, marketing and pricing. The Company is
responding to these requests.
On April 27, 2007, the Company received two subpoenas
from the Office of the Attorney General of the State of
Delaware. The subpoenas seek documents and information
relating to nominal pricing agreements. For purposes
of the subpoenas, nominal pricing agreements are
defined as agreements under which the Company agreed to
provide a pharmaceutical product for less than ten
percent of the Average Manufacturer Price for the
product. The Company is responding to the subpoenas
and will cooperate with the inquiry.
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 Court
denied plaintiffs' class certification motion in
December 2006 and their motion for reconsideration in
April 2007. Plaintiffs are seeking to appeal these
decisions.
In late December 2005 and early 2006, three purported
class actions were filed on behalf of purchasers of
endo-mechanical instruments against the Company and its
wholly-owned subsidiaries, Ethicon, Inc., Ethicon Endo-
Surgery, Inc., and Johnson & Johnson Health Care
Systems, Inc. These challenge 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. These
actions have been filed in the Federal District Court
for the Central District of California.
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.
Amgen licenses EPO for sale in the United States to
the Company's Ortho Biotech Inc. subsidiary for non-
dialysis indications. Trial in this action concluded
in October with a verdict in Amgen's favor. Roche is
expected to appeal.
In October 2006, Wyeth, Inc. initiated litigation in
Delaware against Cordis Corporation alleging that
Cordis breached the license and supply agreement
pursuant to which Wyeth supplies Cordis the drug
Rapamycin which is used in connection with Cordis'
CYPHER(R) Sirolimus-eluting Stent. Cordis has commenced
its own action in Delaware seeking a declaration that
no breach has occurred.
With respect to all the above matters, the Company and
its subsidiaries are vigorously contesting the
allegations asserted against them and otherwise
pursuing defenses to maximize the prospect of success.
The Company and its subsidiaries involved in these
matters continually evaluate their strategies in
managing these matters and, where appropriate, pursue
settlements and other resolutions where those are in
the best interest of the Company.
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 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.
NOTE 13 - SUBSEQUENT EVENT
On November 6, 2007 the Company issued an aggregate
of $2.5 billion in long-term notes. There were
approximately $1.0 billion of 5.5% Notes issued in
Sterling due in 2024 and approximately $1.5 billion of
4.75% Notes issued in Euro currency due in 2019. The
proceeds of the notes are expected to be used for
general corporate purposes including the repayment of
a portion of the outstanding commerical paper, issued
to fund the Pfizer Consumer Healthcare acquisition.
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 nine months of 2007, worldwide
sales were $45.1 billion, a total increase of 13.9% and
an operational increase of 11.3% over 2006 first fiscal
nine months sales of $39.6 billion. Currency had a
positive impact of 2.6% for the period. The acquisition
of Pfizer Inc.'s Consumer Healthcare business net of
related divestitures increased both total sales growth
and operational growth by 7.3%.
Sales by U.S. companies were $24.2 billion in the first
fiscal nine months of 2007, which represented an
increase of 8.9% over the same period last year. Sales
by international companies were $20.9 billion, which
represented a total increase of 20.2%, an operational
increase of 14.3%, and a positive impact from currency
of 5.9% over the first fiscal nine months of 2006.
Sales by companies in Europe increased by 21.4%, with
operational growth of 13.1% and a positive impact from
currency of 8.3%. Sales by companies in the Western
Hemisphere, excluding the U.S., increased by 29.7%,
with operational growth of 25.2% and a positive impact
from currency of 4.5%. Sales by companies in the Asia-
Pacific, Africa region increased by 13.5%, with
operational growth of 11.2% and a positive impact from
currency of 2.3%.
For the fiscal third quarter of 2007, worldwide sales
were $15.0 billion, a total increase of 12.7% and an
operational increase of 9.7%, over 2006 fiscal third
quarter sales of $13.3 billion. Currency fluctuations
positively impacted sales by 3.0% for the period. The
acquisition of Pfizer Inc.'s Consumer Healthcare
business net of related divestitures increased both
total sales growth and operational growth by 7.5%.
Sales by U.S. companies were $7.9 billion in the fiscal
third quarter of 2007, which represented an increase of
5.8% over the same period last year. Sales by
international companies were $7.0 billion, which
represented a total increase of 21.5%, an operational
increase of 14.7%, and a positive impact from currency
of 6.8% over the fiscal third quarter of 2006.
Sales by companies in Europe increased by 21.5%, with
operational growth of 13.3% and a positive impact from
currency of 8.2%. Sales by companies in the Western
Hemisphere, excluding the U.S., increased by 32.6%,
with operational growth of 24.9% and a positive impact
from currency of 7.7%. Sales by companies in the Asia-
Pacific, Africa region posted sales growth of 15.8%,
with operational growth of 11.8% and a positive impact
from currency of 4.0%.
Analysis of Sales by Business Segments
Consumer
Consumer segment sales in the first fiscal nine months
of 2007 were $10.7 billion, an increase of 48.2% over
the same period a year ago, with 44.8% of operational
growth and a positive currency impact of 3.4%. U.S.
Consumer segment sales increased by 41.0% while
international sales experienced a total increase of
54.6%, an operational increase of 48.1%, with a
positive currency impact of 6.5%.
The acquisition of Pfizer Inc.'s Consumer Healthcare
business net of the related divestitures increased both
total sales growth and operational growth for the total
Consumer Segment by 40.1%.
Major Consumer Franchise Sales - First Fiscal Nine Months
(Dollars in Millions)
Sept. 30, Oct. 1, Total Operations Currency
2007 2006 Change Change Change
OTC Pharm & Nutr $3,727 $1,985 87.8% 85.6% 2.2%
Skin Care 2,258 1,948 15.9 12.3 3.6
Baby & Kids Care 1,445 1,279 13.0 8.1 4.9
Women's Health 1,345 1,246 8.0 3.7 4.3
Oral Care Products 1,109 293 278.1 275.8 2.3
Other 799 458 74.5 71.8 2.7
Total $10,683 $7,209 48.2% 44.8% 3.4%
Consumer segment sales in the fiscal third quarter of
2007 were $3.6 billion, an increase of 47.5% over the
same period a year ago with 43.4% of operational growth
and a positive currency impact of 4.1%. U.S. Consumer
segment sales increased by 39.8% while international
sales experienced a total increase of 54.2%, an
operational increase of 46.5%, with a positive currency
impact of 7.7%.
The acquisition of Pfizer Inc.'s Consumer Healthcare
business net of the related divestitures increased both
total sales growth and operational growth for the total
Consumer Segment by 40.6%.
Major Consumer Franchise Sales - Fiscal Third Quarter
(Dollars in Millions)
Sept. 30, Oct. 1, Total Operations Currency
2007 2006 Change Change Change
OTC Pharm & Nutr $1,264 $699 80.9% 78.6% 2.3%
Skin Care 737 635 16.0 11.8 4.2
Baby & Kids Care 511 451 13.3 7.3 6.0
Women's Health 461 432 6.8 1.5 5.3
Oral Care Products 396 96 312.3 309.3 3.0
Other 254 143 77.6 74.2 3.4
Total $3,623 $2,456 47.5% 43.4% 4.1%
The OTC Pharmaceuticals and Nutritionals franchise
achieved operational growth of 78.6%. This was
attributable to new products from acquisitions, as well
as growth for adult analgesics and SPLENDA(R) products.
These gains were partially offset by lower sales of
upper respiratory products. The 2006 OTC Pharmaceutical
and Nutritionals franchise sales included the impact of
the re-launch of the TYLENOL(R) Upper Respiratory product
line with products containing phenylephrine instead of
pseudoephedrine. The impact on OTC Pharmaceuticals and
Nutritionals total sales growth and operational growth
due to newly acquired brands from Pfizer Inc. was 77.4%
in the fiscal third quarter of 2007.
On October 11, 2007 The Company announced a voluntary
withdrawal of infants' cough and cold products from the
market. When used as directed, these medicines have
been generally recognized as safe and effective.
However, an assessment of available data on the use of
pediatric cough and cold medicines has identified rare
instances of misuse leading to overdose, particularly
in infants under two years of age. As well, these
products along with children's cough and cold products
generally were the subject of a recent FDA
Nonprescription Drug Advisory Committee hearing, which
recommended to the FDA certain changes in the marketing
and sale of such products. This is not expected to have
a significant impact on sales for the OTC
Pharmaceuticals and Nutritionals franchise.
The Skin Care franchise operational growth of 11.8% was
driven by strong performances from the NEUTROGENA(R),
CLEAN AND CLEAR(R) and AVEENO(R) product lines as well
as new products related to acquisitions. The impact on
Skin Care total sales growth and operational growth due
to newly acquired brands from Pfizer Inc. was 5.1% in
the fiscal third quarter of 2007.
The Baby & Kids Care franchise operational growth of
7.3% was the result of the strong performances of
cleansers and powders. The impact on Baby & Kids Care
total sales growth and operational growth due to newly
acquired brands from Pfizer Inc. and divestitures
related to the acquisition was 1.7% in the fiscal third
quarter of 2007.
The Women's Health franchise achieved operational
growth of 1.5%. The impact on Women's Health total
sales growth and operational growth due to newly
acquired brands from Pfizer Inc. was 4.6% in the fiscal
third quarter of 2007. Net of sales related to
acquisitions there was an operational decline due to
increased competition.
The Oral Care franchise operational growth was
attributable to new products from acquisitions and
newly launched products, such as LISTERINE(R) mouthwashes
and dissolvable whitening strips. The impact on Oral
Care total sales growth and operational growth due to
newly acquired brands from Pfizer Inc. and divestitures
related to the acquisition was greater than 100%.
Pharmaceutical
Pharmaceutical segment sales in the first fiscal nine
months of 2007 were $18.5 billion, a total increase of
6.7% over the same period a year ago with 4.5% of this
change due to operational increases and a 2.2% increase
related to the positive impact of currency. The U.S.
Pharmaceutical sales increase was 3.9% and the total
growth in international Pharmaceutical sales was 11.8%,
with 5.6% of this change due to operational increases
and the remaining 6.2% increase related to the positive
impact of currency.
Major Pharmaceutical Product Revenues - First Fiscal Nine Months
(Dollars in Millions)
Sept. 30, Oct. 1, Total Operations Currency
2007 2006 Change Change Change
Anti-psychotics $3,477 $3,122 11.4% 8.8% 2.6%
REMICADE(R) 2,419 2,233 8.3 8.3 -
PROCRIT(R)/EPREX(R) 2,257 2,392 (5.6) (8.1) 2.5
TOPAMAX(R) 1,801 1,498 20.2 18.8 1.4
LEVAQUIN(R)/
FLOXIN(R) 1,214 1,091 11.2 11.2 -
ACIPHEX(R)/
PARIET(TM) 1,010 921 9.7 6.3 3.4
DURAGESIC(R)/Fentanyl
Transdermal 900 1,002 (10.2) (13.4) 3.2
CONCERTA(R) 739 672 10.0 8.5 1.5
Hormonal
Contraceptives 710 772 (8.0) (9.4) 1.4
Other 3,942 3,614 9.1 5.5 3.6
Total $18,469 $17,317 6.7% 4.5% 2.2%
Pharmaceutical segment sales in the fiscal third
quarter of 2007 were $6.1 billion, a total increase of
3.7% over the same period a year ago with 1.2% of this
change due to operational increases and the remaining
2.5% increase related to the positive impact of
currency. Pharmaceutical sales in the U.S. experienced
a decrease of 2.0% while international Pharmaceutical
sales achieved an increase of 14.4%, with 7.2% of this
change due to operational increases and the remaining
7.2% increase related to the positive impact of
currency.
Major Pharmaceutical Product Revenues - Fiscal Third Quarter
(Dollars in Millions)
Sept. 30, Oct. 1, Total Operations Currency
2007 2006 Change Change Change
Anti-psychotics $1,162 $1,068 8.9% 6.0% 2.9%
REMICADE(R) 819 776 5.5 5.5 -
PROCRIT(R)/EPREX(R) 682 798 (14.6) (17.4) 2.8
TOPAMAX(R) 613 533 15.0 13.6 1.4
LEVAQUIN(R)/
FLOXIN(R) 371 347 6.9 6.8 0.1
ACIPHEX(R)/
PARIET(TM) 338 307 10.1 6.1 4.0
DURAGESIC(R)/Fentanyl
Transdermal 309 342 (9.7) (13.2) 3.5
Hormonal
Contraceptives 233 270 (13.9) (15.6) 1.7
CONCERTA(R) 231 220 5.3 3.6 1.7
Other 1,341 1,220 9.9 5.6 4.3
Total $6,099 $5,881 3.7% 1.2% 2.5%
Sales growth within the segment was led by strong
performances from RISPERDAL(R) CONSTA(R) (risperidone),
TOPAMAX(R) (topiramate) and LEVAQUIN(R). Generic competition
related to DURAGESIC(R) (fentanyl transdermal system),
DITROPAN(R), SPORANOX(R) (itraconazole), RISPERDAL(R) oral and
hormonal contraceptives continued to negatively impact
sales during the fiscal third quarter of 2007. Sales
results in both the fiscal third quarter of 2007 and
2006 benefited from one-time adjustments. The fiscal
third quarter of 2007 included a reduction to sales
rebate reserves of approximately $60 million versus a
reduction of approximately $130 million in the fiscal
third quarter of 2006.
The anti-psychotic franchise which includes RISPERDAL(R)
oral (risperidone), a medication that treats the
symptoms of schizophrenia, bipolar mania and
irritability associated with autistic behavior in
indicated patients, RISPERDAL(R) CONSTA(R) (risperidone) a
long acting injectable and INVEGA(TM) (paliperdone)
Extended-Release tablets for the treatment of
schizophrenia, achieved operational growth of 6.0% in
the fiscal third quarter of 2007. Sales growth was
positively impacted by the continued global success of
RISPERDAL(R) CONSTA(R) The patent for the RISPERDAL(R)
compound will expire in the U.S. and most major markets
outside the U.S. by December 2007. In March, the U.S.
Food and Drug Administration (FDA) granted pediatric
exclusivity for RISPERDAL(R), which extends the marketing
exclusivity in the U.S. for RISPERDAL(R) oral to the end
of June 2008. In 2006 Worldwide sales of RISPERDAL(R)
oral were $3.3 billion and U.S. sales were $2.1
billion. The expiration of the RISPERDAL(R) oral patent
will result in a significant reduction in sales in the
U.S.
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, achieved
operational growth of 5.5% over prior year fiscal third
quarter. This continued growth was driven by increased
demand due to expanded indications and overall market
growth. During the fiscal second quarter of 2007,
REMICADE(R) received approval from the European
Commission (EU) for the pediatric Crohn's disease
indications. REMICADE(R) is competing in a market which
is experiencing increased competition.
PROCRIT(R) (Epoetin alfa) and EPREX(R) (Epoetin alfa)
combined had an operational sales decline of 17.4%, as
compared to prior year fiscal third quarter. EPREX(R) as
it is known outside the U.S. achieved operational
growth of 1.0% while PROCRIT(R) as it is known in the
U.S. market experienced an operational decline of
27.1%. The decline was primarily due to the declining
market of Erythropoiesis Stimulating Agents (ESAs)
partially offset by an increase in the Company's
overall market share as compared to prior year fiscal
third quarter. On July 30, 2007 The Centers for
Medicare and Medicaid (CMS) issued a National Coverage
Determination (NCD), which significantly limits the
future reimbursement of ESAs in oncology in the U.S. In
the U.S., Epoetin alfa products are subject to a label
change, which may negatively impact future sales. The
label for Epoetin alfa products is also under review in
jurisdictions outside the U.S.
TOPAMAX(R) (topiramate), which has been approved for
adjunctive and monotherapy use in epilepsy, as well as
for the prophylactic treatment of migraines, achieved
strong operational growth of 13.6% over prior year
fiscal third quarter. The major contributor to the
growth was the continued success in the migraine
category. This was partially offset by the impact of
the one-time reduction adjustment to the reserve for
sales rebates recorded in the fiscal third quarter of
2006. The patent for TOPAMAX(R) (topiramate) in the U.S.
will expire in September 2008. The TOPAMAX(R) patent
carries the possibility of a pediatric extension in the
U.S., which if obtained, would grant market exclusivity
in the U.S. until March 2009. The Company is on target
to file for the pediatric extension. In 2006 Worldwide
sales of TOPAMAX(R) were $2.0 billion and U.S. sales were
$1.6 billion. The expiration of a product patent or
loss of market exclusivity can result in a significant
reduction in sales.
LEVAQUIN(R) (levofloxacin)/FLOXIN(R) achieved operational
growth of 6.8% over prior year fiscal third quarter.
This was primarily due to favorable market growth. In
March the FDA granted pediatric exclusivity in the U.S.
for LEVAQUIN(R) which will extend the marketing
exclusivity by six months to June 2011.
ACIPHEX(R)/PARIET(R) a proton pump inhibitor, achieved
operational growth of 6.1% as compared to prior year
fiscal third quarter.
DURAGESIC(R)/Fentanyl Transdermal (fentanyl transdermal
system) experienced an operational sales decline of
13.2% compared to prior year fiscal third quarter,
primarily due to continued generic erosion.
The hormonal contraceptive franchise experienced an
operational sales decline of 15.6% compared to prior
year fiscal third quarter primarily resulting from
branded and generic competition in oral contraceptives.
ORTHO EVRA(R)(norelgestromin/ethinyl estradiol), the first
contraceptive patch approved by the FDA, experienced a
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 3.6% over the
fiscal third quarter of 2006. Sales in the U.S. were
down slightly due to lower market share partially
offset by market growth, while all regions outside the
U.S. achieved strong operational growth. Although the
original CONCERTA(R) patent expired in 2004, the FDA has
not approved any generic version that is substitutable
for CONCERTA(R) Two parties have filed Abbreviated New
Drug Applications (ANDAs) for generic versions of
CONCERTA(R), which are pending and may be approved at any
time.
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, continues to experience a decline in demand
due to negative media coverage regarding a meta
analysis of selected historical clinical trials. The
Company believes that the full data set does not
support the conclusions of these medical and consumer
publications and the currently approved label for
NATRECOR(R) reflects all available data to date.
NATRECOR(R) was purchased by the Company in 2003 and
resulted in the recording of an intangible asset, which
is being amortized over 12 years. The remaining
unamortized intangible value associated with NATRECOR(R)
was $0.9 billion at the end of the fiscal third quarter
of 2007, and based on the current estimate of projected
future cash flows, no adjustment to this intangible
asset is required.
Medical Devices and Diagnostics
Medical Devices and Diagnostics segment sales in the
first fiscal nine months of 2007 were $16.0 billion, an
increase of 5.8% over the same period a year ago, with
3.2% of this change due to operational increases and
the remaining 2.6% increase related to the positive
impact of currency. The U.S. Medical Devices and
Diagnostics sales increase was 2.0% and the growth in
international Medical Devices and Diagnostics sales was
9.6%, which included operational increases of 4.3% and
an increase of 5.3% related to the positive impact of
currency.
Major Medical Devices and Diagnostics Franchise Sales -
First Fiscal Nine Months
(Dollars in Millions)
Sept. 30, Oct. 1, Total Operations Currency
2007 2006 Change Change Change
DEPUY(R) $3,378 $3,045 10.9% 8.0% 2.9%
ETHICON ENDO-
SURGERY(R) 2,770 2,476 11.9 8.9 3.0
ETHICON(R) 2,648 2,386 11.0 7.1 3.9
CORDIS(R) 2,557 3,126 (18.2) (19.9) 1.7
LIFESCAN(R) 1,730 1,532 13.0 9.9 3.1
Vision Care 1,643 1,408 16.7 15.7 1.0
ORTHO-CLINICAL
DIAGNOSTICS(R) 1,203 1,098 9.5 7.2 2.3
Other 57 45 26.7 26.0 0.7
Total $15,986 $15,116 5.8% 3.2% 2.6%
Medical Devices and Diagnostics segment sales in the
fiscal third quarter of 2007 were $5.2 billion, an
increase of 6.0% over the same period a year ago, with
3.0% of this change due to operational growth and the
remaining 3.0% increase related to the positive impact
of currency. The U.S. Medical Devices and Diagnostics
sales increase was 2.4% and the growth in international
Medical Devices and Diagnostics sales was 9.8%, which
included operational growth of 3.7% and an increase of
6.1% related to the positive impact of currency.
Major Medical Devices and Diagnostics Franchise Sales - Fiscal
Third Quarter
(Dollars in Millions)
Sept. 30, Oct. 1, Total Operations Currency
2007 2006 Change Change Change
DEPUY(R) $1,086 $971 11.9% 8.8% 3.1%
ETHICON ENDO-
SURGERY(R) 922 825 11.7 8.3 3.4
ETHICON(R) 877 796 10.1 5.7 4.4
CORDIS(R) 777 983 (21.0) (23.1) 2.1
LIFESCAN(R) 585 505 16.0 12.5 3.5
Vision Care 577 493 17.2 15.5 1.7
ORTHO-CLINICAL
DIAGNOSTICS(R) 404 360 12.2 9.5 2.7
Other 20 17 17.6 16.9 0.7
Total $5,248 $4,950 6.0% 3.0% 3.0%
The DePuy franchise achieved operational growth of 8.8%
over prior year fiscal third quarter. This was
primarily due to DePuy's orthopaedic joint
reconstruction products including the hip and knee
product lines. Strong performance was also achieved in
Mitek sports medicine products.
The Ethicon Endo-Surgery franchise achieved operational
growth of 8.3% over prior year fiscal third quarter. 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 continued success of the
HARMONIC SCALPEL(R), an ultrasonic cutting and
coagulating surgical device.
Ethicon worldwide sales grew operationally by 5.7% from
the same period in the prior year, resulting from
growth in the hemostasis, women's health, biosurgicals,
and the mesh product lines.
The Cordis franchise experienced an operational sales
decline of 23.1% over the fiscal third quarter of 2006.
This decline was caused by lower sales of the CYPHER(R)
Sirolimus-eluting Stent due to increased competition
outside the U.S. as well as the global contraction of
the drug-eluting stent market following reports of a
potential risk of late stent thrombosis associated with
the use of drug-eluting stents. These results were
partially offset by strong performance by the Biosense
Webster and neurovascular businesses.
On June 13, 2007 the U.S. Food and Drug Administration
(FDA) notified Cordis that all items outlined in the
Warning Letters received in April and July 2004
regarding Good Manufacturing Practice regulations and
Good Clinical Practice regulations have been resolved.
The LifeScan franchise achieved operational growth of
12.5% over the fiscal third quarter of 2006 reflecting
the continued success of the ULTRA(R) product lines. An
additional contributor was the growth of the Animas
business due to the launch of the 2020 insulin pump
earlier this year.
The Vision Care franchise operational sales growth of
15.5% was led by the global success of ACUVUE(R) OASYS(TM),
ACUVUE(R) ADVANCE(TM) Brand Contact Lenses for ASTIGMATISM
and 1-DAY ACUVUE(R) MOIST(TM).
The Ortho-Clinical Diagnostics franchise achieved
operational growth of 9.5% over prior year fiscal third
quarter. The Immunodiagnostic product line was a major
contributor in the U.S., as well as the continued
growth of the Chagas screening assay in the U.S.
Cost of Products Sold
Consolidated costs of products sold for the first
fiscal nine months of 2007 increased to 28.8% from
27.9% of sales over the same period a year ago. The
cost of products sold for the fiscal third quarter of
2007 increased to 28.5% from 27.5% of sales in the
fiscal third quarter of 2006. The increase was
primarily due to the impact of newly acquired consumer
brands.
Selling, Marketing and Administrative Expenses
Consolidated selling, marketing and administrative
expenses for the first fiscal nine months of 2007
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
nine months of 2007 were 32.6% versus 32.1% for the
same period a year ago. Consolidated selling,
marketing and administrative expenses for the fiscal
third quarter of 2007 increased 0.4% over the same
period a year ago. As a percent to sales, consolidated
selling, marketing and administrative expenses were
32.7% versus 32.3% for the same period a year ago.
Increases in the quarterly and nine month periods were
attributable to the addition of the newly acquired
consumer brands to the mix of businesses partially
offset by continued 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 nine months of 2007 were $5.3
billion, an increase of 5.4% over the same period a
year ago. Research and development spending in the
fiscal third quarter of 2007 was $1.8 billion, an
increase of 6.7% over the fiscal third quarter of 2006.
Research and development spending as a percent to sales
for the first fiscal nine months of 2007 was 11.9%
versus 12.8% for the same period a year ago. The
decrease was primarily due to the inclusion in 2006 of
the $165 million up front payment to Vertex
Pharmaceuticals for the rights to develop and
commercialize VX-950 for Hepatitis C in selected
regions, including Europe and the change in the mix of
businesses with the inclusion of the newly acquired
consumer products. Research and development spending,
as a percent to sales for the fiscal third quarter of
2007 was 12.3% versus 12.9% for the same period a year
ago. This decrease was primarily due to the change in
the mix of businesses with the inclusion of the newly
acquired consumer products.
Restructuring
On July 31, 2007 the Company announced initiatives that
are expected to generate pre-tax, annual cost savings
of $1.3-$1.6 billion for 2008 in an effort to improve
its overall cost structure. During the fiscal third
quarter of 2007, the Company recorded $745 million in
pre-tax charges See note 11 for more details.
In-Process Research & Development(IPR&D)
In the fiscal third quarter of 2007, the Company had no
IPR&D charges. IPR&D charges of $807 million before and
after tax were recorded during the first fiscal nine
months of 2007 related to the acquisition of Conor
Medsystems Inc.
In the fiscal third quarter of 2006, the Company
recorded IPR&D charges of $115 million before tax, with
no tax benefit, related to the acquisitions of Ensure
Medical, Inc. and Colbar LifeScience Ltd. IPR&D
charges of $239 million before tax and $231 million
after tax were recorded during the first fiscal nine
months of 2006 related to the acquisitions of Vascular
Control Systems, Inc., Hand Innovations LLC, Future
Medical Systems S.A. and the third quarter acquisitions
mentioned above.
Other (Income) Expense, Net
Other (income) expense, net includes 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, as well as royalty income.
The favorable change in other (income) expense, net for
the fiscal third quarter of 2007 as compared to the
same period a year ago was due to additional product
liability reserves recorded in 2006 partially offset by
the 2007 payment for an orthopaedics industry wide
settlement to the U.S. Attorney's office, District of
New Jersey. The unfavorable change in other (income)
expense, net for the first fiscal nine months of 2007
as compared to the same period a year ago was $428
million. This was primarily due to the net gain of $175
million before tax related to the divestiture of
certain brands recorded in the fiscal first quarter of
2007, as compared to the same period a year ago, which
included a gain of $622 million recorded for the
Guidant acquisition agreement termination fee, less
associated expenses.
OPERATING PROFIT BY SEGMENT
Consumer Segment
Operating profit for the Consumer segment as a percent
to sales in the first fiscal nine months of 2007 was
17.1% versus 18.9% over the same period a year ago.
Operating profit as a percent to sales in the fiscal
third quarter of 2007 was 16.2% versus 18.5% over the
same period a year ago. The primary driver of the
decrease in the operating profit margin in the Consumer
segment for both periods in 2007 over the same period a
year ago was related to integration costs and other
operating expenses related to newly acquired products.
Pharmaceutical Segment
Operating profit for the Pharmaceutical segment as a
percent to sales in the first fiscal nine months of
2007 was 32.5% versus 31.4% over the same period a year
ago. Operating profit as a percent to sales in the
fiscal third quarter of 2007 was 26.1% versus 30.8%
over the same period a year ago. Operating profit
margin improved in the first fiscal nine months of 2007
as compared to the same period a year ago. This was due
to the inclusion of the $165 million up front payment
to Vertex Pharmaceuticals for the rights to develop and
commercialize VX-950 for Hepatitis C in selected
regions in the fiscal nine months of 2006. Operating
profit margin for the fiscal third quarter of 2007 was
unfavorable versus the same period a year ago due to
the restructuring charges of $429 million recorded
during the fiscal third quarter of 2007.
Medical Devices and Diagnostics Segment
Operating profit for the Medical Devices and
Diagnostics segment as a percent to sales in the first
fiscal nine months of 2007 was 21.1% versus 32.6% over
the same period a year ago. Operating profit as a
percent to sales in the fiscal third quarter of 2007
was 21.7% versus 27.1% over the same period a year ago.
The decline in the operating profit margin in the
Medical Devices and Diagnostics segment for both
periods in 2007 versus the same period a year ago was
due to the restructuring charges of $301 million
recorded during the fiscal third quarter of 2007 and
unfavorable product mix within the segment.
Additionally, the first fiscal nine months of 2007
included acquisition related IPR&D charges of $807
million versus $239 million a year ago and the gain
associated with the Guidant acquisition agreement
termination fee, less associated expenses, of $622
million before tax recorded in the first fiscal nine
months of 2006.
Interest (Income) Expense
Interest income decreased in both the first fiscal nine
months and fiscal third quarter of 2007 as compared to
the same periods a year ago. The cash balance and
marketable securities, was $8.3 billion at the end of
the fiscal third quarter of 2007. This was a decrease
of $6.4 billion from the same period a year ago. The
decline in the cash balance was primarily due to
acquisition activity and the stock repurchase program
during the fiscal year 2007.
Interest expense increased in both the first fiscal
nine months and fiscal third quarter of 2007 as
compared to the same periods a year ago, resulting from
a higher debt position. This was due to acquisition
activity and the stock repurchase programs during the
fiscal year 2007 and 2006.
Provision For Taxes on Income
The worldwide effective income tax rates for the first
fiscal nine months of 2007 and 2006 were 25.1% and
25.2%, respectively, a decrease of 0.1%. This was
primarily due to increases in taxable income in lower
tax jurisdictions relative to taxable income in higher
tax jurisdictions and the Research and Development
(R&D) tax credit, which was not in effect in the first
fiscal nine months of 2006. This was partially offset
by higher IPR&D charges recorded in the fiscal nine
months of 2007 versus 2006, which was non-deductible
for tax purposes. The tax rate for the first fiscal
nine months of 2006 benefited from a reversal of
deferred tax valuation allowances of $134 million
associated with the Tibotec business.
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 and dividends. In the first fiscal nine
months of 2007, cash flow from operations was $10.9
billion, an increase of $1.0 billion over the same
period a year ago. The major changes in assets and
liabilities were a $1.3 billion increase in accounts
payable and accrued liabilities, $0.4 billion increase
in other current and non-current liabilities and a $0.3
decrease in the accounts receivable. This was partially
offset by a $1.1 billion increase in other current and
non-current assets. Net cash used by investing
activities increased by $1.5 billion primarily due to a
$1.6 billion net increase in the purchase/sale of
marketable securities. Net cash used by financing
activities decreased by $4.6 billion primarily due to a
$2.8 billion decrease in the repurchase of common stock
and a $2.6 billion increase in proceeds from long-term
debt partially offset by the net retirement/proceeds of
short term debt. There was also a $0.3 billion increase
in dividends to shareholders in 2007. Cash and current
marketable securities were $8.3 billion at the end of
the fiscal third quarter of 2007 as compared with $14.7
billion at fiscal third quarter of 2006. This change
was primarily due to acquisition activity in December
of 2006 and the 2007 stock repurchase program.
On July 9, 2007, the Company announced that its Board
of Directors approved a stock repurchase program,
authorizing the Company to buy back up to $10 billion
of the Company's common stock. Share repurchases will
take place on the open market from time to time based
on market conditions. The repurchase program has no
time limit and may be suspended for periods or
discontinued at any time. Any shares acquired will be
available for general corporate purposes. The Company
intends to fund the share repurchase program through a
combination of available cash and debt. The Company
does not expect its triple-A credit rating to be
effected by the share repurchase program.
On August 15, 2007 the Company issued an aggregate of
$2.6 billion in long-term notes. There are $0.6 billion
of 5.150% Notes due in 2012, $1.0 billion of 5.550%
Notes due in 2017 and $1.0 billion of 5.950% Notes due
in 2037. The proceeds of the notes are expected to
be used for general corporate purposes including the
repayment of a portion of the outstanding commercial
paper, issued to fund the Pfizer Consumer Healthcare
acquisition.
Dividends
On July 16, 2007, the Board of Directors declared a
regular cash dividend of $0.415 per share, which was
paid on September 11, 2007 to shareholders of record as
of August 28, 2007.
On October 18, 2007, the Board of Directors declared a
regular cash dividend of $0.415 per share, payable on
December 11, 2007 to shareholders of record as of
November 27, 2007.
The Company expects to continue the practice of paying
regular cash dividends.
OTHER INFORMATION
New Accounting Standards
In September 2006, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting
Standards No 157, Fair Value Measurements. This
statement defines fair value, establishes a framework
for measuring fair value under generally accepted
accounting principles, and expands disclosures about
fair value measurements. The statement is effective in
the fiscal first quarter of 2008 and the Company will
adopt the statement at that time. The Company believes
that the adoption of SFAS No 157 will not have a
material effect on its results of operations, cash
flows or financial position.
In February 2007, the FASB issued Statement No. 159,
Fair Value Option for Financial Assets and Financial
Liabilities, which permits an entity to measure certain
financial assets and financial liabilities at fair
value. Statement 159 is effective for fiscal year 2008
but early adoption is permitted. The Company is
currently in the process of evaluating this
pronouncement and the impact of the adoption of FASB
159 would have on its results of operations, cash flows
and financial position.
EITF Issue 07-3: Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in
Future Research and Development Activities. This Issue
is effective for financial statements issued for fiscal
years beginning after December 15, 2007. The adoption
of EITF 07-3 is not expected to have a significant
impact on the Company's results of operations, cash
flows and 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 1996 through 2006
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 2006, 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" included in Item 1. Financial Statements
(unaudited)- Notes to Consolidated Financial
Statements, Note 12.
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 does not
undertake 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 December 31, 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
December 31, 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 Dominic J. Caruso, Vice President, Finance
and Chief Financial Officer, reviewed and participated
in this evaluation. Based on this evaluation, Messrs.
Weldon and Caruso 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 11 included in Part I, Item
1. Financial Statements (unaudited) - Notes to
Consolidated Financial Statements.
Item 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS
(c) Purchases of Equity Securities by the Issuer and
Affiliated Purchasers.
On July 9, 2007, the Company announced that its Board
of Directors approved a stock repurchase program,
authorizing the Company to buy back up to $10 billion
of the Company's common stock. Share repurchases will
take place on the open market from time to time based
on market conditions. The repurchase program has no
time limit and may be suspended for periods or
discontinued at any time. Any shares acquired will be
available for general corporate purposes. The Company
intends to fund the share repurchase program through a
combination of available cash and debt. The Company
does not expect its triple-A credit rating to be
effected by the share repurchase program.
In addition, common stock purchases on the open market
are made as part of a systematic plan related to the
Company's compensation programs.
The following table provides information with respect
to Common Stock purchases by the Company during the
fiscal third quarter of 2007.
Fiscal Month Total Total Number Remaining
Number of Average of Shares Maximum
Shares Price Purchased as Number of
Purchased(1) Paid Part of Shares that
per Publicly May Be
Share Announced Purchased
Plans or Under the
Programs Plans or
Programs (2)
July 2, 2007 through
July 29, 2007 800,000 $62.31
July 30, 2007
through
August 26, 2007 6,643,000 $61.51 6,643,000
August 27, 2007
through
September 30, 2007 21,880,400 $63.22 19,655,300
Total 29,323,400 26,298,300 127,143,807
(1) During the fiscal third quarter of 2007, the
Company repurchased an aggregate of 26,298,300 shares
of Johnson & Johnson Common Stock pursuant to the
repurchase program that was publicly announced on July
9, 2007 and an aggregate of 3,025,100 shares in open-
market transactions outside of the program.
(2) As of September 30, 2007, based on the closing
price of the Company's Common Stock on the New York
Stock Exchange on September 28, 2007 of $65.70 per
share.
Item 6 - EXHIBITS
Exhibit 10.1 Compensation Arrangements for Non-
Employee Directors - Filed with this document.
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: November 6, 2007 By /s/ D. J. CARUSO
Vice President, Finance;
Chief Financial Officer
(Principal Financial Officer)
Date: November 6, 2007 By /s/ S. J. COSGROVE
S. J. COSGROVE
Controller
(Principal Accounting Officer)