UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
for the quarterly period ended July 1, 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 July 29, 2007 2,894,509,495 shares of
Common Stock, $1.00 par value, were outstanding.
JOHNSON & JOHNSON AND SUBSIDIARIES
TABLE OF CONTENTS
Part I - Financial Information Page No.
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets -
July 1, 2007 and December 31, 2006 3
Consolidated Statements of Earnings for the Fiscal
Second Quarters Ended July 1, 2007 and
July 2, 2006 5
Consolidated Statements of Earnings for the Fiscal
Six Months Ended July 1, 2007 and
July 2, 2006 6
Consolidated Statements of Cash Flows for the Fiscal
Six Months Ended July 1, 2007 and
July 2, 2006 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 28
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 41
Item 4. Controls and Procedures 41
Part II - Other Information
Item 1 - Legal Proceedings 42
Item 2 - Unregistered Sales of Equity Securities
and Use of Proceeds 42
Item 4 - Submission of Matters to a Vote of Security
Holders 43
Item 6 - Exhibits 44
Signatures 44
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
ASSETS
July 1, 2007 December 31, 2006
Current Assets:
Cash & cash equivalents $5,571 $4,083
Marketable securities 400 1
Accounts receivable, trade,
less allowances for doubtful
accounts
$163 (2006,$164) 9,470 8,712
Inventories (note 4) 5,155 4,889
Deferred taxes on income 2,194 2,094
Prepaid expenses and other
receivables 3,014 3,196
Total current assets 25,804 22,975
Marketable securities, non-
current 17 16
Property, plant and equipment
at cost 24,930 24,028
Less: accumulated
depreciation (11,545) (10,984)
Property, plant and
equipment, net 13,385 13,044
Intangible assets, net (note 5) 15,412 15,348
Goodwill, net (note 5) 13,754 13,340
Deferred taxes on income 3,575 3,210
Other assets 2,736 2,623
Total Assets $74,683 $70,556
See Notes to Consolidated Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
July 1, 2007 December 31, 2006
Current Liabilities:
Loans and notes payable $4,470 $4,579
Accounts payable 5,458 5,691
Accrued liabilities 4,585 4,587
Accrued rebates, returns and
promotions 2,447 2,189
Accrued salaries, wages and
commissions 1,140 1,391
Accrued taxes on income 883 724
Total current
liabilities 18,983 19,161
Long-term debt 2,013 2,014
Deferred taxes on income 1,361 1,319
Employee related obligations 5,654 5,584
Other liabilities 3,550 3,160
Total liabilities 31,561 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) (1,898) (2,118)
Retained earnings 52,819 49,290
Less: common stock held in
treasury, at cost
(226,020,000 and 226,612,000
shares) 10,919 10,974
Total shareholders'
equity 43,122 39,318
Total liabilities and
shareholders' equity $74,683 $70,556
See Notes to Consolidated Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; dollars & shares in millions
except per share amounts)
Fiscal Quarters Ended
July 1, Percent July 2, Percent
2007 to 2006 to
Sales Sales
Sales to customers
(Note 6) $15,131 100.0% $13,363 100.0%
Cost of products sold 4,358 28.8 3,788 28.3
Gross profit 10,773 71.2 9,575 71.7
Selling, marketing and
administrative expenses 5,029 33.3 4,351 32.6
Research expense 1,866 12.3 1,828 13.7
In-process research &
development (IPR&D) - - 87 0.6
Interest income (95) (.6) (209) (1.6)
Interest expense, net
of portion capitalized 59 0.4 13 0.1
Other income, net (117) (0.8) (98) (0.7)
Earnings before
provision for taxes on
income 4,031 26.6 3,603 27.0
Provision for taxes on
income (Note 3) 950 6.2 783 5.9
NET EARNINGS $3,081 20.4% $2,820 21.1%
`
NET EARNINGS PER SHARE
Basic $1.06 $0.96
Diluted $1.05 $0.95
CASH DIVIDENDS PER
SHARE $0.415 $0.375
AVG. SHARES OUTSTANDING
Basic 2,895.1 2,954.0
Diluted 2,922.5 2,974.4
See Notes to Consolidated Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; dollars & shares in millions
except per share amounts)
Fiscal Six Months Ended
July 1, Percent July 2, Percent
2007 to 2006 to
Sales Sales
Sales to customers
(Note 6) $30,168 100.0% $26,355 100.0%
Cost of products sold 8,743 29.0 7,400 28.1
Gross profit 21,425 71.0 18,955 71.9
Selling, marketing and
administrative expenses 9,831 32.5 8,446 32.0
Research expense 3,518 11.7 3,360 12.7
In-process research &
development 807 2.7 124 0.5
Interest income (190) (.6) (406) (1.5)
Interest expense, net
of portion capitalized 121 0.4 29 0.1
Other income, net (345) (1.1) (816) (3.1)
Earnings before
provision for taxes on
income 7,683 25.4 8,218 31.2
Provision for taxes on
income (Note 3) 2,029 6.7 2,093 8.0
NET EARNINGS $5,654 18.7% $6,125 23.2%
`
NET EARNINGS PER SHARE
Basic $1.95 $2.07
Diluted $1.93 $2.05
CASH DIVIDENDS PER
SHARE $0.790 $0.705
AVG. SHARES OUTSTANDING
Basic 2,894.8 2,963.0
Diluted 2,924.9 2,982.5
See Notes to Consolidated Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
Fiscal Six Months Ended
July 1, 2007 July 2, 2006
CASH FLOW FROM OPERATING
ACTIVITIES
Net earnings $5,654 $6,125
Adjustment to reconcile net
earnings to cash flow:
Depreciation and
amortization of property
and intangibles 1,305 1,067
Stock based compensation 360 340
Purchased in-process
research and development 807 124
Changes in assets and
liabilities, net of effects
from acquisitions:
Deferred tax provision (405) (628)
Accounts receivable
allowances 1 (5)
Increase in accounts
receivable (659) (949)
Increase in inventories (190) (229)
Decrease in accounts payable
and accrued liabilities (306) (794)
(Increase)/Decrease in other
current and non-current
assets (424) 83
Increase in other current
and non-current liabilities 591 696
NET CASH FLOWS FROM OPERATING
ACTIVITIES 6,734 5,830
CASH FLOWS FROM INVESTING
ACTIVITIES
Additions to property, plant
and equipment (1,045) (1,034)
Proceeds from the disposal of
assets 214 1
Acquisitions, net of cash
acquired (1,368) (1,218)
Purchases of investments (566) (396)
Sales of investments 103 322
Other (primarily intangibles) (49) (37)
NET CASH (USED)/PROVIDED BY
INVESTING ACTIVITIES (2,711) (2,362)
CASH FLOWS FROM FINANCING
ACTIVITIES
Dividends to shareholders (2,287) (2,089)
Repurchase of common stock (739) (2,968)
Proceeds from short-term debt 15,296 500
Retirement of short-term debt (15,449) (723)
Proceeds from long-term debt 1 -
Retirement of long-term debt (6) (10)
Proceeds from the exercise of stock
options/excess tax benefits 564 332
NET CASH USED BY FINANCING
ACTIVITIES (2,620) (4,958)
Effect of exchange rate
changes on cash and cash
equivalents 85 82
Increase/ (decrease) in cash
and cash equivalents 1,488 (1,408)
Cash and Cash equivalents,
beginning of period 4,083 16,055
CASH AND CASH EQUIVALENTS,
END OF PERIOD $5,571 $14,647
Acquisitions
Fair value of assets acquired $1,599 $1,392
Fair value of liabilities
assumed (231) (174)
Net cash paid for
acquisitions $1,368 $1,218
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) 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 July 1, 2007, the balance of deferred net losses
on derivatives included in accumulated other
comprehensive income was $18 million after-tax. For
additional information, see Note 8. The Company expects
that substantially all of this amount will be
reclassified into earnings over the next 12 months as a
result of transactions that are expected to occur over
that period. The amount ultimately realized in earnings
will differ as foreign exchange rates change. Realized
gains and losses are ultimately determined by actual
exchange rates at maturity of the derivative.
Transactions with third parties will cause the amount
in accumulated other comprehensive income to affect net
earnings. The maximum length of time over which the
Company is hedging is 18 months. The Company also uses
currency swaps to manage currency risk primarily
related to borrowings, which may exceed 18 months.
For the fiscal second quarters ended July 1, 2007 and
July 2, 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 six months of 2007 and 2006 were 26.4% and
25.5%, respectively, an increase of 0.9%. This was
primarily due to the IPR&D charge of $807 million
recorded in the fiscal first quarter of 2007, which was
non-deductible for tax purposes. This was partially
offset by increases in taxable income in lower tax
jurisdictions relative to taxable income in higher tax
jurisdictions along with the Research and Development
(R&D) tax credit, which was not in effect in the first
fiscal nine months of 2006.
The tax rate for the first fiscal six months of 2006
benefited from a reversal of deferred tax valuation
allowances of $134 million associated with the Tibotec
business. This benefit was offset by acquisition-
related IPR&D charges of $124 million, for which there
was a minimal tax benefit.
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)
July 1, 2007 December 31, 2006
Raw materials and
supplies $1,073 $980
Goods in process 1,296 1,253
Finished goods 2,786 2,656
Total $5,155 $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)
July 1, 2007 December 31, 2006
Trademarks (non-amortizable) $6,648 $6,609
Less accumulated amortization 142 134
Trademarks (non-amortizable)-
net 6,506 6,475
Patents and trademarks 5,353 5,282
Less accumulated amortization 1,863 1,695
Patents and trademarks - net 3,490 3,587
Other amortizable intangibles 7,219 6,923
Less accumulated amortization 1,803 1,637
Other intangibles - net 5,416 5,286
Total intangible assets -
gross 19,220 18,814
Less accumulated amortization 3,808 3,466
Total intangible assets - net 15,412 15,348
Goodwill - gross 14,490 14,075
Less accumulated amortization 736 735
Goodwill - net $13,754 $13,340
Goodwill as of July 1, 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 - - 439 439
Translation & Other (31) 4 2 (25)
Goodwill as of
July 1, 2007 $7,835 $906 $5,013 $13,754
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 six
months ended July 1, 2007 was $383 million and the
estimated amortization expense for the five succeeding
years approximates $740 million, per year.
NOTE 6 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
(Dollars in Millions)
SALES BY SEGMENT OF BUSINESS (1)
Fiscal Quarters Ended
July 1, July 2, Percent
2007 2006 Change
Consumer
U.S. $1,562 $1,103 41.6%
International 2,002 1,295 54.6
3,564 2,398 48.6
Pharmaceutical
U.S. 3,860 3,682 4.8
International 2,289 2,128 7.6
6,149 5,810 5.8
Medical Devices &
Diagnostics
U.S. 2,619 2,590 1.1
International 2,799 2,565 9.1
5,418 5,155 5.1
U.S. 8,041 7,375 9.0
International 7,090 5,988 18.4
Worldwide $15,131 $13,363 13.2%
Fiscal Six Months Ended
July 1, July 2, Percent
2007 2006 Change
Consumer
U.S. $3,191 $2,253 41.6%
International 3,869 2,500 54.8
7,060 4,753 48.5
Pharmaceutical
U.S. 7,894 7,383 6.9
International 4,476 4,053 10.4
12,370 11,436 8.2
Medical Devices &
Diagnostics
U.S. 5,203 5,110 1.8
International 5,535 5,056 9.5
10,738 10,166 5.6
U.S. 16,288 14,746 10.5
International 13,880 11,609 19.6
Worldwide $30,168 $26,355 14.5%
(1) Export and intersegment sales are not significant.
OPERATING PROFIT BY SEGMENT OF BUSINESS
(Dollars in Millions)
Fiscal Quarters Ended
July 1, July 2, Percent
2007 2006 Change
Consumer $482 $439 9.8%
Pharmaceutical 2,131 1,697 25.6
Medical Devices &
Diagnostics (1) 1,523 1,435 6.1
Segments total 4,136 3,571 15.8
Income/(expense)
not allocated to
segments (105) 32
Worldwide total $4,031 $3,603 11.9%
Fiscal Six Months Ended
July 1, July 2, Percent
2007 2006 Change
Consumer $1,242 $904 37.4%
Pharmaceutical 4,412 3,624 21.7
Medical Devices &
Diagnostics(2) 2,238 3,595 (37.7)
Segments total 7,892 8,123 (2.8)
Income/(expense)
not allocated to
segments (209) 95
Worldwide total $7,683 $8,218 (6.5)%
(1)Includes $87 million of IPR&D charges related to
acquisitions completed in the fiscal second quarter
of 2006.
(2)Includes $807 million and $124 million of IPR&D
charges related to acquisitions completed in the
first fiscal six months of 2007 and first fiscal
six months of 2006, respectively. The first fiscal
six 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
July 1, July 2, Percent
2007 2006 Change
U.S. $8,041 $7,375 9.0%
Europe 3,907 3,295 18.6
Western Hemisphere,
excluding U.S. 1,131 876 29.1
Asia-Pacific,
Africa 2,052 1,817 12.9
Total $15,131 $13,363 13.2%
Fiscal Six Months Ended
July 1, July 2, Percent
2007 2006 Change
U.S. $16,288 $14,746 10.5%
Europe 7,720 6,366 21.3
Western Hemisphere,
excluding U.S. 2,177 1,698 28.2
Asia-Pacific,
Africa 3,983 3,545 12.4
Total $30,168 $26,355 14.5%
NOTE 7 - EARNINGS PER SHARE
The following is a reconciliation of basic net earnings
per share to diluted net earnings per share for the
fiscal second quarters ended July 1, 2007 and July 2,
2006.
(Shares in Millions) Fiscal Quarters Ended
July 1, July 2,
2007 2006
Basic net earnings per share $1.06 $0.96
Average shares outstanding -
basic 2,895.1 2,954.0
Potential shares exercisable
under stock option plans 201.2 227.5
Less: shares which could be
repurchased under treasury
stock method (177.7) (211.0)
Convertible debt shares 3.9 3.9
Adjusted average shares
outstanding - diluted 2,922.5 2,974.4
Diluted earnings per share $1.05 $0.95
The diluted earnings per share calculation included the
dilutive effect of convertible debt that was offset by
the related reduction in interest expense of $1 million
and $1 million for the fiscal second quarters ended
July 1, 2007 and July 2, 2006, respectively.
The diluted earnings per share calculation excluded 67
million and 45 million shares related to options and
restricted stock units for the fiscal second quarters
ended July 1, 2007 and July 2, 2006, respectively, due
to their anti-dilutive effect on diluted earnings per
share.
The following is a reconciliation of basic net earnings
per share to diluted net earnings per share for the
fiscal six months ended July 1, 2007 and July 2, 2006.
(Shares in Millions)
Fiscal Six Months Ended
July 1, July 2,
2007 2006
Basic net earnings per share $1.95 $2.07
Average shares outstanding -
basic 2,894.8 2,963.0
Potential shares exercisable
under stock option plans 201.4 227.4
Less: shares which could be
repurchased under treasury
stock method (175.2) (211.8)
Convertible debt shares 3.9 3.9
Average shares
outstanding - diluted 2,924.9 2,982.5
Diluted earnings per share $1.93 $2.05
The diluted earnings per share calculation included the
dilutive effect of convertible debt that was offset by
the related reduction in interest expense of $2 million
and $2 million for the first fiscal six months ended
July 1, 2007 and July 2, 2006, respectively.
The diluted earnings per share calculation excluded 66
million and 45 million shares related to options and
restricted stock units for the first fiscal six months
ended July 1, 2007 and July 2, 2006, respectively, due
to their anti-dilutive effect on diluted earnings per
share.
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The total comprehensive income for the first fiscal six
months ended July 1, 2007 was $5.9 billion, compared
with $6.3 billion for the same period a year ago. The
total comprehensive income for the fiscal second
quarter ended July 1, 2007 was $3.3 billion, compared
with $2.9 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 Six Months changes:
Net change associated
with current period
hedging transactions (23)
Net amount reclassed
to net earnings (4)*
Net six months changes 144 23 80 (27) 220
July 1, 2007 $(14) 84 (1,950) (18) (1,898)
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
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 2006 acquisitions included Animas Corporation, a
leading maker of insulin infusion pumps and related
products; Hand Innovations LLC, a privately held
manufacturer of fracture fixation products for the
upper extremities; 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 second quarters of 2007 and 2006 include the
following components:
(Dollars in Millions)
Retirement Plans Other Benefit Plans
Fiscal Quarters Ended
July 1, July 2, July 1, July 2,
2007 2006 2007* 2006
Service cost $ 134 $136 $33 $19
Interest cost 160 144 37 26
Expected return on
plan assets (198) (177) 0 (1)
Amortization of prior
service cost 3 3 (1) (1)
Recognized actuarial
losses 48 64 16 10
Net periodic benefit cost $ 147 $170 $85 $53
*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 six months of 2007 and 2006 include
the following components:
(Dollars in Millions)
Retirement Plans Other Benefit Plans
Fiscal Six Months Ended
July 1, July 2, July 1, July 2,
2007 2006 2007 2006
Service cost $ 269 $262 $70 $37
Interest cost 320 284 74 52
Expected return on
plan assets (395) (350) (1) (2)
Amortization of prior
service cost 5 6 (3) (3)
Amortization of net
transition asset - - - -
Recognized actuarial
losses 95 127 33 20
Net periodic benefit cost $ 294 $329 $173 $104
*Includes other post employment benefits as per the
adoption of SFAS No. 158.
Company Contributions
For the fiscal six months ended July 1, 2007, the
Company contributed $11 million and $10 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 - 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 2,400 claimants who have filed lawsuits
or made claims regarding injuries allegedly due to
ORTHO EVRA(R), 700 claimants with respect to RISPERDAL(R),
250 with respect to CHARITE(TM) and 100 with respect to
DURAGESIC(R). These claimants seek substantial
compensatory and, where available, punitive damages.
With respect to RISPERDAL(R), the Attorneys General of
three 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 Express2(TM), Taxus(R) and
Liberte(R) stents of infringing the Palmaz patent that
expired in November 2005. The Liberte(R) stent was also
accused of infringing Cordis' Gray patent that expires
in 2016. In June 2005, a jury found that the
Express2(TM), Taxus(R) and Liberte(R) stents infringed the
Palmaz patent and that the Liberte(R) stent also
infringed the Gray patent. Motions filed by Boston
Scientific seeking to vacate the verdict or obtain a
new trial were denied in June 2006. Cordis expects
Boston Scientific will appeal 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. In June 2006, the District Court denied motions
by Cordis to overturn the jury verdicts or grant a new
trial. Cordis has moved for re-consideration of those
decisions. If reconsideration is denied, Cordis will
appeal 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 and
the Netherlands under its Kastenhofer patent to enjoin
the manufacture and sale of allegedly infringing
catheters in those countries, and to recover damages.
The hearing in the Belgian case is set for 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 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 N.D. Cal 10/07 02/02
Catheters hofer Corp. Belgium 09/07 12/03
Forman
Catheters Cordis Fitzmau- Medtronic AVE E.D. Tex 09/07 06/03
stent delivery rice
systems
Contact Lenses Vision Nicolson CIBA Vision M.D. Fla. * 09/03
Care
Stents Cordis Ricci Medtronic and E.D. Tex * 03/07
Evysio
* Trial date to be established.
LITIGATION AGAINST FILERS OF ABBREVIATED NEW DRUG
APPLICATIONS (ANDAS)
The following chart indicates lawsuits pending against
generic firms that filed Abbreviated New Drug
Applications seeking to market generic forms of
products sold by various subsidiaries of the Company
prior to expiration of the applicable patents covering
those products. These ANDAs typically include
allegations of non-infringement, invalidity and
unenforceability of these patents. In the event the
subsidiary of the Company involved is not successful in
these actions, or the 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 Expires
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. * 09/05 None
18,27,36
and 54 mg ALZA
controlled
release tablet
ORTHO TRI CYCLEN(R)
LO Ortho-McNeil Barr D.N.J. * 10/03 02/06
0.18 mg/
0.025 mg
0.215 mg/
0.025 mg
and 0.25 mg/
0.025 mg
PEPCID
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. * 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 of Eisai Pharmaceutical, Inc., Ortho McNeil
Pharmaceutical's marketing partner, proceeded before
the district court in New York in April 2007. On May
11, 2007, the Court held that the ACIPHEX compound
patent is enforceable. The Court had previously held
that the patent is valid. Teva has 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.
In the action 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 version 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.
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. will appeal 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.
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. Other leading orthopaedic
companies are known to have received a similar
subpoena. DePuy Orthopaedics is responding to the
subpoena as well as several follow-on subpoenas for
documents. A number of employees of DePuy have been
subpoenaed to testify before a grand jury in connection
with this investigation.
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.
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 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 is
responding to the request for documents. In the wake of
publicity about the subpoena, DePuy was served with
five civil antitrust class actions.
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 is producing material responsive to
the subpoena and cooperating with the investigation.
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 with 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 will
commence in October 2007.
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 12 - SUBSEQUENT EVENT
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. The company expects to take
associated pre-tax, restructuring charges in the range
of $550-$750 million in the second half of 2007.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Analysis of Consolidated Sales
For the first fiscal six months of 2007, worldwide
sales were $30.2 billion, a total increase of 14.5%
including an operational increase of 12.1% over 2006
first fiscal six months sales of $26.4 billion.
Currency had a positive impact of 2.4% 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 7.1%.
Sales by U.S. companies were $16.3 billion in the first
fiscal six months of 2007, which represented an
increase of 10.5% over the same period last year.
Sales by international companies were $13.9 billion,
which represented a total increase of 19.6% including
an operational increase of 14.2%, and a positive impact
from currency of 5.4% over the first fiscal six months
of 2006.
Sales by companies in Europe experienced an increase of
21.3%, including an operational growth of 13.0% and a
positive impact from currency of 8.3%. Sales by
companies in the Western Hemisphere, excluding the
U.S., experienced total growth of 28.2% including
operational growth of 25.5% and a positive impact from
currency of 2.7%. Sales by companies in the Asia-
Pacific, Africa region posted sales growth of 12.4%,
with operational growth of 10.9% and a positive impact
from currency of 1.5%.
For the fiscal second quarter of 2007, worldwide sales
were $15.1 billion, a total increase of 13.2% and an
operational increase of 10.8%, over 2006 fiscal second
quarter sales of $13.4 billion. Currency fluctuations
positively impacted sales by 2.4% 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 7.1%.
Sales by U.S. companies were $8.0 billion in the fiscal
second quarter of 2007, which represented an increase
of 9.0%. Sales by international companies were $7.1
billion, which represented a total increase of 18.4%,
including an operational increase of 13.0%, and a
positive impact from currency of 5.4% over the fiscal
second quarter of 2006.
Sales by companies in Europe experienced a total
increase of 18.6%, with operational growth of 11.0% and
a positive impact from currency of 7.6%. Sales by
companies in the Western Hemisphere, excluding the
U.S., experienced total growth of 29.1%, operational
growth of 24.1% and a positive impact from currency of
5.0%. Sales by companies in the Asia-Pacific, Africa
region posted sales growth of 12.9%, with operational
growth of 11.3% and a positive impact from currency of
1.6%.
Analysis of Sales by Business Segments
Consumer
Consumer segment sales in the first fiscal six months
of 2007 were $7.1 billion, an increase of 48.5% over
the same period a year ago, with 45.4% of operational
growth and a positive currency impact of 3.1%. U.S.
Consumer segment sales increased by 41.6% while
international sales experienced a total increase of
54.8%, an operational increase of 48.9%, with a
positive currency impact of 5.9%.
The acquisition of Pfizer Inc.'s Consumer Healthcare
business net of the related divestitures increased
total sales growth for the total Consumer Segment by
39.4%.
Major Consumer Franchise Sales - First Fiscal Six Months
(Dollars in Millions)
July 1, July 2, Total Operations Currency
2007 2006 Change Change Change
OTC Pharm & Nutr $2,463 $1,286 91.5% 89.4% 2.1%
Skin Care 1,521 1,313 15.9 12.7 3.2
Baby & Kids Care 934 827 12.8 8.5 4.3
Women's Health 884 814 8.6 4.8 3.8
Oral Care Products 713 197 * * 2.0
Other 545 316 72.5 70.1 2.4
Total $7,060 $4,753 48.5% 45.4% 3.1%
*Percentages greater than 100%
Consumer segment sales in the fiscal second quarter of
2007 were $3.6 billion, an increase of 48.6% over the
same period a year ago with 45.1% of operational growth
and a positive currency impact of 3.5%. U.S. Consumer
segment sales increased by 41.6% 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
total sales growth for the total Consumer Segment by
39.7%.
Major Consumer Franchise Sales - Fiscal Second Quarter
(Dollars in Millions)
July 1, July 2, Total Operations Currency
2007 2006 Change Change Change
OTC Pharm & Nutr $1,206 $633 90.6% 88.4% 2.2%
Skin Care 757 654 15.8 12.1 3.7%
Baby & Kids Care 487 421 15.6 10.6 5.0
Women's Health 463 415 11.4 7.0 4.4
Oral Care Products 353 104 * * 2.2
Other 298 171 74.3 71.7 2.6
Total $3,564 $2,398 48.6% 45.1% 3.5%
*Percentages greater than 100%
The OTC Pharmaceuticals and Nutritionals franchise
achieved operational growth of 88.4%. This was
attributable to new products from acquisitions, as well
as growth for adult analgesics and SPLENDA(R) products.
The impact on OTC Pharmaceuticals and Nutritionals
total sales growth due to newly acquired brands from
Pfizer Inc. was 71.0% in the fiscal second quarter of
2007.
The Skin Care franchise operational growth of 12.1% was
driven by strong performances from the AVEENO(R), and
NEUTROGENA(R) product lines as well as the addition of the
Pfizer and Group Vendome products. These gains were
partially offset by softer sales of Johnson's Adult
products. The impact on Skin Care total sales growth
due to newly acquired brands from Pfizer Inc. was 5.1%
in the fiscal second quarter of 2007.
The Baby & Kids Care franchise operational growth of
10.6% was the result of the strong performances of
cleansers, lotions and creams and hair care products.
The impact on Baby & Kids Care total sales growth due
to newly acquired brands from Pfizer Inc. and
divestitures related to the acquisition was 1.8% in the
fiscal second quarter of 2007.
The Women's Health franchise achieved operational
growth of 7.0%, which was attributable to new products
related to acquisitions. The impact on Women's Health
total sales growth due to newly acquired brands from
Pfizer Inc. was 4.9% in the fiscal second quarter of
2007.
The Oral Care franchise operational growth was
attributable to new products from acquisitions such as
LISTERINE(R) mouthwashes. An operational sales decline in
the toothbrush, floss and mouth fresheners and
whitening products, was due to new product launches
included in the fiscal second quarter of 2006 as well
as increased competition in 2007. The impact on Oral
Care total sales 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 six
months of 2007 were $12.4 billion, a total increase of
8.2% over the same period a year ago with 6.2% of this
change due to operational increases and the remaining
2.0% increase related to the positive impact of
currency. The U.S. Pharmaceutical sales increase was
6.9% and the total growth in international
Pharmaceutical sales was 10.4%, with 4.7% of this
change due to operational increases and the remaining
5.7% increase related to the positive impact of
currency.
Major Pharmaceutical Product Revenues - First Fiscal Six Months
(Dollars in Millions)
July 1, July 2, Total Operations Currency
2007 2006 Change Change Change
Anti-psychotics $2,315 $2,055 12.7% 10.2% 2.5%
REMICADE(R) 1,600 1,457 9.8 9.8 -
PROCRIT(R)/EPREX(R) 1,575 1,594 (1.2) (3.6) 2.4
TOPAMAX(R) 1,188 965 23.1 21.8 1.3
LEVAQUIN(R)/FLOXIN(R) 843 744 13.3 13.3 -
ACIPHEX(R)/PARIET(TM) 672 614 9.4 6.3 3.1
DURAGESIC(R)/Fentanyl
Transdermal 591 661 (10.5) (13.5) 3.0
CONCERTA(R) 508 452 12.3 10.9 1.4
Hormonal
Contraceptives 477 501 (4.9) (6.2) 1.3
Other 2,601 2,393 8.7 5.4 3.3
Total $12,370 $11,436 8.2% 6.2% 2.0%
Pharmaceutical segment sales in the fiscal second
quarter of 2007 were $6.1 billion, a total increase of
5.8% over the same period a year ago with 3.8% of this
change due to operational increases and the remaining
2.0% increase related to the positive impact of
currency. The U.S. Pharmaceutical sales increase was
4.8% and the growth in international Pharmaceutical
sales was 7.6%, with 2.0% of this change due to
operational increases and the remaining 5.6% increase
related to the positive impact of currency.
Major Pharmaceutical Product Revenues - Fiscal Second Quarter
(Dollars in Millions)
July 1, July 2, Total Operations Currency
2007 2006 Change Change Change
Anti-psychotics $1,137 $1,036 9.7% 7.3% 2.4%
REMICADE(R) 869 777 11.9 11.9 -
PROCRIT(R)/EPREX(R) 758 808 (6.1) (8.5) 2.4
TOPAMAX(R) 578 495 16.8 15.5 1.3
LEVAQUIN(R)/FLOXIN(R) 364 343 6.1 6.0 0.1
ACIPHEX(R)/PARIET(TM) 336 308 9.1 5.9 3.2
DURAGESIC(R)/Fentanyl
Transdermal 289 336 (14.1) (16.8) 2.7
CONCERTA(R) 255 217 17.8 16.3 1.5
Hormonal
Contraceptives 240 247 (3.2) (4.6) 1.4
Other 1,323 1,243 6.4 3.0 3.4
Total $6,149 $5,810 5.8% 3.8% 2.0%
Sales growth within the segment was led by strong
performances from TOPAMAX(R) (topiramate), REMICADE(R)
(infliximab), CONCERTA(R) and RISPERDAL(R) CONSTA(R)
(risperidone). Generic competition related to DURAGESIC(R)
(fentanyl transdermal system) and DITROPAN(R) in the U.S,
as well as SPORANOX(R) (itraconazole), DURAGESIC(R) (fentanyl
transdermal system) and RISPERDAL oral in certain
countries outside the U.S., continue to negatively
impact sales during the fiscal second quarter of 2007.
The anti-psychotic franchise which includes RISPERDAL(R)
oral (risperidone), a medication that treats the
symptoms of schizophrenia and bipolar mania, 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 7.3% in the fiscal second quarter of 2007. Sales
growth was positively impacted by the U.S. launch of
INVEGA(TM) and the 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. The
expiration of a product patent or loss of market
exclusivity can result in a significant reduction in sales.
REMICADE(R) (infliximab), a biologic approved for the
treatment of Crohn's disease, ankylosing spondylitis,
psoriasis, psoriatic arthritis, ulcerative colitis and
use in the treatment of rheumatoid arthritis,
experienced strong operational growth of 11.9% over
prior year fiscal second quarter. This continued growth
was driven by 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 experiencing increased
competition which may negatively impact the future rate
of sales growth.
PROCRIT(R) (Epoetin alfa) and EPREX(R) (Epoetin alfa)
performance combined had an operational sales decline
of 8.5%, as compared to prior year fiscal second
quarter. PROCRIT(R) experienced an operational decline of
14.3% primarily due to a decline in the market as
compared to prior year fiscal second quarter, while
EPREX(R) had operational growth of 2.3%. On July 30, 2007
The Centers for Medicare and Medicaid (CMS) issued a
National Coverage Determination (NCD), which
significantly limits the future reimbursement of
Erythropoiesis Stimulating Agents (ESA's) 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,
experienced strong operational growth of 15.5% as
compared to prior year fiscal second quarter. The
growth in the U.S. was due to continued growth of share
in the migraine indication, while outside the U.S.
sales declined slightly on an operational basis due to
generic competition in certain markets.
LEVAQUIN(R) (levofloxacin)/FLOXIN(R) achieved operational
growth of 6.0% over prior year fiscal second 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 5.9% as compared to prior year
fiscal second quarter.
DURAGESIC(R)/Fentanyl Transdermal (fentanyl transdermal
system) experienced an operational sales decline of
16.8% over the fiscal second quarter of 2006 primarily
due to continued generic erosion.
CONCERTA(R) (methylphenidate HCl), a product for the
treatment of attention deficit hyperactivity disorder,
achieved operational sales growth of 16.3% over the
fiscal second quarter of 2006. 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.
The hormonal contraceptive franchise experienced an
operational sales decline of 4.6% primarily resulting
from 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. This
was partially offset by growth in ORTHO TRI-CYCLEN(R)
LO (norgestimate/ethinyl estradiol), a low dose oral
contraceptive.
Medical Devices and Diagnostics
Medical Devices and Diagnostics segment sales in the
first fiscal six months of 2007 were $10.7 billion, an
increase of 5.6% over the same period a year ago, with
3.2% of this change due to operational increases and
the remaining 2.4% increase related to the positive
impact of currency. The U.S. Medical Devices and
Diagnostics sales increase was 1.8% and the growth in
international Medical Devices and Diagnostics sales was
9.5%, which included operational increases of 4.6% and
an increase of 4.9% related to the positive impact of
currency.
Major Medical Devices and Diagnostics Franchise Sales -
Fiscal Six Months
(Dollars in Millions)
July 1, July 2, Total Operations Currency
2007 2006 Change Change Change
DEPUY(R) $2,292 $2,074 10.5% 7.7% 2.8%
ETHICON ENDO-
SURGERY(R) 1,848 1,651 11.9 9.0 2.9
CORDIS(R) 1,780 2,143 (16.9) (18.3) 1.4
ETHICON(R) 1,771 1,590 11.4 7.8 3.6
LIFESCAN(R) 1,145 1,027 11.6 8.6 3.0
Vision Care 1,066 915 16.4 15.7 0.7
ORTHO-CLINICAL
DIAGNOSTICS(R) 799 738 8.2 6.0 2.2
Other 37 28 32.1 31.4 0.7
Total $10,738 $10,166 5.6% 3.2% 2.4%
Medical Devices and Diagnostics segment sales in the
fiscal second quarter of 2007 were $5.4 billion, an
increase of 5.1% over the same period a year ago, with
2.8% of this change due to operational growth and the
remaining 2.3% increase related to the positive impact
of currency. The U.S. Medical Devices and Diagnostics
sales increase was 1.1% and the growth in international
Medical Devices and Diagnostics sales was 9.1%, which
included operational growth of 4.4% and an increase of
4.7% related to the positive impact of currency.
Major Medical Devices and Diagnostics Franchise Sales
Fiscal Second Quarter
(Dollars in Millions)
July 1, July 2, Total Operations Currency
2007 2006 Change Change Change
DEPUY(R) $1,135 $1,035 9.7% 7.0% 2.7%
ETHICON ENDO-
SURGERY(R) 957 857 11.7 8.9 2.8
ETHICON(R) 901 816 10.4 6.7 3.7
CORDIS(R) 852 1,068 (20.3) (21.6) 1.3
LIFESCAN(R) 596 522 14.2 11.2 3.0
Vision Care 553 474 16.5 16.3 0.2
ORTHO-CLINICAL
DIAGNOSTICS(R) 406 368 10.3 8.1 2.2
Other 18 15 20.0 19.4 0.6
Total $5,418 $5,155 5.1% 2.8% 2.3%
The DePuy franchise's operational growth of 7.0% over
the same period a year ago 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 8.9% over prior year fiscal second 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. Additionally,
strong results were achieved with the continued success
of the HARMONIC ACE(R), an ultrasonic cutting and
coagulating surgical device.
Ethicon worldwide sales grew operationally by 6.7% from
the same period in the prior year, resulting from
strong growth in the hemostasis, biosurgicals and
meshes and women's health product lines.
The Cordis franchise experienced an operational sales
decline of 21.6% over the fiscal second quarter of
2006. These results were impacted by lower sales of
CYPHER(R) Sirolimus-eluting Coronary Stent due to
increased competition in Europe and Japan as well as
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
sales growth achieved by the Biosense Webster business.
The growth of the Biosense Webster business was
primarily driven by the sales of AcuNav(TM) Ultrasound
Catheters.
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
11.2% over the fiscal second quarter of 2006 reflecting
the continued success of the ULTRA(R) product lines. An
additional contributor was the growth of the Animas
business, driven by new product launches.
The Vision Care franchise operational sales growth of
16.3% was led by the continued global success of
ACUVUE(R) OASYS(TM), ACUVUE(R) ADVANCE(TM) Brand Contact
Lenses for Astigmatism and the 1-DAY ACUVUE(R) product
lines.
The Ortho-Clinical Diagnostics franchise achieved
operational growth of 8.1% over the fiscal second
quarter of 2006. The Immunohematology 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 and Selling, Marketing and
Administrative Expenses
Consolidated costs of products sold for the first
fiscal six months of 2007 increased to 29.0% from 28.1%
of sales as compared to the same period a year ago.
The cost of products sold for the fiscal second quarter
of 2007 increased to 28.8% from 28.3% of sales in the
same period a year ago. The increase was due to the
impact of newly acquired consumer brands partially
offset by cost improvements primarily in the Medical
Devices and Diagnostics segment.
Consolidated selling, marketing and administrative
expenses for the first fiscal six 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 six
months of 2007 were 32.5% versus 32.0% for the same
period a year ago. Consolidated selling, marketing and
administrative expenses for the fiscal second quarter
of 2007 increased 0.7% over the same period a year ago.
As a percent to sales, consolidated selling, marketing
and administrative expenses were 33.3% versus 32.6% for
the same period a year ago. Increases in the quarterly
and six 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 primarily in the Pharmaceutical
business.
Research & Development
Research activities represent a significant part of the
Company's business. These expenditures relate to the
development of new products, improvement of existing
products, technical support of products and compliance
with governmental regulations for the protection of the
consumer. Worldwide costs of research activities, for
the first fiscal six months of 2007 were $3.5
billion, an increase of 4.7% over the same period a
year ago. Research and development spending in the
fiscal second quarter of 2007 was $1.9 billion, an
increase of 2.1% over the fiscal second quarter of
2006. As a percent to sales, the level of research and
development spending decreased for both the fiscal
second quarter and the first fiscal six months of 2007
as compared to the same period a year ago. The decrease
as compared to 2006 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. An additional contributing
factor to the decrease as a percent to sales in
research and development was the change in the mix of
businesses with the inclusion of the newly acquired
consumer products.
In-Process Research & Development(IPR&D)
In the fiscal second quarter of 2007, the Company had
no IPR&D charges. In the fiscal second quarter of 2006,
the Company recorded IPR&D charges of $87 million
before tax, with no tax benefit, related to the
acquisition of Vascular Control Systems, Inc.
Other (Income) Expense, Net
Other (income) expense, net is the account where the
Company records gains and losses related to the sale
and write-down of certain equity securities of the
Johnson & Johnson Development Corporation, gains and
losses on the disposal of fixed assets, currency gains
and losses, minority interests, litigation settlements,
as well as royalty income. As a percent to sales, other
(income) expense, net for the fiscal second quarter of
2007 was similar to the fiscal second quarter of 2006.
The unfavorable change in other (income) expense, net
for the first fiscal six months of 2007 as compared to
the same period a year ago was $471 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 six months of 2007 was
17.6% versus 19.0% over the same period a year ago.
Operating profit as a percent to sales in the fiscal
second quarter of 2007 was 13.5% versus 18.3% over the
same period a year ago. This decrease 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 six months of 2007
was 35.7% versus 31.7% over the same period a year ago.
Operating profit as a percent to sales in the fiscal
second quarter of 2007 was 34.7% versus 29.2% over the
same period a year ago. For both periods in 2007,
operating profit margin improved, as compared to the
same periods 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 second quarter of 2006 as well as
cost containment efforts in selling, marketing and
administrative expenses in the first fiscal six months
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 six months of 2007 was 20.8% versus 35.4% over
the same period a year ago. Operating profit as a
percent to sales in the fiscal second quarter of 2007
was 28.1% versus 27.8% over the same period a year ago.
The primary driver of the decline in the operating
profit margin in the Medical Devices and Diagnostics
segment for the fiscal six months over the same period
a year ago was the acquisition related IPR&D charges of
$807 million incurred during the fiscal six months of
2007 versus $124 million incurred during the fiscal six
months of 2006. Partially offsetting this decline was
the impact of cost improvements in cost of goods sold.
Additionally, the first fiscal six months of 2006
included the gain associated with the Guidant
acquisition agreement termination fee, less associated
expenses, of $622 million before tax.
Interest (Income) Expense
Interest income decreased in both the first fiscal six
months and fiscal second quarter of 2007 as compared to
the same periods a year ago. The cash balance, which
included marketable securities, was $6.0 billion at the
end of the fiscal second quarter of 2007. This was a
decrease of $8.7 billion from the same period a year
ago. The decline was primarily due to acquisition
activity and the stock repurchase program during the
fiscal year 2006.
Interest expense increased in both the first fiscal six
months and fiscal second 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 program during the fiscal year
2006.
Provision For Taxes on Income
The worldwide effective income tax rates for the first
fiscal six months of 2007 and 2006 were 26.4% and
25.5%, respectively, an increase in the effective tax
rate of 0.9%. This was primarily due to the IPR&D
charge of $807 million recorded in the fiscal first
quarter of 2007, which was non-deductible for tax
purposes. This unfavorable change was partially offset
by increases in taxable income in lower tax
jurisdictions relative to taxable income in higher tax
jurisdictions along with the impact of the Research and
Development tax credit, which was not in effect in the
first fiscal nine months of 2006.
The tax rate for the first fiscal six months of 2006
benefited from a reversal of tax allowances of $134
million associated with the Tibotec business. This 2006
benefit was offset by 2006 acquisition-related IPR&D
charges of $124 million, for which there was a minimal
tax benefit and a high tax rate related to the gain of
$622 million before tax associated with the Guidant
acquisition agreement termination fee.
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. In the first fiscal six months of 2007,
cash flow from operations was $6.7 billion, an increase
of $0.9 billion over the same period a year ago. This
increase was primarily due to the change of $0.5
billion in accounts payable and accrued liabilities as
well as a decrease in accounts receivable of $0.3
billion versus the same period a year ago. Net cash
used by investing activities increased by $.3 billion
primarily due to a $0.2 billion increase in proceeds
from the disposal of assets. This is due to
divestitures related to the acquisition of Consumer
Healthcare business of Pfizer Inc. Net cash used by
financing activities decreased by $2.3 billion
primarily due to a $2.2 billion decrease in the
repurchase of common stock over the same period a year
ago. During the first fiscal six months of 2006 $2.7
billion was utilized for the stock repurchase program.
Cash and current marketable securities were $6.0
billion at the end of the fiscal second quarter of 2007
as compared with $14.7 billion at fiscal second quarter
of 2006, a decrease of $8.7 billion, which was due to
acquisition activity and the 2006 stock repurchase
program.
On July 9, 2007, the Company announced that its Board
of Directors has 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.
Dividends
On April 26, 2007, the Board of Directors declared a
regular cash dividend of $0.415 per share, payable on
June 12, 2007 to shareholders of record as of May 29,
2007. This represented an increase of 10.7% in the
quarterly dividend rate and was the 45th consecutive
year of cash dividend increases.
On July 16, 2007, the Board of Directors declared a
regular cash dividend of $0.415 per share, payable on
September 11, 2007 to shareholders of record as of
August 28, 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 June 2006, the FASB issued FASB Interpretation 48
(FIN 48), Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No 109. This
interpretation prescribes a recognition threshold and
measurement attribute for the financial statement
recognition and measurement of a tax position taken or
expected to be taken in a tax return. The
interpretation also provides guidance on derecognition,
classification and other matters. The statement was
effective for the fiscal year 2007 and the Company
adopted the Interpretation at that time. See Note 3 to
the Unaudited Consolidated Financial Statements for
more details.
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 11.
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 end of the
period covered by this report, 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.
The following table provides information with respect
to Common Stock purchases by the Company during the
fiscal second quarter of 2007. Common Stock purchases
on the open market are made as part of a systematic
plan to meet the Company's compensation programs.
Total Average
Number of Price
Shares Paid per
Fiscal Month Purchased Share
April 2, 2007
through
April 29,2007
2007 759,900 $64.28
April 30, 2007
through
May 27, 2007 3,508,300 $63.07
May 28, 2007
through
July 1, 2007 2,788,400 $62.41
Total 7,056,600 $62.94
On July 9, 2007, the Company announced that its Board
of Directors has 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.
Item 4 - Submission of Matters to a Vote of Security
Holders
(a) The annual meeting of the shareholders of the
Company was held on April 26, 2007.
(b) Election of the directors is set forth in (c)
below.
(c) The shareholders elected all the Company's
nominees for director and ratified the appointment of
PricewaterhouseCoopers LLP as the Company's independent
registered accounting firm for the fiscal year 2007.
The shareholders did not approve the shareholder
proposal on majority voting requirements for director
nominees or the shareholder proposal on the
Supplemental Retirement Plan.
1. Election of Directors:
Shares For* Shares Withheld
M. S. Coleman 2,466,892,805 66,572,007
J. G. Cullen 2,448,973,367 84,491,445
M. M. E. Johns 2,466,990,283 66,474,529
A. G. Langbo 2,450,076,051 83,388,761
S. L. Lindquist 2,468,186,923 65,277,889
L. F. Mullin 2,465,217,964 68,246,848
C. A. Poon 2,451,698,460 81,766,352
C. Prince 2,378,580,307 154,884,505
S. S Reinemund 2,468,193,021 65,271,791
D. Satcher 2,467,154,212 66,310,600
W. C. Weldon 2,448,815,553 84,649,259
*Includes 532,746,949 broker non-votes
2. Ratification of Appointment of
PricewaterhouseCoopers LLP:
For* 2,461,102,118
Against 45,531,421
Abstain 26,831,273
*Includes 532,746,949 broker non-votes
3. Shareholder proposal on majority voting
requirements for director nominees:
For 881,161,926
Against 1,083,580,571
Abstain 35,975,366
Broker Non-vote 532,746,949
4 . Proposal on Supplemental Retirement Plan:
For 645,742,277
Against 1,314,642,129
Abstain 40,333,457
Broker Non-vote 532,746,949
Item 6 - EXHIBITS
Exhibit 31.1 Certifications under Rule 13a-
14(a) of the Securities Exchange Act pursuant
to Section 302 of the Sarbanes-Oxley Act of
2002 - Filed with this document.
Exhibit 32.1 Certifications pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002 - Furnished with this document.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
JOHNSON & JOHNSON
(Registrant)
Date: August 8, 2007 By /s/ D. J. CARUSO
D. J. CARUSO
Vice President, Finance;
Chief Financial Officer
(Principal Financial Officer)
Date: August 8, 2007 By /s/ S. J. COSGROVE
S. J. COSGROVE
Controller
(Principal Accounting Officer)