J&J Product

Company

Patents

Plaintiff/ Patent Holder

Court

Trial Date

Date Filed

Two-layer Catheters

Cordis

Kastenhofer

Boston Scientific Corp.

Multiple European

*

09/07

CYPHER® Stent

Cordis

Wall

Wall

E.D. TX

04/11

11/07

CYPHER® Stent

Cordis

Bonutti

MarcTec

S.D. IL

06/10

11/07

CYPHER® Stent

Cordis

Saffran

Saffran

E.D. TX

06/11

10/07

LISTERINE® Tooth Whitening Strips

McNeil-PPC

Sagel

Procter & Gamble

W.D. WI

*

05/08

Blood Glucose Meters and Strips

Lifescan

Wilsey

Roche Diagnostics

D. DE

*

11/07

REMICADE®, ustekinumab, golimumab, ReoPro

Centocor/COBI

Cabilly II

Genentech

C.D. CA

*

05/08

SIMPONI®

Centocor/COBI

Salfeld

Abbott Laboratories

MA

*

05/09

* Trial date to be scheduled.

LITIGATION AGAINST FILERS OF ABBREVIATED NEW DRUG APPLICATIONS (ANDAs)

The following chart indicates lawsuits pending against generic firms that filed Abbreviated New Drug Applications (ANDAs) 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.

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Brand Name Product

Patent/NDA Holder

Generic Challenger

Court

Trial Date

Date Filed

30-Month Stay Expiration

CONCERTA®

McNeil-PPC

Andrx

D. DE

12/07

09/05

None

18, 27, 36 and 54 mg controlled release tablet

ALZA

LEVAQUIN® 250, 500, 750 mg tablet

Ortho-McNeil

Lupin

D. NJ

*

10/06

03/09

ORTHO TRI-CYCLEN® LO

Ortho-McNeil

Barr

D. NJ

*

10/03

02/06

0.18 mg/0.025 mg, 0.215 mg/ 0.025 mg and 0.25 mg/ 0.025 mg

Watson

D. NJ

*

10/08

03/11

RAZADYNE ®

Janssen

Teva

D. DE

05/07

07/05

08/08

Mylan

D. DE

05/07

07/05

08/08

Dr. Reddy’s

D. DE

05/07

07/05

08/08

Purepac

D. DE

05/07

07/05

08/08

Barr

D. DE

05/07

07/05

08/08

AlphaPharm

D. DE

05/07

07/05

08/08

ULTRAM® ER 100, 200, 300 mg tablet

Ortho-McNeil

Par

D. DE

04/09

05/07

09/09

ULTRAM® ER 100 mg tablet

Ortho-McNeil- Janssen

Impax

D. DE

06/10

08/08

09/09

* Trial date to be scheduled.

In the action against Barr Pharmaceuticals, Inc. (Barr) regarding ORTHO TRI-CYCLEN® LO, on January 22, 2008, the Company’s subsidiary Ortho Women’s Health & Urology, a Division of Ortho-McNeil-Janssen Pharmaceuticals, Inc., and Barr agreed to a non-binding term sheet to settle the litigation, which settlement discussions are still underway. The trial court postponed the January 22, 2008 trial without setting a new trial date. The court has ordered the parties to mediation.

On October 16, 2008, the Company’s subsidiary Ortho-McNeil-Janssen Pharmaceuticals, Inc. (OMJPI) filed suit in Federal District Court in New Jersey against Watson Laboratories, Inc. (Watson) in response to Watson’s ANDA regarding ORTHO TRI-CYCLEN® LO.

In the action against Barr and AlphaPharm with respect to their ANDA challenges to the RAZADYNE® patent that Janssen (now OMJPI)licenses from Synaptech, Inc. (Synaptech), a four-day non-jury trial was held in the Federal District Court in Delaware in May 2007. On August 27, 2008, the court held that the patent was invalid because it was not enabled. Janssen (OMJPI) and Synaptech have appealed the decision. Since the court’s decision, three generic companies have received final approvals for their products and have launched “at risk” pending appeal. Additional generic approvals and launches could occur at any time.

In the action by McNEIL-PPC, Inc. (McNeil-PPC) and ALZA Corporation (ALZA) against Andrx Corporation (Andrx) with respect to its ANDA challenge to the CONCERTA® patents, a five-day non-jury trial was held in the Federal District Court in Delaware in

 

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December 2007. On March 30, 2009, the court ruled that one CONCERTA® patent would not be infringed by Andrx’s proposed generic product and that the patent was invalid because it was not enabled. The court dismissed without prejudice Andrx’s declaratory judgment suit on a second patent for lack of jurisdiction.  McNeil-PPC and ALZA expect to appeal the court’s decision.

In the RAZADYNE®ER cases, a lawsuit was filed against Barr on the RAZADYNE® use patent that Janssen (now OMJPI) licenses from Synaptech in June 2006. In September 2008, the above-discussed Delaware decision invalidating the RAZADYNE® use patent resulted in entry of judgment for Barr on that patent, but the case will be reopened if Janssen (now OMJPI) and Synaptech win on appeal. Barr has received FDA approval of its product and has launched “at risk.”

In the action against Lupin Pharmaceuticals, Inc. (Lupin) regarding its ANDA concerning LEVAQUIN®, Lupin contends that the United States Patent and Trademark Office improperly granted a patent term extension to the patent that Ortho-McNeil (now Ortho-McNeil-Janssen Pharmaceuticals, Inc. (OMJPI)) licenses from Daiichi Pharmaceuticals, Inc. (Daiichi). Lupin alleges that the active ingredient in LEVAQUIN® was the subject of prior marketing, and therefore was not eligible for the patent term extension. Lupin concedes validity and that its product would violate the patent if marketed prior to the expiration of the original patent term.

In the ULTRAM®ER actions, Ortho-McNeil (now OMJPI), filed lawsuits (each for different dosages) against Par Pharmaceuticals, Inc. and Par Pharmaceuticals Companies, Inc. (Par) in May, June and October 2007 on two Tramadol ER formulation patents owned by Purdue Pharma Products L.P. (Purdue) and Napp Pharmaceutical Group Ltd. (Napp). OMJPI also filed lawsuits (each for different dosages) against Impax Laboratories, Inc. (Impax) on a Tramadol ER formulation patent owned by Purdue and Napp in August and November 2008. Purdue, Napp and Biovail Laboratories International SRL (Biovail)(the NDA holder) joined as co-plaintiffs in the lawsuits against Par and Impax, but Biovail and OMJPI were subsequently dismissed for lack of standing. The trial against Par took place on April 16-22, 2009 and is awaiting a decision from the Court. The trial against Impax is scheduled for June 2010.

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. Many 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,

 

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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. In June 2007, the MDL Court issued post-trial rulings, dismissing the Johnson & Johnson defendants from the case regarding all claims of Classes 2 and 3, and subsequently of Class 1 as well. The ruling is the subject of a pending appeal. AWP cases brought by various Attorneys General have proceeded to trial against other manufacturers. Cases including Johnson & Johnson subsidiaries are expected to be set for trial in 2010 and thereafter.

 

OTHER

In July 2003, Centocor (now COBI), a Johnson & Johnson subsidiary, 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 have responded to these requests for documents and information.

In December 2003, Ortho-McNeil (now OMJPI) 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® (topiramate). Additional subpoenas for documents have been received, and current and former employees have testified before a grand jury. Discussions are underway in an effort to resolve this matter, but whether agreement can be reached and on what terms are uncertain.

In January 2004, Janssen (now OMJPI) 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® (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® was received from the U.S. Attorney’s Office for the Eastern District of Pennsylvania in November 2005. Subpoenas seeking testimony from various witnesses before a grand jury have also been received. Janssen is cooperating in responding to ongoing requests for documents and witnesses.

 

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In September 2004, Ortho Biotech Inc. (now COBI), received a subpoena from the U.S. Office of Inspector General’s Denver, Colorado field office seeking documents directed to the sales and marketing of PROCRIT® (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 (now COBI) has responded to the subpoena.

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 sought to appeal these decisions and, in April 2008, the Court of Appeals ruled that plaintiffs’ appeal of the denial of class certification was untimely. Plaintiffs are now engaged in further discovery of individual plaintiffs’ claims.

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 and surgeons or surgeons-in-training involved in hip and knee replacement and reconstructive surgery. This investigation was resolved by DePuy and the four other leading suppliers of hip and knee implants in late September 2007 by agreements with the U.S. Attorney’s Office for the District of New Jersey. The settlements included an 18-month Deferred Prosecution Agreement (DPA), acceptance by each company of a monitor to assure compliance with the DPA and, with respect to four of the five companies, payment of settlement monies and entry into five year Corporate Integrity Agreements. DePuy paid $85 million as its settlement. The term of the Monitorship under the Deferred Prosecution Agreement concluded on March 27, 2009, and an order dismissing all charges was entered on March 30, 2009.  In November 2007, the Attorney General of the Commonwealth of Massachusetts issued a civil investigative demand to DePuy seeking information regarding financial relationships between a number of Massachusetts-based orthopedic surgeons and providers and DePuy, which relationships had been publicly disclosed by DePuy pursuant to the DPA. In February 2008, DePuy received a written request for information from the U.S. Senate Special Committee on Aging, as a follow-up to earlier inquiries, concerning a number of aspects of the DPA.

 

 

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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®. 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. Additional requests for documents have been received and responded to and former Scios employees have testified before a grand jury in San Francisco. The Qui Tam complaints were unsealed on February 19, 2009. The U.S. government has indicated that it intends to intervene and has until June 11, 2009 to file its complaints.

 

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 Omni-care, Inc., a manager of pharmaceutical benefits for long-term care facilities. The Johnson & Johnson subsidiaries involved responded 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 November 2005, Amgen filed suit against Hoffmann-LaRoche, Inc. (Roche) in the U.S. District Court for the District of Massachusetts seeking a declaration that the Roche product CERA, which Roche has indicated it would 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 Ortho Biotech (now COBI) for non-dialysis indications. Trial in this action concluded in October 2007 with a verdict in Amgen’s favor, finding the patents valid and infringed. The judge issued a preliminary injunction blocking the CERA launch, and subsequently made the injunction permanent.  Roche has appealed to the Federal Circuit, and the Company is awaiting scheduling of the oral argument date.

  

In February 2007, Johnson & Johnson voluntarily disclosed to the DOJ and the 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 the DOJ and SEC, and will cooperate with the agencies’ reviews of these matters. Law enforcement agencies of a number of other countries are also pursuing investigations of matters voluntarily disclosed by the Company to the DOJ and SEC. Discussions are underway in an effort to resolve these matters, and the Iraq Oil for Food matter referenced above, but whether agreement can be reached and on what terms is uncertain.

 

 

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In March 2007, the Company 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® by Janssen (now OMJPI), TOPAMAX® by Ortho-McNeil (now OMJPI) and NATRECOR® 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 responded to these requests. In addition, the U.S. Attorney’s office in Boston has issued subpoenas for grand jury testimony to several employees of Johnson & Johnson.

In May 2007, the New York State Attorney General issued a subpoena seeking information relating to the marketing and safety of PROCRIT®. The Company is responding to these requests.

In April 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 responded to these requests.

In January 2008, the European Commission (“EC”) began an industry-wide antitrust inquiry concerning competitive conditions within the pharmaceutical sector. Because this is a sector inquiry, it is not based on any specific allegation that the Company has violated EC competition law. The inquiry began with unannounced raids of a substantial number of pharmaceutical companies throughout Europe, including Johnson & Johnson affiliates. In March 2008, the EC issued detailed questionnaires to approximately 100 companies, including Johnson & Johnson affiliates. In November 2008, the EC issued a preliminary report summarizing its findings. The final report is expected in June or July of 2009.

In March 2008, the Company received a letter request from the Attorney General of the State of Michigan. The request seeks documents and information relating to nominal price transactions. The Company is responding to the request and will cooperate with the inquiry.

In June 2008, Johnson & Johnson received a subpoena from the United States Attorneys Office for the District of Massachusetts relating to the marketing of biliary stents by the Company’s Cordis subsidiary. Cordis is cooperating in responding to the subpoena.

In September 2008, Multilan AG, an indirect subsidiary of Schering-Plough Corporation, commenced arbitration against Janssen Pharmaceutica NV for an alleged wrongful termination of an agreement relating to payments in connection with termination of certain marketing rights. Multilan seeks declaratory relief, specific performance and damages. Multilan alleges that damages exceed €700 million. The parties are in the process of selecting an arbitral tribunal.

 

 

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In February 2009, Basilea Pharmaceutica AG brought an arbitration against Johnson & Johnson and various affiliates alleging that the Company breached the 2005 License Agreement for ceftobiprole by, among other things, failing to secure FDA approval of the cSSSI (skin) indication and allegedly failing to properly develop the pneumonia indication.  Basilea is seeking to recover damages and specific performance.

In April 2009, Johnson & Johnson received a HIPPA subpoena from the U.S. Attorney’s Office for the District of Massachusetts (Boston) seeking information regarding the Company’s financial relationship with several doctors.

In April 2009, Ortho-Clinical Diagnostics, Inc. received a grand jury subpoena from the U.S. Department of Justice, Antitrust Division, requesting documents and information for the period beginning September 1, 2000 through the present, pertaining to an investigation of alleged violations of the antitrust laws in the blood reagents industry. The company is in the process of complying with the subpoena.

In recent years the Company has received numerous requests from a variety of United States Congressional Committees to produce information relevant to ongoing congressional inquiries. It is the Company’s policy to cooperate with these inquiries by producing the requested information.

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 condition, 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.

 

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Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Analysis of Consolidated Sales

For the fiscal first quarter of 2009, worldwide sales were $15.0 billion, a decrease of 7.2% including an operational decrease of 1.2% as compared to 2008 fiscal first quarter sales of $16.2 billion. Currency had a negative impact of 6.0% on total reported fiscal first quarter 2009 sales.

Sales by U.S. companies were $8.0 billion in the fiscal first quarter of 2009, which represented a decrease of 5.0% as compared to the same period last year. Sales by international companies were $7.0 billion, which represented a total decrease of 9.6% including an operational increase of 3.0%, and a negative impact from currency of 12.6% as compared to the first fiscal quarter sales of 2008.

Sales by companies in Europe experienced a sales decline of 14.8%, including an operational decrease of 0.2% and a negative impact from currency of 14.6%. Sales by companies in the Western Hemisphere, excluding the U.S., experienced a sales decline of 14.7% including operational growth of 4.5% and a negative impact from currency of 19.2%. Sales by companies in the Asia-Pacific, Africa region achieved sales growth of 3.6%, with operational growth of 8.5% and a negative impact from currency of 4.9%.

Analysis of Sales by Business Segments

Consumer

Consumer segment sales in the fiscal first quarter of 2009 were $3.7 billion, a decrease of 8.7% as compared to the same period a year ago, with an operational decrease of 1.0% and a negative currency impact of 7.7%. U.S. Consumer segment sales declined by 5.1% while international sales experienced an overall sales decline of 11.6%, representing an operational increase of 2.4%, with a negative currency impact of 14.0%.

Major Consumer Franchise Sales – Fiscal Quarters Ended

(Dollars in Millions)		March 29, 2009				March 30, 2008				Total Change				Operations Change				Currency Change
OTC Pharm & Nutr		$	1,348			$	1,594				(15.4	)%			(8.4	)%			(7.0	)%
Skin Care			842				840				0.2				7.8				(7.6	)
Baby Care			489				533				(8.3	)			0.9				(9.2	)
Women’s Health			423				461				(8.2	)			0.7				(8.9	)
Oral Care			365				386				(5.4	)			2.8				(8.2	)
Wound Care/Other			244				250				(2.4	)			4.0				(6.4	)
Total		$	3,711			$	4,064				(8.7	)%			(1.0	)%			(7.7	)%

 

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The OTC Pharmaceuticals and Nutritionals franchise experienced an  operational decline of 8.4% as compared to prior year fiscal first quarter. The 2008 inventory build for initial stocking related to the U.S. launch of over-the-counter ZYRTEC® negatively impacted year over year growth comparisons. Additionally, competition from private label and a milder flu and fever season in the U.S. have negatively impacted sales.

The Skin Care franchise achieved operational growth of 7.8% over prior year fiscal first quarter. This was attributable to growth in the Neutrogena and Aveeno product lines in addition to sales of recently acquired products from the acquisition of Beijing Dabao Cosmetics Co., Ltd.

The Baby Care franchise operational growth was 0.9% over prior year fiscal first quarter. This was due to growth in the cleanser and powder product lines primarily outside the U.S. partially offset by the impact of BabyCenter exiting the online retail business.

The Oral Care franchise operational growth of 2.8% was driven by the growth of LISTERINE® mouthwash partially offset by lower sales of whitening strips and mouth fresheners.

Pharmaceutical

Pharmaceutical segment sales in the first fiscal quarter of 2009 were $5.8 billion, a total decrease of 10.1% as compared to the same period a year ago with an operational decline of 5.1% and a decrease of 5.0% related to the negative impact of currency. U.S. Pharmaceutical sales declined by 9.7% as compared to the same period a year ago. International Pharmaceutical sales experienced a sales decline of 10.7%, representing an operational increase of 2.8%, and a decrease of 13.5% related to the negative impact of currency.

Major Pharmaceutical Product Revenues – Fiscal Quarters Ended

(Dollars in Millions)		March 29, 2009				March 30, 2008				Total Change				Operations Change				Currency Change
REMICADE®		$	1,028			$	998				3.0	%			3.0	%			-	%
TOPAMAX®			602				646				(6.8	)			(3.8	)			(3.0	)
PROCRIT®/EPREX®			550				629				(12.6	)			(6.8	)			(5.8	)
LEVAQUIN®/FLOXIN®			425				496				(14.3	)			(13.4	)			(0.9	)
CONCERTA®			344				290				18.6				23.9				(5.3	)
RISPERDAL® CONSTA®			325				309				5.2				17.5				(12.3	)
RISPERDAL®/risperidone			275				809				(66.0	)			(64.2	)			(1.8	)
ACIPHEX®/PARIET®			263				277				(5.1	)			3.0				(8.1	)
DURAGESIC®/Fentanyl Transdermal			231				233				(0.9	)			8.5				(9.4	)
Other			1,737				1,742				(0.3	)			9.4				(9.7	)
Total		$	5,780			$	6,429				(10.1	)%			(5.1	)%			(5.0	)%

 

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REMICADE® (infliximab), a biologic approved for the treatment of Crohn’s disease, ankylosing spondylitis, psoriasis, psoriatic arthritis, ulcerative colitis and use in the treatment of rheumatoid arthritis, achieved operational growth of 3.0% over prior year fiscal first quarter. Sales to the U.S. market grew 9.0% versus the prior year primarily driven by market growth. U.S. export sales declined 10.6% versus the prior year due to production planning needs in both fiscal first quarters 2009 and 2008. REMICADE® is competing in a market which is experiencing increased competition due to new entrants and the expansion of indications for existing competitors.

TOPAMAX® (topiramate), which has been approved for adjunctive and monotherapy use in epilepsy, as well as for the prophylactic treatment of migraines, experienced an operational decline of 3.8% as compared to prior year fiscal first quarter. Marketing exclusivity for TOPAMAX® (topiramate) in the U.S. expired in March 2009 and multiple generics have entered the market. The expiration of a product patent or loss of market exclusivity will result in a significant reduction in sales. In 2008, U.S. sales of TOPAMAX® were $2.3 billion. U.S. sales of TOPAMAX® in the fiscal first quarter of 2009 were $0.5 billion.

PROCRIT® (Epoetin alfa)/EPREX® (Epoetin alfa) experienced an operational sales decline of 6.8%, as compared to prior year fiscal first quarter. The decline in PROCRIT® sales was due to the declining markets for Erythropoiesis Stimulating Agents (ESAs) in the U.S. The FDA issued an order requiring a labeling supplement making specific revisions to the label for ESAs, including PROCRIT®. The label for PROCRIT® was updated July 30, 2008 based on review of emerging safety data for the use of ESAs in patients with cancer. Outside the U.S., new competition and the emerging safety data issues have contributed to the lower sales results for EPREX®.

LEVAQUIN®(levofloxacin)/FLOXIN®(ofloxacin), experienced an operational decline of 13.4% primarily due to lower incidence of respiratory illness and flu in the U.S.

CONCERTA® (methylphenidate HCl), a product for the treatment of attention deficit hyperactivity disorder, achieved operational sales growth of 23.9% over the fiscal first quarter of 2008 primarily due to market growth. Although the original CONCERTA® patent expired in 2004, the FDA has not approved any generic version that is substitutable for CONCERTA®. Parties have filed Abbreviated New Drug Applications (ANDAs) for generic versions of CONCERTA®, which are pending and may be approved at any time.

RISPERDAL® CONSTA® (risperidone), a long-acting injectable for the treatment of schizophrenia, achieved operational growth of 17.5% over the fiscal first quarter of 2008. Strong growth was due to a positive shift from daily therapies to longer-acting RISPERDAL® CONSTA®.

 

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RISPERDAL®(risperidone), a medication that treats the symptoms of schizophrenia, bipolar mania and irritability associated with autistic behavior in indicated patients, experienced an operational decline of 64.2% versus the prior year. Market exclusivity for RISPERDAL® oral in the U.S. expired on June 29, 2008. Loss of market exclusivity for the RISPERDAL® oral patent has resulted in a significant reduction in sales in the U.S. In 2008, U.S. sales of RISPERDAL® oral were $1.3 billion. U.S. sales of RISPERDAL® oral were $1.1 billion and $0.2 billion in the first half and the second half of the 2008 fiscal year, respectively.

ACIPHEX®/PARIET® and DURAGESIC®/Fentanyl Transdermal (fentanyl transdermal system) achieved operational growth of 3.0% and 8.5%, respectively, versus the prior year.

In the fiscal first quarter of 2009, Other Pharmaceutical sales achieved operational growth of 9.4% versus the prior year. Contributors to the increase were sales of VELCADE® (bortezomib), a treatment for multiple myeloma, PREZISTA® (darunavir), for the treatment of HIV/AIDS patients and INVEGA® (paliperidone), a once-daily atypical antipsychotic.

Medical Devices and Diagnostics

Medical Devices and Diagnostics segment sales in the first fiscal quarter of 2009 were $5.5 billion, a decrease of 2.9% as compared to the same period a year ago, with 3.1% of this change due to operational increases and a decrease of 6.0% related to the negative impact of currency. The U.S. Medical Devices and Diagnostics sales increase was 2.5% and the decline in international Medical Devices and Diagnostics sales was 7.4%, which included operational increases of 3.6% and a decrease of 11.0% related to the negative impact of currency.

Major Medical Devices and Diagnostics Franchise Sales* – Fiscal Quarters Ended

(Dollars in Millions)		March 29, 2009				March 30, 2008				Total Change				Operations Change				Currency Change
DEPUY®		$	1,292			$	1,287				0.4	%			7.3	%			(6.9	)%
ETHICON ENDO-SURGERY®			1,015				1,003				1.2				8.6				(7.4	)
ETHICON®			953				945				0.8				9.1				(8.3	)
CORDIS®			668				801				(16.6	)			(12.9	)			(3.7	)
Vision Care			599				607				(1.3	)			0.6				(1.9	)
Diabetes Care			541				615				(12.0	)			(6.0	)			(6.0	)
ORTHO-CLINICAL DIAGNOSTICS®			467				443				5.4				10.3				(4.9	)
Total		$	5,535			$	5,701				(2.9	)%			3.1	%			(6.0	)%

 *Prior year amounts have been reclassified to conform to current presentation.

 

 

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The DePuy franchise achieved operational growth of 7.3% over the same period a year ago. This growth was primarily due to growth in the hip and spine product line. Additionally, new product launches in the Mitek sports medicine product line contributed to the growth.

The Ethicon Endo-Surgery franchise achieved operational growth of 8.6% over prior year fiscal first quarter. This growth was mainly driven by the HARMONIC™ technology business due to the success of newly launched products and the underlying strength of the technology. Additional contributors to the growth were the REALIZE® Gastric Band in the U.S. and endoscopy products outside the U.S.

The Ethicon franchise achieved operational growth of 9.1% over prior year fiscal first quarter. This was attributable to growth in the meshes and biosurgical product lines in addition to sales of newly acquired products from the acquisition of Mentor Corporation.

The Cordis franchise experienced an operational sales decline of 12.9% as compared to the fiscal first quarter of 2008. This decline was caused by lower sales of the CYPHER® Sirolimus-eluting Coronary Stent due to increased global competition. These results were partially offset by growth of the Biosense Webster business.

The Vision Care franchise achieved operational sales growth of 0.6%. ACUVUE® OASYS™, 1-DAY ACUVUE® MOIST™, and ACUVUE® OASYS™ for Astigmatism were the major contributors to this growth offset by slowing category growth due to declines in consumer spending.

The Diabetes Care franchise experienced an operational sales decline of 6.0% as compared to the fiscal first quarter of 2008. This decline reflects the overall decrease in the market due to current economic conditions. These results were partially offset by growth of the Animas business.

The Ortho-Clinical Diagnostics franchise achieved operational growth of 10.3% over the fiscal first quarter of 2008. This was attributable to sales growth in Immunohematology and donor screening products. Additionally, the launch of new VITROS 3600 and 5600 analyzers contributed to the growth.

Cost of Products Sold and Selling, Marketing and Administrative Expenses

Consolidated costs of products sold decreased to 28.3% from 28.5% of sales as compared to the same period a year ago. The decrease was primarily due to cost containment, primarily in the Medical Devices and Diagnostics business.

Consolidated selling, marketing and administrative expenses decreased 0.9% of sales as compared to the same period a year ago. Selling, marketing and administrative expenses as a percent to sales were 30.7% versus 31.6% in the fiscal first quarter of 2008. The decreases in the percent to sales was attributable to cost containment efforts across all the businesses, primarily the Consumer business.

 

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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 fiscal first quarter of 2009 were $1.5 billion, a decrease of 11.3% as compared to the same period a year ago. As a percent to sales, the level of research and development spending decreased to 10.1% in the fiscal first quarter of 2009, from 10.6% during the same period a year ago. The decrease as a percent to sales was primarily due to changes to the mix of businesses and increased efficiencies in the Pharmaceutical research and development support.

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, gains and losses relating to non-controlling interests, litigation settlements, as well as royalty income. The favorable change in other (income) expense, net for the fiscal first quarter of 2009 as compared to the fiscal first quarter of 2008 was primarily due to integration costs associated with the Consumer Healthcare business of Pfizer Inc. recorded in the fiscal first quarter of 2008.

OPERATING PROFIT BY SEGMENT

Consumer Segment

Operating profit for the Consumer segment as a percent to sales in the fiscal first quarter of 2009 was 21.6% versus 17.9% for the same period a year ago. The increase was primarily due to cost containment initiatives related to selling, marketing and administrative expenses. Additionally, the fiscal first quarter of 2008 included integration costs associated with the acquisition of the Consumer Healthcare business of Pfizer Inc.

Pharmaceutical Segment

Operating profit for the Pharmaceutical segment as a percent to sales in the fiscal first quarter of 2009 was 39.0% versus 36.8% for the same period a year ago. The primary driver of the improved operating profit was due to the savings generated by the cost containment initiatives partially offset by the negative impact of product mix.

Medical Devices and Diagnostics Segment

Operating profit for the Medical Devices and Diagnostics segment as a percent to sales in the fiscal first quarter of 2009 was 32.3% versus 31.6% for the same period a year ago. The primary driver of the improvement in the operating profit margin in the Medical Devices and Diagnostics segment was due to favorable product mix, manufacturing efficiencies and cost containment initiatives.

 

 

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Interest (Income) Expense

Interest income in the fiscal first quarter of 2009 decreased by $57 million as compared to the fiscal first quarter of 2008, due to lower rates of interest earned, despite higher average cash balances. The ending balance of cash, cash equivalents and marketable securities was $13.9 billion at the end of the fiscal first quarter of 2009. This is an increase of $2.8 billion from the same period a year ago. The increase was primarily due to cash generated from operating activities.

Interest expense in the fiscal first quarter of 2009 increased by $8 million as compared to the fiscal first quarter of 2008, due to a higher debt position of $14.1 billion at the end of the fiscal first quarter of 2009, compared to $11.4 billion from the same period a year ago. The higher debt balance was due to increased borrowings primarily to purchase common stock under the ongoing Common Stock repurchase program announced on July 9, 2007 and to fund acquisitions.

Provision For Taxes on Income

The worldwide effective income tax rates for the first fiscal quarters of 2009 and 2008 were 24.5% and 24.2%, respectively. The increase in the effective tax rate was primarily due to increases in taxable income in higher tax jurisdictions relative to taxable income in lower tax jurisdictions partially offset by the U.S. Research and Development tax credit that was not in effect in the fiscal first quarter of 2008.

As of March 29, 2009 the Company had approximately $2.1 billion of liabilities from unrecognized tax benefits. The Company does not expect that the total amount of unrecognized tax benefits will change significantly during the next twelve months.

See Note 8 to the Consolidated Financial Statements in the Annual Report on Form 10-K for the fiscal year ended December 28, 2008 for more detailed information regarding unrecognized tax benefits.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Cash and Cash equivalents were $12.6 billion at the end of the fiscal first quarter of 2009 as compared with $10.8 billion at the fiscal year end of 2008. The primary sources of cash that contributed to the $1.8 billion increase were $2.8 billion generated from operating activities and $2.2 billion net proceeds from short-term debt. The major uses of cash were acquisitions of $1.3 billion, dividends to shareholders of $1.3 billion and the repurchase of common stock of $0.8 billion.

Cash flow from operations of $2.8 billion is the result of $3.5 billion of net earnings and $0.8 billion of non cash charges related to depreciation and amortization and stock based compensation offset by $1.5 billion related to changes in assets, liabilities and the deferred tax provision net of effects from acquisitions.

 

 

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In the fiscal first quarter of 2009 the Company continued to have access to liquidity through the commercial paper market. The Company anticipates that operating cash flows, existing credit facilities and access to the commercial paper markets will continue to provide sufficient resources to fund operating needs in 2009.

Dividends

On January 5, 2009, the Board of Directors declared a regular cash dividend of $0.460 per share, which was paid on March 10, 2009 to shareholders of record as of February 24, 2009.

On April 23, 2009, the Board of Directors declared a regular cash dividend of $0.490 per share, payable on June 9, 2009 to shareholders of record as of May 26, 2009. This represented an increase of 6.5% in the quarterly dividend rate and was the 47th consecutive year of cash dividend increases. The Company expects to continue the practice of paying regular quarterly cash dividends.

OTHER INFORMATION

New Accounting Standards

During the fiscal first quarter of 2009, the Company adopted, SFAS Statements No. 141(R), Business Combinations, and No. 160, Noncontrolling Interests in Consolidated Financial Statements. These statements aim to improve, simplify, and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. These statements have a significant impact on the manner in which the Company accounts for acquisitions beginning in the fiscal year 2009. Significant changes include the capitalization of in process research and development (IPR&D), expensing of acquisition related restructuring actions and transaction related costs and the recognition of contingent purchase price consideration at fair value at the acquisition date. In addition, changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period will be recognized in earnings rather than as an adjustment to the cost of acquisition. This accounting treatment for taxes is applicable to acquisitions that occurred both prior and subsequent to the adoption of SFAS No. 141(R). Noncontrolling interests as related to Johnson & Johnson's financial statements are insignificant therefore, the adoption of SFAS No. 141(R) and SFAS No. 160 did not have a material effect on the Company’s results of operations, cash flows or financial position.

During the fiscal first quarter of 2009, the Company adopted, SFAS Statement No. 161, Disclosures About Derivative Instruments and Hedging Activities, to enhance the disclosure regarding the Company’s derivative and hedging activities to improve the transparency of financial reporting. The adoption of SFAS No. 161 did not have a significant impact on the Company’s results of operations, cash flows or financial position. See Note 2 for more enhanced disclosures.

 

 

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EITF Issue 07-1: Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property. This issue is effective for financial statements issued for fiscal years beginning after December 15, 2008 and was adopted by the Company in the fiscal first quarter of 2009. This issue addresses the income statement classification of payments made between parties in a collaborative arrangement. The adoption of EITF 07-1 did not have a significant impact on the Company’s results of operations, cash flows or financial position.

EITF Issue 08-7: Accounting for Defensive Intangible Assets. This issue is effective for financial statements issued for fiscal years beginning after December 15, 2008 and was adopted by the Company in the fiscal first quarter of 2009. This issue applies to acquired intangible assets in situations in which an entity does not intend to actively use the asset but intends to hold the asset to prevent others from obtaining access to the asset, except for intangible assets that are used in research and development activities. The adoption of EITF 08-7 did not have a significant impact on the Company’s results of operations, cash flows or financial position.

Economic and Market Factors

Johnson & Johnson is aware that its products are used in an environment where, for more than a decade, policymakers, consumers and businesses have expressed concern about the rising cost of health care.  Johnson & Johnson has a long-standing policy of pricing products responsibly. For the period 1998 through 2008 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 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 continue to result in pricing pressures that include health care cost containment and government legislation relating to sales, promotions and reimbursement.

Changes in the behavior and spending patterns of consumers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance coverage, as a result of a prolonged global economic downturn will continue to impact the Company’s businesses.

 

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The Company also operates in an environment increasingly hostile to intellectual property rights. Generic drug firms have filed Abbreviated New Drug Applications seeking to market generic forms of most of the Company's key pharmaceutical products, prior to expiration of the applicable patents covering those products. In the event the Company is not successful in defending a lawsuit resulting from an Abbreviated New Drug Application filing, the generic firms will then introduce generic versions of the product at issue, resulting in very substantial market share and revenue losses. For further information see the discussion on “Litigation Against Filers of Abbreviated New Drug Applications” included in Item 1. Financial Statements (unaudited)- Notes to Consolidated Financial Statements, Note 12.

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

This Form 10-Q contains forward-looking statements. Forward-looking statements do not relate strictly to historical or current facts and anticipate results based on management's plans that are subject to uncertainty. Forward-looking statements may be identified by the use of words like "plans," "expects," "will," "anticipates," "estimates" and other words of similar meaning in conjunction with, among other things, discussions of future operations, financial performance, the Company's strategy for growth, product development, regulatory approval, market position and expenditures.

Forward-looking statements are based on current expectations of future events. The Company cannot guarantee that any forward- looking statement will be accurate, although the Company believes that it has been reasonable in its expectations and assumptions. Investors should realize that if underlying assumptions prove inaccurate or that unknown risks or uncertainties materialize, actual results could vary materially from the Company's expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. The Company does not undertake to update any forward-looking statements as a result of new information or future events or developments.

Risks and uncertainties include general industry conditions and competition; economic conditions; 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 28, 2008 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.

 

 

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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 28, 2008.

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.

 

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Part II – OTHER INFORMATION

Item 1 – LEGAL PROCEEDINGS

The information called for by this item is incorporated herein by reference to Note 12 included in Part I, Item 1, Financial Statements (unaudited) - Notes to Consolidated Financial Statements.

Item 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 first quarter of 2009.  Common Stock purchases on the open market are made as part of a systematic plan to meet the needs of the Company’s compensation programs.

Fiscal Month		Total Number of Shares Purchased (1)				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Remaining Maximum Number of Shares that May Be Purchased Under the Plans or Programs (2)
December 29, 2008 through Jan. 25, 2009			1,968,100			$	58.58				357,700
Jan. 26, 2009 through February 22, 2009			4,038,600			$	57.13				168,200
February 23, 2009 through March 29, 2009			9,569,700			$	50.95				9,569,700
Total			15,576,400								10,095,600	(3)			25,910,388

(1) During the fiscal first quarter of 2009, the Company repurchased an aggregate of 10,095,600 shares of Johnson & Johnson Common Stock pursuant to the repurchase program that was publicly announced on July 9, 2007 and an aggregate of 5,480,800 shares in open-market transactions outside of the program. The repurchase program has no time limit and may be suspended for periods or discontinued at any time.

(2) As of March 29, 2009, based on the closing price of the Company’s Common Stock on the New York Stock Exchange on March 27, 2009 of $52.83 per share.

(3) As of March 29, 2009, an aggregate of 134,946,100 shares were purchased for a total of $8.6 billion since the inception of the repurchase program announced on July 9, 2007.

 

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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 23, 2009.

(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 2009.  The shareholders did not approve the shareholder proposal on advisory vote on executive compensation policies and disclosure.

 

1.           Election of Directors:

 

		Shares For				Shares Against				Shares Abstain
M. S. Coleman			2,006,621,700				278,304,735				9,262,645
J. G. Cullen			2,184,391,596				100,227,251				9,570,234
M. M. E. Johns			2,000,881,337				283,706,569				9,601,174
A. G. Langbo			2,237,877,187				45,587,608				10,724,285
S. L. Lindquist			2,242,706,560				42,646,713				8,835,807
L. F. Mullin			2,251,383,532				33,017,031				9,788,517
W. D. Perez			2,195,483,097				88,941,946				9,764,037
C. Prince			1,943,973,242				338,759,442				11,456,396
D. Satcher			2,239,626,695				45,189,957				9,372,429
W. C. Weldon			2,223,794,439				60,786,646				9,607,995

2.           Ratification of Appointment of PricewaterhouseCoopers LLP:

 

For			2,243,215,941
Against			42,453,068
Abstain			8,520,072

3.    Shareholder proposal on advisory vote on executive compensation policies and disclosure:

 

For			822,133,632
Against			951,896,313
Abstain			75,811,847
Non-votes			444,347,289

 

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.

 

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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:  May 5, 2009

By /s/ D.J. CARUSO D.J. CARUSO Vice President, Finance; Chief Financial Officer (Principal Financial Officer)

 

Date:  May 5, 2009

By /s/ S.J. COSGROVE S.J. COSGROVE Controller (Principal Accounting Officer)