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 October
1, 2006
or
( )Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of
1934 for the transition period from to
Commission file number 1-3215
JOHNSON & JOHNSON
(Exact name of registrant as specified in
its charter)
NEW JERSEY 22-1024240
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
(Address of principal executive offices)
Registrant's telephone number, including area code
(732) 524-0400
Indicate by check mark whether the
registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter
period that the registrant was required to
file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
(X) Yes ( )No
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See
definition of "accelerated filer and large
accelerated filer" in Rule 12b-2 of the
Exchange Act. Large accelerated filer (X)
Accelerated filer ( ) Non-accelerated filer
( )
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of
the Exchange Act). ( ) Yes (X) No
Indicate the number of shares outstanding
of each of the issuer's classes of common
stock, as of the latest practicable date.
On October 29, 2006 2,899,355,180 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 -
October 1, 2006 and January 1, 2006 3
Consolidated Statements of Earnings for the Fiscal
Third Quarters Ended October 1, 2006 and
October 2, 2005 5
Consolidated Statements of Earnings for the Fiscal
Nine Months Ended October 1, 2006 and
October 2, 2005 6
Consolidated Statements of Cash Flows for the Fiscal
Nine Months Ended October 1, 2006 and
October 2, 2005 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 29
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 42
Item 4. Controls and Procedures 42
Part II - Other Information
Item 1 - Legal Proceedings 43
Item 1A - Risk Factors 43
Item 2 - Unregistered Sales of Equity Securities
and Use of Proceeds 43
Item 6 - Exhibits 44
Signatures 45
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
ASSETS
October 1, January
2006 1, 2006*
Current Assets:
Cash & cash equivalents $14,491 $16,055
Marketable securities 201 83
Accounts receivable,
trade, less allowances
for doubtful accounts
$154 (2005,$164) 7,978 7,010
Inventories (note 4) 4,449 3,959
Deferred taxes on income 2,001 1,931
Prepaid expenses and
other receivables 2,166 2,442
Total current
assets 31,286 31,480
Marketable securities,
non-current 16 20
Property, plant and
equipment at cost 21,490 19,716
Less: accumulated
depreciation (10,028) (8,886)
Property, plant and
equipment, net 11,462 10,830
Intangible assets, net
(note 5) 6,562 6,185
Goodwill, net (note 5) 6,769 5,990
Deferred taxes on income 1,865 1,138
Other assets 3,278 3,221
Total Assets $61,238 $58,864
* Adjusted to include the impact of share based
compensation expense; see Notes 1 and 10 for
additional information.
See Notes to Consolidated Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
October January
1, 2006 1, 2006*
Current Liabilities:
Loans and notes
payable $362 $668
Accounts payable 3,964 4,315
Accrued liabilities 3,330 3,529
Accrued rebates,
returns and
promotions 2,183 2,017
Accrued salaries,
wages and commissions 1,268 1,166
Accrued taxes on
income 956 940
Total current
liabilities 12,063 12,635
Long-term debt 2,007 2,017
Deferred taxes on
income 352 211
Employee related
obligations 3,570 3,065
Other liabilities 2,673 2,226
Total liabilities 20,665 20,154
Shareholders' Equity:
Common stock - par
value $1.00 per share
(authorized
4,320,000,000 shares;
issued 3,119,842,000
shares) 3,120 3,120
Accumulated other
comprehensive income
(note 8) (539) (755)
Retained earnings 48,210 42,310
Less: common stock
held in treasury, at
cost (215,519,000 and
145,364,000 shares) 10,218 5,965
Total shareholders'
equity 40,573 38,710
Total liabilities
and shareholders'
equity $61,238 $58,864
* Adjusted to include the impact of share based
compensation expense; see Notes 1 and 10 for
additional information.
See Notes to Consolidated Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; dollars & shares in millions
except per share figures)
Fiscal Quarters Ended
Oct. 1, Percent Oct. 2, Percent
2006 to 2005* to
Sales Sales
Sales to
customers
(Note 6) $13,287 100.0% $12,310 100.0%
Cost of
products sold 3,650 27.5 3,354 27.2
Gross profit 9,637 72.5 8,956 72.8
Selling,
marketing and
administrative
expenses 4,291 32.3 4,161 33.8
Research
expense 1,719 12.9 1,539 12.5
In-process
research &
development 115 0.9 - -
Interest
income (207) (1.6) (123) (1.0)
Interest
expense, net
of portion
capitalized 13 0.1 22 0.2
Other expense
(income), net 45 0.3 (63) (0.5)
Earnings
before
provision for
taxes on
income 3,661 27.6 3,420 27.8
Provision for
taxes on
income (Note 3) 901 6.8 882 7.2
NET EARNINGS $2,760 20.8% $2,538 20.6%
NET EARNINGS
PER SHARE
Basic $0.95 $0.85
Diluted $0.94 $0.85
CASH DIVIDENDS
PER SHARE $0.375 $0.33
AVG. SHARES
OUTSTANDING
Basic 2,920.0 2,974.6
Diluted 2,948.1 3,006.2
* Adjusted to include the impact of share based
compensation expense; see Notes 1 and 10 for
additional information.
See Notes to Consolidated Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; dollars & shares in millions
except per share figures)
Fiscal Nine Months Ended
Oct. Percent Oct. 2, Percen
1, to 2005* t to
2006 Sales Sales
Sales to customers
(Note 6) $39,642 100.0% $37,904 100.0%
Cost of
products sold 11,050 27.9 10,372 27.4
Gross profit 28,592 72.1 27,532 72.6
Selling,
marketing and
administrative
expenses 12,737 32.1 12,566 33.2
Research
expense 5,079 12.8 4,448 11.7
In-process
research &
development 239 0.6 353 0.9
Interest income (613) (1.5) (316) (0.8)
Interest
expense, net of
portion
capitalized 42 0.1 52 0.1
Other income,
net (771) (2.0) (184) (0.5)
Earnings before
provision for
taxes on income 11,879 30.0 10,613 28.0
Provision for
taxes on income
(Note 3) 2,994 7.6 2,648 7.0
NET EARNINGS $8,885 22.4% $7,965 21.0%
NET EARNINGS
PER SHARE
Basic $3.01 $2.68
Diluted $2.99 $2.65
CASH DIVIDENDS
PER SHARE $1.08 $0.945
AVG. SHARES
OUTSTANDING
Basic 2,948.7 2,973.5
Diluted 2,971.3 3,008.4
* Adjusted to include the impact of share based
compensation expense; see Notes 1 and 10 for
additional information.
See Notes to Consolidated Financial
Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
Fiscal Nine Months
Ended
October October
1, 2006 2, 2005*
CASH FLOW FROM
OPERATING ACTIVITIES
Net earnings $8,885 $7,965
Adjustment to
reconcile net
earnings to cash
flow:
Depreciation and
amortization of
property and
intangibles 1,606 1,586
Stock based
compensation 511 405
Purchased in-process
research and
development 239 353
Deferred tax
provision (681) (552)
Accounts receivable
allowances (16) (24)
Changes in assets and
liabilities, net of
effects from
acquisitions:
Increase in accounts
receivable (714) (646)
Increase in
inventories (339) (433)
Decrease in accounts
payable and accrued
liabilities (398) (1,732)
Decrease in other
current and non-
current assets 79 860
Increase in other
current and non-
current liabilities 793 854
NET CASH FLOWS FROM
OPERATING ACTIVITIES 9,965 8,636
CASH FLOWS FROM
INVESTING ACTIVITIES
Additions to
property, plant and
equipment (1,607) (1,490)
Proceeds from the
disposal of assets 2 152
Acquisitions, net of
cash acquired (1,377) (747)
Purchases of
investments (452) (5,095)
Sales of investments 324 8,324
Other (primarily
intangibles) (124) (295)
NET CASH
(USED)/PROVIDED BY
INVESTING ACTIVITIES (3,234) 849
CASH FLOWS FROM
FINANCING ACTIVITIES
Dividends to
shareholders (3,182) (2,810)
Repurchase of common
stock (5,371) (1,164)
Proceeds from short-
term debt 599 537
Retirement of short-
term debt (1,139) (602)
Proceeds from long-
term debt 1 4
Retirement of long-
term debt (12) (196)
Proceeds from the
exercise of stock
options/excess tax
benefits 692 592
NET CASH USED BY
FINANCING ACTIVITIES (8,412) (3,639)
Effect of exchange
rate changes on cash
and cash equivalents 117 (224)
(Decrease)/increase
in cash and cash
equivalents (1,564) 5,622
Cash and Cash
equivalents,
beginning of period 16,055 9,203
CASH AND CASH
EQUIVALENTS, END OF
PERIOD $14,491 $14,825
Acquisitions
Fair value of assets
acquired $1,627 $883
Fair value of
liabilities assumed (250) (136)
Net cash paid for
acquisitions $1,377 $747
* Adjusted to include the impact of share based
compensation expense; see Notes 1 and 10 for
additional information.
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - The accompanying unaudited interim
financial statements and related notes should
be read in conjunction with the Consolidated
Financial Statements of Johnson & Johnson and
Subsidiaries (the "Company") and related
notes as contained in the Company's Annual
Report on Form 10-K for the fiscal year ended
January 1, 2006 and the related Current Report
on Form 8-K filed with the SEC on October 31,
2006 containing the Company's previously
reported consolidated financial statements for
the fiscal years 2003, 2004 and 2005, and the
notes thereto, as adjusted to reflect the
impact of SFAS No. 123 (R), Share Based
Payment, adopted during the fiscal first
quarter of 2006. The unaudited interim
financial statements include all adjustments
(consisting only of normal recurring
adjustments) and accruals necessary in the
judgment of management for a fair statement of
the results for the periods presented.
During the fiscal first quarter of 2006, the
Company elected to adopt SFAS 123(R), Share
Based Payment, under the modified retrospective
application method. Accordingly, financial
statement amounts for the prior periods
presented in this Form 10-Q have been adjusted
to reflect the fair value method of expensing
prescribed by SFAS 123(R).
NOTE 2 - FINANCIAL INSTRUMENTS
The Company follows the provisions of Statement
of Financial Accounting Standards (SFAS) 133,
SFAS 138 and SFAS 149 requiring that all
derivative instruments be recorded on the
balance sheet at fair value.
As of October 1, 2006, the balance of deferred
net gains on derivatives included in
accumulated other comprehensive income was $29
million after-tax. For additional information,
see Note 8. The Company expects that
substantially all of this amount will be
reclassified into earnings over the next 12
months as a result of transactions that are
expected to occur over that period. The amount
ultimately realized in earnings will differ as
foreign exchange rates change. Realized gains
and losses are ultimately determined by actual
exchange rates at maturity of the derivative.
Transactions with third parties will cause the
amount in accumulated other comprehensive
income to affect net earnings. The maximum
length of time over which the Company is
hedging is 18 months. The Company also uses
currency swaps to manage currency risk
primarily related to borrowings, which may
exceed 18 months.
For the fiscal third quarters ended October 1,
2006 and October 2, 2005, the net impact of the
hedges' ineffectiveness, transactions not
qualifying for hedge accounting and
discontinuance of hedges, to the Company's
financial statements was insignificant. Refer
to Note 8 for disclosures of movements in
Accumulated Other Comprehensive Income.
NOTE 3 - INCOME TAXES
The worldwide effective income tax rates for
the first fiscal nine months of 2006 and 2005
were 25.2% and 25.0%, respectively, an increase
of 0.2% primarily due to the expiration of the
U.S. research and development tax credit at the
end of fiscal 2005, and the Guidant termination
fee recorded at a 40.8% rate. The tax rate for
the first fiscal nine months of 2006 benefited
from a reversal of tax allowances of $134
million associated with the Tibotec business.
The first fiscal nine months of 2005 included a
benefit of $225 million, due to the reversal of
a tax liability previously recorded during the
fiscal fourth quarter of 2004, associated with
a technical correction made to the American
Jobs Creation Act of 2004. The tax rate in the
first fiscal nine months of 2006 also benefited
from additional earnings in lower tax
jurisdictions relative to higher tax
jurisdictions.
NOTE 4 - INVENTORIES
(Dollars in Millions)
October 1, January 1,
2006 2006
Raw materials and
supplies $1,143 $931
Goods in process 1,161 1,073
Finished goods 2,145 1,955
$4,449 $3,959
NOTE 5 - INTANGIBLE ASSETS AND GOODWILL
Intangible assets that have finite useful lives
are amortized over their estimated useful
lives. Goodwill and indefinite lived intangible
assets are assessed annually for impairment.
The latest impairment assessment of goodwill
and indefinite lived intangible assets was
completed in the fiscal fourth quarter of 2005
and no impairment was determined. Future
impairment tests will be performed annually in
the fiscal fourth quarter, or sooner if
warranted by economic conditions.
(Dollars in Millions)
October 1, January 1,
2006 2006
Trademarks (non-
amortizable) $1,561 $1,400
Less accumulated
amortization 132 134
Trademarks (non-
amortizable)- net 1,429 1,266
Patents and trademarks 4,452 4,128
Less accumulated
amortization 1,605 1,370
Patents and trademarks
- net 2,847 2,758
Other amortizable
intangibles 3,860 3,544
Less accumulated
amortization 1,574 1,383
Other intangibles -
net 2,286 2,161
Total intangible
assets - gross 9,873 9,072
Less accumulated
amortization 3,311 2,887
Total intangible
assets - net 6,562 6,185
Goodwill - gross 7,497 6,703
Less accumulated
amortization 728 713
Goodwill - net $6,769 $5,990
Goodwill as of October 1, 2006 as allocated by
segment of business is as follows:
(Dollars in Millions)
Consumer Pharm Med Total
Dev &
Diag
Goodwill, net of
accumulated
amortization at
January 1, 2006 $1,090 $874 $4,026 $5,990
Acquisitions 153 - 543 696
Translation &
Other 46 19 18 83
Goodwill as of
October 1, 2006 $1,289 $893 $4,587 $6,769
The weighted average amortization periods for
patents and trademarks and other intangible
assets are 15 years and 17 years, respectively.
The amortization expense of amortizable
intangible assets for the fiscal nine months
ended October 1, 2006 was $405 million and the
estimated amortization expense for the five
succeeding years approximates $565 million, per
year.
NOTE 6 - SEGMENTS OF BUSINESS AND GEOGRAPHIC
AREAS
SALES BY SEGMENT OF BUSINESS (1)
(Dollars in Millions)
Fiscal Quarters Ended
Oct. 1, Oct. 2, Percent
2006 2005 Change
Consumer
U.S. $1,138 $1,075 5.9%
International 1,318 1,156 14.0
2,456 2,231 10.1
Pharmaceutical
U.S. 3,841 3,527 8.9
International 2,040 1,930 5.7
5,881 5,457 7.8
Medical Devices &
Diagnostics
U.S. 2,509 2,365 6.1
International 2,441 2,257 8.2
4,950 4,622 7.1
U.S. 7,488 6,967 7.5
International 5,799 5,343 8.5
Worldwide $13,287 $12,310 7.9%
Fiscal Nine Months Ended
Oct. 1, Oct. 2, Percent
2006 2005 Change
Consumer
U.S. $3,391 $3,281 3.4%
International 3,818 3,508 8.8
7,209 6,789 6.2
Pharmaceutical
U.S. 11,224 10,905 2.9
International 6,093 5,935 2.7
17,317 16,840 2.8
Medical Devices &
Diagnostics
U.S. 7,619 7,104 7.2
International 7,497 7,171 4.5
15,116 14,275 5.9
U.S. 22,234 21,290 4.4
International 17,408 16,614 4.8
Worldwide $39,642 $37,904 4.6%
(1) Export and intersegment sales are not
significant.
OPERATING PROFIT BY SEGMENT OF BUSINESS
(Dollars in Fiscal Quarters Ended
Millions)
Oct. 1, Oct. 2, Percent
2006 2005 Change
Consumer $455 $408 11.5%
Pharmaceutical 1,814 1,734 4.6
Medical Devices &
Diagnostics (1) 1,339 1,319 1.5
Segments total 3,608 3,461 4.2
Income/(expense)
not allocated to
segments 53 (41)
Worldwide total $3,661 $3,420 7.0%
Fiscal Nine Months
Ended
Oct. 1, Oct. 2, Percent
2006 2005 Change
Consumer $1,359 $1,245 9.2%
Pharmaceutical(2) 5,438 5,334 1.9
Medical Devices &
Diagnostics(3) 4,934 4,131 19.4
Segments total 11,731 10,710 9.5
Income/(expense)
not allocated to
segments 148 (97)
Worldwide total $11,879 $10,613 11.9%
(1)Includes $115 million of IPR&D charges
related to acquisitions completed in the
fiscal third quarter of 2006.
(2)Includes $302 million of IPR&D charges
related to acquisitions completed in the
first fiscal nine months of 2005.
(3)Includes $239 million and $51 million of
IPR&D charges related to acquisitions
completed in the first fiscal nine months
of 2006 and 2005, respectively. The first
fiscal nine months of 2006 also includes
the gain associated with the Guidant
termination fee, less associated expenses,
of $622 million before tax. Excluding the
Guidant termination fee operating profit
growth for the first fiscal nine months of
2006 versus the same period last year was
4.4%.
SALES BY GEOGRAPHIC AREA
(Dollars in Millions)
Fiscal Quarters Ended
Oct. 1, Oct. 2, Percent
2006 2005 Change
U.S. $7,488 $6,967 7.5%
Europe 3,098 2,860 8.3
Western Hemisphere,
excluding U.S. 901 783 15.1
Asia-Pacific,
Africa 1,800 1,700 5.9
Total $13,287 $12,310 7.9%
Fiscal Nine Months
Ended
Oct. 1, Oct. 2, Percent
2006 2005 Change
U.S. $22,234 $21,290 4.4%
Europe 9,464 9,222 2.6
Western Hemisphere,
excluding U.S. 2,599 2,259 15.1
Asia-Pacific,
Africa 5,345 5,133 4.1
Total $39,642 $37,904 4.6%
NOTE 7 - EARNINGS PER SHARE
The following is a reconciliation of basic net
earnings per share to diluted net earnings per
share for the fiscal third quarters ended
October 1, 2006 and October 2, 2005.
(Shares in Millions) Fiscal Quarters
Ended
Oct. 1, Oct. 2,
2006 2005
Basic net earnings per
share $0.95 $0.85
Average shares
outstanding - basic 2,920.0 2,974.6
Potential shares
exercisable under stock
option plans 218.0 209.7
Less: shares which could
be repurchased under
treasury stock method (193.8) (185.2)
Convertible debt shares 3.9 7.1
Adjusted average shares
outstanding - diluted 2,948.1 3,006.2
Diluted earnings per
share $0.94 $0.85
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 $2
million for the fiscal third quarters ended
October 1, 2006 and October 2, 2005,
respectively.
The diluted earnings per share calculation
excluded 43 million and 46 million shares
related to options for the fiscal third
quarters ended October 1, 2006 and October 2,
2005, respectively, as the exercise price per
share of these options was greater than the
average market value. If these shares were
included it would result in an anti-dilutive
effect on diluted earnings per share.
The following is a reconciliation of basic net
earnings per share
to diluted net earnings per share for the
fiscal nine months ended October 1, 2006 and
October 2, 2005.
(Shares in Millions)
Fiscal Nine Months Ended
Oct. 1, Oct. 2,
2006 2005
Basic net earnings per share $3.01 $2.68
Average shares outstanding
- basic 2,948.7 2,973.5
Potential shares exercisable under
stock option plans 217.6 209.9
Less: shares which could be repurchased
under treasury stock method (198.9) (182.1)
Convertible debt shares 3.9 7.1
Average shares
outstanding - diluted 2,971.3 3,008.4
Diluted earnings per share $2.99 $2.65
The diluted earnings per share calculation
included the dilutive effect of convertible
debt that was offset by the related reduction
in interest expense of $3 million and $9
million for the first fiscal nine months ended
October 1, 2006 and October 2, 2005,
respectively.
The diluted earnings per share calculation
excluded 44 million and 46 million shares
related to options for the first fiscal nine
months ended October 1, 2006 and October 2,
2005, respectively, as the exercise price per
share of these options was greater than the
average market value. If these shares were
included it would result in an anti-dilutive
effect on diluted earnings per share.
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The total comprehensive income for the first
fiscal nine months ended October 1, 2006 was
$9.1 billion, compared with $7.7 billion for
the same period a year ago. The total
comprehensive income for the fiscal third
quarter ended October 1, 2006 was $2.8 billion,
compared with $2.6 billion for the same period
a year ago. Total comprehensive income
included net earnings, net unrealized currency
gains and losses on translation, net unrealized
gains and losses on securities available for
sale and net gains and losses on derivative
instruments qualifying and designated as cash
flow hedges. The following table sets
forth the components of accumulated other
comprehensive income.
(Dollars in Millions)
Total
Unrld Gains/ Accum
For. Gains/ Pens (Losses) Other
Cur. (Losses) Liab on Deriv Comp
Trans. on Sec Adj. & Hedg Inc/
(Loss)
January 1, 2006 $ (520) 70 (320) 15 (755)
2006 nine months changes:
Net change associated
with current period
hedging transactions - - - 29
Net amount reclassed to
net earnings - - - (15)*
Net nine months
changes 216 (14) - 14 216
October 1, 2006 $ (304) 56 (320) 29 (539)
Amounts in accumulated other comprehensive
income are presented net of the related tax
impact. Foreign currency translation
adjustments are not currently adjusted for
income taxes, as they relate to permanent
investments in international subsidiaries.
*Primarily offset in net earnings by changes in
value of the underlying transactions.
NOTE 9 - MERGERS, ACQUISITIONS AND DIVESTITURES
On June 25, 2006 the Company entered into a
definitive agreement to acquire the Consumer
Healthcare business of Pfizer Inc. for a
purchase price of $16.6 billion in cash. The
transaction is expected to close by the end of
2006 and is subject to customary clearances,
including the Hart-Scott-Rodino Antitrust
Improvements Act and European Union merger
control regulation. The Company estimates that
approximately $1.0 billion in proceeds will be
received from the divestiture of businesses
resulting from regulatory reviews.
During the fiscal third quarter of 2006, the
following companies were acquired: Colbar
LifeScience Ltd., a privately held company
specializing in reconstructive medicine and
tissue engineering and Ensure Medical, Inc., a
privately held company that develops devices
for post-catheterization closure of the femoral
artery.
During the fiscal second quarter of 2006, the
following companies were acquired: Vascular
Control Systems, Inc., a privately held company
focused on developing medical devices to treat
fibroids and to control bleeding in obstetric
and gynecologic applications and Groupe Vendome
S.A., a privately held French marketer of adult
and baby skin care products.
During the fiscal first quarter of 2006, the
following companies were acquired: Animas
Corporation, a leading maker of insulin
infusion pumps and related products; Hand
Innovations LLC, a privately held manufacturer
of fracture fixation products for the upper
extremities; and Future Medical Systems S.A., a
privately held company that primarily develops,
manufactures and markets arthroscopic fluid
management systems.
On January 25, 2006 the definitive agreement to
acquire Guidant Corporation was terminated by
Guidant in accordance with its terms. Pursuant
to the terms of the agreement, Guidant paid the
Company a fee of $705 million. The Company
recorded a gain associated with the Guidant
termination fee, less associated expenses, of
$622 million before tax in other income during
the fiscal first quarter of 2006.
The 2005 acquisitions included: TransForm
Pharmaceuticals, Inc., a company specializing
in the discovery of superior formulations and
novel crystalline forms of drug molecules;
Closure Medical Corporation, a company with
expertise and intellectual property in the
biosurgicals market; Peninsula Pharmaceuticals,
Inc., a biopharmaceutical company focused on
developing and commercializing antibiotics to
treat life-threatening infections; and rights
to all consumer and professionally dispensed
REMBRANDT(R) Brand of oral care products,
such as whitening toothpastes, strips,
systems and mouth rinses.
NOTE 10 - SHARE BASED COMPENSATION
At October 1, 2006, the Company had 16 share
based compensation plans. The shares
outstanding are for contracts under the
Company's 1995 and 2000 Stock Option Plans, the
2005 Long Term Incentive Plan, the 1997 Non-
Employee Director's Plan and the Centocor,
Innovasive Devices, ALZA, Inverness and Scios
Stock Option Plans. During 2006, no options
were granted under any of these plans except
the 2005 Long Term Incentive Plan. The
compensation cost that has been charged against
income for these plans was $171 million for the
fiscal third quarter of 2006 and $134 million
for the fiscal third quarter of 2005. The
total income tax benefit recognized in the
income statement for share based compensation
arrangements was $60 million and $47 million
for the fiscal third quarters of 2006 and 2005,
respectively. The compensation cost that has
been charged against income for these plans was
$511 million for the first fiscal nine months
of 2006 and $405 million for the first fiscal
nine months of 2005. The total income tax
benefit recognized in the income statement for
share based compensation arrangements was $179
million and $142 million for the first fiscal
nine months of 2006 and 2005, respectively.
Share based compensation costs capitalized as
part of inventory were insignificant in all
periods.
The total intrinsic value of options exercised
during 2006 was $319.5 million. As of October
1, 2006, the total unrecognized compensation
cost was $795.1 million, which will be charged
against income over a weighted average period
of 1.22 years.
The following table details the retroactive
application impact of SFAS 123(R) on previously
reported results.
(Dollars in Millions, Except Per Share
Amounts)
For the quarter ended As Previously
October 2, 2005 Restated Reported
Earnings before
provision for
taxes on income $ 3,420 $ 3,554
Net
earnings 2,538 2,625
Basic net
earnings per
share 0.85 0.88
Diluted net
earnings per
share 0.85 0.87
For the nine months ended
October 2, 2005:
Earnings before
provision for
taxes on income $ 10,613 $ 11,018
Net earnings 7,965 8,228
Basic net earnings
per share 2.68 2.77
Diluted net earnings
per share 2.65 2.73
Net cash flows
from operating
activities 8,636 8,694
Net cash used by
financing
activities $(3,639) $(3,697)
NOTE 11 - PENSIONS AND OTHER POSTRETIREMENT
BENEFITS
Components of Net Periodic Benefit Cost
Net periodic benefit cost for the Company's
defined benefit retirement plans and other
benefit plans for the fiscal third quarters of
2006 and 2005 include the following components:
(Dollars in Millions)
Retirement Plans Other Benefit Plans
Fiscal Quarters Ended
Oct. 1, Oct. 2, Oct. 1, Oct. 2,
2006 2005 2006 2005
Service cost $131 $107 $16 $14
Interest cost 142 120 26 22
Expected return on
plan assets (174) (144) - (1)
Amortization of prior
service cost 1 3 (2) (3)
Amortization of net
transition asset (1) (1) - -
Recognized actuarial
losses 61 54 9 6
Net periodic benefit
cost $160 $139 $49 $38
Net periodic benefit cost for the Company's
defined benefit retirement plans and other
benefit plans for the first fiscal nine months
of 2006 and 2005 include the following
components:
(Dollars in Millions)
Retirement Plans Other Benefit Plans
Fiscal Nine Months Ended
Oct. 1, Oct. 2, Oct. 1, Oct. 2,
2006 2005 2006 2005
Service cost $393 $323 $53 $42
Interest cost 426 366 78 66
Expected return on
plan assets (524) (435) (2) (3)
Amortization of prior
service cost 7 9 (5) (6)
Amortization of net
transition asset (1) (2) - -
Recognized actuarial
losses 188 165 29 19
Net periodic benefit
cost $489 $426 $153 $118
Company Contributions
For the fiscal nine months ended October 1,
2006, the Company contributed $18 million and
$22 million to its U.S. and international
retirement plans, respectively. The Company
does not anticipate a minimum statutory funding
requirement for its U.S. retirement plans in
2006. International plans will be funded in
accordance with local regulations.
NOTE 12 - LEGAL PROCEEDINGS
PRODUCT LIABILITY
The Company is involved in numerous product
liability cases in the United States, many of
which concern adverse reactions to drugs and
medical devices. The damages claimed are
substantial, and while the Company is
confident of the adequacy of the warnings and
instructions for use that accompany such
products, it is not feasible to predict the
ultimate outcome of litigation. However, the
Company believes that if any liability results
from such cases, it will be substantially
covered by existing amounts accrued in the
Company's balance sheet and, where available,
by third-party product liability insurance.
One group of cases against the Company
concerns a product of the Company's
subsidiary, Janssen Pharmaceutica Inc.
(Janssen), PROPULSID(R) (cisapride), which was
withdrawn from general sale and restricted to
limited use in 2000. In the wake of publicity
about those events, numerous lawsuits were
filed against Janssen and the Company
regarding PROPULSID(R) in state and federal
courts across the country.
In February 2004, Janssen reached an agreement
with the Plaintiffs' Steering Committee (PSC)
of the PROPULSID(R) Federal Multi-District
Litigation (MDL), to resolve federal lawsuits
related to PROPULSID(R). The agreement was to
become effective once 85% of the death
claimants, and 75% of the remainder, agreed to
the terms of the settlement.
In March 2005, it was confirmed that the PSC of
the MDL had enrolled enough plaintiffs and
claimants in the proposed settlement program to
make the agreement effective. Janssen has paid
into a compensation escrow account $77.6
million, established an administrative fund of
$15 million, and paid legal fees to the PSC of
$22.5 million, which amount was approved by the
court. No additional funds will be contributed
to this first settlement program.
In December 2005, Janssen reached agreement
with the MDL PSC and the plaintiffs' State
Liaison Committee (SLC) to create a second
settlement program for resolving the state and
federal lawsuits not subject to, or not
participating in, the first settlement
program, as well as the remaining unfiled
claims subject to tolling agreements. The new
program becomes effective once 90% of the
plaintiffs representing decedents, 95% of the
other plaintiffs and 5,000 of the remaining
tolled claims, agree to the terms of the
settlement. Janssen will pay as compensation a
minimum of $14.5 million and a maximum of $15
million into the second settlement program,
depending upon the percentage of enrollment
above the 90% and 95% thresholds. Janssen will
also establish an administrative fund not to
exceed $3 million and pay legal fees not to
exceed $4 million subject to court approval.
Funds remaining in the compensation account,
after resolution of all filed claims, will be
returned to Janssen and the Company.
Janssen and the Company believe they have
adequate self-insurance accruals and third-
party product liability insurance with respect
to these cases. In communications to the
Company, several of the excess insurance
carriers raised certain defenses to their
liability under the policies and to date have
declined voluntarily to reimburse Janssen and
the Company for PROPULSID(R)-related costs
despite demand for payment. In May 2005,
hearings were held in London in the arbitration
proceeding commenced by Janssen and the Company
against Allianz Underwriters Insurance Company,
which issued the first layer of applicable
excess insurance coverage, to obtain
reimbursement of PROPULSID(R)-related costs.
That proceeding was resolved in a fashion
satisfactory to Janssen and the Company in
November 2005. In May 2005, the Company
commenced arbitration against Lexington
Insurance Company, which issued the second
layer of excess insurance coverage and, in
March 2006, against SR International Business
Insurance Co., LTD., which issued the third.
The claim against SR International has been
resolved satisfactorily. A decision on the
claim against Lexington Insurance Company,
which was heard by an arbitration panel in
October, is expected in the first quarter of
2007. In the opinion of the Company, the
excess carriers remain legally obligated to
provide coverage for the PROPULSID(R)- related
losses at issue.
A number of other products of Johnson & Johnson
subsidiaries are subject to numerous product
liability claims and lawsuits, including ORTHO
EVRA(R), RISPERDAL(R) and DURAGESIC(R). There
are approximately 1,000 claimants who have
filed lawsuits or made claims regarding
injuries allegedly due to ORTHO EVRA(R), 700
claimants with respect to RISPERDAL(R) and 100
with respect to DURAGESIC(R). These claimants
seek substantial compensatory and, where
available, punitive damages. The Johnson &
Johnson subsidiary responsible for marketing
the product at issue is vigorously defending
against these claims except where settlement is
deemed appropriate.
AFFIRMATIVE STENT PATENT LITIGATION
In patent infringement actions tried in
Delaware Federal District Court in late 2000,
Cordis Corporation (Cordis), a subsidiary of
Johnson & Johnson, obtained verdicts of
infringement and patent validity, and damage
awards against Boston Scientific Corporation
(Boston Scientific) and Medtronic AVE, Inc.
(Medtronic) based on a number of Cordis
vascular stent patents. In December 2000, the
jury in the damage action against Boston
Scientific returned a verdict of $324 million
and the jury in the Medtronic action returned a
verdict of $271 million. These sums represent
lost profit and reasonable royalty damages to
compensate Cordis for infringement but do not
include pre or post judgment interest.
In March and May 2002, the district judge
granted Boston Scientific a new trial on
liability and damages and vacated the verdict
against Medtronic on legal grounds. In August
2003, the Court of Appeals for the Federal
Circuit found the trial judge erred in vacating
the verdict against Medtronic and remanded the
case to the trial judge for further
proceedings. In March 2005, the remaining
issues were tried in the remanded case against
Medtronic and the retrial proceeded against
Boston Scientific. Juries returned verdicts of
infringement and patent validity in favor of
Cordis in both retrials. In March 2006, the
district judge entered judgment on liability
for Cordis, but deferred deciding on damages
pending appeal to the Court of Appeals for the
Federal Circuit.
Cordis also has an arbitration claim against
Medtronic accusing Medtronic of infringement by
sale of stent products introduced by Medtronic
subsequent to its GFX(R) and MicroStent(R)
products, the subject of the earlier action
referenced above. Those products were found to
have been licensed 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. With respect to all of these
matters, the Johnson & Johnson subsidiary
involved is vigorously defending against the
claims of infringement and disputing, where
appropriate, the validity and enforceability of
the patent claims asserted against it.
In July 2005, a jury in Federal District Court
in Delaware found that the Cordis CYPHER(R)
stent infringed Boston Scientific's Ding `536
patent and that the Cordis CYPHER(R) and BX
VELOCITY(R) stents also infringed Boston
Scientific's Jang `021 patent. The jury also
found both of those patents valid. Boston
Scientific seeks substantial damages and an
injunction in that action. In June 2006, the
District Court denied motions by Cordis to
overturn the jury verdicts or grant a new
trial. Cordis 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, wilfullness
and injunctive relief after the appeals have
been decided.
Trial of Boston Scientific's case asserting
infringement by the CYPHER(R) stent of another
Boston Scientific patent, which had been
scheduled for trial in March 2006, has been
adjourned without a new trial date. In that
case as well, Boston Scientific seeks an
injunction and substantial damages.
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
Belgian case is pending and no hearing date has
been set. A decision by the lower court in the
Netherlands in Boston Scientific's favor is on
appeal.
In Germany, Boston Scientific has several
actions based on 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
Catheters and Cordis Fitzmaurice Medtronic AVE E.D. Tex 09/07 06/03
stent delivery
systems
Drug Eluting Cordis Grainger Boston Scientific D. Del. * 12/03
Stents Corp.
Drug Eluting Cordis Ding Boston Scientific Germany * 04/04
Stents Corp. 11/04
Two-layer Cordis Kasten- Boston Scientific N.D. Cal * 02/02
Catheters hofer Corp. Belgium * 12/03
Forman
Stents Cordis Israel Medinol Multiple E.U. * 05/03
jurisdictions
Contact Lenses Vision Nicolson CIBA Vision M.D. Fla. * 09/03
Care
* Trial date to be established.
LITIGATION AGAINST FILERS OF ABBREVIATED NEW
DRUG APPLICATIONS (ANDAs)
The following chart indicates lawsuits pending
against generic firms that filed Abbreviated
New Drug Applications seeking to market generic
forms of products sold by various subsidiaries
of the Company prior to expiration of the
applicable patents covering those products.
These ANDAs typically include allegations of
non-infringement, invalidity and
unenforceability of these patents. In the event
the subsidiary of the Company involved is not
successful in these actions, or the 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 and
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. * 11/03 02/07
mg delay
release (for Janssen) Dr.Reddy's S.D.N.Y. * 11/03 02/07
tablet Mylan S.D.N.Y. * 01/04 02/07
AXERT(R) 6.25 Almirall Teva S.D.N.Y. * 03/06 11/08
and 12.5 mg Ortho-McNeil
Neurologics
CONCERTA(R) McNeil-PPC Andrx D.Del. * 09/05 None
18,27,36 and
54 mg ALZA
controlled
release tablet
DITROPAN XL(R)Ortho-McNeil Mylan D.W.V. 02/05 05/03 09/05
5, 10, 15 mg ALZA Impax N.D.Cal. 12/05 09/03 01/06
controlled
release tablet
LEVAQUIN(R)
Injectable Daiichi,JJPRD Sicor (Teva) D.N.J. * 12/03 05/06
Single use Ortho-McNeil
vials
and 5 mg/ml
premix
LEVAQUIN(R)
Injectable Daiichi,JJPRD American D.N.J. * 12/03 05/06
Single use Ortho-McNeil Pharmaceutical
vials Partners
QUIXIN(R)
Ophthalmic Daiichi, Hi-Tech D.N.J. * 12/03 05/06
Solution Ortho-McNeil Pharmacal
(Levo-
floxacin)
Ophthalmic
solution
ORTHO TRI
CYCLEN(R) LO Ortho-McNeil Barr D.N.J. * 10/03 02/06
0.18 mg/0.025 mg
0.215 mg/0.025 mg
and 0.25 mg/0.025 mg
PEPCID(R)
Complete McNeil-PPC Perrigo S.D.N.Y. 10/06 02/05 06/07
RAZADYNE(TM) Janssen Teva D. Del 06/07 07/05 01/08
Mylan D. Del 06/07 07/05 01/08
Dr. Reddy's D. Del 06/07 07/05 01/08
Purepac D. Del 06/07 07/05 01/08
Barr D. Del 06/07 07/05 01/08
Par D. Del 06/07 07/05 01/08
AlphaPharm D. Del 06/07 07/05 01/08
RAZADYNE(TM)
ER Janssen Barr D.N.J. * 06/06 11/08
RISPERDAL(R)
Tablets Janssen Mylan D.N.J. 06/06 12/03 05/06
..25, 0.5, 1, 2, 3, 4 Dr. Reddy's D.N.J. 06/06 12/03 06/06
mg tablets Apotex D.N.J. * 06/06 11/08
RISPERDAL(R)
M-Tab Janssen Dr. Reddy's D.N.J. 06/06 02/05 07/07
0.5,1,2,3, 4 mg Barr D.N.J. * 10/05 02/08
RISPERDAL(R)
Oral Janssen Apotex D.N.J. * 03/06 08/08
Solution, 1 mg/ml
TOPAMAX(R) Ortho-McNeil Mylan D.N.J. * 04/04 09/06
25,50,100, 200 mg tablet Cobalt D.N.J. * 10/05 03/08
TOPAMAX(R)
SPRINKLE Ortho-McNeil Cobalt D.N.J. * 12/05 05/08
15, 25 mg capsule
* Trial date to be established
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.
In the action against Mylan with respect to the
patent on TOPAMAX(R), the District Court in New
Jersey, on October 24, 2006, granted Ortho-
McNeil's motion for a preliminary injunction
barring launch by Mylan of its generic version
of TOPAMAX(R).
In the action against Mylan involving the
Company's subsidiary Ortho-McNeil
Pharmaceutical, Inc.'s (Ortho- McNeil) product,
DITROPAN XL(R) (oxybutynin chloride), the court
in September 2005 found the DITROPAN XL(R)
patent invalid and not infringed by Mylan's
generic product. Those rulings were affirmed
by the Court of Appeals for the Federal Circuit
on September 6, 2006. Neither Mylan nor Impax
has received final FDA approval to launch its
generic product, but such approval could come
at any time.
In December 2005, Mylan announced that it had
entered into two agreements with Ortho-McNeil
regarding oxybutynin chloride extended release
tablets. One agreement relates to Ortho-
McNeil's supply of certain dosages of
oxybutynin chloride extended release tablets
and the second relates to a patent license to
ALZA intellectual property regarding DITROPAN
XL(R). These agreements, which are
confidential, have been submitted to the
Federal Trade Commission.
In the weeks following the adverse ruling in
the DITROPAN XL(R) ANDA litigation against
Mylan in September 2005, Ortho-McNeil and ALZA
received seven antitrust class action
complaints filed by purchasers of the product.
They allege that Ortho-McNeil and ALZA violated
the antitrust laws of the various states by
knowingly pursuing baseless patent litigation,
and thereby delaying entry into the market by
Mylan and Impax.
In the action against Mylan involving its ANDA
for Ortho- McNeil's product LEVAQUIN(R)
(levofloxacin), the trial judge in December
2004 found the patent at issue valid,
enforceable and infringed by Mylan's generic
product and issued an injunction precluding
sale of the product until patent expiration in
late 2010. In December 2005, the Court of
Appeals for the Federal Circuit affirmed the
judgment of validity, enforceability and
infringement. Mylan filed a motion for
rehearing by the Court of Appeals, which was
denied.
In the consolidated actions against Teva,
Sicor, Hi-Tech Pharmacal, and American
Pharmaceutical Partners involving the ANDAs
for various levofloxacin preparations, summary
judgment was granted for Ortho- McNeil and
ALZA in March 2006 on the claim that the
LEVAQUIN(R) patent was obtained by inequitable
conduct and was therefore unenforceable.
In the action against Impax involving its ANDA
referencing McNeil-PPC's product CONCERTA(R),
McNeil and ALZA Corporation, both subsidiaries
of the Company, dismissed with prejudice their
claim of infringement against Impax with
respect to its ANDA.
With respect to all of the above matters, the
Johnson & Johnson subsidiary involved is
vigorously defending the validity and
enforceability and asserting the infringement
of its own or its licensor's patents.
AVERAGE WHOLESALE PRICE (AWP) LITIGATION
Johnson & Johnson and 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. In the MDL
proceeding in Boston, plaintiffs moved for
class certification of all or some portion of
their claims. On August 16, 2005, the trial
judge certified Massachusetts-only classes of
private insurers providing "Medi-gap" insurance
coverage and private payers for physician-
administered drugs where payments were based on
AWP. The judge also allowed plaintiffs to file
a new complaint seeking to name proper parties
to represent a national class of individuals
who made co-payments for physician-administered
drugs covered by Medicare. The Court of Appeals
declined to allow an appeal of those issues and
in January 2006, the court certified the
national class as noted above. A trial of the
two Massachusetts-only class actions began
before the Massachusetts District Court on
November 6, 2006.
OTHER
In June 2003, the Company received a request
for records and information from the U.S. House
of Representatives' Committee on Energy and
Commerce in connection with its investigation
into pharmaceutical reimbursements and rebates
under Medicaid. The Committee's request focuses
on the drug REMICADE(R) (infliximab), marketed
by the Company's Centocor, Inc. (Centocor)
subsidiary. In July 2003, Centocor received a
request that it voluntarily provide documents
and information to the criminal division of the
U.S. Attorney's Office, District of New Jersey,
in connection with its investigation into
various Centocor marketing practices.
Subsequent requests for documents have been
received from the U.S. Attorney's Office. Both
the Company and Centocor responded, or are in
the process of responding, to these requests
for documents and information.
In December 2003, Ortho-McNeil received a
subpoena from the U.S. Attorney's Office in
Boston, Massachusetts seeking documents
relating to the marketing, including alleged
off-label marketing, of the drug TOPAMAX(R)
(topiramate). An additional subpoena for
documents was served in June 2006. Ortho-McNeil
is cooperating in responding to the subpoenas.
In October 2004, the U.S. Attorney's Office in
Boston asked attorneys for Ortho- McNeil to
cooperate in facilitating the subpoenaed
testimony of several present and former Ortho-
McNeil employees before a federal grand jury in
Boston. Cooperation in securing the testimony
of additional witnesses before the grand jury
has been requested and is being provided.
In January 2004, Janssen received a subpoena
from the Office of the Inspector General of the
U.S. Office of Personnel Management seeking
documents concerning sales and marketing of,
any and all payments to physicians in
connection with sales and marketing of, and
clinical trials for, RISPERDAL(R) (risperidone)
from 1997 to 2002. Documents subsequent to 2002
have also been requested. An additional
subpoena seeking information about marketing of
and adverse reactions to RISPERDAL(R) was
received from the U.S. Attorney's Office for
the Eastern District of Pennsylvania in
November 2005. Janssen is cooperating in
responding to these subpoenas.
In April 2004, several of the Company's
pharmaceutical companies were requested to
submit information to the U.S. Senate Finance
Committee on their use of the "nominal pricing
exception" in calculating Best Price under the
Medicaid Rebate Program. This request was sent
to manufacturers for the top twenty drugs
reimbursed under the Medicaid Program. The
Company's pharmaceutical companies have
responded to the request. In February 2005 a
request for supplemental information was
received from the Senate Finance Committee,
which has been responded to by the Company's
pharmaceutical companies.
In August 2004, Johnson & Johnson Health Care
Systems, Inc. (HCS), a Johnson & Johnson
subsidiary, received a subpoena from the
Dallas, Texas U. S. Attorney's Office seeking
documents relating to the relationships between
the group purchasing organization Novation and
HCS and other Johnson & Johnson subsidiaries.
The Company's subsidiaries involved have
responded to the subpoena.
In September 2004, Ortho Biotech Inc. (Ortho
Biotech), a Johnson & Johnson subsidiary,
received a subpoena from the U.S. Office of
Inspector General's Denver, Colorado field
office seeking documents directed to sales and
marketing of PROCRIT(R) (Epoetin alfa) from
1997 to the present, as well as to dealings
with U.S. Oncology Inc., a healthcare services
network for oncologists. Ortho Biotech has
responded to the subpoena.
In March 2005, DePuy Orthopaedics, Inc. (DePuy
Orthopaedics), a Johnson & Johnson subsidiary,
received a subpoena from the U.S. Attorney's
Office, District of New Jersey, seeking records
concerning contractual relationships between
DePuy Orthopaedics and surgeons or surgeons-in-
training involved in hip and knee replacement
and reconstructive surgery. Other leading
orthopaedic companies are known to have
received a similar subpoena. DePuy Orthopaedics
is responding to the subpoena as well as a
follow-on subpoena 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 January 2006, Janssen received a civil
investigative demand from the Texas Attorney
General seeking broad categories of documents
related to the sales and marketing of
RISPERDAL(R). Janssen is responding to the
request.
In February 2006, Johnson & Johnson received a
subpoena from the Securities & Exchange
Commission requesting documents relating to the
participation by several Johnson & Johnson
subsidiaries in the United Nations Iraq Oil For
Food Program. The subsidiaries are cooperating
with the SEC in producing responsive documents.
In June 2006, DePuy, Inc. (DePuy), a Johnson &
Johnson subsidiary, received a subpoena from
the U.S. Department of Justice, Antitrust
Division, requesting documents related to the
manufacture, 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 September 2004, plaintiffs in an employment
discrimination litigation initiated against the
Company in 2001 in Federal District Court in
New Jersey moved to certify a class of all
African American and Hispanic salaried
employees of the Company and its affiliates in
the U.S., who were employed at any time from
November 1997 to the present. Plaintiffs seek
monetary damages for the period 1997 through
the present (including punitive damages) and
equitable relief. The Company filed its
response to plaintiffs' class certification
motion in May 2005. The Company expects the
Court to decide that motion in 2007. The
Company disputes the allegations in the lawsuit
and is vigorously defending against them.
The Company, along with its wholly-owned
subsidiaries, Ethicon, Inc. and Ethicon Endo-
Surgery, Inc., are defendants in three federal
antitrust actions challenging suture and endo-
mechanical contracts with group purchasing
organizations and hospitals in which discounts
are predicated on a hospital achieving
specified market share targets for both
categories of products. In each case,
plaintiffs seek substantial monetary damages
and injunctive relief. These actions are:
Applied Medical v. Ethicon, Inc. et al.
(C.D.CA, filed September 5, 2003); Conmed v.
Johnson & Johnson et al. (S.D.N.Y., filed
November 6, 2003); and Genico v. Ethicon, Inc.
et al. (E.D. TX, filed October 15, 2004). In
August 2006, a jury in Los Angeles returned a
verdict in favor of all defendants rejecting
Applied Medical's claims of antitrust
violations. The Conmed case is currently
scheduled for trial in April 2007. Conmed
alleges damages up to $1.8 billion, which
damages would be trebled under the antitrust
laws if such damages, and liability, are
successfully established at trial. In late
December 2005 and early 2006, three purported
class actions were filed on behalf of
purchasers of endo-mechanical instruments.
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 and manufactures EPO for sale in the
United States by the Company's Ortho Biotech
Inc. subsidiary for non-dialysis indications.
The suit is in its preliminary stages.
In October 2006, Wyeth, Inc. initiated
litigation in Delaware against Cordis, a
subsidiary of the Company, 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.
The Company is also involved in a number of
other patent, trademark and other lawsuits
incidental to its business. The ultimate legal
and financial liability of the Company in
respect to all claims, lawsuits and proceedings
referred to above cannot be estimated with any
certainty. However, in the Company's opinion,
based on its examination of these matters, its
experience to date and discussions with
counsel, the ultimate outcome of legal
proceedings, net of liabilities already accrued
in the Company's balance sheet, is not expected
to have a material adverse effect on the
Company's financial position, although the
resolution in any reporting period of one or
more of these matters could have a significant
impact on the Company's results of operations
and cash flows for that period.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Analysis of Consolidated Sales
For the first fiscal nine months of 2006,
worldwide sales were $39.6 billion, a total
increase of 4.6% and an operational increase of
5.0% over 2005 first fiscal nine months sales
of $37.9 billion. Currency fluctuations
negatively impacted sales by 0.4% for the
period.
Sales by U.S. companies were $22.2 billion in
the first fiscal nine months of 2006, which
represented an increase of 4.4% over the same
period last year. Sales by international
companies were $17.4 billion, which represented
a total increase of 4.8%, an operational
increase of 5.7%, and a negative impact from
currency of 0.9% over the first fiscal nine
months of 2005.
Sales by companies in Europe increased by 2.6%,
with operational growth of 4.5% and a negative
impact from currency of 1.9%. Sales by
companies in the Western Hemisphere, excluding
the U.S., increased by 15.1%, with operational
growth of 8.6% and a positive impact from
currency of 6.5%. Sales by companies in the
Asia-Pacific, Africa region posted sales growth
of 4.1%, with operational growth of 6.6% and a
negative impact from currency of 2.5%.
For the fiscal third quarter of 2006, worldwide
sales were $13.3 billion, a total increase of
7.9% and an operational increase of 6.7%, over
2005 fiscal third quarter sales of $12.3
billion. Currency fluctuations positively
impacted sales by 1.2% for the period.
Sales by U.S. companies were $7.5 billion in
the fiscal third quarter of 2006, which
represented an increase of 7.5% over the same
period last year. Sales by international
companies were $5.8 billion, which represented
a total increase of 8.5%, an operational
increase of 5.7%, and a positive impact from
currency of 2.8% over the fiscal third quarter
of 2005.
Sales by companies in Europe increased by 8.3%,
with operational growth of 3.8% and a positive
impact from currency of 4.5%. Sales by
companies in the Western Hemisphere, excluding
the U.S., increased by 15.1%, with operational
growth of 10.6% and a positive impact from
currency of 4.5%. Sales by companies in the
Asia-Pacific, Africa region posted sales growth
of 5.9%, with operational growth of 6.7% and a
negative impact from currency of 0.8%.
Analysis of Sales by Business Segments
Consumer
Consumer segment sales in the first fiscal nine
months of 2006 were $7.2 billion, an increase
of 6.2% over the same period a year ago, with
5.7% of operational growth and a positive
currency impact of 0.5%. U.S. Consumer segment
sales increased by 3.4% while international
sales experienced a total increase of 8.8%, an
operational increase of 7.8%, with a positive
currency impact of 1.0%.
Major Consumer Franchise Sales
First Fiscal Nine Months
Oct. 1, Oct. 2, Total Operations Currency
2006 2005 Change Change Change
(Dollars in Millions)
OTC Pharm
& Nutr $1,985 $1,947 2.0% 1.5% 0.5%
Skin Care 1,948 1,804 8.0 7.8 0.2
Baby &
Kids Care 1,279 1,168 9.5 8.7 0.8
Women's
Health 1,246 1,180 5.6 4.7 0.9
Other 751 690 8.8 8.7 0.1
Total $7,209 $6,789 6.2% 5.7% 0.5%
Consumer segment sales in the fiscal third
quarter of 2006 were $2.5 billion, an increase
of 10.1% over the same period a year ago with
8.1% of operational growth and a positive
currency impact of 2.0%. U.S. Consumer segment
sales increased by 5.9% while international
sales experienced a total increase of 14.0%, an
operational increase of 10.2%, with a positive
currency impact of 3.8%.
Major Consumer Franchise Sales - Fiscal Third
Quarter
Oct. 1, Oct. 2, Total Operations Currency
2006 2005 Change Change Change
(Dollars in Millions)
OTC Pharm
& Nutr $699 $634 10.2% 8.7% 1.5%
Skin Care 635 582 9.2 6.4 2.8
Baby &
Kids Care 451 396 14.1 12.2 1.9
Women's
Health 432 398 8.6 6.5 2.1
Other 239 221 8.1 6.8 1.3
Total $2,456 $2,231 10.1% 8.1% 2.0%
Consumer segment sales growth in the fiscal
third quarter of 2006 was attributable to solid
performance across the franchises. The OTC
Pharmaceutical and Nutritionals franchise
experienced an operational increase of 8.7%
primarily due to the re-launch of the
TYLENOL(R) Upper Respiratory product line with
products containing phenylephrine instead of
pseudoephedrine. The Skin Care franchise's
operational sales growth of 6.4% was driven by
international sales of suncare products and the
newly acquired Groupe Vendome product line. The
Baby and Kids Care franchise experienced strong
operational growth of 12.2%. This was driven by
the continued strength of JOHNSON'S(R) Baby
Lotion and Bath in the U.S., and in the
haircare, cleanser and cream product lines in
international markets. The Women's Health
franchise achieved operational growth of 6.5%
resulting from strong sales in the CAREFREE(R)
and K-Y(R) product lines.
Pharmaceutical
Pharmaceutical segment sales in the first
fiscal nine months of 2006 were $17.3 billion,
a total increase of 2.8% over the same period a
year ago with 3.1% of this change due to
operational increases and a 0.3% decrease
related to the negative impact of currency.
The U.S. Pharmaceutical sales increase was 2.9%
and the total growth in international
Pharmaceutical sales was 2.7%, with 3.5% of
this change due to operational increases and
the remaining 0.8% decrease related to the
negative impact of currency.
Major Pharmaceutical Product Revenues - First
Fiscal Nine Months
(Dollars in Millions)
Oct. 1, Oct. 2, Total Operations Currency
2006 2005 Change Change Change
RISPERDAL(R)/
RISPERDAL(R)
CONSTA(R) $3,122 $2,654 17.6% 18.6% (1.0)%
PROCRIT(R)/
EPREX(R) 2,392 2,526 (5.3) (5.2) (0.1)
REMICADE(R) 2,233 1,842 21.2 21.2 -
TOPAMAX(R) 1,498 1,267 18.3 18.4 (0.1)
LEVAQUIN(R)/
FLOXIN(R) 1,091 1,092 (0.1) (0.1) -
DURAGESIC(R)/
Fentany Transdermal 1,002 1,226 (18.2) (17.4) (0.8)
ACIPHEX(R)/
PARIET(TM) 921 856 7.2 7.2 -
Hormonal
Contraceptives 772 879 (12.2) (12.6) 0.4
Other 4,286 4,495 (4.6) (4.4) (0.2)
Total $17,317 $16,840 2.8% 3.1% (0.3)%
Pharmaceutical segment sales in the fiscal
third quarter of 2006 were $5.9 billion, a
total increase of 7.8% over the same period a
year ago with 6.7% of this change due to
operational increases and the remaining 1.1%
increase related to the positive impact of
currency. The U.S. Pharmaceutical sales
increase was 8.9% and the growth in
international Pharmaceutical sales was 5.7%,
with 2.7% of this change due to operational
increases and the remaining 3.0% increase
related to the positive impact of currency.
Major Pharmaceutical Product Revenues - Fiscal
Third Quarter
(Dollars in Millions)
Oct. 1, Oct. 2, Total Operations Currency
2006 2005 Change Change Change
RISPERDAL(R)/
RISPERDAL(R)
CONSTA(R) $1,068 $916 16.5% 15.4% 1.1%
PROCRIT(R)/
EPREX(R) 798 844 (5.5) (6.8) 1.3
REMICADE(R) 776 624 24.3 24.3 -
TOPAMAX(R) 533 429 24.1 23.3 0.8
LEVAQUIN(R)/
FLOXIN(R) 347 332 4.7 4.8 (0.1)
DURAGESIC(R)/
Fentany Transdermal 342 394 (13.4) (15.1) 1.7
ACIPHEX(R)/
PARIET(TM) 307 300 2.2 0.1 2.1
Hormonal
Contraceptives 270 281 (3.7) (4.7) 1.0
Other 1,440 1,337 7.7 6.4 1.3
Total $5,881 $5,457 7.8% 6.7% 1.1%
Sales growth within the segment was led by
strong performances from
RISPERDAL(R)/RISPERDAL(R) CONSTA(R)
(risperidone), REMICADE(R) (infliximab) and
TOPAMAX(R) (topiramate). Generic competition
related to DURAGESIC(R) (fentanyl transdermal
system), ULTRACET(R)(tramadol
hydrochloride/acetaminophen), SPORANOX(R)
(itraconazole) and hormonal contraceptives
continued to negatively impact sales during the
fiscal third quarter of 2006. Sales results in
both the fiscal third quarter of 2006 and 2005
benefited from one-time adjustments. The
reserve for sales rebates was reduced by
approximately $130 million in the fiscal third
quarter of 2006. Sales in the fiscal third
quarter of 2005 were positively impacted by a
refund of approximately $80 million due to a
retroactive change in the methodology used to
calculate average manufacturers price from
Medicaid charges. The net effect of these one-
time gains contributed less than 1.0% to fiscal
third quarter 2006 pharmaceutical sales growth.
RISPERDAL(R) (risperidone), a medication that
treats the symptoms of schizophrenia and
bipolar mania, and RISPERDAL(R) CONSTA(R)
(risperidone) long acting injection that treats
the symptoms of schizophrenia, achieved
operational growth of 15.4% in the fiscal third
quarter of 2006. Sales growth was positively
impacted by increases in the net pricing of
RISPERDAL(R) and demand for RISPERDAL(R)
CONSTA(R). In October of 2006, the Company
received approval from the FDA to market
RISPERDAL(R) for the treatment of irritability
associated with autistic disorder in children
and adolescents.
PROCRIT(R) (Epoetin alfa) and EPREX(R) (Epoetin
alfa) combined had an operational sales decline
of 6.8%, as compared to prior year fiscal third
quarter. PROCRIT(R) experienced an operational
decline of 9.3% due to a competitor's
anticompetitive contracting strategy, both in
oncology clinics and the hospital setting,
while EPREX(R) had an operational decline of
1.4%. The approval of the once weekly
administration for EPREX(R) in Europe resulted
in volume gains, which were offset by price
declines. Although the EPREX(R) patent has
expired in most major European markets, an
erythropoietin biosimilar has not yet been
approved.
REMICADE(R) (infliximab), a biologic approved
for the treatment of Crohn's disease,
ankylosing spondylitis, psoriasis, psoriatic
arthritis, ulcerative colitis and use in the
treatment of rheumatoid arthritis, experienced
strong operational growth of 24.3% over prior
year fiscal third quarter. This continued
growth was driven by increased demand due to
expanded indications. During the fiscal third
quarter of 2006, REMICADE(R) received FDA
approval for the treatment of adults with
chronic severe plaque psoriasis.
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 23.3% over prior year
fiscal third quarter. The net impact of the
previously discussed one-time adjustments added
approximately 7.0% to the operational growth in
the fiscal third quarter.
DURAGESIC(R)/Fentanyl Transdermal (fentanyl
transdermal system) experienced an operational
sales decline of 15.1% compared to prior year
fiscal third quarter, primarily driven by the
negative impact of generic competition in
Europe, as well as in the U.S.
The hormonal contraceptive franchise
experienced an operational sales decline of
4.7% compared to prior year fiscal third
quarter primarily resulting from continued
generic competition in oral contraceptives.
This was partially offset by growth in ORTHO
TRI-CYCLEN(R) LO (norgestimate/ethinyl
estradiol), a low dose oral contraceptive.
ORTHO EVRA(R)(norelgestromin/ethinyl
estradiol), the first contraceptive patch
approved by the FDA, experienced a significant
decline in sales as a result of labeling
changes and negative media coverage concerning
product safety.
CONCERTA(R) (methylphenidate HCl), a product
for the treatment of attention deficit
hyperactivity disorder, achieved operational
sales growth of 29.4% over the fiscal third
quarter of 2005, due in part to price. At
present, the FDA has not approved any generic
version that is substitutable for CONCERTA(R).
Abbreviated New Drug Applications (ANDAs) for
generic versions of CONCERTA(R) are pending and
may be approved at any time.
NATRECOR(R) (nesiritide), a product for the
treatment of patients with acutely
decompensated congestive heart failure who have
dyspnea at rest or with minimal activity, has
experienced a significant decline in demand due
to past negative media coverage regarding a
meta analysis of selected historical clinical
trials. The Company believes that there is no
new data supporting the conclusions of these
medical and consumer publications and the
currently approved label for NATRECOR(R)
reflects all available data to date.
Medical Devices and Diagnostics
Medical Devices and Diagnostics segment sales
in the first fiscal nine months of 2006 were
$15.1 billion, an increase of 5.9% over the
same period a year ago, with 6.9% of this
change due to operational increases and the
remaining 1.0% decrease related to the negative
impact of currency. The U.S. Medical Devices
and Diagnostics sales increase was 7.2% and the
growth in international Medical Devices and
Diagnostics sales was 4.5%, which included
operational increases of 6.5% and a decrease of
2.0% related to the negative impact of
currency.
Major Medical Devices and Diagnostics Franchise
Sales - First Fiscal Nine Months
(Dollars in Millions)
Oct. 1, Oct. 2, Total Operations Currency
2006 2005 Change Change Change
CORDIS(R) $3,126 $2,977 5.0% 6.3% (1.3)%
DEPUY(R) 3,045 2,870 6.1 6.8 (0.7)
ETHICON
ENDO-SURGERY(R) 2,476 2,278 8.7 9.6 (0.9)
ETHICON(R) 2,386 2,327 2.6 3.4 (0.8)
LIFESCAN(R) 1,532 1,436 6.6 6.7 (0.1)
Vision Care 1,408 1,276 10.3 12.7 (2.4)
ORTHO-CLINICAL
DIAGNOSTICS(R) 1,098 1,064 3.2 4.1 (0.9)
Other 45 47 (4.3) (4.3) -
Total $15,116 $14,275 5.9% 6.9% (1.0)%
Medical Devices and Diagnostics segment sales
in the fiscal third quarter of 2006 were $4.9
billion, an increase of 7.1% over the same
period a year ago, with 6.1% of this change due
to operational growth and the remaining 1.0%
increase related to the positive impact of
currency. The U.S. Medical Devices and
Diagnostics sales increase was 6.1% and the
growth in international Medical Devices and
Diagnostics sales was 8.2%, which included
operational growth of 6.1% and an increase of
2.1% related to the positive impact of
currency.
Major Medical Devices and Diagnostics Franchise
Sales - Fiscal Third Quarter
(Dollars in Millions)
Oct. 1, Oct. 2, Total Operations Currency
2006 2005 Change Change Change
CORDIS(R) $983 $994 (1.1) (1.7)% 0.6%
DEPUY(R) 971 897 8.3 7.1 1.2
ETHICON
ENDO-SURGERY(R) 825 725 13.8 12.5 1.3
ETHICON(R) 796 743 7.3 5.7 1.6
LIFESCAN(R) 505 462 9.4 7.6 1.8
Vision Care 493 443 11.2 11.8 (0.6)
ORTHO-CLINICAL
DIAGNOSTICS(R) 360 342 5.3 4.3 1.0
Other 17 16 6.3 6.3 -
Total $4,950 $4,622 7.1% 6.1% 1.0%
The Cordis franchise experienced an operational
sales decline of 1.7% over the fiscal third
quarter of 2005. This decline was caused by
lower sales of the CYPHER(R) Sirolimus-eluting
Stent, partially offset by strong performance
by the Biosense Webster business. The decline
in CYPHER(R) Sirolimus-eluting Stent sales was
caused by lower average selling prices,
negative media coverage concerning drug eluting
stents and the corresponding lack of market
growth. During the fiscal third quarter, the
Company received FDA approval to market the
PRECISE(R) Nitinol Stent and the ANGIOGUARD(TM)
Emboli Capture Guidewire to treat carotid artery
disease. In addition, the Company received CE
Mark approval in Europe for CYPHER SELECT(TM)
Sirolimus-eluting Stent for use in the treatment
of severe arterial disease in the leg.
In April and July of 2004, the Cordis
Cardiology Division of Cordis Corporation
received Warning Letters from the FDA regarding
Good Manufacturing Practice regulations and
Good Clinical Practice regulations. In
response to the Warning Letters, Cordis has
made improvements to its quality systems and
has provided periodic updates to the FDA. The
Clinical Warning Letter issues have been
resolved to the FDA's satisfaction. With
respect to the Quality System Warning Letter,
in addition to the improvement updates, the
Cordis Juarez and stent supplier locations were
inspected with acceptable results. The FDA
inspected the Miami site and the Global Quality
System, including Design Control system, in
August 2006, with acceptable results; Cordis
received no observations from the FDA during
this inspection. Cordis continues to update
the FDA on the status of improvements
quarterly. Cordis is awaiting notification of
re-inspection at the San German, Puerto Rico
location and possible re-inspection of the
Warren, New Jersey location.
The DePuy franchise's operational growth of
7.1% was primarily due to DePuy's orthopaedic
joint reconstruction products, Mitek sports
medicine products and the trauma business. The
acquisitions of Future Medical Systems and
Hand Innovations contributed to this growth.
The Ethicon Endo-Surgery franchise experienced
operational growth of 12.5% over prior year
fiscal third quarter. A major contributor of
growth continues to be endocutter sales, which
include products used in performing bariatric
procedures for the treatment of obesity, an
important focus area for the franchise. Strong
results were achieved with the success of the
HARMONIC SCALPEL(R), an ultrasonic cutting and
coagulating surgical device, which received
approval in January 2006 for expanded
indications to include plastic surgery. There
was also continued growth in advanced
sterilization products.
Ethicon worldwide sales grew operationally by
5.7% from the same period in the prior year,
resulting from solid growth in wound management
and women's health and urology, partially
offset by challenging conditions within several
European health care systems. Sales of both
GYNECARE products and DERMABOND(R) had strong
results in the fiscal third quarter of 2006 as
compared to the same period in the prior year.
The LifeScan franchise experienced operational
growth of 7.6% over prior year fiscal third
quarter. Animas Corporation, which was
acquired in the fiscal first quarter of 2006,
providing LifeScan with a platform for entry
into the insulin pump segment of the diabetes
market, was a key contributor to this growth.
Strong performance was also achieved in the
ONETOUCH(R) ULTRA(R) product line
internationally.
The Vision Care franchise operational sales
growth of 11.8% was led by the global success
of ACUVUE(R) OASYS(TM) Brand Contact Lenses with
HYDRACLEAR(TM) PLUS and ACUVUE(R) ADVANCE(TM) Brand
Contact Lenses for ASTIGMATISM and the
international success of 1-DAY ACUVUE(R) MOIST(TM)
and ACUVUE(R) DEFINE.
The Ortho-Clinical Diagnostics franchise
achieved operational growth of 4.3% over prior
year fiscal third quarter. Growth was achieved
in clinical laboratory sales in both the U.S.
and international markets.
Cost of Products Sold and Selling, Marketing
and Administrative Expenses
Consolidated costs of products sold for the
first fiscal nine months of 2006 increased to
27.9% from 27.4% of sales over the same period
a year ago. The cost of products sold for the
fiscal third quarter of 2006 increased to 27.5%
from 27.2% of sales in the fiscal third quarter
of 2005. The increase resulted from
unfavorable product mix, primarily in the
Pharmaceutical segment, partially offset by
reductions in the manufacturing costs in the
Medical Devices and Diagnostics segment.
Consolidated selling, marketing and
administrative expenses for the first fiscal
nine months of 2006 increased 1.4% over the
same period a year ago. Consolidated selling,
marketing and administrative expenses as a
percent to sales for the first fiscal nine
months of 2006 were 32.1% versus 33.2% for the
same period a year ago. Consolidated selling,
marketing and administrative expenses for the
fiscal third quarter of 2006 increased 3.1%
over the same period a year ago. As a percent
to sales, consolidated selling, marketing and
administrative expenses were 32.3% versus 33.8%
for the same period a year ago. Decreases in
the quarterly and nine month periods were
primarily associated with cost containment
efforts across many of the Company's businesses
as well as reductions in advertising and
promotion spending.
Research & Development
Research activities represent a significant
part of the Company's business. These
expenditures relate to the development of new
products, improvement of existing products,
technical support of products and compliance
with governmental regulations for the
protection of the consumer. Worldwide costs of
research activities, for the first fiscal nine
months of 2006 were $5.1 billion, an increase
of 14.2% over the same period a year ago.
Research and development spending in the fiscal
third quarter of 2006 was $1.7 billion, an
increase of 11.7% over the fiscal third quarter
of 2005. The major factors contributing to this
increase were higher levels of investment in
research projects in the Medical Devices and
Diagnostics segment and a significant number of
pharmaceutical projects in late stage
development.
In-Process Research & Development(IPR&D)
In the fiscal third quarter of 2006, the
Company recorded IPR&D charges of $115 million
before tax, with no tax benefit, related to the
acquisitions of Ensure Medical, Inc. and Colbar
LifeScience Ltd. IPR&D charges of $239 million
before tax and $231 million after tax were
recorded during the first fiscal nine months of
2006 related to the acquisitions of Vascular
Control Systems, Inc., Hand Innovations LLC,
Future Medical Systems S.A. and the third
quarter acquisitions mentioned above.
In the fiscal second quarter of 2005, the
Company recorded IPR&D charges of $353 million
before tax, with no tax benefit, related to
acquisitions in the Pharmaceutical and Medical
Devices and Diagnostics segments. These
acquisitions included TransForm Pharmaceuticals,
Inc., Peninsula Pharmaceuticals, Inc. and Closure
Medical Corporation.
Other (Income) Expense, Net
Other (income) expense, net includes gains and
losses related to the sale and write-down of
certain equity securities of the Johnson &
Johnson Development Corporation, gains and
losses on the disposal of fixed assets,
currency gains and losses, minority interests,
litigation settlements, royalty income, as well
as, certain miscellaneous one time events. The
favorable change in other (income) expense for
the first fiscal nine months of 2006 was
primarily due to the gain associated with the
Guidant termination fee, less associated
expenses, recorded in the fiscal first quarter
of 2006. This was partially offset by
additional product liability reserves recorded
in the fiscal third quarter of 2006.
OPERATING PROFIT BY SEGMENT
Consumer Segment
Operating profit for the Consumer segment as a
percent to sales in the first fiscal nine
months of 2006 was 18.9% versus 18.3% over the
same period a year ago. Operating profit as a
percent to sales in the fiscal third quarter of
2006 was 18.5% versus 18.3% over the same
period a year ago. This increase was related
to better leveraging of advertising spending in
the OTC Pharmaceutical and Nutritionals
franchise.
Pharmaceutical Segment
Operating profit for the Pharmaceutical segment
as a percent to sales in the first fiscal nine
months of 2006 was 31.4% versus 31.7% over the
same period a year ago. Operating profit as a
percent to sales in the fiscal third quarter of
2006 was 30.8% versus 31.8% over the same
period a year ago. For both periods in 2006,
operating profit was unfavorable, as compared
to the same periods a year ago, due to
increased research and development spending,
the recording of additional product liability
reserves, as well as, lower gross profit
margins.
Medical Devices and Diagnostics Segment
Operating profit for the Medical Devices and
Diagnostics segment as a percent to sales in
the first fiscal nine months of 2006 was 32.6%
versus 28.9% over the same period a year ago.
Operating profit as a percent to sales in the
fiscal third quarter of 2006 was 27.1% versus
28.5% over the same period a year ago. The
primary driver of the improved operating profit
in the Medical Devices and Diagnostics segment
for the fiscal nine months over the same period
a year ago was the gain associated with the
Guidant termination fee, less associated
expenses, of $622 million before tax.
Additionally, gross profit for the first fiscal
nine months of 2006 was enhanced by cost
reduction programs, and favorable product mix,
which offset increased research and development
spending and IPR&D charges. The unfavorability
in the operating profit in the fiscal third
quarter of 2006 over the same period a year ago
was driven by the IPR&D charges recorded during
the fiscal third quarter of 2006.
Interest (Income) Expense
Interest income increased in both the first
fiscal nine months and fiscal third quarter of
2006 as compared to the same periods a year
ago. The increase reflected higher rates of
interest being earned on cash and cash
equivalents, as well as, an improved average
cash position.
Interest expense decreased in both the first
fiscal nine months and fiscal third quarter of
2006 as compared to the same periods a year
ago, resulting from lower average interest
rates and a lower debt balance.
Provision For Taxes on Income
The worldwide effective income tax rates for
the first fiscal nine months of 2006 and 2005
were 25.2% and 25.0%, respectively, an increase
of 0.2% primarily due to the expiration of the
U.S. research and development tax credit at the
end of fiscal 2005, and the Guidant termination
fee recorded at a 40.8% rate. The tax rate for
the first fiscal nine months of 2006 benefited
from a reversal of tax allowances of $134
million associated with the Tibotec business.
The first fiscal nine months of 2005 included a
benefit of $225 million, due to the reversal of
a tax liability previously recorded during the
fiscal fourth quarter of 2004, associated with
a technical correction made to the American
Jobs Creation Act of 2004. The tax rate in the
first fiscal nine months of 2006 also benefited
from additional earnings in lower tax
jurisdictions relative to higher tax
jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash generated from operations provided the
major sources of funds for the growth of the
business, including working capital, capital
expenditures and acquisitions. Other uses of
cash included share repurchases, dividends and
debt repayments. In the first fiscal nine
months of 2006, cash flow from operations was
$10.0 billion, an increase of $1.3 billion over
the same period a year ago. This was a result
of growth in net income of $0.9 billion. This
increase in net income includes a reduction in
the non-cash impact of IPR&D charges of $0.1
billion and the gain associated with the
Guidant termination fee, less associated
expenses, of $368 million after tax. A $1.3
billion increase in accounts payable and
accrued liabilities, partially offset by a $0.8
billion increase in other current and non-
current assets, was also a key driver of the
increase in cash flow from operations. Net
cash used by investing activities increased by
$4.1 billion due to a $3.4 billion net decrease
in sales of investments and a $0.6 billion
increase in acquisition activity. Net cash
used by financing activities increased by $4.8
billion due primarily to a $4.2 billion
increase in the repurchase of common stock.
During the first fiscal nine months of 2006,
$4.8 billion was utilized for the stock
repurchase program. There was also a $0.4
billion increase in dividends to shareholders.
Cash and current marketable securities were
$14.7 billion at the end of the fiscal third
quarter of 2006 as compared with $16.1 billion
at fiscal year end 2005. The Company's net
cash position will be impacted in the fiscal
fourth quarter of 2006 as a result of the
acquisition of the Consumer Healthcare business
of Pfizer Inc., which is expected to close by
the end of 2006. This acquisition will be
funded through a combination of cash and debt.
Dividends
On July 17, 2006, the Board of Directors
declared a regular cash dividend of $0.375 per
share, which was paid on September 12, 2006 to
shareholders of record as of August 29, 2006.
On October 18, 2006, the Board of Directors
declared a regular cash dividend of $0.375 per
share, payable on December 12, 2006 to
shareholders of record as of November 28, 2006.
The Company expects to continue the practice of
paying regular cash dividends.
OTHER INFORMATION
New Accounting Standards
In September 2006, the FASB issued Statement of
Financial Accounting Standards No 157, Fair
Value Measurements. This statement defines
fair value, establishes a framework for
measuring fair value in generally accepted
accounting principles, and expands disclosures
about fair value measurements. The statement
is effective in the first fiscal 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 September 2006, the FASB issued Statement of
Financial Accounting Standards No 158,
Employer's Accounting for Defined Pension and
Other Postretirement Plans - an amendment of
FASB Statements No 87, 88, 106 and 132(R).
This statement requires the recognition of the
funded status of a benefit plan in the
statement of financial position. It also
requires the recognition as a component of
other comprehensive income (OCI), net of tax,
of the gains or losses and prior service costs
or credits that arise during the period but are
not recognized as components of net periodic
benefit cost pursuant to statements 87 or 106.
The statement has also new provisions regarding
the measurement date as well as certain
disclosure requirements. The statement is
effective at fiscal year end 2006 and the
Company will adopt the statement at that time.
Based on fiscal year end 2005 financial data,
the impact would be a decrease in OCI of
approximately $1.7 billion and a corresponding
decrease in net assets of approximately $1.7
billion. At adoption, the impact will be
computed in a similar manner using then current
information.
In September 2006, the SEC issued Staff
Accounting Bulletin (SAB) 108, which expresses
the Staff's views regarding the process of
quantifying financial statement misstatements.
The bulletin is effective at fiscal year end
2006. The Company believes the implementation
of this bulletin will have no 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. FIN 48 is effective for the
fiscal year 2007 and the Company plans to adopt
the Interpretation at that time. The Company
is currently evaluating the impact of the
adoption of FIN 48 on its results of
operations, cash flows and financial position.
The Company implemented SFAS 123(R), Share
Based Payment, in the fiscal first quarter of
2006. The Company applied the modified
retrospective transition method to implement
SFAS No. 123(R). Previously reported financial
statements were restated to reflect SFAS No.
123 disclosure amounts. See Note 1 included in
Item 1. Financial Statements (unaudited)- Notes
to Consolidated Financial Statements.
The Company implemented SFAS 151, Inventory
Costs, an amendment of ARB No. 43 in the fiscal
first quarter of 2006. The adoption of this
statement did not have a material effect on the
Company's results of operations, cash flows or
financial position.
Economic and Market Factors
Johnson & Johnson is aware that its products
are used in an environment where, for more than
a decade, policymakers, consumers and
businesses have expressed concern about the
rising cost of health care. Johnson & Johnson
has a long-standing policy of pricing products
responsibly. For the period 1995 through 2005
in the United States, the weighted average
compound annual growth rate of Johnson &
Johnson price increases for health care
products (prescription and over-the-counter
drugs, hospital and professional products) was
below the U.S. Consumer Price Index (CPI).
Inflation rates, even though moderate in many
parts of the world during 2005, continue to
have an effect on worldwide economies and,
consequently, on the way companies operate. In
the face of increasing costs, the Company
strives to maintain its profit margins through
cost reduction programs, productivity
improvements and periodic price increases. The
Company faces various worldwide health care
changes that may result in pricing pressures
that include health care cost containment and
government legislation relating to sales,
promotions and reimbursement.
The Company also operates in an environment
increasingly hostile to intellectual property
rights. Generic drug firms have filed
Abbreviated New Drug Applications seeking to
market generic forms of most of the Company's
key pharmaceutical products, prior to
expiration of the applicable patents covering
those products. In the event the Company is not
successful in defending a lawsuit resulting
from an Abbreviated New Drug Application
filing, the generic firms will then introduce
generic versions of the product at issue,
resulting in very substantial market share and
revenue losses. For further information see the
discussion on "Litigation Against Filers of
Abbreviated New Drug Applications" in Note 12
included in Item 1. Financial Statements
(unaudited)- Notes to Consolidated Financial
Statements.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE
RESULTS
This Form 10-Q contains forward-looking
statements. Forward- looking statements do not
relate strictly to historical or current facts
and anticipate results based on management's
plans that are subject to uncertainty. Forward-
looking statements may be identified by the use
of words like "plans," "expects," "will,"
"anticipates," "estimates" and other words of
similar meaning in conjunction with, among
other things, discussions of future operations,
financial performance, the Company's strategy
for growth, product development, regulatory
approval, market position and expenditures.
Forward-looking statements are based on current
expectations of future events. The Company
cannot guarantee that any forward- looking
statement will be accurate, although the
Company believes that it has been reasonable in
its expectations and assumptions. Investors
should realize that if underlying assumptions
prove inaccurate or that unknown risks or
uncertainties materialize, actual results could
vary materially from the Company's expectations
and projections. Investors are therefore
cautioned not to place undue reliance on any
forward-looking statements. The Company 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 January 1, 2006 contains,
as an Exhibit, a discussion of additional
factors that could cause actual results to
differ from expectations. The Company notes
these factors as permitted by the Private
Securities Litigation Reform Act of 1995.
Item 3 - QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
There has been no material change in the
Company's assessment of its sensitivity to
market risk since its presentation set forth in
Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk," in its Annual
Report on Form 10-K for the fiscal year ended
January 1, 2006.
Item 4 - CONTROLS AND PROCEDURES
Disclosure controls and procedures. At the end
of the period covered by this report, the
Company evaluated the effectiveness of the
design and operation of its disclosure controls
and procedures. The Company's disclosure
controls and procedures are designed to ensure
that information required to be disclosed by
the Company in the reports that it files or
submits under the Securities Exchange Act is
recorded, processed, summarized and reported,
within the time periods specified in the SEC's
rules and forms. Disclosure controls and
procedures include, without limitation,
controls and procedures designed to ensure that
information required to be disclosed by the
Company in the reports that it files or submits
under the Securities Exchange Act is
accumulated and communicated to the Company's
management, including its principal executive
and principal financial officers, or persons
performing similar functions, as appropriate to
allow timely decisions regarding required
disclosure. William C. Weldon, Chairman and
Chief Executive Officer, and Robert J.
Darretta, Vice Chairman and Chief Financial
Officer, reviewed and participated in this
evaluation. Based on this evaluation, Messrs.
Weldon and Darretta concluded that, as of the
date of their evaluation, the Company's
disclosure controls and procedures were
effective.
Internal control. During the period covered by
this report, there were no changes in the
Company's internal control over financial
reporting that have materially affected, or are
reasonably likely to materially affect, the
Company's internal control over financial
reporting.
Part II - OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS
The information called for by this item is
incorporated herein by reference to Note 12
included in Part I, Item 1. Financial
Statements (unaudited) - Notes to Consolidated
Financial Statements.
Item 1A - RISK FACTORS
Not applicable.
Item 2 - UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
(c) Purchases of Equity Securities by the
Issuer and Affiliated Purchasers.
Common Stock purchases on the open market are
made as part of a systematic plan to meet the
Company's compensation programs. On March 8,
2006, the Company announced that its Board of
Directors approved a stock repurchase program,
authorizing the Company to buy back up to $5
billion of the Company's common stock. The
program was completed in the fiscal fourth
quarter of 2006.
The following table provides information with
respect to Common Stock purchases by the
Company during the fiscal third quarter of
2006.
Fiscal Month Total Total Number Remaining
Number of Average of Shares Maximum
Shares Price Purchased as Number of
Purchased(1) Paid Part of Shares that
per Publicly May Be
Share Announced Purchased
Plans or Under the
Programs Plans or
Programs (2)
July 3, 2006 through
July 30, 2006 10,599,000 $60.49 10,599,000
July 31, 2006
through August 27,
2006 13,356,400 $63.45 9,598,000
August 28, 2006
through October 1,
2006 14,262,100 $64.14 12,945,200
Total 38,217,500 33,142,200 3,694,656
(1) During the fiscal third quarter of 2006,
the Company repurchased an aggregate of
33,142,200 shares of Johnson & Johnson Common
Stock pursuant to the repurchase program that
was publicly announced on March 8, 2006 and an
aggregate of 5,075,300 shares in open-market
transactions outside of the program.
(2) As of October 1, 2006, based on the closing
price of the Company's Common Stock on the New
York Stock Exchange on September 29, 2006 of
$64.94 per share.
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 Sarbanes-Oxley Act of
2002 - Furnished with this document.
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
JOHNSON & JOHNSON
(Registrant)
Date: November 8, 2006 By /s/ R. J. DARRETTA
R. J. DARRETTA
Vice Chairman, Board of
Directors; Chief Financial
Officer and Director
(Principal Financial Officer)
Date: November 8, 2006 By /s/ S. J. COSGROVE
S. J. COSGROVE
Controller
(Principal Accounting Officer)