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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 March 28, 2004
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the 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. 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 April 25, 2004, 2,968,603,275 shares of Common Stock, $1.00
par value, were outstanding.
1
JOHNSON & JOHNSON AND SUBSIDIARIES
TABLE OF CONTENTS
Part I - Financial Information Page No.
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets -
March 28, 2004 and December 28, 2003 3
Consolidated Statements of Earnings for the Fiscal
First Quarters Ended March 28, 2004 and
March 30, 2003 6
Consolidated Statements of Cash Flows for the Fiscal
First Quarters Ended March 28, 2004 and
March 30, 2003 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 24
Item 4. Controls and Procedures 24
Part II - Other Information
Item 1 - Legal Proceedings 24
Item 5 - Exhibits and Reports on Form 8-K 34
Signatures 35
2
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
ASSETS
March 28, December 28,
2004 2003
Current Assets:
Cash and cash equivalents $ 5,637 5,377
Marketable securities 4,724 4,146
Accounts receivable, trade, less
allowances for doubtful accounts
$188(2003, $192) 6,772 6,574
Inventories (Note 4) 3,522 3,588
Deferred taxes on income 1,558 1,526
Prepaid expenses and other
receivables 2,151 1,784
Total current assets 24,364 22,995
Marketable securities, non-current 70 84
Property, plant and equipment,
at cost 17,104 17,052
Less accumulated
depreciation 7,435 7,206
Property, plant and equipment, net 9,669 9,846
Intangible assets (Note 5) 14,191 14,168
Less accumulated amortization 2,749 2,629
Intangible assets, net 11,442 11,539
Deferred taxes on income 822 692
Other assets 2,501 3,107
Total assets $48,868 48,263
See Notes to Consolidated Financial Statements
3
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
March 28, December 28,
2004 2003
Current Liabilities:
Loans and notes payable $ 594 1,139
Accounts payable 3,782 4,966
Accrued liabilities 2,729 2,639
Accrued rebates, returns
and promotions 2,671 2,308
Accrued salaries, wages and
commissions 813 1,452
Taxes on income 1,860 944
Total current liabilities 12,449 13,448
Long-term debt 2,961 2,955
Deferred tax liability 741 780
Employee related obligations 2,282 2,262
Other liabilities 1,941 1,949
Shareholders' equity:
Preferred stock - without par
value (authorized and unissued
2,000,000 shares) - -
Common stock - par value $1.00
per share (authorized
4,320,000,000 shares; issued
3,119,842,000 shares) 3,120 3,120
Note receivable from employee
stock ownership plan (11) (18)
Accumulated other comprehensive
income (Note 8) (598) (590)
Retained earnings 32,153 30,503
4
Less common stock held in treasury,
at cost (152,286,000 & 151,869,000
shares) 6,170 6,146
Total shareholders' equity 28,494 26,869
Total liabilities and shareholders'
equity $48,868 48,263
See Notes to Consolidated Financial Statements
5
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; dollars & shares in millions
except per share figures)
Fiscal Quarters Ended
March 28, Percent March 30, Percent
2004 to Sales 2003 to Sales
Sales to customers
(Note 6) $11,559 100.0 9,821 100.0
Cost of products sold 3,367 29.1 2,722 27.7
Gross Profit 8,192 70.9 7,099 72.3
Selling, marketing and
administrative expenses 3,640 31.5 3,253 33.1
Research expense 1,095 9.5 936 9.5
Purchased in-process
research and
development - - 18 .2
Interest income (39) (.3) (38) (.4)
Interest expense, net of
portion capitalized 45 .4 38 .4
Other (income)expense, net (53) (.5) (37) (.3)
Earnings before provision
for taxes on income 3,504 30.3 2,929 29.8
Provision for taxes on
income (Note 3) 1,011 8.7 859 8.7
NET EARNINGS $2,493 21.6 2,070 21.1
NET EARNINGS PER SHARE
(Note 7)
Basic $ .84 .70
Diluted $ .83 .69
CASH DIVIDENDS PER SHARE $ .24 .205
AVG. SHARES OUTSTANDING
Basic 2,967.8 2,968.4
Diluted 3,004.6 3,018.5
See Notes to Consolidated Financial Statements
6
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
Fiscal Quarters Ended
March 28, March 30,
2004 2003
CASH FLOWS FROM OPERATIONS
Net earnings $ 2,493 2,070
Adj. to reconcile net earnings to cash flows:
Depreciation and amortization of
property and intangibles 502 446
Purchased in-process research and
development - 18
Increase in deferred taxes (191) (47)
Accounts receivable provisions 20 (5)
Changes in assets and liabilities, net
of effects from acquisition of businesses:
Increase in accounts receivable (271) (366)
Decrease (increase) in inventories 38 (181)
Decrease in accounts payable and
accrued liabilities (1,350) (594)
Decrease (increase) in other
current and non-current assets 368 (172)
Increase in other current
and non-current liabilities 1,046 867
NET CASH FLOWS FROM OPERATING
ACTIVITIES 2,655 2,036
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant
and equipment (292) (408)
Proceeds from the disposal of assets 49 3
Acquisition of businesses, net of cash
acquired - (258)
Purchases of investments (3,103) (1,634)
Sales of investments 2,512 1,417
Other (16) (17)
NET CASH USED BY INVESTING
ACTIVITIES (850) (897)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to shareholders (713) (609)
Repurchase of common stock (407) (339)
Proceeds from short-term debt 147 221
Retirement of short-term debt (675) (354)
Proceeds from long-term debt 19 2
Retirement of long-term debt 1 (20)
Proceeds from the exercise of
stock options 125 90
NET CASH USED BY FINANCING
ACTIVITIES (1,503) (1,009)
7
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (42) 37
INCREASE(DECREASE) IN CASH AND CASH
EQUIVALENTS 260 167
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 5,377 2,894
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 5,637 3,061
ACQUISITION OF BUSINESSES
Fair value of assets acquired - 285
Fair value of liabilities assumed - (27)
Net cash paid for acquisitions $ - 258
See Notes to Consolidated Financial Statements
8
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 Annual Report
on Form 10-K for the fiscal year ended December 28,
2003. 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 presentation of such statements.
NOTE 2 - FINANCIAL INSTRUMENTS
The Company follows the provisions of SFAS 133 requiring
that all derivative instruments be recorded on the balance
sheet at fair value.
As of March 28, 2004, the balance of deferred net losses
on derivatives included in accumulated other comprehensive
income was $128 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.
For the fiscal first quarter ended March 28, 2004, the net
impact of the hedges' ineffectiveness to the Company's
financial statements was insignificant. For fiscal first
quarter ended March 28, 2004, the Company has recorded a net
loss of $1 million after tax in the "other (income) expense,
net" category of the consolidated statement of earnings,
representing the impact of discontinuance of cash flow
hedges because it is probable that the originally forecasted
transactions will not occur by the end of the originally
specified time period.
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
fiscal first quarter of 2004 and 2003 were 28.8% and
29.3%. The decrease in the effective tax rate of 0.5% is
due to the increase in taxable income in lower tax
jurisdictions relative to taxable income in higher tax
jurisdictions.
NOTE 4 - INVENTORIES
(Dollars in Millions)
March 28, 2004 December 28, 2003
Raw materials and supplies $ 1,079 966
Goods in process 1,229 981
Finished goods 1,214 1,641
$ 3,522 3,588
9
NOTE 5 - INTANGIBLE ASSETS
Intangible assets that have definite useful lives are
amortized over their useful lives. Goodwill and non-
amortizable intangible assets are assessed annually
for impairment. The impairment assessment was completed in
the fiscal fourth quarter of 2003 and no impairment was
determined. Future impairment tests will be performed in
the fiscal fourth quarter, annually.
(Dollars in Millions)
March 28, 2004 December 28, 2003
Goodwill $ 6,072 6,085
Less accumulated amortization 702 695
Goodwill - net 5,370 5,390
Trademarks (non-amortizable) 1,095 1,098
Less accumulated amortization 136 136
Trademarks (non-amortizable)- net 959 962
Patents and trademarks 3,812 3,798
Less accumulated amortization 890 818
Patents and trademarks - net 2,922 2,980
Other amortizable intangibles 3,212 3,187
Less accumulated amortization 1,021 980
Other intangibles - net 2,191 2,207
Total intangible assets 14,191 14,168
Less accumulated amortization 2,749 2,629
Total intangibles - net $11,442 11,539
Goodwill as of March 28, 2004 as allocated by segment of
business
is as follows:
(Dollars in Millions)
Med. Dev
Consumer Pharm & Diag Total
Goodwill, net of
accumulated amortization
at December 28, 2003 $882 781 3,727 5,390
Acquisitions - - - -
Translation & Other - (5) (15) (20)
Goodwill as of
March 28, 2004 882 776 3,712 5,370
The weighted average amortization periods for patents and
trademarks and other intangible assets were 16 years and 18
years, respectively. The amortization expense of
amortizable intangible assets for the fiscal first quarter
ended March 28, 2004 was $123 million before tax and the
estimated amortization expense for the five succeeding years
approximates $490 million before tax, per year,
respectively.
10
NOTE 6 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
(Dollars in Millions)
SALES BY SEGMENT OF BUSINESS
Fiscal First Quarter
Percent
2004 2003 Change
Consumer
U.S. $ 1,081 1,000 8.1
International 966 791 22.1
2,047 1,791 14.3%
Pharmaceutical
U.S. $ 3,643 3,263 11.6
International 1,733 1,403 23.5
5,376 4,666 15.2%
Med Devices and Diagnostics
U.S. $ 2,194 1,748 25.5
International 1,942 1,616 20.2
4,136 3,364 22.9%
U.S. $ 6,918 6,011 15.1
International 4,641 3,810 21.8
Worldwide $ 11,559 9,821 17.7%
OPERATING PROFIT BY SEGMENT OF BUSINESS
Fiscal First Quarter
Percent
2004 2003 Change
Consumer $ 440 413 6.5
Pharmaceutical 2,085 1,859 12.2
Med. Dev. & Diag. 1,067 731 46.0
Segments total 3,592 3,003 19.6
Expenses not allocated
to segments (88) (74)
Worldwide total $ 3,504 2,929 19.6%
11
SALES BY GEOGRAPHIC AREA
Fiscal First Quarter
Percent
2004 2003 Change
U.S. $ 6,918 6,011 15.1
Europe 2,708 2,218 22.1
Western Hemisphere,
excluding U.S. 597 472 26.5
Asia-Pacific, Africa 1,336 1,120 19.3
Total $ 11,559 9,821 17.7%
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
first quarters ended March 28, 2004 and March 30, 2003.
(Shares in Millions)
Fiscal Quarter Ended
March 28, March 30,
2004 2003
Basic net earnings per share $ .84 .70
Average shares outstanding - basic 2,967.8 2,968.4
Potential shares exercisable under
stock option plans 119.4 179.6
Less: shares which could be repurchased
under treasury stock method (97.4) (144.4)
Convertible debt shares 14.8 14.9
Adjusted average shares
outstanding - diluted 3,004.6 3,018.5
Diluted earnings per share $ .83 .69
The diluted earnings per share calculation included the
dilution effect of convertible debt that was offset by the
related decrease in interest expense of $4 million each
for the fiscal first quarters ended March 28, 2004 and
March 30, 2003, respectively.
The diluted earnings per share excluded 135 million and
47 million shares related to options for the fiscal first
quarters ended March 28, 2004 and March 30, 2003,
respectively as the exercise price per share of these
options was greater than the average market value,
resulting in an anti-dilutive effect on diluted earnings
per share.
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The total comprehensive income for the fiscal first quarter
endedMarch 28, 2004 was $2.5 billion, compared with
$2.1 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 available for sale securities and net
gains and losses on derivative instruments
12
qualifying and designated as cash flow hedges. The
following table sets forth the components of
accumulated other comprehensive income.
Total
Unrld Gains/ Accum
For. Gains/ Pens (Losses) Other
Cur. (Losses) Liab on Deriv Comp
Trans. on Sec Adj. & Hedg Inc/
(Loss)
December 28, 2003 $ (373) 27 (64) (180) (590)
2004 Three Months changes
Net change associated
with current period
hedging transactions - - - 261
Net amount reclassed to
net earnings - - - (209)*
Net Three Months
changes (61) 1 - 52 (8)
March 28, 2004 $ (434) 28 (64) (128) (598)
Note: All amounts, other than foreign currency translation,
are net of tax. Foreign currency translation adjustments
are not currently adjusted for income taxes, as they relate
to permanent investments in non-US subsidiaries.
*Primarily offset by changes in value of the underlying
transactions.
NOTE 9 - MERGERS, ACQUISITIONS AND DIVESTITURES
There were no acquisitions in the fiscal first quarter of
2004. DePuy's Castings business was divested in the fiscal
first quarter of 2004, which did not have a material effect
on the Company's results of operations, cash flows or
financial position.
On January 29, 2003, Johnson & Johnson acquired certain
assets of Orquest, Inc., a privately held biotechnology
company focused on developing biologically based implants
for orthopedic and spine surgery. Orquest's principal
product, HEALOS Bone Graft Substitute, is designed to reduce
the time and pain associated with standard bone graft
harvesting and represents a therapeutic advance for patients
requiring bone graft material for spine fusion. The Company
incurred a charge for In-process Research and Development
(IPR&D) of approximately $11 million before tax and $8
million after tax.
On February 10, 2003, Johnson & Johnson acquired
Orapharma, Inc., a specialty pharmaceutical company focused
on the development and commercialization of unique
therapeutics. Orapharma's initial product, ARESTIN, is
the first locally administered, time-released antibiotic
encapsulated in microspheres that controls the germs that
can cause periodontal disease. The transaction was valued
at approximately $85 million, net of cash.
On March 28, 2003, Johnson & Johnson acquired 3-
Dimensional Pharmaceuticals, Inc., a company with a
technology platform
13
focused on the discovery and development of potential new
drugs in early stage development for the treatment of
cardiovascular disorders, oncology and inflammation.
The transaction was valued at approximately $88 million, net
of cash.
The Company incurred a before and after tax charge for in-
process research and development (IPR&D) of approximately $7
million.
NOTE 10 - PRO FORMA STOCK BASED COMPENSATION
At March 28, 2004, the Company had 21 stock-based
employee compensation plans. The Company accounted for
those plans under the recognition and measurement principles
of Accounting Principle Board Opinion No. 25 "Accounting for
Stock Issued to Employees" and its related Interpretations.
Compensation costs were not recorded in net income for stock
options, as all options granted under those plans had an
exercise price equal to the market value of the underlying
common stock on the date of grant.
As required by SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure - an amendment
of FASB Statement No. 123," the following table shows the
estimated effect on net income and earnings per share if the
Company had applied the fair value recognition provision of
SFAS No. 123, "Accounting for Stock-Based Compensation,"
to stock-based employee compensation.
(Dollars in Millions
Except Per Share Data) March 28, 2004 March 30, 2003
Net income,
as reported $ 2,493 2,070
Less:
Compensation
expense(1) 80 85
Pro forma $ 2,413 1,985
Earnings per share:
Basic - as reported $.84 $.70
- pro forma .81 .67
Diluted - as reported $.83 $.69
- pro forma .81 .66
(1) Determined under fair value based method for all
awards, net of tax.
14
NOTE 11 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Components of Net Periodic Benefit Cost
Net periodic benefit costs for the Company's defined benefit
retirement plans and other benefit plans for the fiscal
first quarter of 2004 and 2003 include the following
components:
(Dollars in Millions)
Retirement Plans Other Benefit Plans
March 28, March 30, March 28, March 30,
2004 2003 2004 2003
Service cost $ 108 81 13 7
Interest cost 119 98 26 18
Expected return on
plan assets (131) (124) (1) (1)
Amortization of prior
service cost 4 5 (1) (1)
Amortization of net
transition asset (1) (1) - -
Recognized actuarial
losses (gains) 44 16 11 1
Net periodic benefit cost $ 143 75 48 24
Company Contributions
The Company contributed $155 million to its U.S. retirement
plans on April 15, 2004. The Company is not expected to
further fund its U.S. retirement plans in 2004 in order to
meet minimum statutory funding requirements. International
plans will be funded in accordance with local regulations.
NOTE 12 - LEGAL PROCEEDINGS
The information called for by this footnote is incorporated
herein by reference to Item 1 ("Legal Proceedings") included
in Part II of this Report on Form 10-Q.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Analysis of Consolidated Sales
For the fiscal first quarter of 2004, worldwide sales were
$11.6 billion, an increase of 17.7% over 2003 fiscal first
quarter sales of $9.8 billion. The impact of foreign
currencies accounted for 5.4% of the total reported fiscal
first quarter 2004 increase.
Sales by U.S. companies were $6.9 billion in the
fiscal first quarter of 2004, which represented an
increase of 15.1%. Sales by international companies
were $4.6 billion, which represented an increase of
21.8%, of which 14.0% was due to currency fluctuations.
All geographic areas throughout the world posted sales
increases during the fiscal first quarter of 2004 as
sales increased 22.1% in Europe, 26.5% in the Western
Hemisphere (excluding the U.S.) and 19.3% in the Asia-
Pacific, Africa regions. These sales gains include the
positive impact of currency fluctuations between
15
the U.S. dollar and foreign currencies in Europe of 16.3%,
in the Western Hemisphere (excluding the U.S.) of 11.5% and
in the Asia-Pacific, Africa region of 10.5%.
Analysis of Sales by Business Segments
Consumer
Consumer segment sales in the fiscal first quarter of
2004 were $2.0 billion, an increase of 14.3% over the same
period a year ago with 8.7% of operational growth and a
positive currency impact of 5.6%. U.S. Consumer segment
sales increased by 8.1% while international sales gains
of 22.1% included a positive currency impact of 12.5%.
Major Consumer Franchise Sales
Total Operations Currency
2004 2003 %Change %Change %Change
McNeil $ 563 $ 487 15.6% 13.6% 2.0%
Skin Care 562 465 20.9 13.5 7.4
Women's Health 348 313 11.2 3.9 7.3
Baby & Kids Care 343 304 12.9 5.8 7.1
Consumer segment sales growth is attributable to strong
sales performance in the major franchises in this segment
including Skin Care, Baby & Kids Care, McNeil Consumer over-
the-counter pharmaceutical and nutritional products and the
Women's Health Franchise. The Skin Care franchise sales
growth was attributed to NEUTROGENA(r), due to new product
introductions in cosmetics; AVEENO(r), with strong growth in
the facial care line; RoC(r) with the relaunch of Retinol
Gold(r) in Europe; and CLEAN & CLEAR(r), with new products
such as Morning Burst(tm) and Acne Advantage(tm). The Baby
& Kids Care franchise growth was led by new products, the
continued strength of BabyCenter and the sales growth of
Balmex(r) Diaper Rash Ointment, which was acquired in 2003.
McNeil Consumer over-the-counter pharmaceutical and
nutritional products franchise sales increase was primarily
due to the SPLENDA(r) Tabletop brand no calorie sweetener
that continued to build on its number one share position
established in 2003. Another franchise contributing to the
overall sales growth in the Consumer segment was the Women's
Health franchise due to the growth in sanitary protection
products in international markets.
In February 2004, the Company announced an agreement with
Tate & Lyle related to the production of sucralose and the
SPLENDA brand. This transaction was completed on April 2,
2004 and resulted in the Company being responsible for the
worldwide sales and marketing of the tabletop category of
SPLENDA(r), with Tate & Lyle responsible for the
manufacturing of sucralose and the marketing of ingredient
sales.
Also in the fiscal first quarter of 2004, the Company
announced an agreement to acquire the remaining 50% stake in
the Johnson & Johnson/Merck non-prescription pharmaceuticals
joint venture with the Company in Europe. This agreement was
consummated in the fiscal second quarter of 2004 resulting
in 100% ownership and a fully owned subsidiary.
16
Pharmaceutical
Pharmaceutical segment sales in the fiscal first quarter
of 2004 were $5.4 billion, an increase of 15.2% over the
same period a year ago with 10.9% of this change due to
operational increases and the remaining 4.3% increase
related to the positive impact of currency. The U.S.
Pharmaceutical sales increase was 11.6% and the growth in
international Pharmaceutical sales was 23.5% which included
14.4% related to the positive impact of currency.
Top Pharmaceutical Product Sales
Total Operations Currency
2004 2003 %Change %Change %Change
PROCRIT(r)/EPREX(r) $ 977 $ 997 (2.0%) (6.0%) 4.0%
RISPERDAL(r) 731 601 21.7 15.3 6.4
REMICADE(r) 464 409 13.4 13.4 0.0
DURAGESIC(r) 455 395 15.0 8.9 6.1
LEVAQUIN(r)/FLOXIN(r) 383 298 28.2 28.1 0.1
TOPAMAX(r) 328 231 41.9 38.2 3.7
Hormonal Contraceptives 305 268 13.8 11.9 1.9
Pharmaceutical segment sales growth was adversely
affected by the decline of PROCRIT(r) (Epoetin alfa) and
EPREX(r) (Epoetin alfa) due to increased competition.
Combined, PROCRIT and EPREX sales declined 2.0% in the
fiscal first quarter of 2004 versus the same period a year
ago. The Company continues to implement programs to improve
its competitive position that include steps to ensure that
PROCRIT is priced competitively, as well as conducting
clinical development programs, which will provide
comparative data with competitive products.
Strong product growth drivers in the Pharmaceutical
segment included RISPERDAL(r) (risperidone), a medication
that treats the symptoms of schizophrenia, fueled by the
successful launch of RISPERDAL(r) CONSTA(tm) and REMICADE(r)
(infliximab), a novel monoclonal antibody therapy indicated
to treat Crohn's disease and rheumatoid arthritis, continued
to maintain its leadership position in the growing Anti-TNF-
a (tumor necrosis factor alpha) market. Net sales for
DURAGESIC(r) (fentanyl transdermal system) in the U.S. were
negatively impacted by the establishment of a return reserve
related to a product recall. LEVAQUIN(r) (levofloxacin),
FLOXIN(r) (ofloxacin), and TOPAMAX(r) (topiramate) had
strong growth over the same period a year ago. The hormonal
contraceptive franchise had strong performance in ORTHO
EVRA(r) (norelgestromin/ethinyl estradiol), the first
contraceptive patch approved by the FDA, as well as, a
reduction in sales of ORTHO TRI-CYCLEN(r)
(norgestimate/ethinyl estradiol) due to generic competition
offset by an adjustment to customer rebates. Excluding the
adjustment to customer rebates; hormonal contraceptive sales
would have been flat over the same period a year ago. There
was also strong growth achieved in other brands, including
DOXIL(r) (doxorubicin), an anti-cancer treatment, DITROPAN
XL(r) (oxybutynin) for the treatment of overactive bladder,
and REMINYL(r) (galantamine (HBr)), a treatment for patients
with mild to moderate Alzheimer's disease, and NATRECOR(r)
(nesiritide) to treat acute congestive heart failure.
On March 25, 2004 a U.S. District Court upheld the
validity of
17
the DURAGESIC(r) product patent guaranteeing that generic
competition could not occur prior to July 23, 2004. The
Company has submitted the judge's order to the FDA with a
request that the six-month pediatric extension granted in
2003 for DURAGESIC(r) be honored. If the extension is
honored, generic competition will not begin until 2005.
Medical Devices and Diagnostics
Medical Devices and Diagnostics segment sales in the
fiscal first quarter of 2004 were $4.1 billion, an increase
of 22.9% over the same period a year ago with 16.1% of this
change due to operational increases and the remaining 6.8%
increase related to the positive impact of currency. The
U.S. Medical Devices and Diagnostics sales increase was
25.5% and the growth in international Medical Devices and
Diagnostics sales was 20.2% which included 14.3% related to
the positive impact of currency.
Major Medical Devices and Diagnostics Franchise Sales
Total Operations Currency
2004 2003 %Change %Change %Change
Cordis $ 877 $ 420 108.7% 101.2% 7.5%
DePuy 839 740 13.5 7.8 5.7
Ethicon 681 629 8.4 (0.1) 8.5
Ethicon Endo-Surgery 665 623 6.7 0.0 6.7
LifeScan 400 348 15.0 8.7 6.3
Vision Care 354 300 18.3 11.0 7.3
Ortho-Clinical Diagnostics 303 287 5.2 (1.1) 6.3
Strong sales growth in this segment was led by the Cordis
and DePuy franchises. The Cordis franchise was a key
contributor to the Medical Devices and Diagnostics segment
results. The primary driver of this sales growth was the
CYPHER(r) Sirolimus-eluting Stent that was approved in the
U.S. by the Food and Drug Administration in April 2003. A
competing drug-eluting stent product was launched in the
U.S. in early March 2004, but it is too early to quantify
the impact on the rate of CYPHER(r) sales going forward.
On February 27, 2004, Cordis Corporation, a Johnson &
Johnson Company, announced a strategic alliance with Guidant
Corporation for the co-promotion of drug-eluting stents and
the advancement of new technology. Additionally, the
agreement provides the Company an opportunity to participate
with Guidant in the future platform of bioabsorbable
vascular stents.
On April 2, 2004, Cordis Cardiology, a division of Cordis
Corporation, a Johnson & Johnson Company, received a warning
letter from the FDA regarding observations concerning Good
Manufacturing Practice regulations. These observations
followed standard post-approval site inspections completed
in 2003, including sites involved in the production of the
CYPHER stent. The company's management has submitted its
response plan to the FDA.
DePuy franchise growth was primarily due to DePuy's
orthopaedic joint reconstruction products including the
shoulder and knee product lines, along with the continued
success of the Global
18
Advantage System(tm) in the shoulder market and the
continuing trend towards mobile bearings and minimally
invasive unicompartmental knees. Strong performance was
also reported in the area of spine, led by the continued
success in new product sales, which include the Monarch(tm)
Ti system, Moss Miami SI(tm) and Crossover(tm). Ethicon
Endo-Surgery franchise experienced growth in Endocutter
sales that include products used in performing bariatric
procedures, an important focus for the franchise. LifeScan
franchise growth was due to increased sales of OneTouch(r)
Ultra(r) and OneTouch(r) FastTake(r) brands. Vision Care
franchise growth was led by the continued success in the
Japanese market as well as strong growth in the U.S. market
led by the introduction of Acuvue(r) Advance(tm) with
HydraClear(tm), a silicone hydrogel material launched
nationwide in January 2004.
Cost of Goods Sold and Selling, General and Administrative
Expenses
Consolidated costs of goods sold increased to 29.1% from
27.7% of sales over the same period a year ago. This
increase was primarily due to the change in product mix.
Consolidated selling, general and administrative
expenses increased 11.9% over the same period a year ago.
Selling, general and administrative expenses as a percent
to sales were 31.5% versus 33.1% for the same period a
year ago, which represents an improvement of 1.6% as a
percent of sales. This improvement was primarily due to the
leveraging of the strong sales growth in the Medical Devices
and Diagnostics segment as well as the Company focusing on
managing expenses under the "Funding Our Future" initiative.
Research & Development
Research activities represent a significant part of the
Company's business. These expenditures relate to the
development of new products, improvement of existing
products, technical support of products and compliance with
governmental regulations for the protection of the consumer.
Worldwide costs of research activities, for the fiscal first
quarter of 2004 were $1.1 billion an increase of 17.0% over
the same period a year ago. The level of research and
development spending remained the same as a percent to sales
as compared to the same period a year ago, excluding the in-
process research & development charge of $18 million before
tax in 2003.
19
In-Process Research & Development
In the fiscal first quarter of 2003, the Company recorded
in-process research & development (IPR&D) charges of $15
million after-tax ($18 million before tax) related to
acquisitions. These acquisitions included certain assets of
Orquest, Inc., a privately-held biotechnology company
focused on developing biologically-based implants for
orthopaedics spine surgery and 3-Dimensional Pharmaceuticals,
Inc., a company with a technology platform focused on the
discovery and development of potential new drugs in early
stage development for the treatment of cardiovascular
diseases, oncology and inflammation.
Other (Income) Expense, Net
Other (income) expense included gains and losses related
to the sale and write-down of certain equity securities
of the Johnson & Johnson Development Corporation, losses
on the disposal of fixed assets, currency gains & losses,
minority interests, litigation settlement expense as well
as royalty income. The favorable change in other (income)
expense as compared to the same period a year ago was due
primarily to the gain associated with business divestitures in
the fiscal first quarter of 2004.
OPERATING PROFIT BY SEGMENT
Consumer Segment
Operating profit for the Consumer segment as a percent to
sales in the fiscal first quarter of 2004 was 21.5% versus
23.1% over the same period a year ago. This decrease is
primarily due to ongoing costs associated with a plant
closure and investment spending in developing markets
outside the U.S.
Pharmaceutical Segment
Operating profit for the Pharmaceutical segment as a percent
to sales in the fiscal first quarter of 2004 was 38.8%
versus 39.8% over the same period a year ago. Operating
profit was primarily impacted by the change in sales due to
the product mix.
Medical Devices and Diagnostics Segment
Operating profit for the Medical Devices and Diagnostics
segment as a percent to sales in the fiscal first quarter of
2004 was 25.8% versus 21.7% over the same period a year ago.
The driver of the Medical Devices and Diagnostics segment
margin growth was primarily due to operating expense
leveraging on increased sales volume on CYPHER(r) Stent
sales.
Interest (Income) Expense
Interest income in the fiscal first quarter of 2004
increased by $1 million due primarily to the increase in the
cash balance offset by a decline in the average rate of
investment of 0.5%. The cash balance, which includes
marketable securities at the end of the fiscal first quarter
of 2004, was $10.4 billion which is $2.6 billion higher than
the same period a year ago.
Interest expense in the fiscal first quarter of 2004
increased by $7 million over the same period a year ago
primarily due to an increase in the average debt rate of
0.9% due to the conversion of short term debt to long term.
20
Provision For Taxes on Income
The worldwide effective income tax rates for the
fiscal first quarter of 2004 and 2003 were 28.8% and
29.3%. The decrease in the effective tax rate of 0.5% is
due to the increase in taxable income in lower tax
jurisdictions relative to taxable income in 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, acquisitions, share
repurchases, dividends and debt repayments. In the fiscal
first quarter of 2004, cash flow from operations was $2.7
billion, an increase of $0.6 billion over the same period a
year ago. Major factors contributing to the increase were
an increase in net income of $0.4 billion and a decrease in
the growth of working capital of $0.2 billion. Net cash
used by investing activities was relatively the same versus
the same period a year ago due to a decrease in capital
spending, no acquisition activity in 2004 and an increase in
the purchases of marketable securities in the fiscal first
quarter of 2004. Net cash used by financing activities
increased by $.5 billion primarily due to the repayment of
commercial paper. Cash and current marketable securities
were $10.4 billion at the end of the fiscal first quarter of
2004 as compared with $9.5 billion at year-end 2003.
Dividends
On January 5, 2004, the Board of Directors declared a
regular cash dividend of $0.24 per share, payable on March
9, 2004 to shareholders of record as of February 17, 2004.
This represented an increase of 17.1% from the fiscal first
quarter of 2003 dividend.
On April 22, 2004, the Board of Directors declared a
regular cash dividend of $0.285 per share, payable on
June 8, 2004 to shareholders of record as of May 18,
2004. This represented an increase of 18.8% and was the
42nd consecutive year of cash dividend increases. The
Company expects to continue the practice of paying regular
cash dividends.
OTHER INFORMATION
New Accounting Standards
In January 2003, the FASB issued FIN 46, "Consolidation of
Variable Interest Entities - an interpretation of ARB No.
51", and in December 2003, issued a revised FIN 46(R),
"Consolidation of Variable Interest Entities - an
interpretation of ARB No. 51", both of which address
consolidation of variable interest entities. FIN 46 expanded
the criteria for consideration in determining whether a
variable interest entity should be consolidated by a
business entity, and requires existing unconsolidated
variable interest entities (which include, but are not
limited to, Special Purpose Entities, or SPEs) to be
consolidated by their primary beneficiaries if the entities
do not effectively disperse risks among parties involved.
This interpretation was immediately applicable to variable
interest entities created after January 31, 2003. The
adoption of this portion of FIN 46 did not have a
21
material effect on the Company's results of operations, cash
flows or financial position. FIN 46 is applicable in 2004 to
variable interest entities in which an enterprise holds a
variable interest that was acquired before February 1, 2003.
The adoption of this portion of FIN 46 did not have a
material effect on the results of operations, cash flows and
financial position of the Company.
In December 2003, the FASB issued SFAS No. 132 (revised
2003), "Employers' Disclosures about Pensions and Other
Postretirement Benefits - an amendment of FASB Statement No.
87, 88 and 106," which was effective for the fourth quarter
of 2003. This Statement revises employers' disclosures about
pension plans and other postretirement benefit plans and
these disclosures are included in Note 11.
In December 2003, the FASB issued FASB Staff Position (FSP)
FAS No. 106-1, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003", which is effective for interim
or annual financial statements of fiscal years ending after
December 7, 2003. The Company has elected to defer adoption
of FSP FAS No. 106-1 until authoritative guidance is issued,
as allowed by the Standard. The Company's adoption of FSP
FAS No. 106-1 is not expected to 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 1993 - 2003, 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 2003, 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. On December 8, 2003,
the Medicare Prescription Drug Improvement and Modernization
Act of 2003 was enacted that introduces a prescription drug
benefit under Medicare as well as a subsidy to sponsors of
retiree health care benefit plans. The Company has elected
to defer the recognition of the Act until such time when the
authoritative guidance is issued. Any measures of the
accumulated postretirement benefit obligation or
22
net periodic postretirement benefit cost in the Company's
financial statements do not reflect the effect of the Act.
The Company also operates in an environment which is
becoming 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 competition typically results in creating a loss
of market exclusivity and may result in a significant
reduction in sales. For further information see the
discussion on "Litigation Against Filers of Abbreviated New
Drug Applications" in Note 12.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-Q contains forward-looking statements. Forward-
looking statements do not relate strictly to historical or
current facts and anticipate results based on management's
plans that are subject to uncertainty. Forward-looking
statements may be identified by the use of words like
"plans," "expects," "will," "anticipates," "estimates" and
other words of similar meaning in conjunction with, among
other things, discussions of future operations, financial
performance, the Company's strategy for growth, product
development, regulatory approval, market position and
expenditures.
Forward-looking statements are based on current expectations
of future events. The Company cannot guarantee that any
forward- looking statement will be accurate, although the
Company believes that it has been reasonable in its
expectations and assumptions. Investors should realize that
if underlying assumptions prove inaccurate or that unknown
risks or uncertainties materialize, actual results could
vary materially from the Company's expectations and
projections. Investors are therefore cautioned not to place
undue reliance on any forward-looking statements. The
Company assumes no obligation to update any forward-looking
statements as a result of new information or future events
or developments.
Risks and uncertainties include general industry conditions
and competition; economic conditions, such as interest rate
and currency exchange rate fluctuations; technological
advances, new products and patents attained by competitors;
challenges inherent in new product development, including
obtaining regulatory approvals; challenges to patents; U.S.
and foreign health care reforms and governmental laws and
regulations; trends toward health care cost containment;
increased scrutiny of the health care industry by government
agencies; product efficacy or safety concerns resulting in
product recalls or regulatory action.
The Company's report on Form 10-K for the year ended
December 28, 2003 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
23
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 a nd Qualitative Disclosures
About Market Risk," in its Annual Report on Form 10-K for the
fiscal year ended December 28, 2003.
Item 4 - CONTROLS AND PROCEDURES-EVALUATION OF DISCLOSURE
CONTROLS AND PROCEDURES
Disclosure controls and procedures. As of 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 the Company
records, processes, summarizes and reports in a timely
manner the information the Company must disclose in its
reports filed under the Securities Exchange Act. 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. Since the date of the evaluation
described above, there have not been any significant
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.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
Product Liability Litigation
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 which
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 under its self-insurance program
and by third party product liability insurance.
One group of cases against the Company concerns the Janssen
Pharmaceutica product PROPULSID, which was withdrawn from
general sale and restricted to limited use in 2000. In the
wake of publicity about those events, numerous lawsuits have
been filed against Janssen, which is a wholly owned
subsidiary of the Company, and the Company regarding
PROPULSID, in state and federal courts across the country.
There are approximately 444 such cases
24
currently pending, including the claims of approximately
5,837 plaintiffs. In the active cases, 400 individuals are
alleged to have died from the use of PROPULSID. These
actions seek substantial compensatory and punitive damages
and accuse Janssen and the Company of inadequately testing
for and warning about the drug's side effects, of promoting
it for off-label use and of over promotion. In addition,
Janssen and the Company have entered into agreements with
various plaintiffs' counsel halting the running of the
statutes of limitations with respect to the potential claims
(tolling agreements) of a significant number of individuals
while those attorneys evaluate whether or not to sue Janssen
and the Company on their behalf.
In September 2001, the first ten plaintiffs in the Rankin
case, which comprises the claims of 155 PROPULSID
plaintiffs, went to trial in state court in Claiborne
County, Mississippi. The jury returned compensatory damage
verdicts for each plaintiff in the amount of $10 million,
for a total of $100 million. The trial judge thereafter
dismissed the claims of punitive damages. On March 4, 2002,
the trial judge reduced these verdicts to a total of $48
million, and denied the motions of Janssen and the Company
for a new trial. Janssen and the Company believe these
verdicts, even as reduced, are insupportable and have
appealed. In the view of Janssen and the Company, the proof
at trial demonstrated that none of these plaintiffs were
injured by PROPULSID and that no basis for liability
existed.
In April 2002, a state court judge in New Jersey denied
plaintiffs' motion to certify a national class of PROPULSID
users for purposes of medical monitoring and refund of the
costs of purchasing PROPULSID. An effort to appeal that
ruling has been denied. In June 2002, the federal judge
presiding over the PROPULSID Multi-District Litigation in
New Orleans, Louisiana similarly denied plaintiffs' motion
there to certify a national class of PROPULSID users.
Plaintiffs in the Multi-District Litigation have said they
are preserving their right to appeal that ruling, and other
complaints filed against Janssen and the Company include
class action allegations, which could be the basis for
future attempts to have classes certified.
On February 5, 2004, Janssen announced that it had reached
an agreement in principle with the Plaintiffs Steering
Committee (PSC), of the PROPULSID Federal Multi-District
Litigation (MDL), to resolve federal lawsuits related to
PROPULSID. There are approximately 4,000 individuals
included in the Federal MDL of whom approximately 300 are
alleged to have died from use of the drug. The agreement
becomes effective once 85 percent of the death claims, and
75 percent of the remainder, agree to the terms of the
settlement. In addition, 12,000 individuals who have
not filed lawsuits, but whose claims are the subject of
tolling agreements suspending the running of the statutes of
limitations against those claims, must also agree to
participate in the settlement before it will become
effective. Those agreeing to participate in the settlement
will submit medical records to an independent panel of
physicians who will determine whether the claimed injuries
were caused by PROPULSID and otherwise meet the standards
for
25
compensation. If those standards are met, a court-appointed
special master will determine compensatory damages. If the
agreement becomes effective, Janssen will pay as
compensation a minimum of $69.5 million and a maximum of $90
million, depending upon the number of plaintiffs who enroll
in the program. Janssen will also establish an
administrative fund not to exceed $15 million, and will pay
legal fees to the PSC up to $22.5 million, subject to court
approval.
With respect to all the various PROPULSID actions against
them, Janssen and the Company dispute the claims in those
lawsuits and are vigorously defending against them except
where, in their judgment, settlement is appropriate. Janssen
and the Company believe they have adequate self-insurance
accruals and third party product liability insurance with
respect to these cases. In communications to the Company,
the excess insurance carriers have raised certain defenses
to their liability under the policies and to date have
declined to reimburse Janssen and the Company for PROPULSID-
related costs despite demand for payment. However, in the
opinion of the Company, those defenses are pro forma and
lack substance and the carriers will honor their obligations
under the policies either voluntarily or after litigation.
The Company recently commenced arbitration against Allianz
Underwriters Insurance Company, which issued the first layer
of applicable excess insurance coverage, to obtain
reimbursement of PROPULSID-related costs.
The Company's Ethicon, Inc. subsidiary has over the last
several years had a number of claims and lawsuits filed
against it relating to VICRYL sutures. The actions allege
that the sterility of VICRYL sutures was compromised by
inadequacies in Ethicon's systems and controls, causing
patients who were exposed to these sutures to incur
infections which would not otherwise have occurred. Ethicon
on several occasions recalled batches of VICRYL sutures in
light of questions raised about sterility but does not
believe any contamination of suture products in fact
occurred. In November 2003, a trial judge in West Virginia
certified for class treatment all West Virginia residents
who had VICRYL sutures implanted during Class I or II
surgeries from May 1, 1994 to December 31, 1997. The
certification is subject to later challenge following the
conclusion of discovery. No trial date has been set in this
matter and Ethicon has been and intends to continue
vigorously defending against the claims.
Affirmative Stent Patent Litigation
In patent infringement actions tried in Delaware Federal
Court in late 2000, Cordis Corporation, a subsidiary of
Johnson & Johnson, obtained verdicts of infringement and
patent validity, and damage awards, against Boston Scientific
Corporation and Medtronic AVE, Inc., based on a number of
Cordis vascular stent patents. On December 15, 2000, the
jury in the damage action against Boston Scientific returned
a verdict of $324 million and on December 21, 2000, the jury
in the Medtronic AVE 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 February 2001 a hearing
26
was held on the claims of Boston Scientific and Medtronic
AVE that the patents at issue were unenforceable owing to
alleged inequitable conduct before the patent office.
In March and May 2002, the district judge issued post trial
rulings that confirmed the validity and enforceability of
the main Cordis stent patent claims but found certain other
Cordis patents unenforceable. Further, the district judge
granted Boston Scientific a new trial on liability and
damages and vacated the verdict against Medtronic AVE on
legal grounds. On August 12, 2003, the Court of Appeals for
the Federal Circuit found the trial judge erred in vacating
the verdict against Medtronic AVE and remanded the case to
the trial judge for further proceedings. Cordis filed
motions before the trial court on October 14, 2003 to
reinstate the verdicts against both Medtronic AVE and Boston
Scientific and to award interest and enter injunctions
against the stent products at issue in those two cases (the
GFX and MicroStent stents of Medtronic AVE and the NIR stent
of Boston Scientific) and colorable variations thereof.
Medtronic AVE and Boston Scientific are resisting
reinstatement of these verdicts and will likely attempt to
appeal to the Court of Appeals for the Federal Circuit once
judgments are entered.
In January 2003, Cordis filed an additional patent
infringement action against Boston Scientific in Delaware
Federal Court accusing its Express2 and TAXUS stents of
infringing one of the Cordis patents involved in the earlier
actions against Boston Scientific and Medtronic AVE. In
February 2003, Cordis moved in that action for a preliminary
injunction seeking to bar the introduction of the TAXUS
stent based on that patent. On November 21, 2003, the
district judge denied that request for a preliminary
injunction and Cordis filed an appeal with the Court of
Appeals for the Federal Circuit. A decision by the Federal
Circuit is expected in the 2nd or 3rd quarter of 2004.
Cordis also has pending in Delaware Federal Court another
action against Medtronic AVE accusing Medtronic AVE of
infringement by sale of stent products introduced by
Medtronic AVE subsequent to its GFX and MicroStent products,
subject to the earlier action referenced above.
In early June 2003, an arbitration panel in Chicago, in a
preliminary ruling, found in favor of Cordis in its
arbitration against ACS/Guidant involving infringement by
ACS/Guidant of a Cordis stent patent. On August 19, 2003,
the panel confirmed that ruling, rejecting the challenge of
ACS/Guidant. Under the terms of an earlier agreement between
Cordis and ACS/Guidant, the arbitration panel's ruling
obligated ACS/Guidant to make a payment of $425 million to
Cordis which was made in the fiscal fourth quarter of 2003.
As a result of resolving this matter, in the fiscal fourth
quarter, $230 million was recorded in other income and
expense (approximately $142 million after tax) relating to
past periods. The balance of the award, $195 million
(approximately $120 million after tax), will be recognized
in income in future periods over the estimated remaining life
of the intellectual property. No additional royalties for
ACS/Guidant's continued use of the technology and no
injunction are involved.
27
Patent Litigation Against Various Johnson & Johnson
Operating Companies
The products of various Johnson & Johnson operating
companies are the subject of various patent lawsuits, which
could potentially affect the ability of those operating
companies to sell those products, or require the payment of
past damages and future royalties. The following patent
lawsuits concern important products of Johnson & Johnson
operating companies: Medtronic AVE v. Cordis Corporation:
This action, filed in April 2002 in federal district court
in Texas and thereafter transferred to the federal district
court in Delaware, asserts certain patents owned by
Medtronic AVE against the Cordis Bx VELOCITY Stent, which is
also the stent structure used in the CYPHER drug-eluting
product. Boston Scientific Corporation (BSC) v. Cordis
Corporation: This action, filed in Delaware Federal Court in
March 2003, asserts that the CYPHER drug-eluting Stent
infringes several patents assigned to Boston Scientific.
Boston Scientific seeks damages and a permanent injunction.
Boston Scientific Corporation (BSC) v. Cordis Corporation:
This action, filed in Delaware Federal Court in December
2003, asserts that the Cordis CYPHER drug-eluting Stent
infringes several patents assigned to BSC by NeoRx
pertaining to pharmaceutical compounds for use on stents.
BSC is seeking damages and a permanent injunction. Medinol
Ltd. v. Cordis Europe NV (Netherlands) and Medinol Ltd. v.
Cordis Holding Belgium B.V.B.A. and Janssen Pharmaceutica
N.V. (Belgium): On July 3, 2003, the Appeal Court of the
Hague overturned a lower court and granted Medinol, an
Israeli stent manufacturer, a preliminary injunction based
on patent infringement prohibiting Cordis from making or
selling the Bx VELOCITY and CYPHER Stents in the
Netherlands. The injunction became effective on August 26,
2003. On March 31, 2004, the underlying patent was cancelled
by the European Patent Office, resulting in the lifting of
the injunction. In Belgium, Medinol had filed a patent
infringement suit based on the same patent it asserted in
the Netherlands, and moved for a preliminary injunction
seeking to prevent the defendants from making or selling the
Bx VELOCITY and CYPHER Stents there. That motion was denied
by the trial court on November 10, 2003. Medinol had
appealed, but the cancellation of the underlying patent by
the European Patent Office negates the appeal. Cordis
currently uses a Janssen Pharmaceutica facility in Belgium
to coat CYPHER Stents with sirolimus principally for the ex-
U.S. market. Rockey v. Cordis Corporation: This is an action
against Cordis by the heirs of Dr. Rockey concerning a
patent he licensed to Cordis in 1996, shortly before Cordis
was acquired by Johnson & Johnson. The plaintiffs assert
that Dr. Rockey's patent, which expired in February 2004,
covers all stent products ever marketed by Cordis and seek a
10% royalty on those sales. Trial of the action, which is
pending in federal court in Miami, Florida, was scheduled
for March 2004, but has been adjourned while the trial court
considers Cordis' motion for summary judgment.
On February 24, 2004, ASC/Guidant and Cordis Corporation
entered into a strategic alliance for the co-promotion of
drug-eluting
28
stents. As a result of this agreement, all pending
litigation between the companies has been settled.
With respect to all of these matters, the Johnson & Johnson
operating company involved is vigorously defending against
the claims of infringement and disputing where appropriate
the validity and enforceability of the patent claims
asserted against it.
Litigation Against Filers of Abbreviated New Drug
Applications (ANDAs)
The following lawsuits are against generic firms that filed
Abbreviated New Drug Applications (ANDAs) seeking to market
generic forms of products sold by various subsidiaries of
the Company prior to expiration of the applicable patents
covering those products. These ANDAs typically include
allegations of non- infringement, invalidity and
unenforceability of these patents. In the event the
subsidiary of the Company involved is not successful in
these actions, the firms involved will then 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. Ortho-McNeil Pharmaceutical,
Inc. and Daiichi, Inc. v. Mylan Laboratories and Ortho-
McNeil Pharmaceutical, Inc. and Daiichi, Inc. v. Teva
Pharmaceutical: These matters, the first of which was filed
in February 2002 in federal court in West Virginia and the
second in June 2002 in federal court in New Jersey, concern
the efforts of Mylan and Teva to invalidate and establish
non-infringement and unenforceability of the patent covering
LEVAQUIN (levofloxacin) tablets. The patent is owned by
Daiichi and exclusively licensed to Ortho-McNeil. The first
phase of the trial of the Mylan case concluded in December
2003 and the second phase should be concluded in May 2004.
No trial date has been set in the Teva matter. Ortho-McNeil
Pharmaceutical, Inc. and Daiichi v. Bedford Laboratories:
This matter was filed in federal district court in New
Jersey in April 2003 and involves the effort of Bedford to
invalidate and assert non-infringement and unenforceability
of the same Daiichi patent on LEVAQUIN involved in the above
proceedings. In this case, however, Bedford is challenging
the patent's application to its products which it asserts
are equivalent to LEVAQUIN injection pre-mix and injection
vials, rather than tablets. Ortho-McNeil Pharmaceutical,
Inc. and Daiichi v. American Pharmaceutical Partners and
Sicor Pharmaceutical: In December 2003, Ortho-McNeil
Pharmaceutical, Inc. and Daiichi filed suits in the federal
district court in New Jersey against American Pharmaceutical
Partners and Sicor Pharmaceutical in respect of ANDAs filed
by those entities involving the same Daiichi patent on
LEVAQUIN for injection pre- mix and single use vials.
Janssen Pharmaceutica Inc. and ALZA Corporation v. Mylan
Laboratories: This action, filed in federal district court
in Vermont in January 2002, concerns Mylan's effort to
invalidate and assert non-infringement and
unenforceability of ALZA's patent covering the DURAGESIC
(fentanyl transdermal system) product. In March 2004, the
trial court issued its ruling upholding the validity of the
patent and finding it infringed by Mylan's generic.
Despite having lost the patent case, Mylan has stated
publicly that it intends to launch its generic to
29
DURAGESIC in July 2004 because it asserts Janssen and ALZA
forfeited the benefits of the FDA grant of pediatric
exclusivity by filing their lawsuit late. Janssen and ALZA
vigorously dispute this contention and have requested FDA to
recognize DURAGESIC (fentanyl transdermal system) marketing
exclusivity until January 2005. Janssen Pharmaceutica N.V.
v. EON Labs Manufacturing: This action was filed in federal
court in the Eastern District of New York in April 2001 and
concerns EON's effort to invalidate and establish non-
infringement of Janssen's patent covering SPORANOX
(itraconozole). Trial in this matter is scheduled to
commence in May 2004.
Ortho-McNeil Pharmaceutical, Inc. v. Kali Laboratories,
Inc.: This lawsuit was filed in federal court in New Jersey
in November 2002 and concerns the attempt of Kali to
invalidate and establish non- infringement of Ortho-McNeil's
patent covering ULTRACET (tramadol/acetaminophen) tablets.
No trial date has been set for this case. Ortho-McNeil
Pharmaceutical, Inc. v. Teva Pharmaceuticals USA: This
lawsuit was filed in federal court in New Jersey in February
2004 and concerns Teva's attempts to invalidate and assert
non-infringement and unenforceability of the same Ortho-
McNeil patent on ULTRACET involved in the above proceeding
with Kali. ALZA Corporation v. Mylan Laboratories: This
action was filed in federal district court in West Virginia
in May 2003 and concerns Mylan's effort to invalidate and
assert non-infringement of an ALZA patent covering the Ortho-
McNeil product DITROPAN XL (oxybutynin chloride). Trial has
been scheduled for February 2005 in this case. ALZA
Corporation v. IMPAX Laboratories: This action was filed in
federal court in California in September 2003 and concerns
Impax's effort to invalidate and assert non-infringement of
the same ALZA patent covering DITROPAN XL involved in the
above Mylan case. No trial date has been set in this matter.
Ortho-McNeil Pharmaceutical, Inc. v. Barr Laboratories,
Inc.: This action, filed in federal district court in New
Jersey in October 2003, concerns the effort of Barr
Laboratories to assert non- infringement, invalidity and
unenforceability of Ortho-McNeil's patent on ORTHO TRI-
CYCLEN LO (norgestimate/ethinyl estradiol), an oral
contraceptive product. Janssen Pharmaceutica N.V. v. Mylan
Pharmaceuticals Inc.: This action, filed in federal district
court in New Jersey in December 2003, concerns Mylan's
effort to invalidate the Janssen patent covering RISPERDAL
(risperidone) tablets. Janssen Pharmaceutica N.V. v. Dr.
Reddy's Laboratories, Inc.: This action, filed in federal
district court in New Jersey, concerns Dr. Reddy's efforts
to invalidate the same Janssen patent covering RISPERDAL
tablets as in the immediately preceding Mylan case. Ortho-
McNeil Pharmaceutical, Inc. v. Mylan Pharmaceuticals Inc.:
This action, filed in federal district court in New Jersey
in April 2004, concerns Mylan's effort to invalidate the Ortho-
McNeil patent covering TOPAMAX (topiramate) tablets. Eisai
Inc. v. Dr. Reddy's Laboratories, Inc.: This action, filed
by Janssen's U.S. co-promotion partner Eisai Inc. in federal
court in New York, concerns Dr. Reddy's effort to invalidate
and assert non-infringement of an Eisai patent covering
ACIPHEX (rabeprazole sodium) tablets. No trial date has been
set. Eisai Inc. v. Teva
30
Pharmaceuticals USA: This action, also filed by Janssen's
U.S. co-promotion partner Eisai Inc., concerns Teva's
efforts to invalidate and assert non-infringement of the
same Eisai patent involved in the immediately preceding Dr.
Reddy's case. No trial date has been set in that matter.
Eisai Inc. v. Mylan Pharmaceuticals Inc.: In January 2004,
Janssen's U.S. co- promotion partner Eisai Inc. filed this
action in federal district court in New York against Mylan
Pharmaceuticals Inc. regarding Mylan's efforts to invalidate
and assert non-infringement of the same Eisai patent
covering ACIPHEX tablets as in the above Dr. Reddy's and
Teva cases. No trial date has been set. Janssen
Pharmaceutica Inc. is not a party to the Eisai actions. With
respect to all of the above matters, the Johnson & Johnson
operating company involved is vigorously defending the
validity and enforceability and asserting the infringement
of its own or its licensor's patents.
Average Wholesale Price (AWP) Litigation
Johnson & Johnson and its pharmaceutical operating
companies, 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 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.
Ethicon Endo-Surgery, Inc., a Johnson & Johnson operating
company which markets endoscopic surgical instruments, and
the Company, are named defendants in a North Carolina state
court class action lawsuit alleging AWP inflation and
improper marketing activities against TAP Pharmaceuticals.
Ethicon Endo-Surgery, Inc. is a defendant based on claims
that several of its former sales representatives are alleged
to have been involved in arbitrage of a TAP drug. The
allegation is that these sales representatives persuaded
certain physicians in states where the drug's price was low
to purchase from TAP excess quantities of the drug and then
resell it in states where its price was higher. Ethicon Endo-
Surgery, Inc. and the Company deny any liability for the
claims made against them in this case and are vigorously
defending against it. The trial judge recently certified a
national class of purchasers of the TAP product at issue and
trial is likely in 2004.
Other
The New York State Attorney General's office and the Federal
Trade Commission issued subpoenas in January and February
2003 seeking documents relating to the marketing of sutures
and endoscopic instruments by the Company's Ethicon, Inc.
and Ethicon Endo-
31
Surgery, Inc. subsidiaries. The Connecticut Attorney
General's office also issued a subpoena for the same
documents. These subpoenas focus on the bundling of sutures
and endoscopic instruments in contracts offered to Group
Purchasing Organizations and individual hospitals in which
discounts are predicated on the hospital achieving specified
market share targets for both categories of products. The
operating companies involved are responding to the
subpoenas.
On June 26, 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 (infliximab), marketed by the Company's Centocor,
Inc. subsidiary. On July 2, 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.
Both the Company and Centocor are responding to these
requests for documents and information.
On August 1, 2003, the Securities and Exchange Commission
(SEC) advised the Company of its informal investigation
under the Foreign Corrupt Practices Act of allegations of
payments to Polish governmental officials by U.S.
pharmaceutical companies. On November 21, 2003, the SEC
advised the company the investigation had become formal and
issued a subpoena for the information previously requested
in an informal fashion, plus other background documents. The
Company and its operating units in Poland are responding to
these requests.
On December 8, 2003, the Company's Ortho-McNeil
Pharmaceutical unit received a subpoena from the United
States Attorney's office in Boston, Massachusetts seeking
documents relating to the marketing, including alleged off-
label marketing, of the drug TOPAMAX (topiramate) which is
approved for anti-epilepsy therapy. Ortho-McNeil is
cooperating in responding to the subpoena.
On January 20, 2004, the Company's Janssen unit received a
subpoena from the Office of the Inspector General of the
United States Office of Personnel Management seeking
documents concerning any and all payments to physicians in
connection with sales and marketing of, and clinical trials
for, RISPERDAL from 1997 to 2002. Janssen is cooperating in
responding to the subpoena.
After a remand from the Federal Circuit Court of Appeals in
January 2003, a partial retrial was commenced in October and
concluded in November 2003 in Boston, Massachusetts in the
action Amgen v. Transkaryotic Therapies, Inc. (TKT) and
Aventis Pharmaceutical, Inc. The matter is a patent
infringement action brought by Amgen against TKT, the
developer of a gene-activated EPO product, and Aventis,
which holds marketing rights to the TKT product, asserting
that TKT's product infringes various Amgen patent claims.
TKT and Aventis dispute infringement and are
32
seeking to invalidate the Amgen patents asserted against
them. The district court has issued preliminary rulings that
upheld the district court's initial findings in 2001. A
further opinion from the district court is expected in the
second quarter of 2004. Further proceedings and an appeal
will follow. The Amgen patents at issue in the case are
exclusively licensed to Ortho Biotech Inc., a Johnson &
Johnson operating company, in the U.S. for non- dialysis
indications. Ortho Biotech Inc. is not a party to the
action.
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 opinion of management, based on its examination of these
matters, its experience to date and discussions with
counsel, the ultimate outcome of these legal proceedings,
net of liabilities already accrued in the Company's
consolidated balance sheet, is not expected to have a
material adverse effect on the Company's consolidated
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.
33
Item 5. Exhibits and Reports on Form 8-K
(a) Exhibit
Exhibit 99.3 Certifications Under Rule 13a-14(a)
of the Securities Exchange Act Pursuant to Section
302 of the Sarbanes-Oxley Act.
Exhibit 99.15 Certifications Pursuant to Section
906 of the Sarbanes-Oxley Act.
(b) Reports on Form 8-K
A report on Form 8-K was furnished on January 16, 2004,
which included a press release announcing the
decision of James T. Lenehan to retire from the Company
as of June 30, 2004 and resign as Vice Chairman of the Board
of Directors and President effective February 1, 2004.
A report on Form 8-K was furnished on January 20,
2004, which included the Press Release for the period ended
December 28, 2003. Also included in this filing are the
unaudited comparative supplementary sales data and
condensed consolidated statement of earnings for
the fiscal fourth quarter of 2003 and fiscal year 2003.
A report on Form 8-K was filed on March 1, 2004, which
included the audited consolidated financial statements for
the three year period ended December 28, 2003.
A report on Form 8-K was filed on March 1, 2004,
which included a Press Release announcing the
strategic alliance with Guidant Corporation for the
co-promotion of drug-eluting stents.
A Report on Form 8-K was filed on April 5, 2004,
which included a press release dated April 2, 2004
reporting that Cordis had received a warning letter
from the U.S. Food and Drug Administration (FDA)
regarding FDA's observations concerning the Good
Manufacturing Practice (GMP) regulations.
A report on Form 8-K was furnished on April 13, 2004,
which included the Press Release for the period ended
March 28, 2004. Also included in this filing are the
unaudited comparative supplementary sales data and
condensed consolidated statement of earnings for the
fiscal first quarter of 2004.
A report on Form 8-K was furnished on April 26, 2004,
which included a Press Release announcing an increase in
the Company's quarterly dividend.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
JOHNSON & JOHNSON
(Registrant)
Date: May 4, 2004 By /s/ R. J. DARRETTA
R. J. DARRETTA
Vice Chairman
(Chief Financial Officer)
Date: May 4, 2004 By /s/ S. J. COSGROVE
S. J. COSGROVE
Controller
(Chief Accounting Officer)
35