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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 April 3, 2005
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. (X) Yes ( )No
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
(X) Yes ( )No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
On May 1, 2005, 2,973,544,570 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 -
April 3, 2005 and January 2, 2005 3
Consolidated Statements of Earnings for the Fiscal
First Quarters Ended April 3, 2005 and
March 28, 2004 6
Consolidated Statements of Cash Flows for the Fiscal
First Quarters Ended April 3, 2005 and
March 28, 2004 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 25
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 34
Item 4. Controls and Procedures 34
Part II - Other Information
Item 1 - Legal Proceedings 35
Item 2 - Unregistered Sales of Equity Securities
and Use of Proceeds 35
Item 6 - Exhibits 35
Signatures 36
2
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
ASSETS
April 3, January 2,
2005 2005
Current Assets:
Cash and cash equivalents $ 8,539 9,203
Marketable securities 5,111 3,681
Accounts receivable, trade, less
allowances for doubtful accounts
$224(2004,$206) 7,336 6,831
Inventories (Note 4) 3,814 3,744
Deferred taxes on income 1,792 1,737
Prepaid expenses and other
receivables 2,174 2,124
Total current assets 28,766 27,320
Marketable securities, non-current 48 46
Property, plant and equipment,
at cost 18,666 18,664
Less accumulated
depreciation 8,429 8,228
Property, plant and equipment, net 10,237 10,436
Intangible assets (Note 5) 15,179 15,105
Less accumulated amortization 3,361 3,263
Intangible assets, net 11,818 11,842
Deferred taxes on income 355 551
Other assets 3,222 3,122
Total assets $54,446 53,317
See Notes to Consolidated Financial Statements
3
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
April 3, January 2,
2005 2005
Current Liabilities:
Loans and notes payable $ 319 280
Accounts payable 4,038 5,227
Accrued liabilities 3,115 3,523
Accrued rebates, returns
and promotions 2,492 2,297
Accrued salaries, wages and
commissions 891 1,094
Taxes on income 2,126 1,506
Total current liabilities 12,981 13,927
Long-term debt 2,459 2,565
Deferred tax liability 389 403
Employee related obligations 2,902 2,631
Other liabilities 2,061 1,978
Total liabilities 20,792 21,504
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)
Accumulated other comprehensive
income (Note 8) (648) (515)
Retained earnings 37,300 35,223
4
Less common stock held in treasury,
at cost (147,456,000 & 148,819,000
shares) 6,118 6,004
Total shareholders' equity 33,654 31,813
Total liabilities and shareholders'
equity $54,446 53,317
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
April 3, Percent March 28, Percent
2005 to Sales 2004 to Sales
Sales to customers $12,832 100.0% $11,559 100.0%
(note 6)
Cost of products sold 3,482 27.1 3,367 29.1
Gross profit 9,350 72.9 8,192 70.9
Selling, marketing and
administrative expenses 4,043 31.5 3,640 31.5
Research expense 1,347 10.5 1,095 9.5
Interest income (84) (.6) (39) (.3)
Interest expense, net of
portion capitalized 15 .1 45 .4
Other (income)expense, net (33) (.3) (53) (.5)
Earnings before provision
for taxes on income 4,062 31.7 3,504 30.3
Provision for taxes on
income (Note 3) 1,135 8.9 1,011 8.7
NET EARNINGS $2,927 22.8% $2,493 21.6%
NET EARNINGS PER SHARE
(Note 7)
Basic $ .98 .84
Diluted $ .97 .83
CASH DIVIDENDS PER SHARE $ .285 .24
AVG. SHARES OUTSTANDING
Basic 2,972.1 2,967.8
Diluted 3,023.7 3,004.6
See Notes to Consolidated Financial Statements
6
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
Fiscal Quarters Ended
April 3, March 28,
2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 2,927 2,493
Adjustment to reconcile net
earnings to cash flows:
Depreciation and amortization of
property and intangibles 515 502
Deferred tax provision 100 (191)
Accounts receivable allowances 22 20
Changes in assets and liabilities, net
of effects from acquisition of
businesses:
Increase in accounts receivable (639) (271)
(Increase)decrease in inventories (140) 38
Decrease in accounts payable and
accrued liabilities (1,509) (1,350)
Decrease in other current
and non-current assets 235 368
Increase in other current
and non-current liabilities 1,143 1,046
NET CASH FLOWS FROM OPERATING
ACTIVITIES 2,654 2,655
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant
and equipment (397) (292)
Proceeds from the disposal of assets 77 49
Purchases of investments (3,824) (3,103)
Sales of investments 2,340 2,512
Other (210) (16)
NET CASH USED BY INVESTING
ACTIVITIES (2,014) (850)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to shareholders (847) (713)
Repurchase of common stock (654) (407)
Proceeds from short-term debt 173 147
Retirement of short-term debt (144) (675)
Proceeds from long-term debt 4 19
Retirement of long-term debt (17) 1
Proceeds from the exercise of
stock options 266 125
NET CASH USED BY FINANCING
ACTIVITIES (1,219) (1,503)
7
Effect of exchange rate changes
on cash and cash equivalents (85) (42)
(Decrease)increase in cash and
cash equivalents (664) 260
Cash and cash equivalents,
beginning of period 9,203 5,377
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 8,539 5,637
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 Company's Annual Report on Form 10-K for the fiscal year
ended January 2, 2005. 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.
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 April 3, 2005, the balance of deferred net losses on
derivatives included in accumulated other comprehensive income
was $114 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 first quarter ended April 3, 2005, the net impact
of the hedges' ineffectiveness to the Company's financial
statements was insignificant. For the fiscal first quarter ended
April 3, 2005, the Company recorded a net loss of $1 million
after tax in other (income) expense, representing the impact of
discontinuance of cash flow hedges because it is probable that
the 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
quarters of 2005 and 2004 were 27.9% and 28.8%, respectively.
The decrease in the effective tax rate of 0.9% was primarily due
to increases in the taxable income in lower tax jurisdictions
relative to taxable income in higher tax jurisdictions.
9
NOTE 4 - INVENTORIES
(Dollars in Millions)
April 3, 2005 January 2, 2005
Raw materials and supplies $ 1,267 964
Goods in process 1,051 1,113
Finished goods 1,496 1,667
$ 3,814 3,744
NOTE 5 - INTANGIBLE ASSETS
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
2004 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)
April 3, 2005 January 2, 2005
Goodwill $ 6,545 6,597
Less accumulated amortization 726 734
Goodwill - net 5,819 5,863
Trademarks (non-amortizable) 1,216 1,232
Less accumulated amortization 137 142
Trademarks (non-amortizable)- net 1,079 1,090
Patents and trademarks 3,971 3,974
Less accumulated amortization 1,187 1,125
Patents and trademarks - net 2,784 2,849
Other amortizable intangibles 3,447 3,302
Less accumulated amortization 1,311 1,262
Other intangibles - net 2,136 2,040
Total intangible assets 15,179 15,105
Less accumulated amortization 3,361 3,263
Total intangibles - net $11,818 11,842
Goodwill as of April 3, 2005 as allocated by segment of business
is as follows:
(Dollars in Millions)
Med. Dev
Consumer Pharm & Diag Total
Goodwill, net of
accumulated amortization
at January 2, 2005 $1,160 832 3,871 5,863
Acquisitions - - - -
Translation & Other (25) (10) (9) (44)
10
Goodwill as of
April 3, 2005 $1,135 822 3,862 5,819
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 first quarter ended April 3, 2005 was $116
million and the estimated amortization expense for the five
succeeding years approximates $550 million, per year.
NOTE 6 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
(Dollars in Millions)
SALES BY SEGMENT OF BUSINESS(1)
Fiscal First Quarter
Percent
2005 2004 Change
Consumer
U.S. $ 1,114 1,081 3.1%
International 1,166 966 20.7
2,280 2,047 11.4
Pharmaceutical
U.S. $ 3,783 3,643 3.8%
International 1,972 1,733 13.8
5,755 5,376 7.0
Med Devices and Diagnostics
U.S. $ 2,361 2,194 7.6%
International 2,436 1,942 25.4
4,797 4,136 16.0
U.S. $ 7,258 6,918 4.9%
International 5,574 4,641 20.1
Worldwide $ 12,832 11,559 11.0
(1) Export and intersegment sales are not significant.
OPERATING PROFIT BY SEGMENT OF BUSINESS
Fiscal First Quarter
Percent
2005 2004 Change
Consumer $ 457 440 3.9%
Pharmaceutical 2,137 2,085 2.5
Med. Dev. & Diag. 1,493 1,067 39.9
Segments total 4,087 3,592 13.8
Expenses not allocated
to segments (25) (88)
Worldwide total $ 4,062 3,504 15.9%
11
SALES BY GEOGRAPHIC AREA
Fiscal First Quarter
Percent
2005 2004 Change
U.S. $ 7,258 6,918 4.9
Europe 3,176 2,708 17.3
Western Hemisphere,
excluding U.S. 725 597 21.4
Asia-Pacific, Africa 1,673 1,336 25.2
Total $ 12,832 11,559 11.0%
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 April 3, 2005 and March 28, 2004.
(Shares in Millions)
Fiscal Quarter Ended
April 3, March 28,
2005 2004
Basic net earnings per share $ .98 .84
Average shares outstanding - basic 2,972.1 2,967.8
Potential shares exercisable under
stock option plans 219.8 119.4
Less: shares which could be repurchased
under treasury stock method (178.3) (97.4)
Convertible debt shares 10.1 14.8
Adjusted average shares
outstanding - diluted 3,023.7 3,004.6
Diluted earnings per share $ .97 .83
The diluted earnings per share calculation included the dilutive
effect of convertible debt that was offset by the related
reduction in interest expense of $4 million for each of the
fiscal first quarters ended April 3, 2005 and March 28, 2004.
The diluted earnings per share calculation excluded 46 million
and 135 million shares related to options for the fiscal first
quarters ended April 3, 2005 and March 28, 2004, 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 ended
April 3, 2005 was $2.8 billion, compared with $2.5 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 qualifying and designated as cash flow hedges. The
12
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)
January 2, 2005 $ (105) 86 (346) (150) (515)
2005 Three Months changes
Net change associated
with current period
hedging transactions - - - 181
Net amount reclassed to
net earnings - - - (145)*
Net three months
changes (154) (15) - 36 (133)
April 3, 2005 $ (259) 71 (346) (114) (648)
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 December 15, 2004, Johnson & Johnson announced the signing of
a definitive agreement to acquire Guidant Corporation (Guidant),
a world leader in the treatment of cardiac and vascular disease,
for $25.4 billion in fully diluted equity value. The Boards of
Directors of Johnson & Johnson and Guidant, as well as the
shareholders of Guidant have given their respective approvals for
the transaction. The transaction is subject to clearance under
the Hart-Scott-Rodino Antitrust Improvements Act, the European
Union merger control regulation, and other customary closing
conditions. The Company is currently in the process of
responding to an information and materials request from the U.S.
Federal Trade Commission and has entered into a second phase
review with the European Union. Subject to the aforementioned
approvals, the acquisition is expected to close in the third
quarter of 2005.
The Company's 2004 acquisitions included: Merck's 50% interest in
the Johnson & Johnson-Merck Consumer Pharmaceuticals Co. European
non-prescription pharmaceutical joint venture including all of
the infrastructure and brand assets managed by the European joint
venture; Egea Biosciences, Inc., which has developed a
proprietary technology platform called Gene Writer, that allows
for the rapid and highly accurate synthesis of DNA sequences,
gene assembly, and construction of large synthetic gene
libraries, through the exercise of the option to acquire the
13
remaining outstanding stock not owned by Johnson & Johnson;
Artemis Medical, Inc. a privately held company with ultrasound
and x-ray visible biopsy site breast markers as well as hybrid
markers; U.S. commercial rights to certain patents and know-how
in the field of sedation and analgesia from Scott Lab, Inc.;
Biapharm SAS, a privately held French producer and marketer of
skin care products centered around the leading brand BIAFINE(R);
the assets of Micomed, a privately owned manufacturer of spinal
implants primarily focused on supplying the German market; and
the acquisition of the AMBI(R) skin care brand for women of color.
NOTE 10 - PRO FORMA STOCK BASED COMPENSATION
At April 3, 2005 the Company had 19 stock-based employee
compensation plans. The Company accounted for these plans under
the recognition and measurement principles of Accounting
Principles 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) April 3, 2005 March 28, 2004
Net income,
as reported $ 2,927 2,493
Less:
Compensation
expense(1) 88 80
Net income, pro forma $ 2,839 2,413
Earnings per share:
Basic - as reported $.98 $.84
- pro forma .96 .81
Diluted - as reported $.97 $.83
- pro forma .94 .81
(1) Determined under fair value based method for all awards,
net of tax.
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 first
quarters of 2005 and 2004 included the following components:
14
(Dollars in Millions)
Retirement Plans Other Benefit Plans
April 3, March 28, April 3, March 28,
2005 2004 2005 2004
Service cost $ 110 108 $ 13 13
Interest cost 118 119 26 26
Expected return on
plan assets (132) (131) (1) (1)
Amortization of prior
service cost 3 4 (1) (1)
Amortization of net
transition asset (1) (1) - -
Recognized actuarial
losses 57 44 11 11
Net periodic benefit cost $ 155 143 $ 48 48
Company Contributions
The Company contributed $18 million during the fiscal first
quarter of 2005 to its retirement plans. The Company does not
expect a minimum statutory funding requirement for its U.S.
retirement plans in 2005. 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 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 Inc. (Janssen) product PROPULSID (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, which is a wholly owned
subsidiary of the Company, and the Company regarding PROPULSID in
state and federal courts across the country.
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 tolling agreements with various
plaintiffs' counsel halting the running of the statutes of
limitations with respect to the potential claims of a significant
number of individuals while those attorneys evaluate whether or
not to sue Janssen and the Company on their behalf.
15
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. The agreement
was to become effective once 85% of the death claims, and 75% of
the remainder, agreed to the terms of the settlement. In
addition, 12,000 individuals who had not filed lawsuits, but
whose claims were the subject of tolling agreements suspending
the running of the statutes of limitations against those claims,
also had to agree to participate in the settlement before it
could become effective. On March 24, 2005, it was confirmed that
the PSC of the MDL had enrolled enough plaintiffs and claimants
in the settlement program to make the agreement effective. Of the
282 death plaintiffs subject to the program, 247 (88%) were
confirmed enrolled. Of the 3,537 other plaintiffs subject to the
program, 3,088 (87%) were confirmed enrolled. In addition, 20,596
"tolled" claimants have been confirmed as enrolled. Those
participating 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 compensation. If those standards are met, a court-
appointed special master will determine compensatory damages.
Janssen will pay as compensation a minimum of $69.5 million and a
maximum of $90 million depending on the number of plaintiffs that
enroll in the program. Enrollment will remain open until October
1, 2005. 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.
Not participating in the settlement program are 2,527 plaintiffs
and 7,757 tolled claimants. Of those, 447 plaintiffs were
potentially subject to the MDL settlement but have not to date
enrolled in it; 1,527 plaintiffs filed cases in federal court
subsequent to February 1, 2004, and thus were not subject to the
MDL settlement; and 558 have state court actions and thus were
not subject to the settlement. Of those not participating in or
subject to the MDL settlement, 159 plaintiffs are alleged to have
died from use of the drug and 2,368 assert other personal injury
claims. The nature of the claims of the tolled claimants are
unknown. Of the remaining federal and state plaintiffs, the cases
of 2,253 (89%) are venued in Mississippi.
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. In March 2004,
the Company commenced arbitration against Allianz Underwriters
16
Insurance Company, which issued the first layer of applicable
excess insurance coverage, to obtain reimbursement of PROPULSID-
related costs. The arbitration hearings are currently scheduled
to begin mid-May 2005 and last several weeks. In May 2005, the
Company commenced arbitration against Lexington Insurance
Company, which issued the second layer of excess insurance
coverage.
The Company's Ethicon, Inc. (Ethicon) 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 state court 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. A motion to
decertify the class is pending. A previous trial date was
adjourned and not reset. 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 (Cordis), 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 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.
In March 2005, the remaining issues were tried in the remanded
case against Medtronic AVE and the retrial proceeded against
Boston Scientific. Juries returned verdicts of infringement and
patent validity in favor of Cordis in both retrials. Cordis has
requested the trial court to reinstate with interest the verdicts
obtained against those entities in 2000. Cordis also has pending
in Delaware Federal Court a second action against Medtronic AVE
17
accusing Medtronic AVE of infringement by sale of stent products
introduced by Medtronic AVE subsequent to its GFX and MicroStent
products, the subject of the earlier action referenced above.
That second action was referenced in April 2005 to arbitration
with respect to Medtronic's license defense.
In January 2003, Cordis filed an additional patent infringement
action against Boston Scientific in Delaware Federal Court
accusing its Express2, TAXUS and Liberte stents of infringing
several Cordis patents, including one involved in the earlier
actions against Boston Scientific and Medtronic AVE. Trial of
that case is set to begin in June 2005.
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. The following chart summarizes various patent
lawsuits concerning important products of Johnson & Johnson
subsidiaries. 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.
Trial of Boston Scientific's patent case alleging infringement by
the Cordis Cypher stent of Boston Scientific's Ding patent, as
referenced in the chart below, will be held in June 2005 in
Delaware federal court following trial of Cordis' case against
Boston Scientific accusing the Express2, TAXUS and Liberte stents
of infringing various Cordis patents. Boston Scientific is
seeking to enjoin sales of the Cypher stent, as well as
substantial damages. In November 2005, Boston Scientific's case
asserting infringement by the Cypher stent of other Boston
Scientific patents is scheduled for trial. In that case as well,
Boston Scientific seeks an injunction and substantial damages.
Product J&J Patents Plaintiff/Patent Court Trial Date
Company Holder Date Filed
Stents Cordis Jang Boston Scientific D.Del. 06/05 03/03
Corp.
Drug Cordis Ding Boston Scientific D.Del. 06/05 04/03
Eluting Corp. Germany 04/05 02/04
Stents (Schneider)
Drug Cordis Kunz Boston Scientific D.Del. 10/05 12/03
Eluting Graing Corp.
Stents er
Stents Cordis Rockey Arlaine and S.D.Fla. TBD 7/02
Gena Rockey Inc.
Stents Cordis Boneau Medtronic Inc. Arbitration TBD 4/02
18
Two-layer Cordis Kasten-Boston Scientific N.D.Cal. TBD 2/02
Catheters hofer Corp. Netherlands 04/05 05/04
Forman (Schneider) Belgium 10/05 12/03
Remicade Centocor Cerami Rockefeller E.D.Tex. 2/06 4/04
University and
Chiron
Corporation
Stents Cordis Israel Medinol Multiple TBD 05/03
E.U.
Jurisdictions
Contact Vision Nicolson CIBA Vision M.D. Fla. 2/06 09/03
Lenses Care
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, 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.
Brand Name Patent/NDA Generic Court Trial Date 30-
Product Holder Challenger Date Filed Month
Stay
Expires
Aciphex 20 mg Eisai Teva S.D.N.Y. TBD 11/03 04/06
delay
release tablet (for Dr. Reddy's S.D.N.Y. TBD 11/03 04/06
Janssen)
Mylan S.D.N.Y. TBD 01/04 06/06
Ditropan XL 5, Ortho- Mylan D.W.V. 2/05 05/03 09/05
10, 15 mg McNeil,
controlled ALZA Impax N.D.Cal. 12/05 09/03 01/06
release tablet
Levaquin Daiichi, Mylan D.W.V. 05/04 02/02 07/04
Tablets
250, 500, 750 JJPRD
mg tablets
Ortho- Teva D.N.J. TBD 06/02 11/04
McNeil
Levaquin Daiichi, Sicor (Teva) D.N.J. TBD 12/03 05/06
Injectable JJPRD
Single use Ortho-
vials and 5 McNeil
mg/ml premix
Levaquin Daiichi, American D.N.J. TBD 12/03 05/06
Injectable JJPRD Pharmaceutical
Single use Ortho- Partners
vials McNeil
19
Quixin Daiichi, Hi-Tech D.N.J. TBD 12/03 05/06
Ophthalmic Pharmacal
Solution
(Levofloxacin) Ortho-
Ophthalmic McNeil
solution
Ortho Tri- Ortho- Barr D.N.J. TBD 10/03 02/06
cyclen LO McNeil
0.18 mg/0.025
mg,
0.215 mg/0.025
mg
and 0.25
mg/0.025 mg
Risperdal Janssen Mylan D.N.J. TBD 12/03 05/06
Tablets
..25, 0.5, 1, 2, Dr. Reddy's D.N.J. TBD 12/03 06/06
3, 4 mg
tablets
Risperdal M-Tab Janssen Dr. Reddy's D.N.J. TBD 02/05 07/07
0.5, 1, 2 mg
Sporanox Janssen Eon Labs E.D.N.Y. 5/04 04/01 03/04
100 mg capsule
Topamax Ortho- Mylan D.N.J. TBD 04/04 09/06
McNeil
25, 100, 200 mg
tablet
Ultracet 37.5 Ortho- Kali (Par) D.N.J. TBD 11/02 04/05
tram/ McNeil
325 apap tablet Teva D.N.J. TBD 02/04 07/06
Caraco E.D. Mich. 03/06 09/04 02/07
PEPCID Complete McNeil-PPC Perrigo S.D.N.Y. TBD 02/05 06/07
In the action against Mylan Pharmaceuticals USA (Mylan) involving
Ortho-McNeil Pharmaceutical, Inc. (Ortho-McNeil) for LEVAQUIN
(levofloxacin), the trial judge on December 23, 2004 found the
patent at issue valid, enforceable and infringed by Mylan's
contemplated ANDA product and issued an injunction precluding
sale of the product until patent expiration in late 2010. Mylan
has appealed to the Court of Appeals for the Federal Circuit.
In the action against Eon Labs involving SPORANOX (itraconazole),
the district court ruled on July 28, 2004 that Janssen's patent
was valid but not infringed by Eon's generic. Janssen has
appealed this ruling to the Court of Appeals for the Federal
Circuit. Eon launched its generic version of SPORANOX "at risk"
on February 9, 2005. The Federal Circuit heard argument on the
appeal on May 5, 2005.
In the action against Kali involving Ortho-McNeil's ULTRACET
(tramadol hydrochloride/ acetaminophen), Kali moved for summary
judgment on the issues of infringement and invalidity. The
20
briefing on that motion was completed in October 2004 and a
decision is expected anytime. With respect to claims other than
that at issue in the litigation against Kali, Ortho-McNeil has
filed a reissue application in the U.S. Patent and Trademark
Office seeking to narrow the scope of the claims. Kali received
final approval of its ANDA at expiration of the 30-month stay on
April 21, 2005, and launched its generic product "at-risk" the
same day.
In the action against Teva Pharmaceuticals USA (Teva) involving
Ortho-McNeil's ULTRACET (tramadol hydrocholoride/acetaminophen),
Teva has moved for summary judgment on the issues of infringement
and validity. The briefing on that motion was completed in March
2005.
In the action against Mylan involving DITROPAN XL
(oxybutynin chloride), the court held a ten-day bench trial which
concluded on April 18, 2005. Post trial briefing will be
completed on June 1, 2005 and a decision is expected in the third
or fourth quarter of 2005.
In the action against Mylan relating to Ortho-McNeil's TOPAMAX
(topiramate), Mylan on October 8, 2004 filed a motion for summary
judgment of non-infringement of Ortho-McNeil's patent. The court
heard argument on the motion on April 18, 2005 and held a further
hearing on the motion on May 6, 2005. A decision is expected in
the third or fourth quarter of 2005.
In late April and early May 2005 Janssen received Paragraph IV
certifications with respect to RAZADYNE(R), formerly REMINYL(R),
from Teva, Mylan, Dr. Reddy's Laboratories, Inc., Purepac
Pharmaceutical Co., Roxane Laboratories, Inc. and Mutual
Pharmaceutical Company, which Janssen is in the process of
evaluating.
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 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 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. In the MDL proceeding in
21
Boston, plaintiffs have moved for class certification of all or
some portion of their claims. A decision is expected on that
motion in the third or fourth quarter of 2005.
Ethicon Endo-Surgery, Inc. (Ethicon Endo), a Johnson & Johnson
subsidiary 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 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 and
the Company deny any liability for the claims made against them
in this case and are vigorously defending against it. On April
24, 2003, the trial judge certified a national class of
purchasers of the TAP product at issue. On July 6, 2004, that
class was decertified by the North Carolina Court of Appeals and
the matter remanded to the trial court for additional
consideration. On January 5, 2005, the trial judge certified a
North Carolina State class of purchasers of the TAP product in
question. No trial date has been set in this matter.
Other
The New York State Attorney General's office (N.Y. AG) 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 and Ethicon Endo
subsidiaries. The Connecticut State 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 have
responded to the subpoenas. In February 2005, the N.Y. AG advised
that it had closed its investigation.
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. (Centocor) 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.
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.
22
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 that the
investigation had become formal and issued a subpoena for the
information previously requested in an informal fashion, in
addition to other background documents. The Company and its
operating units in Poland have responded to these requests.
On December 8, 2003, Ortho-McNeil, a subsidiary of Johnson &
Johnson, 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). Ortho-McNeil is cooperating in responding
to the subpoena. 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 witnesses before a grand jury in Boston.
Cooperation in securing the testimony of additional witnesses
before the grand jury has been requested and is being provided.
On January 20, 2004, the Company's subsidiary, Janssen, received
a subpoena from the Office of the Inspector General of the United
States Office of Personnel Management seeking documents
concerning sales and marketing of, any and all payments to
physicians in connection with sales and marketing of, and
clinical trials for, RISPERDAL (risperidone) from 1997 to 2002.
Documents subsequent to 2002 have also been requested. Janssen is
cooperating in responding to the subpoena.
In April 2004, 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.
On July 27, 2004, the Company received a letter request from the
New York State Attorney General's Office for documents pertaining
to marketing, off-label sales and clinical trials for TOPAMAX
(topiramate), RISPERDAL (risperidone), PROCRIT (Epoetin alfa),
REMINYL (galantamine HBr), REMICADE (infliximab) and ACIPHEX
(rabeprazole sodium). The Company is responding to the request.
On August 9, 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 are responding
to the subpoena.
23
On September 30, 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
(Epoetin alfa) from 1997 to the present. Ortho Biotech is
responding to the subpoena.
In March 2005, DePuy Orthopaedics, Inc. (Depuy), a Johnson &
Johnson subsidiary, received a subpoena from the U.S. Attorney's
Office, District of New Jersey, seeking records concerning
contractual relationships between DePuy and surgeons or surgeons
in training involved in hip and knee replacement and
reconstructive surgery. Other leading orthopaedic companies are
known to have received the same subpoena. Depuy is 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 United States, 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 is expected
to file its response to plaintiffs' class certification motion in
June 2005. A decision by the district court is not expected
before late 2005. The Company disputes the allegations in the
lawsuit and is vigorously defending against them.
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 federal district court 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
held marketing rights to the TKT product, asserting that TKT's
product infringes various Amgen patent claims. TKT and Aventis
dispute infringement and are seeking to invalidate the Amgen
patents asserted against them. On October 15, 2004, the district
court issued rulings that upheld its initial findings in 2001
that Amgen's patent claims were valid and infringed. Further
proceedings and an appeal will follow. The Amgen patents at issue
in the case are exclusively licensed to Ortho Biotech Inc., a
subsidiary of the Company, in the U.S. for non-dialysis
indications. Ortho Biotech Inc. is not a party to the action. On
October 21, 2004, in a companion action brought by TKT and
Aventis against Amgen and Ortho Biotech's U.K. affiliate in the
United Kingdom, the House of Lords, acting as the highest court
in the U.K., invalidated the pertinent claims of Amgen's U.K.
patent on EPO which expired in December 2004.
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
24
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.
NOTE 13 - Subsequent Events
On April 4, 2005 the Company completed its acquisition of
TransForm Pharmaceuticals, Inc., a company specializing in the
discovery of superior formulations and novel crystalline forms of
drug molecules, for $230 million. The Company is expected to
incur an estimated one-time after-tax charge of approximately $50
million reflecting the expensing of in-process research and
development (IPR&D) charges.
On April 28, 2005, the shareholders of Johnson & Johnson approved
a new long-term incentive compensation plan. The Plan allows the
Company to continue to use equity to attract, retain and motivate
employees and will give the Company greater flexibility to
respond to changes in executive compensation practices. The Plan
allows the Company to grant stock options (both incentive stock
options and non-qualified stock options), stock appreciation
rights, restricted shares, restricted share units, stock awards
and performance shares. In the past, stock options have been the
principal form of long-term equity incentive used by the Company.
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 2005, worldwide sales were $12.8
billion, an increase of 11.0% over 2004 fiscal first quarter
sales of $11.6 billion. The impact of foreign currencies
accounted for 2.2% of the total reported fiscal first quarter
2005 increase.
Sales by U.S. companies were $7.2 billion in the fiscal first
quarter of 2005, which represented an increase of 4.9%. Sales
by international companies were $5.6 billion, which represented
an increase of 20.1%, of which 5.4% was due to currency
fluctuations.
All international regions posted double digit sales increases
during the fiscal first quarter of 2005, as sales increased 17.3%
in Europe, 21.4% in the Western Hemisphere (excluding the U.S.)
and 25.2% in the Asia-Pacific, Africa regions. These sales gains
include the positive impact of currency fluctuations between the
U.S. dollar and foreign currencies in Europe of 6.1%, in the
Western Hemisphere (excluding the U.S.) of 6.0% and in the Asia-
Pacific, Africa region of 3.7%.
25
Analysis of Sales by Business Segments
Consumer
Consumer segment sales in the fiscal first quarter of 2005 were
$2.3 billion, an increase of 11.4% over the same period a year ago
with 8.9% of operational growth and a positive currency impact of
2.5%. U.S. consumer segment sales increased by 3.1% while
international sales increased 20.7%, including a positive
currency impact of 5.3%.
Major Consumer Franchise Sales
(Dollars in Millions) Total Operations Currency
2005 2004 %Change %Change %Change
OTC Pharm & Nutr. $ 685 $ 563 21.7% 20.8% 0.9%
Skin Care 620 562 10.3 7.3 3.0
Baby & Kids Care 379 343 10.6 7.5 3.1
Women's Health 377 348 8.0 5.1 2.9
Other 219 231 (5.2) (8.9) 3.7
Total $ 2,280 $2,047 11.4% 8.9% 2.5%
Consumer segment sales growth was attributable to strong sales
performance in the major franchises in this segment including OTC
Pharmaceutical & Nutritionals, Skin Care, Baby & Kids Care and
Women's Health franchise. The OTC Pharmaceutical & Nutritionals
franchise operational sales growth of 20.8% was attributable to
the SPLENDA(R) No Calorie Sweetener and the introduction of
TYLENOL(R) Rapid Release Gels. In the first quarter of 2004, the
Company acquired Merck's equity stake in the European
nonprescription pharmaceutical business and also divested the
U.S. SPLENDA(R) ingredient business. The net effect of this
acquisition and divestiture has had a minimal impact on the
segment as a whole. The Skin Care franchise operational growth
of 7.3% was driven by strong performances from AVEENO(R) and
RoC(R) in the U.S., and Neutrogenar, RoC(R), and CLEAN & CLEAR(R)
outside the U.S. Solid operational growth was related to new
products introduced in 2004, as well as a number of new products
introduced during the first quarter of 2005. The Baby & Kids
Care franchise operational growth of 7.5% was the result of
continued success with JOHNSON'S(R) SOFTWASH(R) and SOFTLOTION(TM)
product lines, baby gift sets and the launch of a new line of
JOHNSON'S(R) BUDDIES(TM) Bathtime Products. Women's health
franchise achieved operational growth of 5.1% with the successful
launch of STAYFREE(R) Dry Maxi, coupled with strong contributions
from MONISTAT(R).
Pharmaceutical
Pharmaceutical segment sales in the fiscal first quarter of 2005
were $5.8 billion, an increase of 7.0% over the same period a
year ago with 5.3% of this change due to operational increases
and the remaining 1.7% increase related to the positive impact of
currency. The U.S. Pharmaceutical sales increase was 3.8% and
the growth in international Pharmaceutical sales was 13.8%, which
included 5.3% related to the positive impact of currency.
26
Major Pharmaceutical Product Revenues
(Dollars in Millions) Total Operations Currency
2005 2004 %Change %Change %Change
RISPERDAL(R) $ 844 $ 731 15.5% 13.0% 2.5%
PROCRIT(R)/EPREX(R) 836 977 (14.4) (15.9) 1.5
REMICADE(R) 577 464 24.4 24.4 0.0
DURAGESIC(R) 450 455 (1.1) (3.9) 2.8
LEVAQUIN(R)/FLOXIN(R) 440 383 14.9 14.9 0.0
TOPAMAX(R) 406 328 23.8 22.0 1.8
Hormonal Contraceptives 302 305 (1.0) (1.5) 0.5
Aciphex(R)/Pariet(TM) 278 247 12.6 9.2 3.4
Other 1,622 1,486 9.2 7.2 2.0
Total $5,755 $5,376 7.0% 5.3% 1.7%
Pharmaceutical segment sales growth in the first quarter of 2005
was led by strong performances from various products. Growth was
fueled by the continued success of RISPERDAL(R) (risperidone), a
medication that treats the symptoms of schizophrenia, and
RIPSERDAL CONSTA(R) (risperidone) long acting injection, with
operational growth of 13.0%. PROCRIT(R) (Epoetin alfa) and
EPREX(R) (Epoetin alfa) combined continued to be negatively
impacted by prior year competitive market pricing and share
erosion, resulting in an operational decline of 15.9% as compared
to the fiscal first quarter of 2004. REMICADE(R) (infliximab),
a biologic approved for the treatment of Crohn's disease,
ankylosing spondylitis, and use in the treatment of rheumatoid
arthritis experienced strong operational growth of 24.4% over
prior year fiscal first quarter.
DURAGESIC(R) (fentanyl transdermal system) sales declined by 3.9%
operationally, which was primarily driven by the negative impact
of generic competition in the U.S. However, the launch of
DURAGESIC(R) D-TRANS(R), a matrix patch, and DURAGESIC(R) 12,
an additional strength matrix patch, have fueled strong operational
growth outside the U.S. Additionally, an authorized generic
version of DURAGESIC(R) being marketed for the Company in the U.S.,
has captured a significant portion of the generic market.
LEVAQUIN(R) (levofloxacin) achieved operational sales growth of
14.9% over prior year benefiting from the late respiratory
infection season. Sales of TOPAMAX(R) (topiramate), which has been
approved for adjunctive use in epilepsy, as well as, for the
prophylactic treatment of migraines, experienced strong
operational growth in both the U.S. and international markets.
The hormonal contraceptive franchise continues to be negatively
impacted by generic competition, however this was offset by the
strong growth in ORTHO EVRA(R), the first contraceptive patch
approved by the FDA, and ORTHO TRI-CYCLEN(R) LO
(norgestimate/ethinyl estradiol), a low dose oral contraceptive.
CONCERTA(R) (methylphenidate HCL), a product for the treatment of
attention deficit hyperactivity disorder, sales continued to grow
despite the lack of patent exclusivity in the U.S. 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.
27
The Company has revised the labeling for NATRECOR(R) (nesiritide),
used for the treatment of acute congestive heart failure, to
include an expanded analysis of the mortality rates seen in the
pivotal trials which supported the initial FDA approval for the
drug. Management does not anticipate that this action will have
a material effect on the Company's results of operations, cash
flow or financial position.
On April 21, 2005 Kali Laboratories, Inc., a unit of Par
Pharmaceutical Co. Inc. received approval from the FDA to market
a generic version of ULTRACET(TM) (tramadol hydrochloride/
acetaminophen), used for the treatment of short-term acute pain.
(Please refer to Note 12, Legal Proceedings, for information
around the Company's patent infringement suit against Kali.) An
authorized generic version of ULTRACET(TM) is currently being
marketed for the Company.
Medical Devices and Diagnostics
Medical Devices and Diagnostics segment sales in the fiscal first
quarter of 2005 were $4.8 billion, an increase of 16.0% over the
same period a year ago with 13.4% of this change due to
operational growth and the remaining 2.6% increase related to the
positive impact of currency. The U.S. Medical Devices and
Diagnostics sales increase was 7.6% while the growth in
international Medical Devices and Diagnostics sales was 25.4%,
which included 5.5% related to the positive impact of currency.
Major Medical Devices and Diagnostics Franchise Sales
(Dollars in Millions)
Total Operations Currency
2005 2004 %Change %Change %Change
DEPUY(R) $ 993 $ 839 18.3% 16.2% 2.1%
CORDIS(R) 969 877 10.5 8.2 2.3
ETHICON(R) 789 681 15.8 12.2 3.6
ETHICON ENDO-SURGERY(R) 765 665 15.0 12.3 2.7
LIFESCAN(R) 501 400 25.2 22.6 2.6
Vision Care 407 354 14.9 12.5 2.4
ORTHO-CLINICAL
DIAGNOSTICS(R) 355 303 17.2 15.2 2.0
Other 18 17 5.9 3.0 2.9
Total $4,797 $4,136 16.0% 13.4% 2.6%
Sales growth in this segment was led by strong results
experienced across the segment. The DePuy franchise's
operational growth of 16.2% was primarily due to DePuy's
orthopaedic joint reconstruction products including the hip and
knee product lines. Strong performance was also reported in
DePuy's spine unit and Mitek sports medicine products. The
Cordis franchise was also a key contributor to the Medical
Devices and Diagnostics segment results, with an operational
growth of 8.2%. The primary driver of this sales growth was the
CYPHER(R) Sirolimus-eluting Stent in international markets, with
excellent growth in Japan. U.S. CYPHER(R) Sirolimus-eluting Stent
sales decreased from the same period in the prior year, as a
competitor has since entered the market.
28
In April and July of 2004, Cordis Cardiology Division of Cordis
Corporation received warning letters from the FDA regarding Good
Manufacturing Practice and Good Clinical Practice regulations.
These observations followed post-approval site inspections
completed in 2003 and early 2004 including sites involved in the
production of the CYPHER(R) Sirolimus-eluting Stent. In response
to the warning letters, Cordis has made several improvements to
their quality system and is in the process of being reinspected
by the FDA.
Ethicon worldwide sales grew operationally by 12.2% from the same
period in the prior year. Contributing to the strong results was
the continued penetration of VICRYL(R) (polyglactin 910) Plus, the
first product in a new anti-bacterial suture platform, expanded
usage of MULTIPASS(TM) needles, growth of DERMABOND(R) and
strong results in mesh sales. The Ethicon Endo-Surgery franchise
experienced operational growth of 12.3% over prior year. This
growth was mainly driven by endocutter sales that include
products used in performing bariatric procedures for the
treatment of obesity, an important focus area for the franchise.
Strong sales in the Advanced Sterilization Products line were
also a key contributor to the overall sales growth for this
franchise.
The LifeScan franchise operational growth of 22.6% was a result
of strong U.S. sales, as well as, increased presence in
international markets. ONETOUCH(R) HORIZON(R), a low cost meter
and strip system for developing markets was launched in China,
South Africa and Kazakhstan during the first quarter of 2005.
LifeScan has initiated a worldwide notification to all users of
its OneTouch(R) Ultra(R), InDuor and OneTouch(R) FastTaker Meters
that it may be possible for users to misinterpret their blood
glucose results. All three affected meter systems were originally
designed to allow patients to select one of two units of measure
to display their test results. This selection is typically
determined by the standard used by the country in which they
live. LifeScan found that it was possible for consumers, in the
course of setting their meter's date and time, to accidentally
change the unit of measure and thereby misinterpret their blood
glucose results. In addition, very rarely, an event such as
dropping a meter while in use can cause a brief power loss, which
may also unexpectedly change the unit of measure and/or the code
number used to program the meter to match a particular vial of
test strips. As a result, LifeScan implemented a product
modification that will prevent users from inadvertently switching
their meter's unit of measure. The Company has accrued for the
cost associated with this program, which is not significant,
during the first quarter of 2005.
Vision Care franchise operational sales growth of 12.5% was led
by the continued success of ACUVUE(R) ADVANCE(TM) brand contact
lenses with HYDRACLEAR(TM) and 1-DAY ACUVUE(R). During the first
quarter of 2005, the franchise launched ACUVUE(R) ADVANCE(TM) the
only lens for astigmatism with HYDRACLEAR(TM). The Ortho-Clinical
Diagnostics franchise reported operational growth of 15.2% over
prior year, which was driven by its market penetration of the
automated blood typing products, coupled with continued growth of
the ECI product line.
29
Cost of Products Sold and Selling, Marketing and Administrative
Expenses
Consolidated costs of goods sold decreased to 27.1% from 29.1% of
sales over the same period a year ago. The decrease resulted
from a favorable product mix, cost improvement initiatives and
improved gross margins in the Medical Devices & Diagnostics
segment, primarily driven by lower manufacturing costs related to
CYPHER(R) Sirolimus-eluting Stent.
Consolidated selling, marketing and administrative expenses
increased 11.1% over the same period a year ago. Selling,
marketing and administrative expenses as a percent to sales were
31.5%, which reflects a consistent rate of spend as compared to
the same period in 2004.
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 2005 were $1.3
billion, an increase of 23.0% over the same period a year ago.
The level of research and development spending increased to 10.5%
from 9.5% as a percent to sales, as compared to the same period a
year ago. This increase is a reflection of the solid progress
achieved in products in late stage development.
In-Process Research & Development
In the fiscal first quarters of 2005 and 2004, the Company did
not record any in-process research & development (IPR&D) charges.
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
unfavorable change in other (income) expense as compared to the
same period a year ago was primarily due to a higher level of
miscellaneous other expenses, as well as, a one time 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 2005 was 20.0% versus 21.5% over
the same period a year ago. This decrease was primarily due to
additional investment in consumer promotions and advertising in
the OTC Pharmaceutical and Nutritionals franchise.
30
Pharmaceutical Segment
Operating profit for the Pharmaceutical segment as a percent to
sales in the fiscal first quarter of 2005 was 37.1% versus 38.8%
over the same period a year ago. Operating profit was negatively
impacted by increased research and development spending.
Medical Devices and Diagnostics Segment
Operating profit for the Medical Devices and Diagnostics segment
as a percent of sales in the fiscal first quarter of 2005 was
31.1% versus 25.8% over the same period a year ago. The driver
of the improved operating profit in the Medical Devices and
Diagnostics segment over prior year was improved gross profit,
resulting from cost reduction programs, lower manufacturing costs
related to CYPHER(R) Sirolimus-eluting Stent and favorable product
mix.
Interest (Income) Expense
Interest income in the fiscal first quarter of 2005 increased by
$45.6 million over the fiscal first quarter of 2004, due
primarily to the improved cash position, as well as, the higher
rates of interest earned on our cash holdings. The cash balance,
which included marketable securities, was $13.7 billion at the
end of the fiscal first quarter of 2005. This is $3.3 billion
higher than the same period a year ago.
Interest expense in the fiscal first quarter of 2005 decreased by
$29.4 million over the same period a year ago primarily due to a
decrease in the average debt balance.
Provision For Taxes on Income
The worldwide effective income tax rates for the fiscal first
quarters of 2005 and 2004 were 27.9% and 28.8%, respectively.
The decrease in the effective tax rate of 0.9% was due to
increases in the 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 2005, cash
flow from operations was $2.7 billion, which is consistent
with the same period a year ago. Net cash used by investing
activities more than doubled due to an increase in capital
spending and an increase in the purchases of marketable
securities in the fiscal first quarter of 2005. Net cash
used by financing activities decreased by $0.3 billion primarily
due to lower repayments of debt in 2005. Cash and current
marketable securities were $13.7 billion at the end of the fiscal
first quarter of 2005 as compared with $12.9 billion at fiscal
year-end 2004.
31
Dividends
On January 4, 2005, the Board of Directors declared a regular
cash dividend of $0.285 per share, paid on March 8, 2005 to
shareholders of record as of February 15, 2005. This represented
an increase of 18.8% from the fiscal first quarter of 2004
dividend.
On April 28, 2005, the Board of Directors declared a regular cash
dividend of $0.33 per share, payable on June 7, 2005 to
shareholders of record as of May 17, 2005. This represented an
increase of 15.8% in the quarterly dividend rate and was the 43rd
consecutive year of cash dividend increases. The Company expects
to continue the practice of paying regular cash dividends.
OTHER INFORMATION
New Accounting Standards
In December 2004, the FASB issued SFAS No. 123(R), Share Based
Payment. This statement establishes standards for the accounting
for transactions in which an entity exchanges its equity
instruments for goods and services. It focuses primarily on
accounting for transactions in which an entity obtains employee
services in share-based payment transactions (such as employee
stock options). The statement requires the measurement of the
cost of employee services received in exchange for an award of
equity instruments (such as employee stock options) at fair value
on the grant date. That cost will be recognized over the period
during which an employee is required to provide services in
exchange for the award (the requisite service period). On April
14, 2005 the SEC approved a new rule that delays the effective
date of SFAS No. 123(R) for annual, rather than interim, periods
that begin after June 15, 2005. As a result, the Company will
adopt this statement in the first fiscal quarter of 2006.
The Company will implement SFAS 151, Inventory Costs, an
amendment of ARB No. 43 and SFAS 153, Exchanges of Non-monetary
Assets, an amendment of APB 29 in the first quarter of 2006 and
the third quarter of 2005 respectively, as allowed by the
Standards.
The Company believes the adoption of these statements will not
have a material effect on its results of operations, cash flows
or financial position.
The following recent accounting pronouncements became effective
in 2004 and did not have a material impact on the Company's
results of operations, cash flows or financial position.
*EITF Issue 02-14: Whether an Investor should apply the Equity
Method of Accounting to Investments other than Common Stock.
*EITF Issue 04-1: Accounting for Preexisting Relationships
between the Parties to a Business Combination.
32
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 1994
through 2004 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 2004, 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.
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
33
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 Annual Report on Form 10-K for the fiscal year
ended January 2, 2005 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 2, 2005.
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, management evaluated the effectiveness of
the Company's 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 is required to
disclose in its reports filed under the Securities Exchange
Act. 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,
34
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, Notes to Consolidated
Financial Statements.
Item 2 - Unregistered Sales of Equity Securities and Use of
Proceeds
(c) Purchases of Equity Securities by the Issuer and Affiliated
Purchasers.
The following table provides information with respect to Common
Stock purchases by the Company during the fiscal first quarter of
2005. Common Stock purchases on the open market are made as part
of a systematic plan to meet the Company's compensation programs.
Fiscal Month Total Number of Average Price Paid
Shares Purchased Per Share
Jan. 3 - Jan. 30, 2005 2,999,700 $62.85
Jan. 31 - Feb. 27, 2005 2,374,200 $65.52
Feb. 28 - April 3, 2005 4,617,900 $67.07
On February 28, 2005 the Company issued 10,624,449 shares of its
Common Stock to a shareholder in exchange for 11,184,666 shares
of Common Stock previously held by such shareholder. These
securities were exempt from registration under the Securities Act
of 1933, as amended (the "Securities Act"), pursuant to Section
3(a)(9) of the Securities Act for securities exchanged by an
issuer with its existing security holders exclusively. There
were no underwriting discounts, commissions or other remuneration
paid to any person, directly or indirectly, nor was there any
underwriter used, in connection with this exchange.
Item 6 - Exhibits
Exhibit 10.1 Johnson & Johnson 2005 Long-Term Incentive
Plan -Incorporated herein by reference to Exhibit 1 to the
Registrant's Proxy Statement filed with the SEC on March
15, 2005.*
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.
35
Exhibit 32.1 Certifications pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 - Furnished with this
document.
*Management contract or compensatory plan.
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 10, 2005 By /s/ R. J. DARRETTA
R. J. DARRETTA
Vice Chairman, Board of Directors;
Chief Financial Officer and Director
(Principal Financial Officer)
Date: May 10, 2005 By /s/ S. J. COSGROVE
S. J. COSGROVE
Controller
(Principal Accounting Officer)
36