UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended July 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. Yes (X) No ( )
Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Yes (X) No ( )
Indicate the number of shares outstanding of each
of the issuer's classes of common stock, as of the
latest practicable date.
On July 31, 2005, 2,974,694,094 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 -
July 3, 2005 and January 2, 2005 3
Consolidated Statements of Earnings for the Fiscal
Quarters Ended July 3, 2005 and
June 27, 2004 6
Consolidated Statements of Earnings for the Fiscal
Six Months Ended July 3, 2005 and
June 27, 2004 7
Consolidated Statements of Cash Flows for the Fiscal
Six Months Ended July 3, 2005 and
June 27, 2004 8
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 30
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 40
Item 4. Controls and Procedures 40
Part II - Other Information
Item 1 - Legal Proceedings 41
Item 2 - Unregistered Sales of Equity Securities
and Use of Proceeds 41
Item 4 - Submission of Matters to a Vote of Security
Holders 41
Item 6 - Exhibits 42
Signatures 43
2
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
ASSETS
July 3, January 2,
2005 2005
Current Assets:
Cash and cash equivalents $12,156 9,203
Marketable securities 1,005 3,681
Accounts receivable, trade, less
allowances for doubtful accounts
$180(2004, $206) 7,379 6,831
Inventories (Note 4) 3,963 3,744
Deferred taxes on income 1,830 1,737
Prepaid expenses and other
current assets 2,387 2,124
Total current assets 28,720 27,320
Marketable securities, non-current 49 46
Property, plant and equipment,
at cost 18,672 18,664
Less accumulated
depreciation 8,581 8,228
Property, plant and equipment, net 10,091 10,436
Intangible assets (Note 5) 15,681 15,105
Less accumulated amortization 3,486 3,263
Intangible assets, net 12,195 11,842
Deferred taxes on income 363 551
Other assets 3,135 3,122
Total assets $54,553 53,317
See Notes to Consolidated Financial Statements
3
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
July 3, January 2,
2005 2005
Current Liabilities:
Loans and notes payable $ 304 280
Accounts payable 3,949 5,227
Accrued liabilities 3,153 3,523
Accrued rebates, returns
and promotions 2,312 2,297
Accrued salaries, wages and
commissions 892 1,094
Taxes on income 1,030 1,506
Total current liabilities 11,640 13,927
Long-term debt 2,329 2,565
Deferred tax liability 418 403
Employee related obligations 2,936 2,631
Other liabilities 2,061 1,978
Total liabilities 19,384 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) (805) (515)
Retained earnings 38,853 35,223
4
Less common stock held in treasury,
at cost (145,646,000 & 148,819,000
shares) 5,999 6,004
Total shareholders' equity 35,169 31,813
Total liabilities and shareholders'
equity $54,553 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 Second Quarter Ended
July 3, Percent June 27, Percent
2005 to Sales 2004 to Sales
Sales to customers
(Note 6) $12,762 100.0% 11,484 100.0
Cost of products sold 3,508 27.5 3,162 27.5
Gross profit 9,254 72.5 8,322 72.5
Selling, marketing and
administrative expenses 4,194 32.8 3,711 32.3
Research expense 1,487 11.6 1,182 10.3
Purchased in-process
research and
development 353 2.8 - -
Interest income (109) (.8) (35) (.3)
Interest expense, net of
portion capitalized 15 .1 52 .4
Other (income)expense, net (88) (.7) (23) (.1)
Earnings before provision
for taxes on income 3,402 26.7 3,435 29.9
Provision for taxes on
income (Note 3) 726 5.7 977 8.5
NET EARNINGS $2,676 21.0 2,458 21.4
NET EARNINGS PER SHARE
(Note 7)
Basic $ .90 .83
Diluted $ .89 .82
CASH DIVIDENDS PER SHARE $ .33 .285
AVG. SHARES OUTSTANDING
Basic 2,973.7 2,968.2
Diluted 3,024.7 3,005.3
See Notes to Consolidated Financial Statements
6
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; dollars & shares in millions
except per share figures)
Fiscal Six Months Ended
July 3, Percent June 27, Percent
2005 to Sales 2004 to Sales
Sales to customers
(Note 6) $25,594 100.0% 23,043 100.0
Cost of products sold 6,990 27.3 6,529 28.3
Gross profit 18,604 72.7 16,514 71.7
Selling, marketing and
administrative expenses 8,237 32.1 7,351 31.9
Research expense 2,834 11.1 2,278 9.9
Purchased in-process
research and
development 353 1.4 - -
Interest income (193) (0.7) (74) (.3)
Interest expense, net of
portion capitalized 30 0.1 97 .4
Other (income)expense, net (121) (.5) (77) (.3)
Earnings before provision
for taxes on income 7,464 29.2 6,939 30.1
Provision for taxes on
income (Note 3) 1,861 7.3 1,988 8.6
NET EARNINGS $5,603 21.9 4,951 21.5
NET EARNINGS PER SHARE
(Note 7)
Basic $ 1.88 1.67
Diluted $ 1.86 1.65
CASH DIVIDENDS PER
SHARE $ .615 .525
AVG. SHARES OUTSTANDING
Basic 2,973.0 2,968.1
Diluted 3,021.8 3,004.4
See Notes to Consolidated Financial Statements
7
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
Fiscal Six Months Ended
July 3, June 27,
2005 2004
CASH FLOWS FROM OPERATIONS
Net earnings $ 5,603 4,951
Adjustment to reconcile net
earnings to cash flows:
Depreciation and amortization of
property and intangibles 1,063 1,027
Purchased in-process research and
development 353 -
Deferred tax provision (117) (429)
Accounts receivable allowances (17) 2
Changes in assets and liabilities, net
of effects from acquisition of
businesses:
Increase in accounts receivable (876) (624)
(Increase) decrease in inventories (380) 23
Decrease in accounts
payable and accrued liabilities (1,651) (1,146)
Decrease in other current
and non-current assets 578 248
Increase in other current
and non-current liabilities 131 729
NET CASH FLOWS FROM OPERATING
ACTIVITIES 4,687 4,781
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant
and equipment (874) (714)
Proceeds from the disposal of assets 77 233
Acquisitions, net of cash
acquired (693) (300)
Purchases of investments (4,999) (5,654)
Sales of investments 7,611 4,684
Other (282) (113)
NET CASH PROVIDED/(USED) BY INVESTING
ACTIVITIES 840 (1,864)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to shareholders (1,829) (1,559)
Repurchase of common stock (988) (760)
Proceeds from short-term debt 351 332
Retirement of short-term debt (314) (911)
Proceeds from long-term debt 4 16
Retirement of long-term debt (20) (1)
Proceeds from the exercise of
stock options 417 311
8
NET CASH USED BY FINANCING
ACTIVITIES (2,379) (2,572)
Effect of exchange rate changes
on cash and cash equivalents (195) (41)
Increase in cash and
cash equivalents 2,953 304
Cash and cash equivalents,
beginning of period 9,203 5,377
CASH AND CASH EQUIVALENTS,
END OF PERIOD $12,156 5,681
ACQUISITIONS
Fair value of assets acquired 854 339
Fair value of liabilities assumed (161) (39)
Net cash paid for acquisitions $ 693 300
See Notes to Consolidated Financial Statements
9
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 July 3, 2005, the balance of deferred net
losses on derivatives included in accumulated other
comprehensive income was $65 million after-tax. 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 first fiscal six months ended July 3, 2005,
the net impact of the hedges' ineffectiveness to the
Company's financial statements was insignificant. For
the first fiscal six months ended July 3, 2005, the
Company has recorded a net loss of $3 million after
tax in other (income) expense, 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
first fiscal six months of 2005 and 2004 were 24.9%
and 28.6%, a decrease of 3.7%. Of this decrease,
1.9% was attributed to increases in taxable income in
lower tax jurisdictions relative to taxable income in
higher tax jurisdictions. The remaining net decrease
of 1.8% was attributed to a one-time tax benefit
partially offset by IPR&D, as described below.
Acquisition related In-process Research & Development
(IPR&D) charges of $353 million that are non-
deductible for tax purposes were recorded in the
fiscal second quarter of 2005.
10
The fiscal second quarter of 2005 included a benefit
of $225 million, due to the reversal of a tax
liability previously recorded during the fiscal
fourth quarter of 2004, associated with a technical
correction made to the American Jobs Creation Act of
2004, in May 2005.
NOTE 4 - INVENTORIES
(Dollars in Millions)
July 3, 2005 January 2, 2005
Raw materials and supplies $ 1,193 964
Goods in process 1,134 1,113
Finished goods 1,636 1,667
$ 3,963 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)
July 3, 2005 January 2, 2005
Goodwill $ 6,716 6,597
Less accumulated amortization 714 734
Goodwill - net 6,002 5,863
Trademarks (non-amortizable) 1,205 1,232
Less accumulated amortization 139 142
Trademarks (non-
amortizable)- net 1,066 1,090
Patents and trademarks 4,175 3,974
Less accumulated amortization 1,272 1,125
Patents and trademarks - net 2,903 2,849
Other amortizable intangibles 3,585 3,302
Less accumulated amortization 1,361 1,262
Other intangibles - net 2,224 2,040
Total intangible assets 15,681 15,105
Less accumulated amortization 3,486 3,263
Total intangibles - net $12,195 11,842
11
Goodwill as of July 3, 2005 as allocated by segment of business
is as follows:
(Dollars in Millions)
Med. Dev
Consumer Pharm & Diag Total
Goodwill, net
at January 2, 2005 $1,160 832 3,871 5,863
Acquisitions - 71 184 255
Translation (62) (25) (29) (116)
Goodwill, net as of
July 3, 2005 $1,098 878 4,026 6,002
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 six months ended July 3, 2005 was $262 million
and the estimated amortization expense for the five
succeeding years approximates $550 million, annually.
NOTE 6 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
(Dollars in Millions)
SALES BY SEGMENT OF BUSINESS (1)
Fiscal Second Quarter
Percent
2005 2004 Change
Consumer
U.S. $ 1,092 987 10.6%
International 1,186 1,013 17.1
2,278 2,000 13.9
Pharmaceutical
U.S. $ 3,595 3,643 (1.3)%
International 2,033 1,784 14.0
5,628 5,427 3.7
Med Devices and Diagnostics
U.S. $ 2,378 2,038 16.7%
International 2,478 2,019 22.7
4,856 4,057 19.7
U.S. $ 7,065 6,668 6.0%
International 5,697 4,816 18.3
Worldwide $ 12,762 11,484 11.1%
12
Fiscal Six Months
Percent
2005 2004 Change
Consumer
U.S. $ 2,206 2,067 6.7%
International 2,352 1,980 18.8
4,558 4,047 12.6
Pharmaceutical
U.S. $ 7,378 7,286 1.3%
International 4,005 3,517 13.9
11,383 10,803 5.4
Med Devices and Diagnostics
U.S. $ 4,739 4,233 12.0%
International 4,914 3,960 24.1
9,653 8,193 17.8
U.S. $ 14,323 13,586 5.4%
International 11,271 9,457 19.2
Worldwide $ 25,594 23,043 11.1%
(1) Export and intersegment sales are not significant.
OPERATING PROFIT BY SEGMENT OF BUSINESS
Fiscal Second Quarter
Percent
2005 2004 Change
Consumer $ 418 382 9.4%
Pharmaceutical(1) 1,585 2,108 (24.8)
Med. Dev. & Diag.(2) 1,409 1,055 33.6
Segments total 3,412 3,545 (3.8)
Expenses not allocated
to segments (10) (110)
Worldwide total $ 3,402 3,435 (1.0)%
Fiscal Six Months
Percent
2005 2004 Change
Consumer $ 875 829 5.5%
Pharmaceutical(1) 3,722 4,194 (11.3)
Med. Dev. & Diag.(2) 2,902 2,118 37.0
Segments total 7,499 7,141 5.0
Expenses not allocated
to segments (35) (202)
Worldwide total $ 7,464 6,939 7.6%
(1) Includes $302 million of IPR&D charges related to
acquisitions
13
completed in the fiscal second quarter
of 2005.
(2) Includes $51 million of IPR&D charges related to
acquisitions completed in the fiscal second quarter
of 2005.
SALES BY GEOGRAPHIC AREA
Fiscal Second Quarter
Percent
2005 2004 Change
U.S. $ 7,065 6,668 6.0%
Europe 3,186 2,779 14.6
Western Hemisphere,
excluding U.S. 751 622 20.7
Asia-Pacific, Africa 1,760 1,415 24.4
Total $ 12,762 11,484 11.1%
Fiscal Six Months
Percent
2005 2004 Change
U.S. $ 14,323 13,586 5.4%
Europe 6,362 5,486 16.0
Western Hemisphere,
excluding U.S. 1,477 1,219 21.2
Asia-Pacific, Africa 3,432 2,752 24.7
Total $ 25,594 23,043 11.1%
NOTE 7 - EARNINGS PER SHARE
The following is a reconciliation of basic net
earnings per share to diluted net earnings per share
for the fiscal second quarters ended July 3, 2005
and June 27, 2004.
(Shares in Millions)
Fiscal Second Quarter Ended
July 3, June 27,
2005 2004
Basic net earnings per share $ .90 .83
Average shares outstanding
- basic 2,973.7 2,968.2
Potential shares exercisable under
stock option plans 260.2 152.8
Less: shares which could be repurchased
under treasury stock method (216.6) (130.5)
Convertible debt shares 7.4 14.8
Average shares
outstanding - diluted 3,024.7 3,005.3
Diluted earnings per share $ .89 .82
14
The diluted earnings per share calculation included
the dilutive effect of convertible debt that was
offset by the related reduction in interest expense
of $3 million each for the fiscal second quarters
ended July 3, 2005 and June 27, 2004.
The diluted earnings per share calculation excluded
0.4 million and 91 million shares related to options
for the fiscal second quarters ended July 3, 2005 and
June 27, 2004, respectively, as the exercise price
per share of these options was greater than the
average market value. If these shares were included
it would result in an anti-dilutive effect on diluted
earnings per share.
The following is a reconciliation of basic net
earnings per share to diluted net earnings per share
for the fiscal six months ended July 3, 2005 and
June 27, 2004.
(Shares in Millions)
Fiscal Six Months Ended
July 3, June 27,
2005 2004
Basic net earnings per share $ 1.88 1.67
Average shares outstanding
- basic 2,973.0 2,968.1
Potential shares exercisable under
stock option plans 214.3 152.7
Less: shares which could be repurchased
under treasury stock method (172.9) (131.2)
Convertible debt shares 7.4 14.8
Average shares
outstanding - diluted 3,021.8 3,004.4
Diluted earnings per share $ 1.86 1.65
The diluted earnings per share calculation included
the dilutive effect of convertible debt that was
offset by the related reduction in interest expense
of $7 million for the first fiscal six months ended
July 3, 2005 and June 27, 2004, respectively.
The diluted earnings per share calculation excluded
46 million and 92 million shares related to options
for the first fiscal six months ended July 3, 2005
and June 27, 2004, respectively, as the exercise
price per share of these options was greater than the
average market value. If these shares were included
it would result in an anti-dilutive effect on diluted
earnings per share.
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The total comprehensive income for the first fiscal
six months ended July 3, 2005 was $5.3 billion,
compared with $5.0 billion for the same period a
year ago. The total comprehensive income for the
fiscal second quarter ended July 3, 2005 was $2.5
billion, which is unchanged from 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 following
table sets forth the components of accumulated
other comprehensive income.
15
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 six months changes:
Net change associated
with current period
hedging
transactions - - - 402
Net amount reclassed to
net earnings - - - (317)*
Net six months
changes (343) (32) - 85 (290)
July 3, 2005 $ (448) 54 (346) (65) (805)
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. In addition, the Company is engaged
in discussions with Guidant to help the Company
understand the issues surrounding the recent product
notifications and product recalls. The Company
continues to work toward a fiscal third quarter close
of the acquisition, which is subject to the outcome
of the previously mentioned activities.
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. During the fiscal
second quarter of 2005 a one-time before and after-
tax charge of $50 million reflecting the expensing of
IPR&D charges was incurred.
On June 3, 2005 the Company completed its acquisition
of CLOSURE Medical, a company with expertise and
intellectual property in the
16
biosurgicals market, for a net purchase price of $364
million. During the fiscal second quarter of 2005 a
one-time before and after-tax charge of approximately
$51 million reflecting the expensing of IPR&D charges
was incurred.
On June 30, 2005 the Company completed its
acquisition of Peninsula Pharmaceuticals, Inc., a
privately held biopharmaceutical company focused on
developing and commercializing antibiotics to treat
life-threatening infections, for a purchase price of
approximately $245 million. During the fiscal second
quarter of 2005, a one-time before and after-tax
charge of approximately $252 million reflecting the
expensing of IPR&D charges was incurred.
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 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 skin care brand for women
of color.
NOTE 10 - PRO FORMA STOCK BASED COMPENSATION
At July 3, 2005, the Company had 18 stock-based
employee compensation plans. The Company accounts
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
17
Except Per Share Data) Fiscal Second Quarter Ended
July 3, 2005 June 27, 2004
Net income,
as reported $ 2,676 2,458
Less:
Compensation
expense(1) 88 88
Net Income,pro forma $ 2,588 2,370
Earnings per share:
Basic - as reported $.90 $.83
- pro forma .87 .80
Diluted - as reported $.89 $.82
- pro forma .86 .79
(1) Determined under fair value based method for all
awards, net of tax.
(Dollars in Millions
Except Per Share Data) Fiscal Six Months ended
July 3, 2005 June 27, 2004
Net income,
as reported $ 5,603 4,951
Less:
Compensation
expense(1) 176 166
Net Income, pro forma $ 5,427 4,785
Earnings per share:
Basic - as reported $1.88 $1.67
- pro forma 1.83 1.61
Diluted - as reported $1.86 $1.65
- pro forma 1.80 1.59
(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 second quarters of 2005 and 2004 include
the following components:
(Dollars in Millions)
Retirement Plans Other Benefit Plans
Fiscal Second Quarter ended
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
Service cost $ 106 104 15 11
Interest cost 128 106 18 25
Expected return on
plan assets (159) (127) (1) -
Amortization of prior
service cost 3 3 (2) -
Amortization of net
transition asset - - - -
Recognized actuarial
18
losses 54 59 2 11
Net periodic benefit
cost $ 132 145 32 47
Net periodic benefit cost for the Company's defined
benefit retirement plans and other benefit plans for
the first fiscal six months of 2005 and 2004 include
the following components:
(Dollars in Millions)
Retirement Plans Other Benefit Plans
Fiscal Six Months ended
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
Service cost $ 216 212 28 24
Interest cost 246 225 44 51
Expected return on
plan assets (291) (258) (2) (1)
Amortization of prior
service cost 6 7 (3) (1)
Amortization of net
transition asset (1) (1) - -
Recognized actuarial
losses 111 103 13 22
Net periodic benefit
cost $ 287 288 80 95
Company Contributions
As of July 3, 2005, the Company contributed $11
million and $23 million to its U.S. and international
retirement plans, respectively, in 2005. The Company
does not anticipate a minimum statutory funding
requirement for its U.S. retirement plans in 2005.
However the Company may or may not choose to further
fund the 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 that accompany such
products, it is not feasible to predict the ultimate
outcome of litigation. However, the Company believes
that if any liability results from such cases, it
will be substantially covered by existing amounts
accrued in the Company's balance sheet 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
19
lawsuits were filed against Janssen 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 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.
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 claimants, 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 became 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%) are confirmed enrolled. Of the
3,543 other plaintiffs subject to the program, 3,082
(87%) are confirmed enrolled. In addition, 19,788
"tolled" claimants are 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 has paid into a compensation escrow
account $72.3 million and could pay up to an additional
$17.7 million depending on the number of plaintiffs
that enroll in the program. Enrollment will remain open
until October 1, 2005. Janssen has established an
administrative fund of $15 million, and paid legal fees
to the PSC of $22.5 million, which amount was approved
by the court.
Not participating in the settlement program are 2,547
plaintiffs and 7,843 tolled claimants. Of those, 453
plaintiffs are potentially subject to the MDL
settlement but have not to date enrolled in it; 1,532
plaintiffs filed cases in federal court subsequent to
February 1, 2004, and thus are not subject to the MDL
settlement; and 562 have state court actions and thus
are 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 2,388 assert other personal injury
claims. The nature of the claims of the tolled
claimants are unknown. Of the remaining federal and
state plaintiffs, 2,254 cases (89%) are venued in
Mississippi.
20
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. In May 2005, hearings
were held in London in the arbitration proceeding
commenced by Janssen and the Company against Allianz
Underwriters Insurance Company, which issued the
first layer of applicable excess insurance coverage,
to obtain reimbursement of PROPULSID-related costs.
Final arguments in that matter were held on July 22,
2005 and a decision is expected before the end of
2005. In May 2005, the Company commenced
arbitration against Lexington Insurance Company,
which issued the second layer of excess insurance
coverage. In the opinion of the Company, the excess
carriers remain legally obligated to provide coverage
for the PROPULSID-related losses at issue.
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
that 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 was granted on May 17, 2005. Ethicon has been
and intends to continue vigorously defending against
the claims.
Affirmative Stent Patent Litigation
In patent infringement actions tried in Delaware
Federal District Court in late 2000, Cordis
Corporation (Cordis), a subsidiary of Johnson &
Johnson, obtained verdicts of infringement and patent
validity, and damage awards against Boston Scientific
Corporation (Boston Scientific) and Medtronic AVE,
Inc. (Medtronic) based on a number of Cordis vascular
stent patents. 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 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 that the
patents at issue were unenforceable owing to alleged
inequitable conduct before the patent office.
21
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 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 and remanded the case to
the trial judge for further proceedings. In March
2005, the remaining issues were tried in the remanded
case against Medtronic and the retrial proceeded
against Boston Scientific. Juries returned verdicts
of infringement and patent validity in favor of
Cordis in both retrials. Cordis has requested the
trial court to reinstate with interest the verdicts
obtained against those entities in 2000. Defendants
in both cases have filed post-trial motions seeking
to vacate the jury verdicts or, alternatively, grant
them a new trial on damages. Cordis also has pending
in Delaware Federal District Court a second action
against Medtronic AVE accusing Medtronic of
infringement by sale of stent products introduced by
Medtronic subsequent to its GFX and MicroStent
products, the subject of the earlier action
referenced above. That second action was stayed in
April 2005 pending the outcome of an arbitration
concerning Medtronic's claim that the products at
issue in that case are licensed pursuant to a 1997
license.
In January 2003, Cordis filed a patent infringement
action against Boston Scientific in Delaware Federal
District Court accusing its Express2, TAXUS and
Liberte stents of infringing the Palmaz patent that
expires in November 2005. The Liberte stent was also
accused of infringing Cordis' Gray patent that
expires in 2016. In June 2005, a jury found that
the Express2, Taxus and Liberte stents infringed the
Palmaz patent and that the Liberte stent also
infringed the Gray patent. Boston Scientific will
ask the trial judge to vacate the verdicts and, if
unsuccessful, there will be a trial on damages and
willfulness in the future.
Patent Litigation Against Various Johnson & Johnson
Subsidiaries
The products of various Johnson & Johnson
subsidiaries are the subject of various patent
lawsuits, the outcomes of which could potentially
adversely affect the ability of those subsidiaries to
sell those products, or require the payment of past
damages and future royalties. With respect to all of
these matters, the Johnson & Johnson subsidiary
involved is vigorously defending against the claims
of infringement and disputing where appropriate the
validity and enforceability of the patent claims
asserted against it.
On July 1, 2005, a jury in Federal District Court in
Delaware found that the Cordis Cypher stent infringed
Boston Scientific's Ding `536 patent and that the
Cordis Cypher and Bx Velocity stents also infringed
Boston Scientific Corporation's Jang `021 patent.
The jury also found both those patents valid. Cordis
will ask the judge to overturn the jury verdicts or
grant a new trial. If the judge does not overturn
the jury verdicts, there will be a damage
22
and willfulness trial in 2006 and Boston Scientific will
seek an injunction against Cypher. If upheld by the
trial court, Cordis will appeal the jury verdicts to
the Court of Appeals for the Federal Circuit. In
November 2005, Boston Scientific's case asserting
infringement by the Cypher stent of another Boston
Scientific patent is scheduled for trial in Delaware
Federal District Court. In that case as well, Boston
Scientific seeks an injunction and substantial
damages.
On January 26, 2005, the Federal District Court for
the Southern District of Florida granted Cordis
summary judgment dismissing a breach of contract and
patent infringement suit filed against Cordis by
Arlaine and Gina Rockey seeking royalties on the
sales of all Cordis balloon expandable stents.
Plaintiffs have filed an appeal with the Court of
Appeals for the Federal Circuit.
On June 8, 2005, in an action brought by Boston
Scientific against Cordis in the Netherlands under
the Kastenhofer patent, Cordis was enjoined from
manufacturing and selling in the Netherlands two-
layer catheters, including those used with the Cypher
Stent. The injunction was stayed by another Dutch
court. This stay decision is being appealed by
Boston Scientific. In any event, Cordis does not
anticipate a disruption in the supply of Cypher
product outside the Netherlands, even if the
injunction becomes effective.
The following chart summarizes various patent
lawsuits concerning products of Johnson & Johnson
subsidiaries.
Product J&J Patents Plaintiff/Patent Court Trial Date
Company Holder Date Filed
Drug Cordis Ding Boston Scientific Germany TBD 02/04
Eluting Corp.
Stents
Drug Cordis Grain- Boston Scientific D.Del. 10/05 12/03
Eluting ger Corp.
Stents
Stents Cordis Boneau Medtronic Inc. Arbitration TBD 4/02
Two-layer Cordis Kasten- Boston Scientific N.D.Cal. TBD 2/02
Catheters hofer Corp. Netherlands 04/05 05/04
Forman Belgium 10/05 12/03
S.D. Cal TBD 02/02
Remicade Centocor Cerami Rockefeller E.D.Tex. 2/06 04/04
University and
Chiron Corporation
Stents Cordis Israel Medinol Multiple TBD 05/03
E.U.
Contact Vision Nicolson CIBA Vision M.D. Fla. TBD 09/03
Lenses Care
Trocars Ethicon Hart Applied Medical C.D. Cal. 10/05 9/03
Endo Resources
23
Litigation Against Filers of Abbreviated New Drug
Applications (ANDAs)
The following chart indicates lawsuits pending
against generic firms that filed Abbreviated New Drug
Applications seeking to market generic forms of
products sold by various subsidiaries of the Company
prior to expiration of the applicable patents
covering those products. These ANDAs typically
include allegations of non-infringement, invalidity
and unenforceability of these patents. In the event
the subsidiary of the Company involved is not
successful in these actions, or the 30-month stay
expires before a ruling from the district court is
obtained, the firms involved will have the ability to
introduce generic versions of the product at issue
resulting in very substantial market share and
revenue losses for the product of the Company's
subsidiary.
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 02/07
delay
release tablet (for Dr. Reddy's S.D.N.Y. TBD 11/03 02/07
Janssen) Mylan S.D.N.Y. TBD 01/04 02/07
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
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
PEPCID Complete McNeil-PPC Perrigo S.D.N.Y. TBD 02/05 06/07
24
Razadyne Janssen Teva D. Del TBD 07/05 01/08
Mylan D. Del TBD 07/05 01/08
Dr. Reddy's D. Del TBD 07/05 01/08
Purepac D. Del TBD 07/05 01/08
Barr D. Del TBD 07/05 01/08
Par D. Del TBD 07/05 01/08
AlphaPharm D. Del TBD 07/05 01/08
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
In the action against Mylan involving Ortho McNeil's
DITROPAN XL (oxybutynin chloride), the court held a
ten-day bench trial, which concluded on April 18,
2005. A decision is expected in the third or fourth
quarter of 2005.
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 (Eon) involving
Janssen's SPORANOX (itraconazole), the district court
ruled on July 28, 2004 that Janssen's patent was
valid but not infringed by Eon's generic. The Court
of Appeals for the Federal Circuit affirmed the
district court's decision on June 13, 2005. Eon Labs
launched its generic product in February 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
denied Mylan's motion on July 18, 2005.
25
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 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 the
same day. If Ortho-McNeil ultimately prevails in its
patent infringement action against Kali, Kali will be
subject to an injunction and damages.
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.
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 (AWP) for the drugs at issue.
Most of these cases, both federal actions and state
actions removed to federal court, have been
consolidated for pre-trial purposes in a Multi-
District Litigation (MDL) in federal district court
in Boston, Massachusetts. The plaintiffs in these
cases include classes of private persons or entities
that paid for any portion of the purchase of the
drugs at issue based on AWP, and state government
entities that made Medicaid payments for the drugs at
issue based on AWP. In the MDL proceeding in Boston,
plaintiffs 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,
26
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. In February 2005, the N.Y. AG advised
that it had closed its investigation. 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.
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.
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
27
facilitating the subpoenaed testimony of several
present and former Ortho-McNeil employees 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.
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.
28
On June 9, 2005, The United States Senate Committee
on Finance requested the Company to produce
information regarding its use of educational grants.
A similar request was sent to other major
pharmaceutical companies. On July 5, 2005, the
Committee specifically requested information about
educational grants in connection with the drug
PROPULSID. The Company is in the process of
responding to the request.
On July 20, 2005, Scios, Inc. ("Scios"), a Johnson &
Johnson subsidiary, received a subpoena from the
United States Attorney's Office, District of
Massachusetts, seeking documents related to the sales
and marketing of NATRECOR. Scios is responding to
the subpoena. In early August 2005, Scios was advised
that the investigation will be handled by the United
States Attorney's Office for the Northern District of
California in San Francisco, rather than the United
States Attorney's Office in Boston, Massachusetts.
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 filed its
response to plaintiffs' class certification motion in
May 2005. A decision by the District Court is not
expected until 2006. The Company disputes the
allegations in the lawsuit and is vigorously
defending against them.
The Company, along with its wholly owned Ethicon and
Ethicon-Endo subsidiaries, are defendants in three
federal antitrust actions challenging suture and endo-
mechanical contracts with Group Purchasing
Organizations and hospitals in which discounts are
predicated on a hospital achieving specified market
share targets for both categories of products. In
each case, plaintiffs seek substantial monetary
damages and injunctive relief. In Applied Medical v.
Ethicon Inc. et al (C.D.CA, filed September 5, 2003),
fact discovery is complete and the defendants have
moved for summary judgment on all claims. In Conmed
v. Johnson & Johnson et al (S.D.N.Y., filed November
6, 2003), fact discovery is also complete and summary
judgment motions are due September 30, 2005. In
Genico v. Ethicon, Inc. et al (E.D. TX, filed October
15, 2004) written discovery is underway.
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. (Aventis). 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, Inc. (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
29
in the case are exclusively licensed to Ortho Biotech
Inc. 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
Company's opinion, based on its examination of these
matters, its experience to date and discussions with
counsel, the ultimate outcome of legal proceedings,
net of liabilities already accrued in the Company's
balance sheet, is not expected to have a material
adverse effect on the Company's financial position,
although the resolution in any reporting period of
one or more of these matters could have a significant
impact on the Company's results of operations and
cash flows for that period.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Analysis of Consolidated Sales
For the first fiscal six months of 2005, worldwide
sales were $25.6 billion, an increase of 11.1% over
2004 first fiscal six month sales of $23.0 billion.
The impact of foreign currencies accounted for 2.1%
of the total reported fiscal six month increase.
Sales by U.S. companies were $14.3 billion in the
first fiscal six months of 2005, which represented an
increase of 5.4% over the same period last year.
Sales by international companies were $11.3 billion,
which represented an increase of 19.2%, of which 5.1%
was due to currency fluctuations.
All international regions throughout the world posted
double digit sales increases during the first fiscal
six months of 2005 as sales increased 16.0% in
Europe, 21.2% in the Western Hemisphere (excluding
the U.S.) and 24.7% in the Asia-Pacific, Africa
region. These sales gains included the positive
impact of currency fluctuations between the U.S.
dollar and foreign currencies in Europe of 5.3%, in
the Western Hemisphere (excluding the U.S.) of 8.1%
and in the Asia-Pacific, Africa region of 3.4%.
For the fiscal second quarter of 2005, worldwide
sales were $12.8 billion, an increase of 11.1% over
2004 fiscal second quarter sales of $11.5 billion.
The impact of foreign currencies accounted for 2.0%
of the total reported fiscal second quarter 2005
increase.
Sales by U.S. companies were $7.1 billion in the
fiscal second quarter of 2005, which represented an
increase of 6.0%. Sales by international companies
were $5.7 billion, which represented an increase of
18.3%, of which 4.9% was due to positive currency
fluctuations.
30
All international regions throughout the world posted
double digit sales increases during the fiscal
second quarter of 2005 as sales increased 14.6% in
Europe, 20.7% in the Western Hemisphere (excluding
the U.S.) and 24.4% in the Asia-Pacific, Africa
region. These sales gains included the positive
impact of currency fluctuations between the U.S.
dollar and foreign currencies in Europe of 4.6%, in
the Western Hemisphere (excluding the U.S.) of 10.0%
and in the Asia-Pacific, Africa region of 3.1%.
Analysis of Sales by Business Segments
Consumer
Consumer segment sales in the first fiscal six months
of 2005 were $4.6 billion, an increase of 12.6% over
the same period a year ago with 10.0% of operational
growth and a positive currency impact of 2.6%. U.S.
Consumer segment sales increased by 6.7% while
international sales gains of 18.8% included a
positive currency impact of 5.4%.
Major Consumer Franchise Sales - First Fiscal Six
Months
Total Operations Currency
2005 2004 %Change %Change %Change
OTC Pharm
& Nutr. $ 1,313 $ 1,096 19.8% 18.2% 1.6%
Skin Care 1,223 1,071 14.2 11.2 3.0
Women's
Health 782 716 9.2 5.9 3.3
Baby & Kids
Care 772 703 9.8 6.7 3.1
Other 468 461 1.5 0.5 1.0
Total $ 4,558 $4,047 12.6% 10.0% 2.6%
Consumer segment sales in the fiscal second quarter
of 2005 were $2.3 billion, an increase of 13.9% over
the same period a year ago with 11.1% of operational
growth and a positive currency impact of 2.8%. U.S.
Consumer segment sales increased by 10.6% while
international sales gains of 17.1% included a
positive currency impact of 5.5%.
Major Consumer Franchise Sales - Fiscal Second Quarter
Total Operations Currency
2005 2004 %Change %Change %Change
OTC Pharm
& Nutr. $ 628 $ 532 18.0% 15.7% 2.3%
Skin Care 602 509 18.5 15.5 3.0
Women's
Health 406 368 10.3 6.7 3.6
Baby & Kids
Care 393 360 9.2 5.9 3.3
Other 249 231 7.8 5.9 1.9
Total $ 2,278 $ 2,000 13.9% 11.1% 2.8%
Consumer segment sales growth in the fiscal second
quarter was attributable to strong sales performance
in the major franchises in this segment including OTC
Pharmaceutical & Nutritional products, Skin Care,
Women's Health and Baby & Kids Care. OTC
31
Pharmaceutical & Nutritional operational sales growth
of 15.7% was primarily driven by continued growth in
SPLENDA(r) No Calorie Sweetener and pediatric
analgesics. The Skin Care franchise operational
sales growth of 15.5% was attributed to
NEUTROGENA(r), AVEENO(r), RoC(r), CLEAN & CLEAR(r)
and JOHNSON'S(r) adult brands. The key drivers of
U.S. Skin Care growth were the continued success with
the NEUTROGENA(r) Advanced Solutions Microdermabrasion
kit, along with new products launched in the first half
of 2005. The Women's Health franchise achieved
operational growth of 6.7% resulting from strong
contributions from the K-Y(r) and STAYFREE(r)
product lines. The Baby & Kids Care franchise
operational sales growth of 5.9% resulted from
continued success with JOHNSON'S(r) SOFTWASH(r) AND
SOFTLOTION(r) product lines.
Pharmaceutical
Pharmaceutical segment sales in the first fiscal six
months of 2005 were $11.4 billion, an increase of
5.4% over the same period a year ago with 3.8% of
this change due to operational increases and the
remaining 1.6% increase related to the positive
impact of currency. The U.S. Pharmaceutical sales
increase was 1.3% and the growth in international
Pharmaceutical sales was 13.9% which included 5.1%
related to the positive impact of currency.
Major Pharmaceutical Product Revenues - First Fiscal Six Months
Total Operations Currency
2005 2004 %Change %Change %Change
RISPERDAL(r) $1,738 $1,458 19.3% 16.9% 2.4%
PROCRIT(r)/
EPREX(r) 1,682 1,852 (9.2) (10.8) 1.6
REMICADE(r) 1,219 1,003 21.5 21.5 0.0
TOPAMAX(r) 837 663 26.2 24.5 1.7
DURAGESIC(r)/
Fentanyl
Transdermal 832 1,011 (17.8) (20.2) 2.4
LEVAQUIN(r)/
FLOXIN(r) 760 651 16.7 16.6 0.1
Hormonal
Contraceptives 598 671 (10.5) (11.5) 1.0
Aciphex(r)/
Pariet(r) 559 510 9.5 6.7 2.8
Other 3,158 2,984 5.8 3.9 1.9
Total $11,383 $10,803 5.4% 3.8% 1.6%
Pharmaceutical segment sales in the fiscal second
quarter of 2005 were $5.6 billion, an increase of
3.7% over the same period a year ago with 2.1% of
this change due to operational increases and the
remaining 1.6% increase related to the positive
impact of currency. The U.S. Pharmaceutical sales
decrease was 1.3% and the growth in international
Pharmaceutical sales was 14.0% which included 4.8%
related to the positive impact of currency.
Major Pharmaceutical Product Revenues - Fiscal Second Quarter
Total Operations Currency
2005 2004 %Change %Change %Change
RISPERDAL(r) $894 $727 23.0% 20.8% 2.2%
PROCRIT(r)/
EPREX(r) 846 875 (3.4) (5.0) 1.6
REMICADE(r) 642 539 19.1 19.1 0.0
TOPAMAX(r) 431 335 28.6 27.0 1.6
DURAGESIC(r)/
32
Fentanyl
Transdermal 382 557 (31.5) (33.5) 2.0
LEVAQUIN(r)/
FLOXIN(r) 320 269 19.2 19.0 0.2
Hormonal
Contraceptives 296 366 (19.2) (20.3) 1.1
Aciphex(r)/
Pariet(r) 281 263 7.0 4.3 2.7
Other 1,536 1,496 2.7 0.1 2.6
Total $5,628 $5,427 3.7% 2.1% 1.6%
Pharmaceutical segment sales growth in the second
quarter of 2005 was led by strong performances from
RISPERDAL(r), REMICADE(r), TOPAMAX(r) and
LEVAQUIN(r). The discussion to follow correlates to
the sequence of the chart above. Growth was fueled
by the continued success of RISPERDAL(r)
(risperidone), and RISPERDAL CONSTA(r) (risperidone),
a long acting injection medication that treats the
symptoms of schizophrenia, with operational growth of
20.8%. PROCRIT(r) (Epoetin alfa) and EPREX(r)
(Epoetin alfa) performance continued to be adversely
affected by competition. Combined these two products
had an operational decline of 5.0% in the second
quarter of 2005. Volume associated with share loss
to competitive products was the primary driver of the
decline. PROCRIT(r) pricing has stabilized in the
second quarter of 2005. 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 19.1% over prior year fiscal
second quarter.
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 of 27.0%, over
prior year fiscal second quarter. In June of 2005
TOPAMAX(r) was also approved for use as an initial
monotherapy in the treatment of epilepsy.
DURAGESIC(r) (fentanyl transdermal system) sales
declined by 33.5% operationally, which was primarily
driven by the negative impact of generic competition
in the U.S. beginning in January 2005. An authorized
generic version of DURAGESIC(r) being marketed for
the Company in the U.S. has captured a strong portion
of the generic market.
LEVAQUIN(r) (levofloxacin) achieved operational sales
growth of 19.0% over prior year benefiting from the
late respiratory infection season.
The hormonal contraceptive franchise experienced an
operational decline of 20.3%. Adjusted for the
impact of the performance-based rebate allowances
that benefited the second quarter of 2004, sales
growth in the second quarter of 2005 was
approximately 6.0%. The adjusted sales growth of
6.0% was the result of strong performances by 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, however this was partially offset by
the impact of generic competition.
CONCERTA(r) (methylphenidate HCL), a product for the
treatment of attention deficit hyperactivity
disorder, sales continued to grow
33
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.
Medical Devices and Diagnostics
Medical Devices and Diagnostics segment sales in the
first fiscal six months of 2005 were $9.7 billion, an
increase of 17.8% over the same period a year ago
with 15.4% of this change due to operational
increases and the remaining 2.4% increase related to
the positive impact of currency. The U.S. Medical
Devices and Diagnostics sales increase was 12.0% and
the growth in international Medical Devices and
Diagnostics sales was 24.1% which included 5.0%
related to the positive impact of currency.
Major Medical Devices and Diagnostics Franchise Sales
- - First Fiscal Six Months
Total Operations Currency
2005 2004 %Change %Change %Change
CORDIS(r) $1,983 $1,541 28.6% 26.2% 2.4%
DEPUY(r) 1,973 1,678 17.6 15.6 2.0
ETHICON(r) 1,587 1,397 13.6 10.3 3.3
ETHICON ENDO-
SURGERY(r) 1,550 1,375 12.7 10.2 2.5
LIFESCAN(r) 975 820 18.8 16.6 2.2
Vision Care 833 731 13.9 11.8 2.1
ORTHO-CLINICAL
DIAGNOSTICS(r) 721 619 16.5 14.6 1.9
Other 31 32 (3.1) (2.1) (1.0)
Total $9,653 $8,193 17.8% 15.4% 2.4%
Medical Devices and Diagnostics segment sales in the
fiscal second quarter of 2005 were $4.9 billion, an
increase of 19.7% over the same period a year ago
with 17.4% of this change due to operational growth
and the remaining 2.3% increase related to the
positive impact of currency. The U.S. Medical
Devices and Diagnostics sales increase was 16.7% and
the growth in international Medical Devices and
Diagnostics sales was 22.7% which included 4.6%
related to the positive impact of currency.
Major Medical Devices and Diagnostics Franchise Sales
- - Fiscal Second Quarter
Total Operations Currency
2005 2004 %Change %Change %Change
CORDIS(r) $1,014 $664 52.6% 50.0% 2.6%
DEPUY(r) 980 839 16.9 15.0 1.9
ETHICON(r) 798 716 11.5 8.5 3.0
ETHICON ENDO-
SURGERY(r) 785 710 10.6 8.3 2.3
LIFESCAN(r) 474 420 12.9 10.8 2.1
Vision Care 426 377 13.0 11.1 1.9
ORTHO-CLINICAL
DIAGNOSTICS(r) 366 317 15.7 13.9 1.8
Other 13 14 (7.1) (6.1) (1.0)
Total $4,856 $4,057 19.7% 17.4% 2.3%
34
Sales growth in the Medical Devices and Diagnostics
segment was led by strong results experienced across
the segment. The Cordis franchise was a major
driver, with operational growth of 50.0%. The
primary growth driver of the Cordis franchise was the
CYPHER(r) Sirolimus-eluting Stent in both U.S. and
international markets, with excellent growth in
Japan. In addition, the Biosense Webster business
also had a strong quarter with its navigational
catheter line of products.
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 improvements to their quality system.
The FDA has completed inspections of the three
facilities involved in the April warning letter and
Cordis has provided written responses to the recent
inspection observations.
The DePuy franchise's operational growth of 15.0% was
primarily attributed to DePuy's orthopaedic joint
reconstruction products including the hip and knee
product lines. Strong performance was also achieved
in DePuy's spine unit and Mitek sports medicine
products.
Ethicon worldwide sales grew operationally by 8.5%
from the same period in the prior year. Contributing
to the strong results was the continued penetration
of VICRYL(r) (polyglactin 910) Plus, an anti-
bacterial coated suture, growth of DERMABOND(r), a
liquid skin adhesive and continued adoption of a
variety of niche products. The Ethicon Endo-Surgery
franchise experienced operational growth of 8.3% 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.
HARMONIC SCALPEL(r) sales led by excellent results
achieved with the recently introduced HARMONIC(r) ACE
were also a significant source of growth in the
quarter.
The LifeScan franchise operational growth of 10.8%
was a result of continued growth of U.S. sales, as
well as strong growth in international markets.
ONETOUCH(r) ULTRA, blood glucose meter, has been the
key growth driver in this franchise.
Vision Care franchise operational sales growth of
11.1% was led by the continued success of ACUVUE(r)
ADVANCETM brand contact lenses with HYDRACLEARTM and
1-DAY ACUVUE(r).
The Ortho-Clinical Diagnostics franchise reported
operational growth of 13.9% over prior year, which
was driven by its market penetration of the automated
blood typing products, continued growth of the ECI
product, and growth in the clinical chemistry sales
driven by success with the Vitros(r) 5.1 FS
instrument platform and the Vitros(r) 350 Chemistry
System.
35
Cost of Products Sold and Selling, Marketing and
Administrative Expenses
Consolidated costs of products sold for the first
fiscal six months of 2005 decreased to 27.3% from
28.3% of sales over the same period a year ago. The
decrease resulted from 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, which more than offset an unfavorable
product mix. The cost of products sold for the
fiscal second quarter of 2005 was 27.5% of sales,
which is consistent with the same period in prior
year. During the quarter, unfavorable mix was offset
by cost improvement initiatives and improved gross
margins in the Medical Devices and Diagnostics
segment.
Consolidated selling, marketing and administrative
expenses for the first fiscal six months of 2005
increased 12.1% over the same period a year ago.
Consolidated selling, marketing and administrative
expenses as a percent to sales for the first fiscal
six months of 2005 were 32.1% versus 31.9% for
the same period a year ago. Consolidated selling,
marketing and administrative expenses for the fiscal
second quarter of 2005 increased 13.0% over the same
period a year ago. As a percent to sales,
consolidated selling, marketing and administrative
expenses were 32.8% versus 32.3% for the same period
a year ago. Increases in the quarterly and six month
periods were primarily associated with higher levels
of advertising spend.
Research & Development
Research activities represent a significant part of
the Company's business. These expenditures relate to
the development of new products, improvement of
existing products, technical support of products and
compliance with governmental regulations for the
protection of the consumer. Worldwide costs of
research activities, for the first fiscal six months
of 2005 were $2.8 billion, an increase of 24.4% over
the same period a year ago. Research and development
spending in the fiscal second quarter of 2005 was
$1.5 billion, an increase of 25.8% over the fiscal
second quarter of 2004. This increase is a reflection
of the solid progress achieved in products in late
stage development.
In-Process Research & Development
In the fiscal second quarter of 2005, the Company
recorded In-process Research & Development (IPR&D)
charges of $353 million before and after tax related
to acquisitions in the Pharmaceutical and Medical
Devices and Diagnostics segments. These acquisitions
included TransForm Pharmaceuticals, Inc., Peninsula
Pharmaceuticals, Inc. and CLOSURE Medical
Corporation.
Other (Income) Expense, Net
Other (income) expense is the account where the
Company records gains and losses related to the sale
and write-down of certain equity securities of the
Johnson & Johnson Development Corporation, losses
on the disposal of fixed assets, currency gains &
losses, minority interests, litigation settlements,
as well as royalty income.
36
OPERATING PROFIT BY SEGMENT
Consumer Segment
Operating profit for the Consumer segment as a
percent to sales in the first fiscal six months of
2005 was 19.2% versus 20.5% over the same period a
year ago. Operating profit as a percent to sales in
the fiscal second quarter of 2005 was 18.3% versus
19.1% over the same period a year ago. This decrease
was due to increased investment spending in consumer
promotions and advertising for the OTC Pharmaceutical
and Nutritional franchise.
Pharmaceutical Segment
Operating profit for the Pharmaceutical segment as a
percent to sales in the first fiscal six months of
2005 was 32.7% versus 38.8% over the same period a
year ago. Operating profit as a percent to sales in
the fiscal second quarter of 2005 was 28.2% versus
38.8% over the same period a year ago. For both
periods operating profit was negatively impacted by
increased research and development spending and
IPR&D. IPR&D of $302 million reduced operating
profit as a percent to sales by 2.7% and 5.3% for the
first fiscal six months and the fiscal second
quarter, respectively.
Medical Devices and Diagnostics Segment
Operating profit for the Medical Devices and
Diagnostics segment as a percent to sales in the
first fiscal six months of 2005 was 30.1% versus
25.9% over the same period a year ago. Operating
profit as a percent to sales in the fiscal second
quarter of 2005 was 29.0% versus 26.0% over the same
period a year ago. The increase in 2005 was due to
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 increased in both the first fiscal
six months and fiscal second quarter of 2005 as
compared to the same periods a year ago. The
increase reflected an improved cash position as well
as higher rates of interest being earned on cash
holdings. The cash balance including marketable
securities at the end of the fiscal second quarter of
2005 was $13.2 billion, which was $2.4 billion higher
than the same period a year ago.
Interest expense decreased in both the first fiscal
six months and fiscal second quarter of 2005 as
compared to the same periods a year ago, resulting
from lower average debt balances.
Provision For Taxes on Income
The worldwide effective income tax rates for the
first fiscal six months of 2005 and 2004 were 24.9%
and 28.6%, a decrease of 3.7%. Of this decrease,
1.9% was attributed to increases in taxable income in
lower tax jurisdictions relative to taxable income in
higher tax jurisdictions. The remaining net decrease
of 1.8% was attributed to a one-time tax benefit
partially offset by IPR&D, as described below.
Acquisition related In-process Research & Development
(IPR&D) charges of $353 million that are non-
deductible for tax purposes were recorded in the
fiscal second quarter of 2005.
37
The fiscal second quarter of 2005 included a benefit
of $225 million, due to the reversal of a tax
liability previously recorded during the fiscal
fourth quarter of 2004, associated with a technical
correction made to the American Jobs Creation Act of
2004, in May 2005.
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 first fiscal six months of 2005,
cash flow from operations was $4.7 billion, a
decrease of $0.1 billion over the same period a
year ago. Investing activities provided $0.8 billion
in the first fiscal six months of 2005, as compared
to the usage of $1.9 billion during the same period
a year ago. The increase in cash generated by
investing activities was a result of higher sales
activity of investment securities, partially offset
by an increase in acquisitions. Net cash used by
financing activities decreased by $0.2 billion
primarily due to lower levels of debt
retirement, partially offset by an increase in
dividends and the repurchase of common stock.
Dividends
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.
On July 18, 2005, the Board of Directors declared a
regular cash dividend of $0.33 per share,
payable on September 13, 2005 to shareholders of
record as of August 23, 2005. 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 and
restricted stock units). 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 and restricted stock units)
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.
38
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.
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 to the unaudited interim consolidated financial
statements.
39
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 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
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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, 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 second 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
April 4 - May 1, 2005 2,386,000 $68.51
May 2 - May 29, 2005 785,300 $67.75
May 30 - July 3, 2005 1,780,400 $65.86
Item 4 - Submission of Matters to a Vote of Security
Holders
(a) The annual meeting of the shareholders of the
Company was held on April 28, 2005.
(b) Election of the directors is set forth in (c)
below.
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(c) The shareholders elected all the Company's
nominees for director and ratified the appointment of
PricewaterhouseCoopers LLP as the Company's
independent auditors for the fiscal year 2005. The
shareholders also approved of the 2005 Long-Term
Incentive Plan.
1. Election of Directors:
Shares For Shares Withheld
M. S. Coleman 2,562,818,361 31,562,661
J. G. Cullen 2,564,660,453 29,720,569
R. J. Darretta 2,468,716,847 125,664,175
M. M. E. Johns 2,566,448,108 27,932,914
A. D. Jordan 2,535,248,036 59,132,986
A. G. Langbo 2,537,950,461 56,430,561
S. L. Lindquist 2,565,402,713 28,978,309
L. F. Mullin 2,562,474,674 31,906,348
C. A. Poon 2,532,852,391 61,528,631
S. S Reinemund 2,566,276,547 28,104,475
D. Satcher 2,564,456,446 29,924,576
W. C. Weldon 2,533,669,335 60,711,687
Abstain 26,983,548
Broker Non-vote -
2. Approval for Appointment of PricewaterhouseCoopers LLP:
For 2,532,548,257
Against 39,560,123
Abstain 22,272,642
Broker Non-vote -
3. Approval for the 2005 Long-Term Incentive Plan.
For 1,730,947,712
Against 343,780,724
Abstain 29,924,967
Broker Non-vote 489,727,619
Item 6 - Exhibits
Exhibit 10.1 Form of Stock Option Certificate
and Restricted Shares to Non-Employee Directors
Certificate under the Johnson & Johnson 2005
Long-Term Incentive Plan - Filed with this document.*
Exhibit 31.1 Certifications under Rule 13a-
14(a) of the Securities Exchange Act pursuant
to Section 302 of the Sarbanes-Oxley Act of
2002 - Filed with this document.
Exhibit 32.1 Certifications pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002 - Furnished with this document.
*Management contract or compensatory plan.
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SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JOHNSON & JOHNSON
(Registrant)
Date: August 10, 2005 By /s/ R. J. DARRETTA
R. J. DARRETTA
Vice Chairman, Board of
Directors; Chief Financial
Officer and Director
(Principal Financial Officer)
Date: August 10, 2005 By /s/ S. J. COSGROVE
S. J. COSGROVE
Controller
(Principal Accounting Officer)
43