JOHNSON & JOHNSON
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| for the quarterly period ended July 4, 2010 |
or
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| for the transition period from to |
Commission file number 1-3215
(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)
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.
þ
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
þ
Yes
o
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large
accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
o
Yes
þ
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 30, 2010 2,754,444,672 shares of Common Stock, $1.00 par value, were outstanding.
JOHNSON & JOHNSON AND SUBSIDIARIES
TABLE OF CONTENTS
2
Table of Contents
Part I — FINANCIAL INFORMATION
Item 1 – FINANCIAL STATEMENTS
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
ASSETS
| July 4, 2010 | January 3, 2010 | |||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 12,713 | $ | 15,810 | ||||
|
|
||||||||
|
Marketable securities
|
6,188 | 3,615 | ||||||
|
|
||||||||
|
Accounts receivable, trade, less
allowances for doubtful accounts $361
(2009, $333)
|
9,629 | 9,646 | ||||||
|
|
||||||||
|
Inventories (Note 2)
|
5,071 | 5,180 | ||||||
|
|
||||||||
|
Deferred taxes on income
|
2,250 | 2,793 | ||||||
|
|
||||||||
|
Prepaid expenses and other receivables
|
3,172 | 2,497 | ||||||
|
|
||||||||
|
Total current assets
|
39,023 | 39,541 | ||||||
|
|
||||||||
|
Property, plant and equipment at cost
|
28,499 | 29,251 | ||||||
|
|
||||||||
|
Less: accumulated depreciation
|
(14,618 | ) | (14,492 | ) | ||||
|
|
||||||||
|
Property, plant and equipment, net
|
13,881 | 14,759 | ||||||
|
|
||||||||
|
Intangible assets, net (Note 3)
|
16,459 | 16,323 | ||||||
|
|
||||||||
|
Goodwill, net (Note 3)
|
14,628 | 14,862 | ||||||
|
|
||||||||
|
Deferred taxes on income
|
5,109 | 5,507 | ||||||
|
|
||||||||
|
Other assets
|
3,200 | 3,690 | ||||||
|
|
||||||||
|
Total assets
|
$ | 92,300 | $ | 94,682 | ||||
See Notes to Consolidated Financial Statements
3
Table of Contents
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
LIABILITIES AND SHAREHOLDERS’ EQUITY
| July 4, 2010 | January 3, 2010 | |||||||
|
Current liabilities:
|
||||||||
|
Loans and notes payable
|
$ | 3,715 | $ | 6,318 | ||||
|
|
||||||||
|
Accounts payable
|
4,871 | 5,541 | ||||||
|
|
||||||||
|
Accrued liabilities
|
4,186 | 5,796 | ||||||
|
|
||||||||
|
Accrued rebates, returns and promotions
|
2,404 | 2,028 | ||||||
|
|
||||||||
|
Accrued salaries, wages and commissions
|
1,197 | 1,606 | ||||||
|
|
||||||||
|
Accrued taxes on income
|
791 | 442 | ||||||
|
|
||||||||
|
Total current liabilities
|
17,164 | 21,731 | ||||||
|
|
||||||||
|
Long-term debt
|
7,937 | 8,223 | ||||||
|
|
||||||||
|
Deferred taxes on income
|
1,669 | 1,424 | ||||||
|
|
||||||||
|
Employee related obligations
|
6,320 | 6,769 | ||||||
|
|
||||||||
|
Other liabilities
|
6,359 | 5,947 | ||||||
|
|
||||||||
|
Total liabilities
|
39,449 | 44,094 | ||||||
|
|
||||||||
|
Shareholders’ equity:
|
||||||||
|
|
||||||||
|
Common stock – par value $1.00 per share
(authorized 4,320,000,000 shares; issued
3,119,843,000 shares)
|
3,120 | 3,120 | ||||||
|
|
||||||||
|
Accumulated other comprehensive income
(Note 7)
|
(5,705 | ) | (3,058 | ) | ||||
|
|
||||||||
|
Retained earnings
|
75,252 | 70,306 | ||||||
|
|
||||||||
|
Less: common stock held in treasury, at
cost (365,708,000 and 365,522,000
shares)
|
19,816 | 19,780 | ||||||
|
|
||||||||
|
Total shareholders’ equity
|
52,851 | 50,588 | ||||||
|
|
||||||||
|
Total liabilities and shareholders’
equity
|
$ | 92,300 | $ | 94,682 | ||||
See Notes to Consolidated Financial Statements
4
Table of Contents
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; dollars & shares in millions
except per share amounts)
| Fiscal Quarters Ended | ||||||||||||||||
| Percent | Percent | |||||||||||||||
| July 4, | to | June 28, | to | |||||||||||||
| 2010 | Sales | 2009 | Sales | |||||||||||||
|
Sales to customers
(Note 9)
|
$ | 15,330 | 100.0 | % | $ | 15,239 | 100.0 | % | ||||||||
|
|
||||||||||||||||
|
Cost of products sold
|
4,630 | 30.2 | 4,450 | 29.2 | ||||||||||||
|
|
||||||||||||||||
|
Gross profit
|
10,700 | 69.8 | 10,789 | 70.8 | ||||||||||||
|
|
||||||||||||||||
|
Selling, marketing and
administrative expenses
|
4,756 | 31.0 | 4,797 | 31.5 | ||||||||||||
|
|
||||||||||||||||
|
Research expense
|
1,648 | 10.8 | 1,638 | 10.7 | ||||||||||||
|
|
||||||||||||||||
|
Interest income
|
(43 | ) | (0.3 | ) | (25 | ) | (0.1 | ) | ||||||||
|
|
||||||||||||||||
|
Interest expense, net
of portion capitalized
|
101 | 0.7 | 110 | 0.7 | ||||||||||||
|
|
||||||||||||||||
|
Other expense, net
|
18 | 0.1 | 6 | — | ||||||||||||
|
|
||||||||||||||||
|
Earnings before
provision for taxes on
income
|
4,220 | 27.5 | 4,263 | 28.0 | ||||||||||||
|
|
||||||||||||||||
|
Provision for taxes on
income (Note 5)
|
771 | 5.0 | 1,055 | 6.9 | ||||||||||||
|
|
||||||||||||||||
|
NET EARNINGS
|
$ | 3,449 | 22.5 | % | $ | 3,208 | 21.1 | % | ||||||||
|
|
||||||||||||||||
|
NET EARNINGS PER SHARE
(Note 8)
|
||||||||||||||||
|
Basic
|
$ | 1.25 | $ | 1.16 | ||||||||||||
|
Diluted
|
$ | 1.23 | $ | 1.15 | ||||||||||||
|
|
||||||||||||||||
|
CASH DIVIDENDS PER SHARE
|
$ | 0.54 | $ | 0.49 | ||||||||||||
|
|
||||||||||||||||
|
AVG. SHARES OUTSTANDING
|
||||||||||||||||
|
Basic
|
2,756.6 | 2,756.2 | ||||||||||||||
|
Diluted
|
2,796.0 | 2,782.0 | ||||||||||||||
See Notes to Consolidated Financial Statements
5
Table of Contents
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; dollars & shares in millions
(Unaudited; dollars & shares in millions
except per share amounts)
| Fiscal Six Months Ended | ||||||||||||||||
| July 4, | Percent | June 28, | Percent | |||||||||||||
| 2010 | to Sales | 2009 | to Sales | |||||||||||||
|
Sales to customers (Note 9)
|
$ | 30,961 | 100.0 | % | $ | 30,265 | 100.0 | % | ||||||||
|
|
||||||||||||||||
|
Cost of products sold
|
9,158 | 29.6 | 8,701 | 28.7 | ||||||||||||
|
|
||||||||||||||||
|
Gross profit
|
21,803 | 70.4 | 21,564 | 71.3 | ||||||||||||
|
|
||||||||||||||||
|
Selling, marketing and
administrative expenses
|
9,535 | 30.8 | 9,405 | 31.1 | ||||||||||||
|
|
||||||||||||||||
|
Research expense
|
3,205 | 10.4 | 3,156 | 10.4 | ||||||||||||
|
|
||||||||||||||||
|
Interest income
|
(70 | ) | (0.2 | ) | (50 | ) | (0.1 | ) | ||||||||
|
|
||||||||||||||||
|
Interest expense, net of
portion capitalized
|
209 | 0.6 | 216 | 0.7 | ||||||||||||
|
|
||||||||||||||||
|
Other income, net
|
(1,576 | ) | (5.1 | ) | (69 | ) | (0.2 | ) | ||||||||
|
|
||||||||||||||||
|
Earnings before provision
for taxes on income
|
10,500 | 33.9 | 8,906 | 29.4 | ||||||||||||
|
|
||||||||||||||||
|
Provision for taxes on
income (Note 5)
|
2,525 | 8.1 | 2,191 | 7.2 | ||||||||||||
|
|
||||||||||||||||
|
NET EARNINGS
|
$ | 7,975 | 25.8 | % | $ | 6,715 | 22.2 | % | ||||||||
|
|
||||||||||||||||
|
NET EARNINGS PER SHARE
(Note 8)
|
||||||||||||||||
|
Basic
|
$ | 2.89 | $ | 2.43 | ||||||||||||
|
Diluted
|
$ | 2.85 | $ | 2.41 | ||||||||||||
|
|
||||||||||||||||
|
CASH DIVIDENDS PER SHARE
|
$ | 1.03 | $ | 0.95 | ||||||||||||
|
|
||||||||||||||||
|
AVG. SHARES OUTSTANDING
|
||||||||||||||||
|
Basic
|
2,755.7 | 2,761.3 | ||||||||||||||
|
Diluted
|
2,796.1 | 2,785.5 | ||||||||||||||
See Notes to Consolidated Financial Statements
6
Table of Contents
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
| Fiscal Six Months Ended | ||||||||
| July 4, | June 28, | |||||||
| 2010 | 2009 | |||||||
|
CASH FLOW FROM OPERATING ACTIVITIES
|
||||||||
|
Net earnings
|
$ | 7,975 | $ | 6,715 | ||||
|
Adjustments to reconcile net earnings to cash
flows from operating activities:
|
||||||||
|
Depreciation and amortization of property and
intangibles
|
1,445 | 1,355 | ||||||
|
Stock based compensation
|
305 | 341 | ||||||
|
Decrease in deferred tax provision
|
604 | 645 | ||||||
|
|
||||||||
|
Accounts receivable allowances
|
46 | 52 | ||||||
|
|
||||||||
|
Changes in assets and liabilities, net of effects
from acquisitions:
|
||||||||
|
Increase in accounts receivable
|
(555 | ) | (225 | ) | ||||
|
Increase in inventories
|
(88 | ) | (339 | ) | ||||
|
Decrease in accounts payable
and accrued liabilities
|
(1,719 | ) | (1,897 | ) | ||||
|
Increase in other current and non-current assets
|
(704 | ) | (28 | ) | ||||
|
Increase/(Decrease) in other current and
non-current liabilities
|
218 | (429 | ) | |||||
|
|
||||||||
|
NET CASH FLOWS FROM OPERATING ACTIVITIES
|
7,527 | 6,190 | ||||||
|
|
||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||
|
Additions to property, plant and equipment
|
(897 | ) | (1,002 | ) | ||||
|
Proceeds from the disposal of assets
|
109 | 12 | ||||||
|
Acquisitions, net of cash acquired
|
(871 | ) | (1,291 | ) | ||||
|
Purchases of investments
|
(6,695 | ) | (3,485 | ) | ||||
|
Sales of investments
|
3,800 | 2,471 | ||||||
|
Other
|
(21 | ) | (84 | ) | ||||
|
|
||||||||
|
NET CASH USED BY INVESTING ACTIVITIES
|
(4,575 | ) | (3,379 | ) | ||||
|
|
||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||
|
Dividends to shareholders
|
(2,839 | ) | (2,623 | ) | ||||
|
Repurchase of common stock
|
(780 | ) | (1,123 | ) | ||||
|
Proceeds from short-term debt
|
956 | 3,082 | ||||||
|
Retirement of short-term debt
|
(3,598 | ) | (1,331 | ) | ||||
|
Proceeds from long-term debt
|
— | 9 | ||||||
|
Retirement of long-term debt
|
(12 | ) | (16 | ) | ||||
|
Proceeds from the exercise of stock
options/excess tax benefits
|
386 | 74 | ||||||
|
|
||||||||
|
NET CASH USED BY FINANCING ACTIVITIES
|
(5,887 | ) | (1,928 | ) | ||||
|
|
||||||||
|
Effect of exchange rate changes on cash and cash
equivalents
|
(162 | ) | 35 | |||||
|
(Decrease)/Increase in cash and cash equivalents
|
(3,097 | ) | 918 | |||||
|
Cash and Cash equivalents, beginning of period
|
15,810 | 10,768 | ||||||
|
|
||||||||
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 12,713 | $ | 11,686 | ||||
|
|
||||||||
|
Acquisitions
|
||||||||
|
Fair value of assets acquired
|
$ | 909 | $ | 1,519 | ||||
|
Fair value of liabilities assumed
|
(38 | ) | (228 | ) | ||||
|
Net cash paid for acquisitions
|
$ | 871 | $ | 1,291 | ||||
See Notes to Consolidated Financial Statements
7
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
—
The accompanying unaudited interim consolidated financial statements and related notes
should be read in conjunction with the audited Consolidated Financial Statements of Johnson &
Johnson and its Subsidiaries (the “Company”) and related notes as contained in the Company’s Annual
Report on Form 10-K for the fiscal year ended January 3, 2010. 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.
The Financial Accounting Standards Board (FASB) issued guidance and amendments to the criteria for
separating consideration in multiple-deliverable revenue arrangements, which the Company adopted in
the fiscal first quarter of 2010. The guidance also (a) provides principles and application
guidance on whether multiple deliverables exist, how the arrangement should be separated, and the
consideration allocated; (b) requires an entity to allocate revenue in an arrangement using
estimated selling prices of deliverables if a vendor does not have vendor-specific objective
evidence or third-party evidence of selling price; and(c) eliminates the use of the residual method
and requires an entity to allocate the revenue using the relative selling price method. The
adoption did not have a material impact on the Company’s results of operations, cash flows or
financial position however it will expand the disclosures for multiple-deliverable revenue
arrangements.
During the fiscal first quarter of 2010 the Company adopted the FASB standard related to variable
interest entities. The adoption of this standard did not have an impact on the Company’s results of
operations, cash flows or financial position.
During the fiscal first quarter of 2010 the Company adopted the new accounting guidance on fair
value measurements and disclosures. This guidance requires the Company to disclose the amount of
significant transfers between Level 1 and Level 2 inputs and the reasons for these transfers as
well as the reasons for any transfers in or out of Level 3 of the fair value hierarchy. In
addition, the guidance clarifies certain existing disclosure requirements. The adoption of this
standard did not have a significant impact on the Company’s results of operations, cash flows or
financial position.
During the fiscal second quarter of 2010 the FASB issued an accounting standard update related to
revenue recognition under the milestone method. The objective of the accounting standard update is
to provide guidance on defining a milestone and determining when it may be appropriate to apply the
milestone method of revenue recognition for research or development transactions. This update is
effective on a prospective basis for
8
Table of Contents
milestones achieved in fiscal years, and interim periods within those years, beginning on or after
June 15, 2010. The adoption of this standard is not expected to have a significant impact on the
Company’s results of operations, cash flows or financial position.
NOTE 2 — INVENTORIES
| (Dollars in Millions) | July 4, 2010 | January 3, 2010 | ||||||
|
Raw materials and supplies
|
$ | 1,072 | $ | 1,144 | ||||
|
Goods in process
|
1,469 | 1,395 | ||||||
|
Finished goods
|
2,530 | 2,641 | ||||||
|
Inventories
|
$ | 5,071 | $ | 5,180 | ||||
NOTE 3 — INTANGIBLE ASSETS AND GOODWILL
Intangible assets that have finite useful lives are amortized over their estimated useful lives.
The latest impairment assessment of goodwill and indefinite lived intangible assets was completed
in the fiscal fourth quarter of 2009. Future impairment tests for goodwill and indefinite lived
intangible assets will be performed annually in the fiscal fourth quarter, or sooner if warranted.
| July 4, | January 3, | |||||||
| (Dollars in Millions) | 2010 | 2010 | ||||||
|
Intangible assets with definite lives:
|
||||||||
|
|
||||||||
|
Patents and trademarks — gross
|
$ | 6,381 | $ | 5,697 | ||||
|
Less accumulated amortization
|
2,417 | 2,177 | ||||||
|
Patents and trademarks – net
|
3,964 | 3,520 | ||||||
|
|
||||||||
|
Other intangibles — gross
|
7,536 | 7,808 | ||||||
|
Less accumulated amortization
|
2,703 | 2,680 | ||||||
|
Other intangibles – net
|
4,833 | 5,128 | ||||||
|
|
||||||||
|
Total intangible assets with definite lives — gross
|
13,917 | 13,505 | ||||||
|
Less accumulated amortization
|
5,120 | 4,857 | ||||||
|
Total intangible assets with definite lives — net
|
8,797 | 8,648 | ||||||
|
|
||||||||
|
Intangible assets with indefinite lives:
|
||||||||
|
Trademarks
|
5,749 | 5,938 | ||||||
|
Purchased in-process research and development*
|
1,913 | 1,737 | ||||||
|
Total intangible assets with indefinite lives
|
7,662 | 7,675 | ||||||
|
Total intangible assets — net
|
$ | 16,459 | $ | 16,323 | ||||
| * | Purchased in-process research and development is accounted for as an indefinite-lived intangible asset until the underlying project is completed or abandoned. |
9
Table of Contents
Goodwill as of July 4, 2010 was allocated by segment of business as follows:
| Med Dev | ||||||||||||||||
| (Dollars in Millions) | Consumer | Pharm | & Diag | Total | ||||||||||||
|
Goodwill, net at January
3, 2010
|
$ | 8,074 | $ | 1,244 | $ | 5,544 | $ | 14,862 | ||||||||
|
Acquisitions
|
— | — | 233 | 233 | ||||||||||||
|
Currency translation/Other
|
(400 | ) | (34 | ) | (33 | ) | (467 | ) | ||||||||
|
Goodwill, net as of July
4, 2010
|
$ | 7,674 | $ | 1,210 | $ | 5,744 | $ | 14,628 | ||||||||
The weighted average amortization periods for patents and trademarks and other intangible assets
are 17 years and 28 years, respectively. The amortization expense of amortizable intangible assets
for the fiscal six months ended July 4, 2010 was $353 million, and the estimated amortization
expense for the five succeeding years approximates $700 million, per year.
NOTE 4 – FAIR VALUE MEASUREMENTS
The Company uses forward exchange contracts to manage its exposure to the variability of cash
flows, primarily related to the foreign exchange rate changes of future intercompany product and
third- party purchases of raw materials denominated in foreign currency. The Company also uses
cross currency interest rate swaps to manage currency risk primarily related to borrowings. Both
types of derivatives are designated as cash flow hedges. The Company also uses forward exchange
contracts to manage its exposure to the variability of cash flows for repatriation of foreign
dividends. These contracts are designated as net investment hedges. Additionally, the Company
uses forward exchange contracts to offset its exposure to certain foreign currency assets and
liabilities. These forward exchange contracts are not designated as hedges and therefore, changes
in the fair values of these derivatives are recognized in earnings, thereby offsetting the current
earnings effect of the related foreign currency assets and liabilities. The Company does not enter
into derivative financial instruments for trading or speculative purposes, or contain credit risk
related contingent features or requirements to post collateral. On an ongoing basis the Company
monitors counterparty credit ratings. The Company considers credit non-performance risk to be low,
because the Company enters into agreements with commercial institutions that have at least an A (or
equivalent) credit rating. As of July 4, 2010, the Company had notional amounts outstanding for
forward foreign exchange contracts and cross currency interest rate swaps of $23 billion and $3
billion, respectively.
All derivative instruments are to be recorded on the balance sheet at fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether the derivative is designated as part of a hedge transaction, and if
so, the type of hedge transaction.
10
Table of Contents
The designation as a cash flow hedge is made at the entrance date into the derivative contract. At
inception, all derivatives are expected to be highly effective. Changes in the fair value of a
derivative that is designated as a cash flow hedge and is highly effective are recorded in
accumulated other comprehensive income until the underlying transaction affects earnings, and are
then reclassified to earnings in the same account as the hedged transaction. Gains/losses on net
investment hedges are accounted for through the currency translation account and are insignificant.
On an ongoing basis, the Company assesses whether each derivative continues to be highly effective
in offsetting changes in the cash flows of hedged items. If and when a derivative is no longer
expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if any,
is included in current period earnings in other (income) and expense, net, and was not material for
the fiscal quarters and fiscal six months ended July 4, 2010 and June 28, 2009. Refer to Note 7 for
disclosures of movements in Accumulated Other Comprehensive Income.
As of July 4, 2010, the balance of deferred net gains on derivatives included in accumulated other
comprehensive income was $56 million after-tax. For additional information, see Note 7. The
Company expects that substantially all of the amounts related to foreign exchange contracts will be
reclassified into earnings over the next 12 months as a result of transactions that are expected to
occur over that period. The maximum length of time over which the Company is hedging transaction
exposure is 18 months excluding interest rate swaps. 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.
The following table is a summary of the activity related to designated derivatives for the fiscal
second quarters:*
| Gain/(Loss) | ||||||||||||||||||||||||
| Gain/(Loss) | reclassified | Gain/(Loss) | ||||||||||||||||||||||
| recognized in | from | recognized in | ||||||||||||||||||||||
| Accumulated | Accumulated OCI | other | ||||||||||||||||||||||
| OCI (1) | into income (1) | income/expense (2) | ||||||||||||||||||||||
| Fiscal | Fiscal | Fiscal | Fiscal | Fiscal | Fiscal | |||||||||||||||||||
| second | second | second | second | second | second | |||||||||||||||||||
| (Dollars in Millions) | quarter | quarter | quarter | quarter | quarter | quarter | ||||||||||||||||||
| Cash Flow Hedges | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
|
Foreign exchange
contracts
|
$ | (53 | ) | $ | (38 | ) | $ | (9 | ) | $ | (13 | ) (A) | $ | (20 | ) | $ | (2 | ) | ||||||
|
Foreign exchange
contracts
|
(102 | ) | (117 | ) | (76 | ) | 15 | (B) | (149 | ) | 3 | |||||||||||||
|
Foreign exchange
contracts
|
44 | 3 | 20 | 12 | (C) | 16 | — | |||||||||||||||||
|
Cross currency
interest rate swaps
|
(82 | ) | 84 | 11 | (1 | ) (D) | — | — | ||||||||||||||||
|
Foreign exchange
contracts
|
35 | 28 | — | 6 | (E) | 20 | — | |||||||||||||||||
|
Total
|
$ | (158 | ) | $ | (40 | ) | $ | (54 | ) | $ | 19 | $ | (133 | ) | $ | 1 | ||||||||
| * | All amounts shown in the table above are net of tax. |
11
Table of Contents
The following table is a summary of the activity related to designated derivatives for the first
fiscal six months ended:*
| Gain/(Loss) | ||||||||||||||||||||||||
| Gain/(Loss) | reclassified | Gain/(Loss) | ||||||||||||||||||||||
| recognized in | from | recognized in | ||||||||||||||||||||||
| Accumulated | Accumulated OCI | other | ||||||||||||||||||||||
| OCI (1) | into income (1) | income/expense (2) | ||||||||||||||||||||||
| Fiscal | Fiscal | Fiscal | Fiscal | Fiscal | Fiscal | |||||||||||||||||||
| six | six | six | six | six | six | |||||||||||||||||||
| (Dollars in Millions) | months | months | months | months | months | months | ||||||||||||||||||
| Cash Flow Hedges | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
|
Foreign exchange
contracts
|
$ | (84 | ) | $ | (46 | ) | $ | (29 | ) | $ | (8 | ) (A) | $ | (21 | ) | $ | (4 | ) | ||||||
|
Foreign exchange
contracts
|
(206 | ) | (65 | ) | (98 | ) | 34 | (B) | (154 | ) | 8 | |||||||||||||
|
Foreign exchange
contracts
|
73 | 16 | 21 | 22 | (C) | 16 | — | |||||||||||||||||
|
Cross currency
interest rate swaps
|
(49 | ) | 193 | 11 | (7 | ) (D) | — | — | ||||||||||||||||
|
Foreign exchange
contracts
|
81 | 33 | (1 | ) | 3 | (E) | 20 | 1 | ||||||||||||||||
|
Total
|
$ | (185 | ) | $ | 131 | $ | (96 | ) | $ | 44 | $ | (139 | ) | $ | 5 | |||||||||
| * | All amounts shown in the table above are net of tax. | |
| (1) | Effective portion | |
| (2) | Ineffective portion | |
| (A) | Included in Sales to customer | |
| (B) | Included in Cost of products sold | |
| (C) | Included in Research expense | |
| (D) | Included in Interest (income)/Interest expense, net | |
| (E) | Included in Other (income)/expense, net |
For the fiscal second quarters ended July 4, 2010 and June 28, 2009, a loss of $21 million and a
gain of $10 million, respectively, was recognized in Other (income)/expense, net, relating to
foreign exchange contracts not designated as hedging instruments.
For the first fiscal six months ended July 4, 2010 and June 28, 2009, a loss of $69 million and a
gain of $4 million, respectively, was recognized in Other (income)/expense, net, relating to
foreign exchange contracts not designated as hedging instruments.
Fair value is the exit price that would be received to sell an asset or paid to transfer a
liability. Fair value is a market-
12
Table of Contents
based measurement that should be determined using assumptions that market participants would use in
pricing an asset or liability. The authoritative literature establishes a three-level hierarchy to
prioritize the inputs used in measuring fair value. The levels within the hierarchy are described
below with Level 1 having the highest priority and Level 3 having the lowest.
The fair value of a derivative financial instrument (i.e. forward exchange contract, currency swap)
is the aggregation by currency of all future cash flows discounted to its present value at the
prevailing market interest rates and subsequently converted to the U.S. dollar at the current spot
foreign exchange rate. The Company does not believe that fair values of these derivative
instruments materially differ from the amounts that could be realized upon settlement or maturity,
or that the changes in fair value will have a material effect on the Company’s results of
operations, cash flows or financial position. The Company also holds equity investments which are
classified as Level 1 since they are traded in an active exchange market. The Company did not have
any other significant financial assets or liabilities which would require revised valuations under
this standard that are recognized at fair value.
The following three levels of inputs are used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets and liabilities.
Level 2 — Significant other observable inputs.
Level 3 — Significant unobservable inputs.
The Company’s significant financial assets and liabilities measured at fair value as of July 4,
2010 and January 3, 2010 were as follows:
| July 4, 2010 | January 3, 2010 | |||||||||||||||||||
| (Dollars in Millions) | Level 1 | Level 2 | Level 3 | Total | Total (1) | |||||||||||||||
|
Derivatives designated as
hedging instruments :
|
||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Foreign exchange contracts
|
— | $ | 384 | — | 384 | 436 | ||||||||||||||
|
Cross currency interest rate
swaps
(2)
|
— | 33 | — | 33 | 126 | |||||||||||||||
|
Total
|
417 | 417 | 562 | |||||||||||||||||
|
Liabilities:
|
||||||||||||||||||||
|
Foreign exchange contracts
|
— | 557 | — | 557 | 608 | |||||||||||||||
|
Cross currency interest rate
swaps
(3)
|
— | 645 | — | 645 | 571 | |||||||||||||||
|
Total
|
1,202 | 1,202 | 1,179 | |||||||||||||||||
|
Derivatives not designated as
hedging instruments:
|
||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Foreign exchange contracts
|
— | 28 | — | 28 | 33 | |||||||||||||||
|
Liabilities:
|
||||||||||||||||||||
|
Foreign exchange contracts
|
— | 35 | — | 35 | 40 | |||||||||||||||
|
Other Investments
(4)
|
$ | 880 | — | — | 880 | 1,134 | ||||||||||||||
13
Table of Contents
| (1) | As of January 3, 2010, these assets and liabilities are classified as Level 2 with the exception of other investments of $1,134 which are classified as Level 1. | |
| (2) | Includes $26 million and $119 million of non-current assets for July 4, 2010 and January 3, 2010, respectively. | |
| (3) | Includes $645 million and $517 million of non-current liabilities for July 4, 2010 and January 3, 2010, respectively. | |
| (4) | Classified as non-current other assets. |
Financial Instruments not measured at Fair Value:
The following financial assets and liabilities are held at carrying amount on the consolidated
balance sheet as of July 4, 2010:
| Carrying | Estimated | |||||||
| (Dollars in Millions) | Amount | Fair Value | ||||||
|
Financial Assets
|
||||||||
|
Current Investments
|
||||||||
|
Cash
|
$ | 2,144 | 2,144 | |||||
|
Government securities
and obligations
|
12,799 | 12,800 | ||||||
|
Corporate debt securities
|
960 | 960 | ||||||
|
Money market funds
|
2,173 | 2,173 | ||||||
|
Time deposits
|
825 | 825 | ||||||
|
|
||||||||
|
Total cash, cash
equivalents and current
marketable securities
|
$ | 18,901 | 18,902 | |||||
|
|
||||||||
| Fair value of government securities and obligations and non-current marketable securities was estimated using quoted broker prices in active markets. | ||||||||
|
|
||||||||
|
Financial Liabilities
|
||||||||
|
|
||||||||
|
Current Debt
|
$ | 3,715 | 3,715 | |||||
|
Non-Current Debt
|
||||||||
|
5.15% Debentures due 2012
|
599 | 655 | ||||||
|
3.80% Debentures due 2013
|
500 | 543 | ||||||
|
5.55% Debentures due 2017
|
1,000 | 1,151 | ||||||
|
5.15% Debentures due 2018
|
898 | 1,023 | ||||||
|
4.75% Notes due 2019
(1B Euro 1.2388)
|
1,230 | 1,409 | ||||||
|
3% Zero Coupon Convertible Subordinated
Debentures due in 2020
|
190 | 222 | ||||||
|
|
||||||||
|
6.73% Debentures due 2023
|
250 | 316 | ||||||
|
5.50% Notes due 2024
(500 GBP 1.5045)
|
746 | 807 | ||||||
|
6.95% Notes due 2029
|
294 | 369 | ||||||
|
4.95% Debentures due 2033
|
500 | 532 | ||||||
|
5.95% Notes due 2037
|
995 | 1,168 | ||||||
|
5.86% Debentures due 2038
|
700 | 816 | ||||||
|
Other (Includes
Industrial Revenue Bonds)
|
35 | 35 | ||||||
|
|
||||||||
|
Total Non-Current Debt
|
$ | 7,937 | $ | 9,046 | ||||
14
Table of Contents
The weighted average effective rate on non-current debt is 5.43%.
Fair value of the non-current debt was estimated using market prices, which were corroborated by
quoted broker prices in active markets.
NOTE 5 — INCOME TAXES
The worldwide effective income tax rates for the first fiscal six months of 2010 and 2009 were
24.0% and 24.6%, respectively. The lower effective tax rate was primarily due to a decline in
taxable income in higher tax jurisdictions relative to taxable income in lower tax jurisdictions
partially offset by the U.S. Research and Development tax credit which was not in effect for the
first fiscal six months of 2010. In the second quarter of 2010 the Company received a favorable tax
ruling related to a litigation settlement which reduced the tax rate previously recorded in the
first quarter of 2010.
NOTE 6 – 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 2010 and 2009 include the following components:
| Retirement Plans | Other Benefit Plans | |||||||||||||||
| Fiscal Quarters Ended | ||||||||||||||||
| July 4, | June 28, | July 4, | June 28, | |||||||||||||
| (Dollars in Millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Service cost
|
$ | 121 | 116 | 33 | 36 | |||||||||||
|
Interest cost
|
194 | 182 | 50 | 42 | ||||||||||||
|
Expected return on plan
assets
|
(248 | ) | (227 | ) | (1 | ) | — | |||||||||
|
Amortization of prior
service cost
|
3 | 3 | (1 | ) | (1 | ) | ||||||||||
|
Amortization of net
transition asset
|
1 | 1 | — | — | ||||||||||||
|
Recognized actuarial
losses
|
59 | 41 | 13 | 14 | ||||||||||||
|
Net periodic benefit cost
|
$ | 130 | 116 | 94 | 91 | |||||||||||
15
Table of Contents
Net periodic benefit cost for the Company’s defined benefit retirement plans and other benefit
plans for the first fiscal six months of 2010 and 2009 include the following components:
| Retirement Plans | Other Benefit Plans | |||||||||||||||
| Fiscal Six Months Ended | ||||||||||||||||
| July 4, | June 28, | July 4, | June 28, | |||||||||||||
| (Dollars in Millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Service cost
|
$ | 247 | 234 | 67 | 70 | |||||||||||
|
Interest cost
|
394 | 367 | 100 | 85 | ||||||||||||
|
Expected return on plan
assets
|
(500 | ) | (455 | ) | (1 | ) | (1 | ) | ||||||||
|
Amortization of prior
service cost
|
6 | 5 | (2 | ) | (2 | ) | ||||||||||
|
Amortization of net
transition asset
|
1 | 1 | — | — | ||||||||||||
|
Recognized actuarial
losses
|
117 | 82 | 25 | 28 | ||||||||||||
|
Net periodic benefit cost
|
$ | 265 | 234 | 189 | 180 | |||||||||||
Company Contributions
For the fiscal six months ended July 4, 2010, the Company contributed $518 million and $11 million
to its U.S. and international retirement plans, respectively. The Company plans to continue to fund
its U.S. defined benefit plans to comply with the Pension Protection Act of 2006. International
plans are funded in accordance with local regulations.
NOTE 7 — ACCUMULATED OTHER COMPREHENSIVE INCOME
Total comprehensive income for the first fiscal six months ended July 4, 2010 was $5.3 billion,
compared with $7.2 billion for the same period a year ago. Total comprehensive income for the
fiscal second quarter ended July 4, 2010 was $1.6 billion, compared with $3.9 billion for the same
period a year ago. Total comprehensive income included net earnings, net unrealized currency gains
and losses on translation, adjustments related to Employee Benefit Plans, net unrealized gains and
losses on securities available for sale and net gains and losses on derivative instruments
qualifying and designated as cash flow hedges. The following table sets forth the components of
accumulated other comprehensive income.
16
Table of Contents
| Total | ||||||||||||||||||||
| For. | Accum | |||||||||||||||||||
| Cur. | Gains/ | Employee | Deriv. | Other | ||||||||||||||||
| Trans. | (Losses) | Benefit | & | Comp. Inc/ | ||||||||||||||||
| (Dollars in Millions) | (Loss) | on Sec. | Plans | Hedges | (Loss) | |||||||||||||||
|
January 3, 2010
|
$ | (508 | ) | (30 | ) | (2,665 | ) | 145 | (3,058 | ) | ||||||||||
|
2010 six months change
|
||||||||||||||||||||
|
Unrealized gain (loss)
|
(121 | ) | (185 | ) | ||||||||||||||||
|
Net amount reclassed
to net earnings
|
— | (9 | ) | — | 96 | * | ||||||||||||||
|
Net six months change
|
(2,502 | ) | (130 | ) | 74 | (89 | ) | (2,647 | ) | |||||||||||
|
July 4, 2010
|
$ | (3,010 | ) | (160 | ) | (2,591 | ) | 56 | (5,705 | ) | ||||||||||
| * | Substantially offset in net earnings by changes in value of the underlying transactions. |
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.
NOTE 8 — 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 4, 2010 and June 28, 2009.
| Fiscal Quarters Ended | ||||||||
| July 4, | June 28, | |||||||
| (Shares in Millions) | 2010 | 2009 | ||||||
|
Basic net earnings per share
|
$ | 1.25 | $ | 1.16 | ||||
|
Average shares outstanding – basic
|
2,756.6 | 2,756.2 | ||||||
|
Potential shares exercisable under stock
option plans
|
175.5 | 80.8 | ||||||
|
Less: shares which could be repurchased under
treasury stock method
|
(139.7 | ) | (58.6 | ) | ||||
|
Convertible debt shares
|
3.6 | 3.6 | ||||||
|
Average shares outstanding – diluted
|
2,796.0 | 2,782.0 | ||||||
|
Diluted earnings per share
|
$ | 1.23 | $ | 1.15 | ||||
The diluted earnings per share calculation for both fiscal second quarters ended July 4, 2010 and
June 28, 2009 included the dilutive effect of convertible debt that was offset by the related
reduction in interest expense.
The diluted earnings per share calculation for the fiscal second quarters ended July 4, 2010 and
June 28, 2009 excluded 68 million and 178 million shares, respectively, related to stock options,
as the exercise price of these options was greater than their average market value, which would
result in an anti-dilutive effect on diluted earnings per share.
17
Table of Contents
The following is a reconciliation of basic net earnings per share to diluted net earnings per share
for the fiscal six months ended July 4, 2010 and June 28, 2009.
| Fiscal Six Months Ended | ||||||||
| July 4, | June 28, | |||||||
| (Shares in Millions) | 2010 | 2009 | ||||||
|
Basic net earnings per share
|
$ | 2.89 | $ | 2.43 | ||||
|
Average shares outstanding – basic
|
2,755.7 | 2,761.3 | ||||||
|
Potential shares exercisable under stock
option plans
|
175.4 | 108.4 | ||||||
|
Less: shares which could be repurchased
under treasury stock method
|
(138.6 | ) | (87.8 | ) | ||||
|
Convertible debt shares
|
3.6 | 3.6 | ||||||
|
Average shares outstanding – diluted
|
2,796.1 | 2,785.5 | ||||||
|
Diluted earnings per share
|
$ | 2.85 | $ | 2.41 | ||||
The diluted earnings per share calculation for both the fiscal six months ended July 4, 2010 and
June 28, 2009 included the dilutive effect of convertible debt that was offset by the related
reduction in interest expense.
The diluted earnings per share calculation for the fiscal six months ended July 4, 2010 and June
28, 2009 excluded 68 million and 151 million shares related to stock options, as the exercise price
of these options was greater than their average market value, which would result in an
anti-dilutive effect on diluted earnings per share.
NOTE 9 — SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
(Dollars in Millions)
SALES BY SEGMENT OF BUSINESS (1)
| Fiscal Quarters Ended | ||||||||||||
| July 4, | June 28, | Percent | ||||||||||
| (Dollars in Millions) | 2010 | 2009 | Change | |||||||||
|
Consumer
|
||||||||||||
|
U.S.
|
$ | 1,463 | $ | 1,708 | (14.3 | )% | ||||||
|
International
|
2,184 | 2,146 | 1.8 | |||||||||
|
Total
|
3,647 | 3,854 | (5.4 | ) | ||||||||
|
|
||||||||||||
|
Pharmaceutical
|
||||||||||||
|
U.S.
|
3,110 | 3,172 | (2.0 | ) | ||||||||
|
International
|
2,443 | 2,326 | 5.0 | |||||||||
|
Total
|
5,553 | 5,498 | 1.0 | |||||||||
|
|
||||||||||||
|
Medical Devices & Diagnostics
|
||||||||||||
|
U.S.
|
2,865 | 2,776 | 3.2 | |||||||||
|
International
|
3,265 | 3,111 | 5.0 | |||||||||
|
Total
|
6,130 | 5,887 | 4.1 | |||||||||
|
|
||||||||||||
|
Worldwide
|
||||||||||||
|
U.S.
|
7,438 | 7,656 | (2.8 | ) | ||||||||
|
International
|
7,892 | 7,583 | 4.1 | |||||||||
|
Total
|
$ | 15,330 | $ | 15,239 | 0.6 | % | ||||||
18
Table of Contents
| Fiscal Six Months Ended | ||||||||||||
| July 4, | June 28, | Percent | ||||||||||
| (Dollars in Millions) | 2010 | 2009 | Change | |||||||||
|
Consumer
|
||||||||||||
|
U.S.
|
$ | 3,023 | $ | 3,434 | (12.0 | )% | ||||||
|
International
|
4,390 | 4,131 | 6.3 | |||||||||
|
Total
|
7,413 | 7,565 | (2.0 | ) | ||||||||
|
|
||||||||||||
|
Pharmaceutical
|
||||||||||||
|
U.S.
|
6,316 | 6,846 | (7.7 | ) | ||||||||
|
International
|
4,875 | 4,432 | 10.0 | |||||||||
|
Total
|
11,191 | 11,278 | (0.8 | ) | ||||||||
|
|
||||||||||||
|
Medical Devices & Diagnostics
|
||||||||||||
|
U.S.
|
5,751 | 5,428 | 6.0 | |||||||||
|
International
|
6,606 | 5,994 | 10.2 | |||||||||
|
Total
|
12,357 | 11,422 | 8.2 | |||||||||
|
|
||||||||||||
|
Worldwide
|
||||||||||||
|
U.S.
|
15,090 | 15,708 | (3.9 | ) | ||||||||
|
International
|
15,871 | 14,557 | 9.0 | |||||||||
|
Total
|
$ | 30,961 | $ | 30,265 | 2.3 | % | ||||||
| (1) | Export sales are not significant. |
OPERATING PROFIT BY SEGMENT OF BUSINESS
| Fiscal Quarters Ended | ||||||||||||
| July 4, | June 28, | Percent | ||||||||||
| (Dollars in Millions) | 2010 | 2009 | Change | |||||||||
|
Consumer
|
$ | 669 | $ | 695 | (3.7 | )% | ||||||
|
Pharmaceutical (2)
|
1,833 | 1,701 | 7.8 | |||||||||
|
Medical Devices & Diagnostics (3)
|
1,876 | 2,088 | (10.2 | ) | ||||||||
|
Segments total
|
4,378 | 4,484 | (2.4 | ) | ||||||||
|
Expense not allocated to segments (4)
|
(158 | ) | (221 | ) | ||||||||
|
Worldwide total
|
$ | 4,220 | $ | 4,263 | (1.0 | )% | ||||||
| Fiscal Six Months Ended | ||||||||||||
| July 4, | June 28, | Percent | ||||||||||
| (Dollars in Millions) | 2010 | 2009 | Change | |||||||||
|
Consumer
|
$ | 1,454 | $ | 1,495 | (2.7 | )% | ||||||
|
Pharmaceutical (2)
|
3,803 | 3,958 | (3.9 | ) | ||||||||
|
Medical Devices & Diagnostics (3)
|
5,578 | 3,875 | 43.9 | |||||||||
|
Segments total
|
10,835 | 9,328 | 16.2 | |||||||||
|
Expense not allocated to segments (4)
|
(335 | ) | (422 | ) | ||||||||
|
Worldwide total
|
$ | 10,500 | $ | 8,906 | 17.9 | % | ||||||
19
Table of Contents
| (2) | Includes net litigation expense of $115 million and $202 million recorded in the fiscal second quarter and the first fiscal six months of 2010, respectively. | |
| (3) | Includes net litigation expense of $42 million and income of $1,542 million recorded in the fiscal second quarter and the first fiscal six months of 2010, respectively. | |
| (4) | Amounts not allocated to segments include interest income/(expense) , non-controlling interests and general corporate income/(expense). |
SALES BY GEOGRAPHIC AREA
(Dollars in Millions)
(Dollars in Millions)
| Fiscal Quarters Ended | ||||||||||||
| July 4, | June 28, | Percent | ||||||||||
| (Dollars in Millions) | 2010 | 2009 | Change | |||||||||
|
U.S.
|
$ | 7,438 | $ | 7,656 | (2.8 | )% | ||||||
|
Europe
|
3,832 | 3,972 | (3.5 | ) | ||||||||
|
Western Hemisphere, excluding U.S.
|
1,375 | 1,215 | 13.2 | |||||||||
|
Asia-Pacific, Africa
|
2,685 | 2,396 | 12.1 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 15,330 | $ | 15,239 | 0.6 | % | ||||||
| Fiscal Six Months Ended | ||||||||||||
| July 4, | June 28, | Percent | ||||||||||
| (Dollars in Millions) | 2010 | 2009 | Change | |||||||||
|
U.S.
|
$ | 15,090 | $ | 15,708 | (3.9 | )% | ||||||
|
Europe
|
7,934 | 7,643 | 3.8 | |||||||||
|
Western Hemisphere, excluding U.S.
|
2,655 | 2,277 | 16.6 | |||||||||
|
Asia-Pacific, Africa
|
5,282 | 4,637 | 13.9 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 30,961 | $ | 30,265 | 2.3 | % | ||||||
NOTE 10– BUSINESS COMBINATIONS AND DIVESTITURES
During the fiscal second quarter of 2010, the Company acquired RespiVert Ltd., a privately held
drug discovery company focused on developing small-molecule, inhaled therapies for the treatment of
pulmonary diseases.
drug discovery company focused on developing small-molecule, inhaled therapies for the treatment of
pulmonary diseases.
During the fiscal first quarter of 2010, the Company acquired Acclarent, Inc., a medical technology
company dedicated to designing, developing and commercializing devices that address conditions
affecting the ear, nose and throat, for a net purchase price of $0.8 billion. The purchase price
for the acquisition was allocated primarily to amortizable intangible assets for $0.7 billion.
20
Table of Contents
During the fiscal first quarter of 2009, the Company acquired Mentor Corporation, a leading
supplier of medical products for the global aesthetic market, for a net purchase price of $1.1
billion. The purchase price for the acquisition was allocated primarily to amortizable intangible
assets for $0.9 billion and goodwill for $0.4 billion.
NOTE 11 — LEGAL PROCEEDINGS
PRODUCT LIABILITY
The Company’s subsidiaries are involved in numerous product liability cases in the United States,
many of which concern alleged 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 product liability results from
such cases, it will be substantially covered by existing amounts accrued in the Company’s balance
sheet and, where available, by third-party product liability insurance.
Multiple products of Johnson & Johnson subsidiaries are subject to numerous product liability
claims and lawsuits. There are a significant number of claimants who have pending lawsuits or
claims regarding injuries allegedly due to ORTHO EVRA
®
, RISPERDAL
®
, LEVAQUIN
®
, DURAGESIC
®
, the
CHARITÉ™ Artificial Disc and CYPHER
®
Stent. These claimants seek substantial compensatory and,
where available, punitive damages.
With respect to RISPERDAL
®
, the Attorneys General of multiple states and the Office of General
Counsel of the Commonwealth of Pennsylvania have filed actions seeking reimbursement of Medicaid or
other public funds for RISPERDAL
®
prescriptions written for off-label use, compensation for
treating their citizens for alleged adverse reactions to RISPERDAL
®
, civil fines or penalties,
damages for “overpayments” by the state and others, punitive damages, or other relief. The Attorney
General of Texas has joined a qui tam action in that state seeking similar relief. Certain of these
actions also seek injunctive relief relating to the promotion of RISPERDAL
®
. The Attorneys General
of more than 40 other states have indicated a potential interest in pursuing similar litigation
against the Company’s subsidiary, Janssen Pharmaceutica Inc. (Janssen) (now Ortho-McNeil-Janssen
Pharmaceuticals Inc. (OMJPI)), and have obtained a tolling agreement staying the running of the
statute of limitations while they inquire into the issues. In addition, there are six cases filed
by union health plans seeking damages for alleged overpayments for RISPERDAL
®
, several of which
seek certification as class actions. One of these has been dismissed on Summary Judgment. In the
case brought by the Attorney General of West Virginia, based on claims for alleged consumer fraud
as to DURAGESIC
®
as well as RISPERDAL
®
, Janssen (now OMJPI) was found liable and damages were
assessed at $4.5 million. OMJPI filed an appeal. The West Virginia Supreme Court has accepted
Janssen’s
21
Table of Contents
appeal from that Judgment. It will be orally argued in September 2010. In the Commonwealth of
Pennsylvania suit against Janssen, trial commenced in June 2010. The Judge dismissed the case after
the close of the plaintiff’s evidence. The Commonwealth has filed post-trial motions and may
appeal. Other cases scheduled for trial are in Louisiana and South Carolina, currently scheduled
in September 2010, and Texas scheduled in January 2011. In addition, Attorneys General of many
states have been involved in a coordinated civil investigation of OMJPI regarding potential
consumer fraud actions in connection with the marketing of RISPERDAL
®
.
PATENT LITIGATION
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.
On January 29, 2010, Cordis Corporation (Cordis) settled a patent infringement action against
Boston Scientific Corporation (Boston Scientific) in Delaware Federal District Court accusing its
Express2™, Taxus
®
and Liberte
®
stents of infringing the Palmaz and Gray patents. Under the terms of
the settlement Boston Scientific dropped its lawsuit in which Cordis’ Cypher stent was found to
have infringed their Jang patent and paid Cordis $1.0 billion on February 1, 2010. Boston
Scientific also agreed to pay Cordis an additional $725 million plus interest by January 3, 2011.
On August 2, 2010, Boston Scientific paid the full $725 million plus interest. The Company
recorded the $1.7 billion in the fiscal first quarter of 2010. Cordis granted Boston Scientific a
worldwide license under the Palmaz and Gray patents and Boston Scientific granted Cordis a
worldwide license under the Jang patents for all stents sold by Cordis except the 2.25mm size
Cypher.
Cordis has several pending lawsuits in the New Jersey and Delaware Federal District
Court, against Guidant Corporation (Guidant), Abbott Laboratories, Inc. (Abbott), Boston Scientific
and Medtronic Ave, Inc. (Medtronic) alleging that the Xience V™ (Abbott), Promus™ (Boston
Scientific) and Endeavor
®
(Medtronic) drug eluting stents infringe several patents owned by or
licensed to Cordis. In one of the cases against Boston Scientific, alleging that sales of their
Promus™ stent infringed Wright and Falotico patents, on January 20, 2010 the District Court in
Delaware found the Wright/Falotico patent invalid for lack of written description and/or lack of
enablement. Cordis has appealed this ruling.
In October 2004, Tyco Healthcare Group, LP, (Tyco) and U.S. Surgical Corporation sued Ethicon
Endo-Surgery (EES) alleging that several features of EES’s harmonic scalpel infringed four Tyco
patents. In October 2007, the court granted in part and denied in part cross-motions for summary
judgment. As a result of the opinion, a number of claims have been found invalid and a number have
been found infringed. No claim has been found valid and infringed. Trial commenced in December
2007, and the court dismissed the case without prejudice on grounds that Tyco did not
22
Table of Contents
own the patents in suit. The dismissal without prejudice was affirmed on appeal. In January 2010,
Tyco filed another complaint in the District of Connecticut asserting three of the four patents
from the previous suit and adding new products. The case is scheduled to be trial ready by June
2011.
In May 2008, Centocor, Inc. (Centocor) (now Centocor Ortho Biotech Inc. (COBI)) filed a
lawsuit against Genentech, Inc. (Genentech) in U.S. District Court for the Central District of
California seeking to invalidate the Cabilly II patent. Prior to filing suit, Centocor had a
sublicense under this patent from Celltech (who was licensed by Genentech) for REMICADE
®
and had
been paying royalties to Celltech. Centocor has terminated that sublicense and stopped paying
royalties. Genentech has filed a counterclaim alleging that REMICADE
®
infringes its Cabilly II
patents. Genentech has dropped all its other claims that the manufacture of REMICADE
®
, STELARA™,
SIMPONI™ and ReoPro
®
also infringes one of its other patents relating to the purification of
antibodies made through recombinant DNA techniques. The court has scheduled a hearing for Summary
Judgment Motions in August 2010.
In April 2009, a bench trial was held before the Federal District Court for the Middle
District of Florida on the liability phase of CIBA VISION Corporation’s (CIBA) patent infringement
lawsuit alleging that Johnson & Johnson Vision Care, Inc.’s (JJVC) ACUVUE
®
OASYS™ lenses infringe
three of their Nicholson patents. In August 2009, the District Court found two of these patents
valid and infringed and entered judgment against JJVC. JJVC has appealed that judgment to the Court
of Appeals for the Federal Circuit. On April 27, 2010 the District Court denied Ciba’s motion to
permanently enjoin the infringing lenses. If the judgment is upheld on appeal the Court will
schedule another trial to determine damages and willfulness.
In May 2009, Abbott Biotechnology Ltd. (Abbott) filed a patent infringement lawsuit against
Centocor (now COBI) in the United States District Court for the District of Massachusetts. The suit
alleges that Centocor’s SIMPONI™ product, a human anti-TNF alpha antibody, infringes Abbott’s ‘394
patent (the Salfeld patent). The case had been stayed pending the resolution of an arbitration
filed by Centocor directed to its claim that it is licensed under the ‘394 patent. In June 2010,
the Arbitrator ruled that Centocor did not have a license to the patents-in-suit. The matter will
proceed before the District Court of Massachusetts on the issues of infringement and validity of
the Abbott patents.
In August 2009, Abbott GmbH & Co. (Abbott GmbH) and Abbott Bioresearch Center filed a patent
infringement lawsuit against Centocor (now COBI) in the United States District Court for the
District of Massachusetts. The suit alleges that COBI’s STELARA™ product infringes two U.S. patents
assigned to Abbott GmbH. In August 2009, COBI filed a complaint for a declaratory judgment of
non-infringement and invalidity of the Abbott GmbH patents in the United States District Court for
the District of Columbia. On the same date, also in the United States District Court for the
District of Columbia, COBI filed a Complaint for Review of a
23
Table of Contents
Patent Interference Decision granting priority of invention on one of the two asserted patents to
Abbott GmbH. In August 2009, Abbott GmbH and Abbott Laboratories Limited brought a patent
infringement suit in Canada alleging that STELARA™ infringes Abbott GmbH’s Canadian patent. The
cases filed by COBI in the District of Columbia have been transferred to the District of
Massachusetts.
In August 2009, Bayer Healthcare LLC (Bayer) filed suit against COBI in Massachusetts
District Court alleging infringement by COBI’s SIMPONI™ product of its patent relating to human
anti-TNF antibodies. Bayer has also filed suit under its European counterpart to these patents in
Germany and the Netherlands.
In June 2009, Centocor’s (now COBI) lawsuit alleging that Abbott’s HUMIRA
®
anti-TNF alpha
product infringes Centocor’s ‘775 patent went to trial in Federal District Court in the Eastern
District of Texas. On June 28, 2009 a jury returned a verdict finding the patent valid and
willfully infringed, and awarded Centocor damages of approximately $1.7 billion. A bench trial on
Abbott’s defenses, of inequitable conduct and prosecution laches, was held in August 2009, and the
District Court decided these issues in favor of Centocor. All of Abbott’s post trial motions have
been denied except that the District Court granted Abbott’s motion to overturn the jury finding of
willfulness. Judgment in the amount of $1.9 billion was entered in favor of Centocor in
December 2009 and Abbott has filed an appeal to the Court of Appeals for the Federal Circuit
therefore, the Company has not reflected any of the $1.9 billion in its consolidated financial
statements. Centocor has also filed a new lawsuit in the Eastern District of Texas seeking damages
for infringement of the ‘775 patent attributable to sales of HUMIRA
®
subsequent to the jury verdict
in June 2009.
The following chart summarizes various patent lawsuits concerning products of the Company’s
subsidiaries that have yet to proceed to trial:
| Plaintiff/ Patent | Trial | |||||||||||
| J&J Product | Company | Patents | Holder | Court | Date** | Date Filed | ||||||
|
CYPHER
®
Stent
|
Cordis | Wall | Wall | E.D. TX | Q2/11 | 11/07 | ||||||
|
|
||||||||||||
|
CYPHER
®
Stent
|
Cordis | Saffran | Saffran | E.D. TX | Q1/11 | 10/07 | ||||||
|
|
||||||||||||
|
Blood Glucose Meters and Strips
|
LifeScan | Wilsey | Roche Diagnostics | D. DE | * | 11/07 | ||||||
|
|
||||||||||||
|
REMICADE
®
,
ustekinumab,
golimumab, ReoPro
®
|
Centocor/COBI | Cabilly II | Genentech | C.D. CA | * | 05/08 | ||||||
|
|
||||||||||||
|
SIMPONI™
|
Centocor/COBI | Salfeld | Abbott Laboratories | MA | * | 05/09 | ||||||
|
|
||||||||||||
|
SIMPONI™
|
Centocor/COBI | Boyle | Bayer Healthcare | MA | * | 08/09 | ||||||
|
|
||||||||||||
|
STELARA™
|
Centocor/COBI | Salfeld | Abbott GmbH | MA | * | 08/09 | ||||||
| * | Trial date to be scheduled. | |
| ** | Q reflects the Company’s fiscal quarter. |
24
Table of Contents
LITIGATION AGAINST FILERS OF ABBREVIATED NEW DRUG APPLICATIONS (ANDAs)
The following chart indicates lawsuits pending against generic firms that filed Abbreviated New
Drug Applications (ANDAs) seeking to market generic forms of products sold by various subsidiaries
of the Company prior to expiration of the applicable patents covering those products. These ANDAs
typically include allegations of non-infringement, invalidity and unenforceability of these
patents. In the event the subsidiary of the Company involved is not successful in these actions, or
the statutory 30-month stay expires before a ruling from the District Court is obtained, the firms
involved will have the ability, upon FDA approval, to introduce generic versions of the product at
issue resulting in very substantial market share and revenue losses for the product of the
Company’s subsidiary.
As noted in the following chart, 30-month stays expired during 2009, and will expire in
2010, 2011 and 2012 with respect to ANDA challenges regarding various products:
| 30-Month | ||||||||||||
| Brand Name | Patent/NDA | Generic | Trial | Date | Stay | |||||||
| Product | Holder | Challenger | Court | Date** | Filed | Expiration | ||||||
|
CONCERTA
®
|
McNeil-PPC | Andrx | D. DE | Q4/07 | 09/05 | None | ||||||
|
18, 27, 36 and 54 mg controlled
|
ALZA | KUDCO | D. DE | * | 01/10 | 05/12 | ||||||
|
release tablet
|
||||||||||||
|
|
||||||||||||
|
LEVAQUIN
®
250, 500,
750 mg tablet
|
Ortho-McNeil | Lupin | D. NJ | * | 10/06 | 03/09 | ||||||
|
|
||||||||||||
|
ORTHO TRI-CYCLEN
®
LO
|
Ortho-McNeil | Watson | D. NJ | * | 10/08 | 03/11 | ||||||
|
0.18 mg/0.025 mg,
|
Sandoz | D. NJ | * | 10/11 | ||||||||
|
0.215 mg/0.025 mg
|
Lupin | D. NJ | * | 01/10 | 06/12 | |||||||
|
and 0.25 mg/0.025 mg
|
||||||||||||
|
|
||||||||||||
|
ULTRAM ER
®
100,
200, 300 mg tablet
|
Ortho-McNeil/Biovail | Par | D. DE | Q2/09 | 05/07 | 09/09 | ||||||
|
|
||||||||||||
|
|
06/07 | 11/09 | ||||||||||
|
|
10/07 | 03/10 | ||||||||||
|
|
||||||||||||
|
ULTRAM ER
®
100,
200, 300 mg tablet
|
Ortho-McNeil/Biovail | Impax | D. DE | 08/08 | 01/11 | |||||||
|
|
||||||||||||
|
|
11/08 | 03/11 | ||||||||||
|
|
||||||||||||
|
ULTRAM ER
®
100,
200, 300 mg tablet
|
Ortho-McNeil/Biovail | Paddock | D.DRD. Minn. | * | 09/09 | 01/12 | ||||||
|
|
||||||||||||
|
ULTRAM ER
®
100,
200, 300 mg tablet
|
Ortho-McNeil/Biovail | Cipher | D. DE | * | 10/09 | 03/12 | ||||||
|
|
||||||||||||
|
ULTRAM ER
®
100,
200, 300 mg tablet
|
Ortho-McNeil/Biovail | Lupin | D. DE | * | 01/10 | 06/12 | ||||||
| * | Trial date to be scheduled. | |
| ** | Q reflects the Company’s fiscal quarter. |
25
Table of Contents
In October 2008, the Company’s subsidiary Ortho-McNeil-Janssen Pharmaceuticals, Inc. (OMJPI)
filed suit in Federal District Court in New Jersey against Watson Laboratories, Inc. (Watson) in
response to Watson’s ANDA regarding ORTHO TRI-CYCLEN
®
LO. In June 2009, OMJPI filed suit in Federal
District Court in New Jersey against Sandoz Laboratories, Inc. (Sandoz) in response to Sandoz’s
ANDA regarding ORTHO TRI-CYCLEN
®
LO. The Sandoz and Watson cases have been consolidated.
In January 2010, the Company’s subsidiary OMJPI filed suit in Federal District Court in New
Jersey against Lupin Ltd. and Lupin Pharmaceuticals, Inc. (collectively “Lupin”) in response to
Lupin’s ANDA regarding ORTHO TRI-CYCLEN
®
LO. The Lupin case has been consolidated with the Watson
and Sandoz cases (discussed above).
In the action by McNEIL-PPC, Inc. (McNeil-PPC) and ALZA Corporation (ALZA) against Andrx
Corporation (Andrx) with respect to its ANDA challenge to the CONCERTA
®
patents, a five-day
non-jury trial was held in the Federal District Court in Delaware in December 2007. In March 2009,
the court ruled that one CONCERTA
®
patent would not be infringed by Andrx’s proposed generic
product and that the patent was invalid because it was not enabled. The court dismissed without
prejudice Andrx’s declaratory judgment suit on a second patent for lack of jurisdiction. McNeil-PPC
and ALZA filed an appeal in May 2009. The appeals court heard argument on February 3, 2010. On
April 26, 2010, the court of appeals affirmed the judgment of the district court that the patent is
invalid because it is not enabled. The court did not reach the issue of infringement.
ALZA and OMJPI filed a second suit in Federal District Court in Delaware against
Kremers-Urban, LLC and KUDCO Ireland, Ltd. (KUDCO) in January 2010 in response to KUDCO’s ANDA
challenge regarding CONCERTA
®
tablets. In its notice letter, KUDCO contends that two ALZA patents
for CONCERTA
®
are invalid and not infringed by a KUDCO generic.
In the action against Lupin Pharmaceuticals, Inc. (Lupin) regarding its ANDA
concerning LEVAQUIN
®
, Lupin contends that the U.S. Patent and Trademark Office improperly granted a
patent term extension to the patent that Ortho-McNeil (now Ortho-McNeil-Janssen Pharmaceuticals,
Inc. (OMJPI)) licenses from Daiichi Pharmaceuticals, Inc. (Daiichi). Lupin alleges that the active
ingredient in LEVAQUIN
®
was the subject of prior marketing, and therefore was not eligible for the
patent term extension. Lupin concedes validity and that its product would violate the patent if
marketed prior to the expiration of the original patent term. Summary judgment against Lupin was
granted in May 2009 and Lupin appealed. Oral argument was held in September 2009. In May 2010, the
Court of Appeals affirmed the judgment of the trial court in favor of Ortho-McNeil and Daiichi that
the patent term extension
26
Table of Contents
covering LEVAQUIN
®
(levofloxacin) is valid. Thereafter, Lupin requested rehearing en banc,
which was denied.
In the ULTRAM
®
ER actions, Ortho-McNeil Pharmaceutical, Inc. (Ortho-McNeil) (now OMJPI), filed
lawsuits (each for different dosages) against Par Pharmaceuticals, Inc. and Par Pharmaceuticals
Companies, Inc. (Par) in May, June and October 2007 on two Tramadol ER formulation patents owned by
Purdue Pharma Products L.P. (Purdue) and Napp Pharmaceutical Group Ltd. (Napp). OMJPI also filed
lawsuits (each for different dosages) against Impax Laboratories, Inc. (Impax) on a Tramadol ER
formulation patent owned by Purdue and Napp in August and November 2008. Purdue, Napp and Biovail
Laboratories International SRL (Biovail) (the NDA holder) joined as co-plaintiffs in the lawsuits
against Par and Impax, but Biovail and OMJPI were subsequently dismissed for lack of standing. The
trial against Par took place in April 2009. In August 2009, the Court issued a decision finding the
patents-in-suit invalid. Purdue has appealed that decision. In November 2009, the case against Impax was stayed with the consent of all parties.
In September and October 2009, respectively, Purdue filed suits against Paddock Laboratories, Inc.
(Paddock) and Cipher Pharmaceuticals Inc. (Cipher) on its Tramadol ER formulation patents. In June
2010, the Federal Circuit Court affirmed the District Court’s
decision in the Par case. The case against Cipher was dismissed based on the collateral estoppel
effect of
the Par decision.
In January 2010, Purdue filed a suit against Lupin Ltd. (Lupin) on its Tramadol ER
formulation patents.
GENERAL LITIGATION
In September 2004, plaintiffs in an employment discrimination litigation initiated against the
Company in 2001 in Federal District Court in New Jersey moved to certify a class of all African
American and Hispanic salaried employees of the Company and its affiliates in the U.S., who were
employed at any time from November 1997 to the present. Plaintiffs seek monetary damages for the
period 1997 through the present (including punitive damages) and equitable relief. The Court denied
plaintiffs’ class certification motion in December 2006 and their motion for reconsideration in
April 2007. Plaintiffs sought to appeal these decisions and, in April 2008, the Court of Appeals
ruled that plaintiffs’ appeal of the denial of class certification was untimely. In July 2009,
plaintiffs filed a motion for certification of a modified class, which the Company opposed. The
district court heard oral argument on plaintiffs’ motion in July 2010. The court recently ruled by
denying plaintiffs’ motion for certification of the modified class.
In September 2009, Centocor Ortho Biotech Products, L.P. (COBI) intervened in an inventorship
dispute between Kansas University Center for Research (KUCR) involving certain U.S.
government-owned
VELCADE
®
formulation patents. KUCR brought this action against the
27
Table of Contents
U.S. government in the District
of Kansas seeking to add two Kansas University scientists to the patents. The U.S. government
licensed the patents (and their foreign counterparts) to Millennium Pharmaceuticals, Inc., who in
turn sublicensed the patents (and their foreign counterparts) to COBI for commercial marketing
outside the U.S. If KUCR succeeds in its co-inventorship claim and establishes co-ownership in the
U.S.
VELCADE
®
formulation patents, there is a potential for the same issue to arise
with respect to the foreign counterparts of the patents. If KUCR is successful, this may adversely affect COBI’s
license rights in those countries. In May 2010, the parties reached an agreement to resolve the
disputes in this case and will submit the inventorship issue to arbitration, and the case has been
stayed pending the arbitration. If KUCR wins the arbitration, the parties will request that the
Court issue an order to correct inventorship on the relevant patents; if the U.S. Government, COBI,
and MPI prevail, the case will be dismissed with prejudice.
In February 2009, Basilea Pharmaceutica AG (Basilea) brought an arbitration against the
Company and various affiliates alleging that the Company breached the 2005 License Agreement for
Cefto-biprole by, among other things, failing to secure FDA approval of the cSSSI (skin) indication
and allegedly failing to properly develop the pneumonia indication. Basilea is seeking to recover
significant damages and a declaration that the Company materially breached the agreement. The
arbitration hearing has concluded, post hearing briefs are being submitted, and a decision by the
panel is expected this fall.
In May 2009, COBI commenced an arbitration proceeding before the American Arbitration
Association against Schering-Plough Corporation and its subsidiary Schering-Plough (Ireland)
Company (collectively, Schering-Plough). COBI and Schering-Plough are parties to a series of
agreements (the Distribution Agreements) that grant Schering-Plough the exclusive right to
distribute the drugs REMICADE
®
and SIMPONI™ worldwide, except within the United States, Japan,
Taiwan, Indonesia, and the People’s Republic of China (including Hong Kong) (the “Territory”). COBI
distributes REMICADE
®
and SIMPONI™, the next generation treatment, within the United States. In the
arbitration, COBI seeks a declaration that the agreement and merger between Merck & Co., Inc.
(Merck) and Schering-Plough constitutes a change of control under the terms of the Distribution
Agreements that permits COBI to terminate the Agreements. The termination of the Distribution
Agreements would return to COBI the right to distribute REMICADE
®
and SIMPONI™ within the
Territory. Schering-Plough has filed a response to COBI’s arbitration demand that denies that it
has undergone a change of control. The arbitrators have been selected and the matter will be
proceeding to arbitration in late September 2010.
In
December 2009, the State of Israel (Sheba Medical Center) filed
suit against the Company’s subsidiary, Omrix, and its affiliates. In the lawsuit, the
28
Table of Contents
State claims that an employee of a government-owned hospital
was the inventor on several patents related to fibrin glue technology, that he developed while he
was a government employee. The State claims that he had no right to transfer any intellectual
property to Omrix because it belongs to the State. The State is seeking damages plus royalty on
QUIXIL™ and EVICEL™ or, alternatively, transfer of the patents to the State.
Average Wholesale Price (AWP) Litigation — Johnson & Johnson and several of its pharmaceutical
subsidiaries, along with numerous other pharmaceutical companies, are defendants in a series of
lawsuits in state and federal courts involving allegations that the pricing and marketing of
certain pharmaceutical products amounted to fraudulent and otherwise actionable conduct because,
among other things, the companies allegedly reported an inflated Average Wholesale Price (AWP) for
the drugs at issue. Many of these cases, both federal actions and state actions removed to federal
court, have been consolidated for pre-trial purposes in a Multi-District Litigation (MDL) in
Federal District Court in Boston, Massachusetts. The plaintiffs in these cases include classes of
private persons or entities that paid for any portion of the purchase of the drugs at issue based
on AWP, and state government entities that made Medicaid payments for the drugs at issue based on
AWP.
The MDL Court identified classes of Massachusetts-only private insurers providing
“Medi-gap” insurance coverage and private payers for physician-administered drugs where payments
were based on AWP (“Class 2” and “Class 3”), and a national class of individuals who made
co-payments for physician-administered drugs covered by Medicare (“Class 1”). A trial of the two
Massachusetts-only class actions concluded before the MDL Court in December 2006. In June 2007, the
MDL Court issued post-trial rulings, dismissing the Johnson & Johnson defendants from the case
regarding all claims of Classes 2 and 3, and subsequently of Class 1 as well. Plaintiffs appealed
the Class 1 judgment and, in September 2009, the Court of Appeals vacated the judgment and remanded
for further proceedings in the District Court. AWP cases brought by various Attorneys General have
proceeded to trial against other manufacturers. Three state cases against certain of the Company’s
subsidiaries have been set for trial: Pennsylvania in October 2010, Hawaii in November 2010, Idaho
in October 2011, and Kentucky in January 2012. Other state cases are likely to be set for trial in
the coming year.
In April 2010, a lawsuit was filed in the United States District Court for the Northern
District of California. The complaint alleges that the company, together with co-defendant
Omnicare, Inc. and other unidentified companies or individuals, engaged in a conspiracy to restrain
trade and in unlawful, unfair and fraudulent business acts or practices in violation of California
Business and Professions Code. The Company filed a motion to dismiss. Plaintiffs then filed an
amended complaint.
The Company’s answer or other response to the amended complaint is due in September 2010.
29
Table of Contents
Johnson & Johnson has been named the nominal defendant in six shareholder derivative lawsuits
in the U.S. District Court for the District of New Jersey on behalf of Company shareholders against
certain current and former directors and officers of the Company derivatively on behalf of the
Company: Calamore v. Coleman et. al., filed April 21, 2010; Carpenters Pension Fund of West
Virginia v. Weldon, et. al., filed May 5, 2010; Feldman v. Coleman, et. al., filed May 6, 2010;
Hawaii Laborers Pension Fund v. Weldon, et. al., filed May 14, 2010; Ryan v. Weldon, et. al., filed
June 18, 2010; and Minneapolis Firefighters’ Relief Association, NECA-IBEW Pension Trust Fund, and
NECA-IBEW Welfare Trust Fund v. Weldon, et. al., filed June 24, 2010. Each of these shareholder
derivative actions is similar in its claims in asserting a variety of alleged breaches of fiduciary
duties, including, among other things, that the defendants allegedly engaged in, approved of, or
failed to remedy or prevent improper pharmaceutical rebates, improper off-label marketing of
pharmaceutical and medical device products, violations of current good manufacturing practice
regulations that resulted in product recalls, and failed to disclose the aforementioned alleged
misconduct in the Company’s filings under the Securities Exchange Act of 1934. Each complaint
seeks a variety of relief, including monetary damages and corporate governance reforms. Motions to
consolidate these shareholder derivative actions are pending.
In addition, on July 27, 2010, a complaint was filed by a shareholder of the Company in New
Jersey Superior Court, Chancery Division, Middlesex County (Lipschutz v. Johnson & Johnson) seeking
to compel inspection of Company books and records with respect to certain product recalls and
various manufacturing plants.
OTHER
In July 2003, Centocor (now COBI), a Johnson & Johnson subsidiary, received a request that it
voluntarily provide documents and information to the criminal division of the U.S. Attorney’s
Office, District of New Jersey, in connection with its investigation into various Centocor
marketing practices. Subsequent requests for documents have been received from the U.S. Attorney’s
Office. Both the Company and Centocor have responded to these requests for documents and
information.
In December 2003, Ortho-McNeil (now OMJPI) received a subpoena from the U.S. Attorney’s
Office in Boston, Massachusetts seeking documents relating to the marketing, including alleged
off-label marketing, of the drug TOPAMAX
®
(topiramate). In the fiscal second quarter of 2010, OMJPI
entered into a settlement agreement resolving the federal government’s investigation. The
settlement includes total payments of $81.5 million plus interest, an amount previously reserved.
As one part of the resolution, Ortho-McNeil Pharmaceutical, L.L.C., a subsidiary of OMJPI, has
agreed to plead guilty to a single misdemeanor violation of the Food, Drug and
Cosmetic Act and to pay a $6.1 million criminal fine. OMJPI denies it engaged in any wrongful
conduct, beyond acknowledging
30
Table of Contents
the limited conduct of Ortho-McNeil Pharmaceutical, L.L.C. that is
the basis of the misdemeanor plea. The balance of the total settlement amount is a civil payment,
part of which was paid to the federal government and part of which was paid or set aside for
payment to states for their Medicaid programs.
In January 2004, Janssen (now OMJPI) received a subpoena from the Office of the Inspector
General of the U.S. Office of Personnel Management seeking documents concerning sales and marketing
of, any and all payments to physicians in connection with sales and marketing of, and clinical
trials for, RISPERDAL
®
(risperidone) from 1997 to 2002. Documents subsequent to 2002 have also been
requested. An additional subpoena seeking information about marketing of and adverse reactions to
RISPERDAL
®
was received from the U.S. Attorney’s Office for the Eastern District of Pennsylvania in
November 2005. Subpoenas seeking testimony from various witnesses before a grand jury have also
been received. Janssen is cooperating in responding to ongoing requests for documents and
witnesses. The government is continuing to actively investigate this matter. In February 2010, the
government served Civil Investigative Demands seeking additional information relating to sales and
marketing of RISPERDAL
®
and sales and marketing of INVEGA
®
.
In September 2004, Ortho Biotech Inc. (Ortho Biotech) (now COBI), received a subpoena from the
U.S. Office of Inspector General’s Denver, Colorado field office seeking documents directed to the
sales and marketing of PROCRIT
®
(Epoetin alfa) from 1997 to the present, as well as to dealings
with U.S. Oncology Inc., a healthcare services network for oncologists. Ortho Biotech (now COBI)
has responded to the subpoena.
In November 2007, the Attorney General of the Commonwealth of Massachusetts issued a Civil
Investigative Demand to DePuy seeking information regarding financial relationships between a
number of Massachusetts-based orthopedic surgeons and providers and DePuy. DePuy is responding to
Massachusetts’ additional requests.
In July 2005, Scios Inc. (Scios), a Johnson & Johnson subsidiary, received a subpoena from the
U.S. Attorney’s Office, District of Massachusetts, seeking documents related to the sales and
marketing of NATRECOR
®
. Scios responded to the subpoena. In early August 2005, Scios was advised
that the investigation would be handled by the U.S. Attorney’s Office for the Northern District of
California in San Francisco. Additional requests for documents have been received and responded to
and former Scios employees have testified before a grand jury in San Francisco. The qui tam
complaints were unsealed on February 19, 2009. The U.S. government has intervened in one of the qui
tam actions, and filed a complaint against Scios and the Company in June 2009. Scios and Johnson &
Johnson filed a motion to dismiss the qui tam complaint filed by the government, and that motion
was denied. The criminal
investigation is continuing and discussions are underway in an
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effort to settle this matter.
Whether a settlement can be reached and on what terms is uncertain.
In September 2005, the Company received a subpoena from the U.S. Attorney’s Office,
District of Massachusetts, seeking documents related to sales and marketing of eight drugs to
Omnicare, Inc., (Omnicare) a manager of pharmaceutical benefits for long-term care facilities. The
Company’s subsidiaries involved responded to the subpoena. Several employees of the Company’s
pharmaceutical subsidiaries were subpoenaed to testify before a grand jury in connection with this
investigation. In April 2009, the Company was served with the complaints in two civil qui tam cases
related to marketing of prescription drugs to Omnicare, Inc. On January 15, 2010, the government
filed a complaint intervening in the cases. The complaint asserts claims under the federal False
Claims Act and a related state law claim in connection with the marketing of several drugs to
Omnicare. The complaints allege that Johnson & Johnson provided Omnicare, Inc. with rebates and other alleged
kickbacks, and in so doing, caused Omnicare to file false claims with Medicaid and other government
programs. Subsequently, the Commonwealth of Massachusetts, Virginia, and Kentucky, and the States
of California and Indiana intervened in the action. A motion to dismiss has been filed and is
pending.
In February 2006, the Company received a subpoena from the U.S. Securities & Exchange
Commission (SEC) requesting documents relating to the participation by several Johnson & Johnson
subsidiaries in the United Nations Iraq Oil for Food Program. The subsidiaries are cooperating with
the SEC and U.S. Department of Justice (DOJ) in producing responsive information.
In February 2007, the Company voluntarily disclosed to the DOJ and the SEC that subsidiaries
outside the United States are believed to have made improper payments in connection with the sale
of medical devices in two small-market countries, which payments may fall within the jurisdiction
of the Foreign Corrupt Practices Act (FCPA). In the course of continuing dialogues with the
agencies, other issues potentially rising to the level of FCPA violations in additional markets
have been brought to the attention of the agencies by the Company. The Company has provided and
will continue to provide additional information to the DOJ and SEC, and will cooperate with the
agencies’ reviews of these matters. Law enforcement agencies of a number of other countries are
also pursuing investigations of matters voluntarily disclosed by the Company to the DOJ and SEC.
Discussions are underway in an effort to resolve these matters, and the Iraq Oil for Food matter
referenced above, but whether agreement can be reached and on what terms is uncertain.
In May 2007, the New York State Attorney General issued a subpoena seeking information
relating to the marketing and safety of PROCRIT
®
. The Company is responding to these requests.
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Table of Contents
In April 2007, the Company received two subpoenas from the Office of the Attorney General of
the State of Delaware. The subpoenas seek documents and information relating to nominal pricing
agreements. For purposes of the subpoenas, nominal pricing agreements are defined as agreements
under which the Company agreed to provide a pharmaceutical product for less than ten percent of the
Average Manufacturer Price for the product. The Company responded to these requests.
In March 2008, the Company received a letter request from the Attorney General of the State of
Michigan. The request seeks documents and information relating to nominal price transactions. The
Company responded to the request and will cooperate with the inquiry.
In June 2008, the Company received a subpoena from the United States Attorney’s Office for the
District of Massachusetts relating to the marketing of biliary stents by the Company’s Cordis
subsidiary. Cordis is cooperating in responding to the subpoena. A False Claims Act complaint was
filed in Dallas relating to similar issues. The U.S. Department of Justice and several states have
declined to intervene at this time. A motion to dismiss the Texas qui tam case is pending.
In April 2009, the Company received a HIPPA subpoena from the U.S. Attorney’s Office for the
District of Massachusetts (Boston) seeking information regarding the Company’s financial
relationship with several psychiatrists. The Company is responding to this request.
In April 2009, Ortho-Clinical Diagnostics, Inc. (OCD) received a grand jury subpoena from the
U.S. Department of Justice, Antitrust Division, requesting documents and information for the period
beginning September 1, 2000 through the present, pertaining to an investigation of alleged
violations of the antitrust laws in the blood reagents industry. The Company is in the process of
complying with the subpoena. In the weeks following the public announcement that OCD had received a
subpoena from the Antitrust Division, multiple class action complaints were filed. The various
cases were consolidated for pre-trial purposes in the Eastern District of Pennsylvania.
In May 2009, the New Jersey Attorney General issued a subpoena to DePuy Orthopaedics, Inc.,
seeking information regarding the financial interest of clinical investigators who performed
clinical studies for DePuy Orthopaedics, Inc. and DePuy Spine, Inc. DePuy Orthopaedics is
responding to these requests.
In May 2010, the Company received a letter from the United States House of Representatives’
Committee on Oversight and Government Reform (“Committee”) requesting information and documents
regarding the April 2010, recall of various infants’ and children’s liquid products by McNeil
Consumer Healthcare. The Company produced documents and other information in response to these
requests. In May 2010, the Committee conducted a public hearing. Thereafter, the Company received
a letter from the Committee, requesting information and documents regarding
33
Table of Contents
the recall of certain Motrin products by McNeil Consumer Healthcare. The Company produced
documents and other information in response to these requests. In addition, McNeil Consumer
Healthcare, and certain affiliates including Johnson & Johnson (“the Companies”), received grand
jury subpoenas from the United States Attorney’s Office for the Eastern District of Pennsylvania
requesting documents broadly relating to recent recalls of various products of McNeil Consumer
Healthcare, and the FDA inspections of the Fort Washington, Pennsylvania and Lancaster,
Pennsylvania manufacturing facilities. The Companies are cooperating with the United States
Attorney’s Office in responding to the subpoenas. Also, multiple complaints seeking class action
certification related to the recalls have been filed. The Company has also received Civil
Investigative Demands from multiple State Attorneys General Offices relating to the same issues.
In recent years the Company has received numerous requests from a variety of United States
Congressional Committees to produce information relevant to ongoing congressional inquiries. It is
the Company’s policy to cooperate with these inquiries by producing the requested information.
With respect to all the above matters, the Company and its subsidiaries are vigorously
contesting the allegations asserted against them and otherwise pursuing defenses to maximize the
prospect of success. The Company and its subsidiaries involved in these matters continually
evaluate their strategies in managing these matters and, where appropriate, pursue settlements and
other resolutions where those are in the best interest of the Company.
The Company is also involved in a number of patent, trademark and other lawsuits
incidental to its business. The ultimate legal and financial liability of the Company in respect to
all claims, lawsuits and proceedings referred to above cannot be estimated with any certainty.
However, in the Company’s opinion, based on its examination of these matters, its experience to
date and discussions with counsel, the ultimate outcome of legal proceedings, net of liabilities
accrued in the Company’s balance sheet, is not expected to have a material adverse effect on the
Company’s financial condition, although the resolution in any reporting period of one or more of
these matters could have a material impact on the Company’s results of operations and cash flows
for that period.
NOTE 12 – RESTRUCTURING
In the fourth quarter of 2009, the Company announced global restructuring initiatives designed to
strengthen the Company’s position as one of the world’s leading global health care companies. This
program will allow the Company to invest in new growth platforms; ensure the successful launch of
its many new products and continued growth of its core businesses; and provide flexibility to
adjust to the changed and evolving global environment.
During the fiscal fourth quarter of 2009, the Company recorded $1.2 billion in related pre-tax
charges, of which approximately $830 million of the pre-tax restructuring charges are expected to
34
Table of Contents
require cash payments. The $1.2 billion of restructuring charges consists of severance costs of
$748 million, asset write-offs of $362 million and $76 million related to leasehold and contract
obligations. The $362 million of asset write-offs relate to inventory of $113 million (recorded in
cost of products sold), property, plant and equipment of $107 million, intangible assets of $81
million and other assets of $61 million. The asset write-offs and leasehold and contract
obligations have been substantially completed. Additionally, as part of this program the Company
plans to eliminate approximately 7,500 positions of which approximately 3,400 have been eliminated
since the restructuring was announced.
The following table summarizes the severance related reserves and the associated spending under
this initiative through the fiscal second quarter of 2010:
| (Dollars in Millions) | Severance | |||
|
Reserve balance as of:
|
||||
|
January 3, 2010
|
$ | 686 | ||
|
Cash outlays
|
(176 | ) | ||
|
July 4, 2010*
|
$ | 510 | ||
| * | Cash outlays for severance are expected to be paid out over the next 12 to 18 months in accordance with the Company’s plans and local laws. |
NOTE 13 – SUBSEQUENT EVENT
On July 12, 2010 the Company announced a definitive agreement to acquire Micrus Endovascular
Corporation, a global developer and manufacturer of minimally invasive devices to address
hemorrhagic and ischemic stroke for a net purchase price of approximately $0.5 billion.
On July 12, 2010 Ethicon Endo-Surgery, Inc., a Johnson & Johnson company, completed the divestiture
of its Breast Care business to Devicor Medical Products, Inc.
On August
2, 2010 the Company received the full $725 million plus interest
from Boston Scientific for the remainder of a settlement, an amount
previously expected to be received in January 2011.
| Item 2 | — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Results of Operations
Analysis of Consolidated Sales
Analysis of Consolidated Sales
For the first fiscal six months of 2010, worldwide sales were $31.0 billion, an increase of 2.3% as
compared to 2009 first fiscal six months sales of $30.3 billion. Currency fluctuations had a
positive impact of 2.3% and operational growth was flat for the first fiscal six months of 2010.
Sales by U.S. companies were $15.1 billion in the first fiscal six months of 2010, which
represented a decrease of 3.9% as compared to the same period last year. Sales by international
companies
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Table of Contents
were $15.9 billion, which represented a total increase of 9.0% including an operational increase of
4.2%, and a positive impact from currency of 4.8% as compared to the first fiscal six months sales
of 2009.
Sales by companies in Europe achieved growth of 3.8%, including operational growth of 2.9% and a
positive impact from currency of 0.9%. Sales by companies in the Western Hemisphere, excluding the
U.S., achieved growth of 16.6% including operational growth of 3.1% and a positive impact from
currency of 13.5%. Sales by companies in the Asia-Pacific, Africa region achieved sales growth of
13.9%, including operational growth of 6.9% and an increase of 7.0% related to the positive impact
of currency.
For the fiscal second quarter of 2010, worldwide sales were $15.3 billion, an increase of 0.6%
including an operational increase of 0.1% as compared to 2009 fiscal second quarter sales of $15.2
billion. Currency fluctuations positively impacted sales by 0.5% for the fiscal second quarter of
2010.
Sales by U.S. companies were $7.4 billion in the fiscal second quarter of 2010, which represented a
decrease of 2.8% as compared to the same period last year. Sales by international companies were
$7.9 billion, which represented a total increase of 4.1% including an operational increase of 3.0%,
and a positive impact from currency of 1.1% as compared to the fiscal second quarter sales of 2009.
Sales by companies in Europe experienced a sales decline of 3.5%, including operational growth of
1.3% and a negative impact from currency of 4.8%. Sales by companies in the Western Hemisphere,
excluding the U.S., achieved growth of 13.2% including operational growth of 2.6% and a positive
impact from currency of 10.6%. Sales by companies in the Asia-Pacific, Africa region achieved
growth of 12.1%, including operational growth of 6.1% and a positive impact from currency of 6.0%.
Health Care Reform
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act
of 2010 were signed into law during March 2010. The newly enacted health care reform legislation
included an increase in the minimum Medicaid rebate rate from 15.1% to 23.1% and also extended the
rebate to drugs provided through Medicaid managed care organizations. The Company has estimated the
total year 2010 impact will be an increase in sales rebates in the range of $400-$500 million of
which $150 million and $90 million impacted the Company’s fiscal first six months and fiscal second
quarter of 2010, respectively.
Beginning in 2011, Companies that sell branded prescription drugs to specified U.S. government
programs will pay an annual non-tax deductible fee based on an allocation of the Companies market
share of branded prior year sales. Additionally, in 2011, discounts will be provided on the
Company’s brand-name drugs to patients who fall within the Medicare Part D coverage gap, “donut
36
Table of Contents
hole”. Beginning in 2013, the Company will record the 2.3% excise tax imposed on the sale of
certain medical devices.
Analysis of Sales by Business Segments
Consumer
Consumer segment sales in the fiscal first six months of 2010 were $7.4 billion, a decrease of 2.0%
as compared to the same period a year ago, including operational decline of 5.1% and a positive
currency impact of 3.1%. U.S. Consumer segment sales declined by 12.0% while international sales
growth of 6.3%, including operational growth of 0.6% and a positive currency impact of 5.7%.
Major Consumer Franchise Sales – Fiscal Six Months
| July 4, | June 28, | Total | Operations | Currency | ||||||||||||||||
| (Dollars in Millions) | 2010 | 2009 | Change | Change | Change | |||||||||||||||
|
OTC Pharm & Nutr
|
$ | 2,348 | $ | 2,658 | (11.7 | )% | (14.3 | )% | 2.6 | % | ||||||||||
|
Skin Care
|
1,763 | 1,675 | 5.3 | 2.9 | 2.4 | |||||||||||||||
|
Baby Care
|
1,066 | 997 | 6.9 | 2.1 | 4.8 | |||||||||||||||
|
Women’s Health
|
935 | 904 | 3.4 | (0.4 | ) | 3.8 | ||||||||||||||
|
Oral Care
|
753 | 751 | 0.3 | (3.6 | ) | 3.9 | ||||||||||||||
|
Wound Care/Other
|
548 | 580 | (5.5 | ) | (8.1 | ) | 2.6 | |||||||||||||
|
Total
|
$ | 7,413 | $ | 7,565 | (2.0 | )% | (5.1 | )% | 3.1 | % | ||||||||||
Consumer segment sales in the fiscal second quarter of 2010 were $3.6 billion, a decrease of
5.4% over the same period a year ago, including an operational decline of 6.5% and a positive
currency impact of 1.1%. U.S. Consumer segment sales declined by 14.3% while international sales
growth of 1.8%, including an operational decline of 0.2%, and a positive currency impact of 2.0%.
Major Consumer Franchise Sales – Fiscal Second Quarters
| July 4, | June 28, | Total | Operations | Currency | ||||||||||||||||
| (Dollars in Millions) | 2010 | 2009 | Change | Change | Change | |||||||||||||||
|
OTC Pharm & Nutr
|
$ | 1,141 | $ | 1,310 | (12.9 | )% | (13.4 | )% | 0.5 | % | ||||||||||
|
Skin Care
|
843 | 833 | 1.2 | 1.1 | 0.1 | |||||||||||||||
|
Baby Care
|
537 | 508 | 5.7 | 2.9 | 2.8 | |||||||||||||||
|
Women’s Health
|
466 | 481 | (3.1 | ) | (4.5 | ) | 1.4 | |||||||||||||
|
Oral Care
|
372 | 386 | (3.6 | ) | (5.8 | ) | 2.2 | |||||||||||||
|
Wound Care/Other
|
288 | 336 | (14.3 | ) | (15.8 | ) | 1.5 | |||||||||||||
|
Total
|
$ | 3,647 | $ | 3,854 | (5.4 | )% | (6.5 | )% | 1.1 | % | ||||||||||
The OTC Pharmaceuticals and Nutritionals franchise experienced an operational decline of 13.4%
as compared to prior year fiscal second quarter. Sales were negatively impacted by the voluntary
recalls of certain OTC products announced earlier in the year and suspension of production at
McNeil Consumer Healthcare’s Fort Washington, Pennsylvania facility. The Company anticipates having
alternative sources of supply before the end of 2010 for a limited number of the products that were
produced at this facility. The impact to 2010 annual sales from not shipping products produced at this
facility is estimated at approximately $600 million.
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Alternate supply of the remainder of these products is projected to start in the first quarter of
2011 and continue to expand throughout the year. McNeil Consumer Healthcare submitted its
comprehensive remediation plan to the Food and Drug Administration (FDA) on July 15, 2010, which
encompasses, among other items, training, resources and capital investments in quality and
manufacturing systems across the McNeil organization. The Company continues to work closely with
the FDA on remediation actions.
The Skin Care franchise achieved operational growth of 1.1%. NEUTROGENA
®
and JOHNSON’s Adult were
the major contributors to this growth.
The Baby Care franchise achieved operational growth of 2.9% over prior year fiscal second quarter.
The major contributors to the sales growth were powders and cleansers outside the U.S. partially
offset by increased competition in the U.S.
The Women’s Health Franchise experienced an operational decline of 4.5% as compared to prior year
fiscal second quarter. Sales were negatively impacted by increased competition and new product
launches in the prior year.
The Oral
Care franchise experienced an operational decline of 5.8% due
in part to the divestiture
of the EFFERDENT
®
/Effergrip
®
brands in the fiscal fourth quarter of 2009.
Pharmaceutical
Pharmaceutical segment sales in the first fiscal six months of 2010 were $11.2 billion, a total
decrease of 0.8% as compared to the same period a year ago with an operational decline of 2.5% and
an increase of 1.7% related to the positive impact of currency. U.S. Pharmaceutical sales declined
by 7.7% as compared to the same period a year ago. International Pharmaceutical sales growth of
10.0%, included an operational increase of 5.7%, and an increase of 4.3% related to the positive
impact of currency.
Major Pharmaceutical Product Revenues – Fiscal Six Months*
| July 4, | June 28, | Total | Operations | Currency | ||||||||||||||||
| (Dollars in Millions) | 2010 | 2009 | Change | Change | Change | |||||||||||||||
|
REMICADE
®
|
$ | 2,316 | $ | 2,130 | 8.7 | % | 8.7 | % | — | % | ||||||||||
|
PROCRIT
®
/EPREX
®
|
1,049 | 1,127 | (6.9 | ) | (8.2 | ) | 1.3 | |||||||||||||
|
RISPERDAL
â
CONSTA
â
|
734 | 673 | 9.1 | 6.8 | 2.3 | |||||||||||||||
|
LEVAQUIN
®
/FLOXIN
®
|
671 | 787 | (14.7 | ) | (14.8 | ) | 0.1 | |||||||||||||
|
CONCERTA
â
|
652 | 661 | (1.4 | ) | (3.3 | ) | 1.9 | |||||||||||||
|
ACIPHEX
®
/PARIET
â
|
514 | 523 | (1.7 | ) | (3.6 | ) | 1.9 | |||||||||||||
|
TOPAMAX
®
|
290 | 784 | (63.0 | ) | (63.8 | ) | 0.8 | |||||||||||||
|
Other Pharmaceuticals
|
4,965 | 4,593 | 8.1 | 5.2 | 2.9 | |||||||||||||||
|
Total
|
$ | 11,191 | $ | 11,278 | (0.8 | )% | (2.5 | )% | 1.7 | % | ||||||||||
| * | Prior year amounts have been reclassified to conform to current year presentation. |
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Table of Contents
Pharmaceutical segment sales in the fiscal second quarter of 2010 were $5.6 billion, a total
increase of 1.0% as compared to the same period a year ago with an operational increase of 1.0% and
no impact related to currency. U.S. Pharmaceutical sales decreased by 2.0% as compared to the same
period a year ago. International Pharmaceutical sales achieved sales growth of 5.0%, including
operational growth of 4.9%, and an increase of 0.1% related to the positive impact of currency.
Major Pharmaceutical Product Revenues – Fiscal Second Quarters*
| July 4, | June 28, | Total | Operations | Currency | ||||||||||||||||
| (Dollars in Millions) | 2010 | 2009 | Change | Change | Change | |||||||||||||||
|
REMICADE
®
|
$ | 1,130 | $ | 1,102 | 2.5 | % | 2.5 | % | – | % | ||||||||||
|
PROCRIT
®
/EPREX
®
|
526 | 577 | (8.8 | ) | (8.1 | ) | (0.7 | ) | ||||||||||||
|
RISPERDAL
â
CONSTA
â
|
355 | 348 | 2.0 | 3.4 | (1.4 | ) | ||||||||||||||
|
CONCERTA
â
|
323 | 317 | 1.9 | 1.2 | 0.7 | |||||||||||||||
|
LEVAQUIN
®
/FLOXIN
®
|
300 | 362 | (17.1 | ) | (17.2 | ) | 0.1 | |||||||||||||
|
ACIPHEX
®
/PARIET
â
|
254 | 260 | (2.3 | ) | (1.6 | ) | (0.7 | ) | ||||||||||||
|
TOPAMAX
®
|
142 | 182 | (22.0 | ) | (21.4 | ) | (0.6 | ) | ||||||||||||
|
Other Pharmaceuticals
|
2,523 | 2,350 | 7.4 | 6.8 | 0.6 | |||||||||||||||
|
Total
|
$ | 5,553 | $ | 5,498 | 1.0 | % | 1.0 | % | 0.0 | % | ||||||||||
| * | Prior year amounts have been reclassified to conform to current year presentation. |
REMICADE
®
(infliximab), a biologic approved for the treatment of a number of immune-mediated
inflammatory diseases, achieved operational growth of 2.5% over prior year fiscal second quarter.
Growth was primarily driven by market growth partially offset by lower market share due to
increased competition, including other of the Company’s immunology products, SIMPONI
®
(golimumab)
and STELARA
®
(ustekinumab). REMICADE
®
is competing in a market which is experiencing increased
competition due to new entrants and the expansion of indications for existing competitors.
PROCRIT
â
(Epoetin alfa)/EPREX
â
(Epoetin alfa), experienced an operational sales decline
of 8.1%, as compared to the prior year fiscal second quarter. The decline in PROCRIT
â
sales
was due to the declining markets for Erythropoiesis Stimulating Agents (ESAs). The decline in
EPREX
â
sales was due to increased competition and a slowdown in certain European markets.
RISPERDAL
®
CONSTA
®
(risperidone), a long-acting injectable antipsychotic, achieved operational
growth of 3.4% over the fiscal second quarter of 2009 due to growth outside the U.S.
CONCERTA
â
(methylphenidate HCl), a product for the treatment of attention deficit
hyperactivity disorder, achieved operational sales growth of 1.2% as compared to the prior year
fiscal second quarter due to growth outside the U.S. Sales in the U.S. were adversely impacted by
the newly enacted health care reform legislation due to changes to rebates to Medicaid managed care
39
Table of Contents
organizations. Although the original CONCERTA
â
patent expired in 2004, the FDA has not
approved any generic version that is substitutable for CONCERTA
â
. Parties have filed
Abbreviated New Drug Applications (ANDAs) for generic versions of CONCERTA
â
, which are
pending and may be approved at any time.
LEVAQUIN
®
(levofloxacin)/FLOXIN
â
(ofloxacin), an anti-infective, experienced an operational
decline of 17.2% as compared to the prior year fiscal second quarter primarily due to the decline
in the market and increased penetration of generics.
ACIPHEX
â
/PARIET
â
, experienced an operational decline of 1.6% as compared to the fiscal
second quarter of 2009 primarily due to generic competition in the U.S.
TOPAMAX
®
(topiramate), experienced an operational decline of 21.4% as compared to prior year fiscal
second quarter. Market exclusivity for TOPAMAX
®
(topiramate) in the U.S. expired in March 2009 and
multiple generics have entered the market. Loss of market exclusivity for the TOPAMAX
®
patent has
resulted in a significant reduction in sales in the U.S. In 2009, full year U.S. sales of TOPAMAX
®
were $0.7 billion. U.S. sales of TOPAMAX
®
were $0.5 billion in the first quarter of 2009 and $0.2
billion for the remainder of the 2009 fiscal year.
In the fiscal second quarter of 2010, Other Pharmaceutical sales achieved operational growth of
6.8% over the prior year fiscal second quarter. Contributors to the increase were sales of
VELCADE
â
(bortezomib), SIMPONI
®
(golimumab), STELARA
®
(ustekinumab), PREZISTA
®
(darunavir),
INTELENCE
®
(etravirine), NUCYNTA
®
(tapentadol) and INVEGA SUSTENNA
®
(paliperidone palmitate). The
growth was partially offset by lower sales of DURAGESIC
®
/Fentanyl Transdermal (fentanyl transdermal
system) and RISPERDAL
â
/risperidone due to continued generic competition.
Medical Devices and Diagnostics
Medical Devices and Diagnostics segment sales in the first fiscal six months of 2010 were $12.4
billion, an increase of 8.2% as compared to the same period a year ago, with 5.8% of this change
due to operational increases and an increase of 2.4% related to the positive impact of currency.
The U.S. Medical Devices and Diagnostics sales increase was 6.0% as compared to the prior year.
International Medical Devices and Diagnostics sales increase of 10.2% included operational
increases of 5.6% and an increase of 4.6% related to the positive impact of currency.
Major Medical Devices and Diagnostics Franchise Sales – Fiscal Six Months
| July 4, | June 28, | Total | Operations | Currency | ||||||||||||||||
| (Dollars in Millions) | 2010 | 2009 | Change | Change | Change | |||||||||||||||
|
DEPUY
®
|
$ | 2,829 | $ | 2,615 | 8.2 | % | 5.9 | % | 2.3 | % | ||||||||||
|
ETHICON ENDO-SURGERY
®
|
2,364 | 2,130 | 11.0 | 8.2 | 2.8 | |||||||||||||||
|
ETHICON
®
|
2,279 | 1,994 | 14.3 | 11.6 | 2.7 | |||||||||||||||
|
CORDIS
®
|
1,327 | 1,342 | (1.1 | ) | (3.3 | ) | 2.2 | |||||||||||||
|
Vision Care
|
1,326 | 1,229 | 7.9 | 4.6 | 3.3 | |||||||||||||||
|
Diabetes Care
|
1,213 | 1,151 | 5.4 | 4.0 | 1.4 | |||||||||||||||
|
ORTHO-CLINICAL
DIAGNOSTICS
®
|
1,019 | 961 | 6.0 | 4.1 | 1.9 | |||||||||||||||
|
Total
|
$ | 12,357 | $ | 11,422 | 8.2 | % | 5.8 | % | 2.4 | % | ||||||||||
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Medical Devices and Diagnostics segment sales in the fiscal second quarter of 2010 were $6.1
billion, an increase of 4.1% as compared to the same period a year ago, with 3.5% of this change
due to operational increases and a positive currency impact of 0.6%. The U.S. Medical Devices and
Diagnostics sales growth was 3.2% and the increase in international Medical Devices and Diagnostics
sales was 5.0%, which included operational increases of 3.9% and a positive currency impact of
1.1%.
Major Medical Devices and Diagnostics Franchise Sales – Fiscal Second Quarters
| July 4, | June 28, | Total | Operations | Currency | ||||||||||||||||
| (Dollars in Millions) | 2010 | 2009 | Change | Change | Change | |||||||||||||||
|
DEPUY
®
|
$ | 1,375 | $ | 1,323 | 3.9 | % | 3.5 | % | 0.4 | % | ||||||||||
|
ETHICON ENDO-SURGERY
®
|
1,196 | 1,115 | 7.3 | 6.6 | 0.7 | |||||||||||||||
|
ETHICON
®
|
1,132 | 1,041 | 8.7 | 8.2 | 0.5 | |||||||||||||||
|
Vision Care
|
662 | 630 | 5.1 | 2.6 | 2.5 | |||||||||||||||
|
CORDIS
®
|
655 | 674 | (2.8 | ) | (3.4 | ) | 0.6 | |||||||||||||
|
Diabetes Care
|
616 | 610 | 1.0 | 1.7 | (0.7 | ) | ||||||||||||||
|
ORTHO-CLINICAL
DIAGNOSTICS
®
|
494 | 494 | — | (0.5 | ) | 0.5 | ||||||||||||||
|
Total
|
$ | 6,130 | $ | 5,887 | 4.1 | % | 3.5 | % | 0.6 | % | ||||||||||
The DePuy franchise achieved operational growth of 3.5% over the same period a year ago. This was
primarily due to growth in the hip and knee product lines. Pressure on pricing continued as a
result of economic trends however new product launches have mitigated some of the impact.
The Ethicon Endo-Surgery franchise achieved operational growth of 6.6% over the prior year fiscal
second quarter. This was attributable to growth in the Endoscopic, HARMONIC
ä
and Advanced
Sterilization product lines.
The Ethicon franchise achieved operational growth of 8.2% over the prior year fiscal second
quarter. Growth was driven by sutures, biosurgicals and Mentor products. Additionally, the
acquisition of Acclarent this year contributed to the growth in the quarter.
The Vision Care franchise achieved operational sales growth of 2.6% over the prior year fiscal
second quarter. Growth was primarily driven by 1-DAY ACUVUE
®
TruEye
TM
, ACUVUE
®
OASYS™
for Astigmatism and 1-DAY ACUVUE
®
MOIST
TM
partially offset by lower sales of reusable
lenses.
The Cordis franchise experienced an operational sales decline of 3.4% as compared to the fiscal
second quarter of 2009. The decline was caused by lower sales of the CYPHER
®
Sirolimus-eluting
Coronary Stent due to increased global competition. The decline
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was partially offset by strong growth in the Biosense Webster business.
The Diabetes Care franchise achieved operational sales growth of 1.7% over the prior year fiscal
second quarter. This was primarily attributable to base business growth in the U.S. and growth of
the Animas business primarily outside the U.S.
The Ortho-Clinical Diagnostics franchise experienced an operational sales decline of 0.5% as
compared to the fiscal second quarter of 2009. Growth of VITROS
®
5600 and 3600 was offset by lower
sales in donor screening.
Cost of Products Sold and Selling, Marketing and Administrative Expenses
Consolidated costs of products sold for the first fiscal six months of 2010 increased to 29.6% from 28.7% of sales in the same period a year ago. The increase was primarily due to unfavorable product mix attributable to the loss of market exclusivity for TOPAMAX ® and the recall of certain OTC products. The cost of products sold for the fiscal second quarter of 2010 increased to 30.2% from 29.2% of sales as compared to the same period a year ago primarily due to the costs associated with the impact of the recall and remediation efforts in the Consumer business as well as the impact of price reductions in the Pharmaceutical and certain Medical Devices and Diagnostics businesses.
Consolidated costs of products sold for the first fiscal six months of 2010 increased to 29.6% from 28.7% of sales in the same period a year ago. The increase was primarily due to unfavorable product mix attributable to the loss of market exclusivity for TOPAMAX ® and the recall of certain OTC products. The cost of products sold for the fiscal second quarter of 2010 increased to 30.2% from 29.2% of sales as compared to the same period a year ago primarily due to the costs associated with the impact of the recall and remediation efforts in the Consumer business as well as the impact of price reductions in the Pharmaceutical and certain Medical Devices and Diagnostics businesses.
Consolidated selling, marketing and administrative expenses for the first fiscal six months of 2010
decreased to 30.8% from 31.1% of sales as compared to the same period a year ago. Consolidated
selling, marketing and administrative expenses for the fiscal second quarter of 2010 decreased to
31.0% from 31.5% of sales as compared to the same period a year ago. The decrease in both the
fiscal second quarter and first fiscal six months was primarily due to cost containment initiatives
principally resulting from the restructuring charge taken in 2009.
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 2009 were $3.2 billion,
which was flat to the prior fiscal period. Worldwide costs of research activities for the fiscal
second quarter of 2010 were $1.6 billion, which was flat to the prior fiscal period.
Other (Income) Expense, Net
Other (income) expense, net is the account where the Company records gains and losses related to
the sale and write-down of certain equity securities of the Johnson & Johnson Development
Corporation, gains and losses on the disposal of fixed assets, currency gains and losses, gains and
losses relating to non-controlling interests, litigation settlements, as well as royalty income.
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Table of Contents
The change in other
(income) expense, net for the first fiscal six months of 2010 was favorable as compared to the same
period a year ago primarily due to net gain of $1.5 billion from litigation matters recorded in the
fiscal first quarter of 2010. The change in other (income) expense, net for the fiscal second
quarter of 2010 was slightly unfavorable as compared to the same period a year ago. In the fiscal
second quarter of 2010 the Company recorded $157 million expense related to litigation matters. The
Company received a $270 million settlement payment from Medtronic AVE, Inc. during the fiscal
second quarter of 2009 which was offset by several smaller litigation matters as well as asset
write-downs and other charges.
OPERATING PROFIT BY SEGMENT
Consumer Segment
Consumer Segment
Operating profit for the Consumer segment as a percent to sales in the first fiscal six months of
2010 was 19.6% versus 19.8% for the same period a year ago. The primary driver of the decline in
operating profit for the first fiscal six months of 2010 was due to lower sales, and costs
associated with the recall of certain OTC products. In addition, 2009 included asset write-downs
recorded in the fiscal second quarter of 2009. Operating profit for the Consumer segment as a
percent to sales in the fiscal second quarter of 2010 was 18.3% versus 18.0% for the same period a
year ago. The decline in the operating profit margins for the fiscal second quarters versus the
fiscal six months was due to costs associated with the recall of certain OTC products and the
suspension of production at McNeil Consumer Healthcare’s Fort Washington, Pennsylvania facility in
the second quarter of 2010 and asset write-downs recorded in the fiscal second quarter of 2009.
Pharmaceutical Segment
Operating profit for the Pharmaceutical segment as a percent to sales in the first fiscal six
months of 2010 was 34.0% versus 35.1% for the same period a year ago. The decreased operating
profit for the fiscal six months of 2010 was primarily due to $0.2 billion of expense related to
litigation matters, the impact of the newly enacted health care reform legislation and unfavorable
product mix due to the loss of market exclusivity for TOPAMAX
®
in the second quarter of 2009. The
decrease was partially offset by cost containment initiatives. Operating profit for the
Pharmaceutical segment as a percent to sales in the fiscal second quarter of 2010 was 33.0% versus
30.9% for the same period a year ago. The primary driver of the improvement in the operating profit
margin for the fiscal second quarter was lower manufacturing costs and benefits from cost
improvement initiatives related to the restructuring charge in 2009 partially offset by $0.1
billion of expense related to litigation matters and the impact of the newly enacted health care
reform legislation.
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 2010 was
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Table of Contents
45.1% versus 33.9% for the same period a year ago. The primary driver of the improvement in the
operating profit margin in the Medical Devices and Diagnostics segment for the first fiscal six
months was due to a $1.5 billion gain from net litigation matters recorded in 2010. Additionally,
in the fiscal second quarter of 2009 the Company received a $270 million settlement payment from
Medtronic AVE, Inc., which was partially offset by asset write-downs and other charges. Operating
profit for the Medical Devices and Diagnostics segment as a percent to sales in the fiscal second
quarter of 2010 was 30.6% versus 35.5% for the same period a year ago. The primary drivers of the
decline in the operating profit margin for the fiscal second quarter was litigation expense of $42
million recorded in the second quarter of 2010 and a $270 million settlement payment from Medtronic
AVE, Inc., which was partially offset by asset write-downs and other charges recorded in the fiscal
second quarter of 2009.
Interest (Income) Expense
Interest income increased in both the first fiscal six months and fiscal second quarter of 2010 as
compared to the same period a year ago. The ending balance of cash, cash equivalents and marketable
securities, was $18.9 billion at the end of the fiscal second quarter of 2010. This is an increase
of $4.2 billion from the same period a year ago. The increase was primarily due to cash generated
from operating activities and net cash proceeds from litigation matters.
Interest expense decreased slightly in the both the first fiscal six months and the fiscal second
quarter of 2010 as compared to the same period a year ago. At the end of the fiscal second quarter
of 2010 the Company’s debt position was $11.7 billion compared to $13.6 billion from the same
period a year ago. The reduction in current debt in the fiscal second quarter was primarily due to
a reduction in Commercial Paper issued.
Provision for Taxes on Income
The worldwide effective income tax rates for the first fiscal six months of 2010 and 2009 were
24.0% and 24.6%, respectively. The lower effective tax rate was primarily due to a decline in
taxable income in higher tax jurisdictions relative to taxable income in lower tax jurisdictions
partially offset by the U.S. Research and Development tax credit which was not in effect for the
first fiscal six months of 2010. In the second quarter of 2010 the Company received a favorable tax
ruling related to a litigation settlement which reduced the tax rate previously recorded in the
first quarter of 2010.
As of July 4, 2010 the Company had approximately $2.5 billion of liabilities from unrecognized tax
benefits. The Company does not expect that the total amount of unrecognized tax benefits will
change significantly during the next twelve months.
See Note 8 to the Consolidated Financial Statements in the Annual Report on Form 10-K for the
fiscal year ended January 3, 2010 for more detailed information regarding unrecognized tax
benefits.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash Flows
Cash and cash equivalents were $12.7 billion at the end of the fiscal second quarter of 2010 as
compared with $15.8 billion at the fiscal year end of 2009. The primary uses of cash that
contributed to the $3.1 billion decrease were $4.6 billion net cash used by investing activities,
primarily the purchase of short-term marketable securities and $5.9 billion used by financing
activities partially offset by $7.5 billion generated from operating activities.
Cash flow from operations of $7.5 billion was the result of $8.0 billion of net earnings and $2.3
billion of non cash charges related to depreciation and amortization, stock based compensation
and deferred tax provision partially offset by $2.8 billion related to changes in assets and
liabilities including a receivable of $0.7 billion from a litigation settlement, net of effects
from acquisitions.
Investing activities use of $4.6 billion cash related to net investments in marketable securities
of $2.9 billion, acquisitions of $0.9 billion and $0.9 billion for additions to property, plant
and equipment, reduced by $0.1 billion of proceeds from asset sales.
The use of $5.9 billion in financing activities was primarily for dividends to shareholders of
$2.8 billion, $2.7 billion net retirement of short and long-term debt and a net of $0.4 billion
for repurchase of common stock net of proceeds from stock options exercised.
In the fiscal second quarter of 2010 the Company continued to have access to liquidity through
the commercial paper market. The Company anticipates that operating cash flows, existing credit
facilities and access to the commercial paper markets will continue to provide sufficient
resources to fund operating needs however the Company monitors the global capital markets on an
ongoing basis and from time to time may raise capital when market conditions are
favorable.
Dividends
On April 22, 2010, the Board of Directors declared a regular cash dividend of $0.540 per
share, payable on June 15, 2010 to shareholders of record as of June 1, 2010. This represented an
increase of 10.2% in the quarterly dividend rate and was the 48th consecutive year of cash dividend
increases.
On July 19, 2010, the Board of Directors declared a regular cash dividend of $0.540 per share,
payable on September 14, 2010 to shareholders of record as of August 31, 2010. The Company expects
to continue the practice of paying regular quarterly cash dividends.
OTHER INFORMATION
New Accounting Standards
New Accounting Standards
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The Financial Accounting Standards Board (FASB) issued guidance and amendments to the criteria for
separating consideration in multiple-deliverable revenue arrangements, which the Company adopted in
the fiscal first quarter of 2010. The guidance also (a) provides principles and application
guidance on whether multiple deliverables exist, how the arrangement should be separated, and the
consideration allocated; (b) requires an entity to allocate revenue in an arrangement using
estimated selling prices of deliverables if a vendor does not have vendor-specific objective
evidence or third-party evidence of selling price; and(c) eliminates the use of the residual method
and requires an entity to allocate the revenue using the relative selling price method. The
adoption did not have a material impact on the Company’s results of operations, cash flows or
financial position however it will expand the disclosures for multiple-deliverable revenue
arrangements.
During the fiscal first quarter of 2010 the Company adopted the FASB standard related to variable
interest entities. The adoption of this standard did not have a significant impact on the Company’s
results of operations, cash flows or financial position.
During the fiscal first quarter of 2010 the Company adopted the new accounting guidance on fair
value measurements and disclosures. This guidance requires the Company to disclose the amount of
significant transfers between Level 1 and Level 2 inputs and the reasons for these transfers as
well as the reasons for any transfers in or out of Level 3 of the fair value hierarchy. In
addition, the guidance clarifies certain existing disclosure requirements. The adoption of this
standard did not have a significant impact on the Company’s results of operations, cash flows or
financial position.
During the fiscal second quarter of 2010 the FASB issued an accounting standard update related to
revenue recognition under the milestone method. The objective of the accounting standard update is
to provide guidance on defining a milestone and determining when it may be appropriate to apply the
milestone method of revenue recognition for research or development transactions. This update is
effective on a prospective basis for milestones achieved in fiscal years, and interim periods
within those years, beginning on or after June 15, 2010. The adoption of this standard is not
expected to have a significant impact on the Company’s results of operations, cash flows or
financial position.
Economic and Market Factors
Johnson & Johnson is aware that its products are used in an environment where, for more than a
decade, policymakers, consumers and businesses have expressed concern about the rising cost of
health care. Johnson & Johnson has a long-standing policy of pricing products responsibly. For the
period 1999 through 2009 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
46
Table of Contents
professional products) was below the U.S. Consumer Price Index (CPI).
The Company operates in certain countries where the economic conditions continue to present
significant challenges. The Company continues to monitor these
situations and take
appropriate actions. Inflation rates continue to have an effect on worldwide economies and,
consequently, on the way companies operate. In the face of increasing costs, the Company strives to
maintain its profit margins through cost reduction programs, productivity improvements and periodic
price increases. The Company faces various worldwide health care changes that may continue to
result in pricing pressures that include health care cost containment and government legislation
relating to sales, promotions and reimbursement.
Changes in the behavior and spending patterns of consumers of health care products and services,
including delaying medical procedures, rationing prescription medications, reducing the frequency
of physician visits and foregoing health care insurance coverage, as a result of a prolonged
global economic downturn will continue to impact the Company’s businesses.
The Company also operates in an environment increasingly hostile to intellectual property rights.
Generic drug firms have filed Abbreviated New Drug Applications seeking to market generic forms of
most of the Company’s key pharmaceutical products, prior to expiration of the applicable patents
covering those products. In the event the Company is not successful in defending a lawsuit
resulting from an Abbreviated New Drug Application filing, the generic firms will then introduce
generic versions of the product at issue, resulting in very substantial market share and revenue
losses. For further information see the discussion on “Litigation Against Filers of Abbreviated New
Drug Applications” included in Item 1. Financial Statements (unaudited)- Notes to Consolidated
Financial Statements, Note 11.
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
47
Table of Contents
not to place undue reliance on any forward-looking statements. The Company does not undertake to
update any forward-looking statements as a result of new information or future events or
developments.
Risks and uncertainties include general industry conditions and competition; economic conditions;
interest rate and currency exchange rate fluctuations; technological advances, new products and
patents attained by competitors; challenges inherent in new product development, including
obtaining regulatory approvals; challenges to patents; U.S. and foreign health care reforms and
governmental laws and regulations; trends toward health care cost containment; increased scrutiny
of the health care industry by government agencies; product efficacy or safety concerns resulting
in product recalls or regulatory action.
The Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2010 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 3, 2010.
| Item 4 | — CONTROLS AND PROCEDURES |
Disclosure controls and procedures. At the end of the period covered by this report, the Company
evaluated the effectiveness of the design and operation of its disclosure controls and procedures.
The Company’s disclosure controls and procedures are designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the Securities
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in
the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange Act is accumulated and communicated
to the Company’s management, including its principal executive and principal financial officers, or
persons performing similar functions, as appropriate to allow timely decisions regarding required
disclosure. William C. Weldon, Chairman and Chief Executive Officer, and Dominic J. Caruso, Vice
President, Finance and Chief Financial Officer, reviewed and participated in this evaluation.
Based on this evaluation, Messrs. Weldon and Caruso concluded that, as of the end of the period
covered by this report, the Company’s disclosure controls and procedures were effective.
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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 11 included in
Part I, Item 1, Financial Statements (unaudited) — Notes to Consolidated Financial Statements.
Item 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
The following table provides information with respect to Common Stock purchases by the Company
during the fiscal second quarter of 2010. Common Stock purchases on the open market are made as
part of a systematic plan to meet the needs of the Company’s compensation programs.
| Total Number of | Remaining | |||||||||||||||
| Shares Purchased | Maximum Number | |||||||||||||||
| Average | as Part of | of Shares that | ||||||||||||||
| Total Number | Price | Publicly | May Be Purchased | |||||||||||||
| of Shares | Paid per | Announced Plans | Under the Plans | |||||||||||||
| Fiscal Month | Purchased (1) | Share | or Programs (2) | or Programs (3) | ||||||||||||
|
April 5, 2010 through May 2, 2010
|
1,408,200 | $ | 64.78 | – | ||||||||||||
|
May 3, 2010 through May 30, 2010
|
2,611,700 | $ | 63.07 | – | ||||||||||||
|
May 31, 2010 through July 4, 2010
|
2,386,000 | $ | 58.59 | 1,474,400 | ||||||||||||
|
Total
|
6,405,900 | 1,474,400 | 16,829,203 | |||||||||||||
| (1) | During the fiscal second quarter of 2010, the Company repurchased an aggregate of 1,474,400 shares of Johnson & Johnson Common Stock pursuant to the repurchase program that was publicly announced on July 9, 2007 and an aggregate of 4,931,500 shares in open-market transactions outside of the program. The repurchase |
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| program has no time limit and may be suspended for periods or discontinued at any time. | ||
| (2) | As of July 4, 2010, an aggregate of 141,852,100 shares were purchased for a total of $9.0 billion since the inception of the repurchase program announced on July 9, 2007. | |
| (3) | As of July 4, 2010, based on the closing price of the Company’s Common Stock on the New York Stock Exchange on July 2, 2010 of $59.08 per share. |
Item 6 – EXHIBITS
Exhibit 31.1 Certifications under Rule 13a-14(a) of the
Securities Exchange Act pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 – Filed with this document.
Exhibit 32.1 Certifications pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 – Furnished with this document.
Exhibit 101 XBRL (Extensible Business Reporting Language)
The following materials from Johnson & Johnson’s Quarterly Report on Form 10-Q for the
quarter ended July 4, 2010, formatted in Extensive Business Reporting Language (XBRL),
(i)consolidated balance sheets, (ii) consolidated statements of earnings, (iii)
consolidated statements of cash flows, and (iv) the notes to the consolidated financial
statements.
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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 11, 2010 | By | /s/ D. J. CARUSO | ||
| D. J. CARUSO | ||||
|
Vice President, Finance;
Chief Financial Officer (Principal Financial Officer) |
||||
| Date: August 11, 2010 | By | /s/ S. J. COSGROVE | ||
| S. J. COSGROVE | ||||
|
Controller
(Principal Accounting Officer) |
||||
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TABLE OF CONTENTS
Part I Financial InformationprintItem 1 Financial StatementsprintNote 2 InventoriesprintNote 3 Intangible Assets and GoodwillprintNote 4 Fair Value MeasurementsprintNote 5 Income TaxesprintNote 6 Pensions and Other Postretirement BenefitsprintNote 7 Accumulated Other Comprehensive IncomeprintNote 8 Earnings Per ShareprintNote 9 Segments Of Business and Geographic AreasprintNote 10 Business Combinations and DivestituresprintNote 11 Legal ProceedingsprintNote 12 RestructuringprintNote 13 Subsequent EventprintItem 2 Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3 Quantitative and Qualitative Disclosures About Market RiskprintItem 4 Controls and ProceduresprintPart II Other InformationprintItem 1 Legal ProceedingsprintItem 2 Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 6 Exhibitsprint