UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended April 2, 2006
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition
period from
to
Commission file number 1-3215
JOHNSON & JOHNSON
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-1024240
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
(Address of principal executive offices)
Registrant's telephone number, including area code
(732) 524-0400
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. (X) Yes ( )No
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, or a non-
accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. Large accelerated filer (X)
Accelerated filer ( ) Non-accelerated filer ( )
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange
Act). ( ) Yes (X) No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
On April 30, 2006 2,961,025,607 shares of Common Stock,
$1.00 par value, were outstanding.
1
JOHNSON & JOHNSON AND SUBSIDIARIES
TABLE OF CONTENTS
Part I - Financial Information Page No.
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets -
April 2, 2006 and January 1, 2006 3
Consolidated Statements of Earnings for the Fiscal
First Quarters Ended April 2, 2006 and
April 3, 2005 5
Consolidated Statements of Cash Flows for the Fiscal
First Quarters Ended April 2, 2006 and
April 3, 2005 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 26
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 34
Item 4. Controls and Procedures 34
Part II - Other Information
Item 1 - Legal Proceedings 35
Item 1A - Risk Factors 35
Item 2 - Unregistered Sales of Equity Securities
and Use of Proceeds 35
Item 5 - Other Information 36
Item 6 - Exhibits 36
Signatures 37
2
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
ASSETS
April 2,2006 January 1, 2006*
Current Assets:
Cash & cash equivalents $16,822 $16,055
Marketable securities 363 83
Accounts receivable, trade, less
allowances for doubtful accounts
$162 (2005,$164) 7,671 7,010
Inventories (note 4) 4,240 3,959
Deferred taxes on income 1,995 1,931
Prepaid expenses and other
receivables 2,661 2,442
Total current assets 33,752 31,480
Marketable securities, non-current 20 20
Property, plant and equipment at
cost 20,151 19,716
Less: accumulated depreciation (9,200) (8,886)
Property, plant and equipment, net 10,951 10,830
Intangible assets, net (note 5) 6,438 6,185
Goodwill, net (note 5) 6,460 5,990
Deferred taxes on income 1,269 1,138
Other assets 3,243 3,221
Total Assets $62,133 $58,864
* Restated to include the impact of share based compensation
expense; see Notes 1 and 10 for additional information.
See Notes to Consolidated Financial Statements
3
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
April 2, 2006 January 1, 2006*
Current Liabilities:
Loans and notes payable $828 $668
Accounts payable 3,939 4,315
Accrued liabilities 3,520 3,529
Accrued rebates, returns and
promotions 2,026 2,017
Accrued salaries, wages and
commissions 939 1,166
Accrued taxes on income 1,940 940
Total current liabilities 13,192 12,635
Long-term debt 1,980 2,017
Deferred taxes on income 294 211
Employee related obligations 3,284 3,065
Other liabilities 2,260 2,226
Total liabilities 21,010 20,154
Shareholders' Equity:
Common stock - par value $1.00 per
share (authorized 4,320,000,000
shares; issued 3,119,842,000
shares) 3,120 3,120
Accumulated other comprehensive
income (note 8) (633) (755)
Retained earnings 44,713 42,310
Less: common stock held in
treasury, at cost (147,352,000 and
145,364,000 shares) 6,077 5,965
Total shareholders' equity 41,123 38,710
Total liabilities and
shareholders' equity $62,133 $58,864
*Restated to include the impact of share based compensation
expense; see Notes 1 and 10 for additional information.
See Notes to Consolidated Financial Statements
4
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; dollars & shares in millions
except per share figures)
Fiscal Quarters Ended
April 2, Percent to April 3, Percent
2006 to Sales 2005* to Sales
Sales to customers $12,992 100.0% $12,832 100.0%
Cost of products sold 3,612 27.8 3,496 27.2
Gross profit 9,380 72.2 9,336 72.8
Selling, marketing and
administrative expenses 4,095 31.5 4,127 32.2
Research expense 1,532 11.8 1,384 10.8
In-process research &
development 37 0.3 - -
Interest Income (197) (1.5) (84) (0.6)
Interest Expense, net
of portion capitalized 16 0.1 15 0.1
Other(income)expense,
net (718) (5.5) (33) (0.3)
Earnings before provision
for taxes on income 4,615 35.5 3,927 30.6
Provision for taxes on
income (Note 3) 1,310 10.1 1,088 8.5
NET EARNINGS $3,305 25.4% $2,839 22.1%
NET EARNINGS PER SHARE
Basic $1.11 $0.96
Diluted $1.10 $0.94
CASH DIVIDENDS PER SHARE $0.33 $0.285
AVG. SHARES OUTSTANDING
Basic 2,974.5 2,972.1
Diluted 2,992.7 3,023.7
*Restated to include the impact of share based compensation
expense; see Notes 1 and 10 for additional information.
See Notes to Consolidated Financial Statements
5
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
Fiscal Quarters Ended
April 2, April 3,
2006 2005*
CASH FLOW FROM OPERATING
ACTIVITIES
Net earnings $3,305 $2,839
Adjustment to reconcile net
earnings to cash flow:
Depreciation and amortization of
property and intangibles 521 515
Stock based compensation 153 135
Purchased in-process research and
development 37 -
Deferred tax provision (153) 53
Accounts receivable allowances (4) 22
Changes in assets and liabilities,
net of effects from acquisitions:
Increase in accounts receivable (568) (639)
Increase in inventories (219) (140)
Decrease in accounts payable and
accrued liabilities (633) (1,509)
(Increase)/decrease in other
current and non-current assets (207) 235
Increase in other current and non-
current liabilities 1,242 1,124
NET CASH FLOWS FROM OPERATING
ACTIVITIES 3,474 2,635
CASH FLOWS FROM INVESTING
ACTIVITIES
Additions to property, plant and
equipment (446) (397)
Proceeds from the disposal of
assets 1 77
Acquisitions, net of cash acquired (811) -
acquired
Purchases of investments (327) (3,824)
Sales of investments 69 2,340
Other (primarily intangibles) (63) (210)
NET CASH USED BY INVESTING
ACTIVITIES (1,577) (2,014)
CASH FLOWS FROM FINANCING
ACTIVITIES
Dividends to shareholders (982) (847)
Repurchase of common stock (401) (654)
Proceeds from short-term debt 357 173
Retirement of short-term debt (267) (144)
Proceeds from long-term debt - 4
Retirement of long-term debt (7) (17)
Proceeds from the exercise of stock
options/excess tax benefits 136 285
6
NET CASH USED BY FINANCING
ACTIVITIES (1,164) (1,200)
Effect of exchange rate changes on
cash and cash equivalents 34 (85)
Increase/(decrease) in cash and
cash equivalents 767 (664)
Cash and Cash equivalents,
beginning of period 16,055 9,203
CASH AND CASH EQUIVALENTS,
END OF PERIOD $16,822 $8,539
Acquisitions
Fair value of assets acquired $850 -
Fair value of liabilities assumed (39) -
Net cash paid for acquisitions $811 -
*Restated to include the impact of share based compensation
expense; see Notes 1 and 10 for additional information.
See Notes to Consolidated Financial Statements
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - The accompanying unaudited interim financial
statements and related notes should be read in
conjunction with the Consolidated Financial Statements
of Johnson & Johnson and Subsidiaries (the "Company")
and related notes as contained in the Company's Annual
Report on Form 10-K for the fiscal year ended
January 1, 2006. The unaudited interim financial
statements include all adjustments (consisting only of
normal recurring adjustments) and accruals necessary in
the judgment of management for a fair statement of the
results for the periods presented.
During the fiscal first quarter of 2006, the Company
elected to adopt SFAS 123(R), Share Based Payment,
under the modified retrospective application method.
Accordingly, financial statement amounts for the prior
periods presented in this Form 10-Q have been restated
to reflect the fair value method of expensing
prescribed by SFAS 123(R).
NOTE 2 - FINANCIAL INSTRUMENTS
The Company follows the provisions of Statement of
Financial Accounting Standards (SFAS) 133, SFAS 138 and
SFAS 149 requiring that all derivative instruments be
recorded on the balance sheet at fair value.
As of April 2, 2006, the balance of deferred net losses
on derivatives included in accumulated other
comprehensive income was $1 million after-tax. For
additional information, see Note 8. The Company expects
that substantially all of this amount will be
reclassified into earnings over the next 12 months as a
result of transactions that are expected to occur over
that period. The amount ultimately realized in earnings
will differ as foreign exchange rates change. Realized
gains and losses are ultimately determined by actual
exchange rates at maturity of the derivative.
Transactions with third parties will cause the amount
in accumulated other comprehensive income to affect net
earnings. The maximum length of time over which the
Company is hedging is 18 months. The Company also uses
currency swaps to manage currency risk primarily
related to borrowings, which may exceed 18 months.
For the fiscal first quarters ended April 2, 2006 and
April 3, 2005, the net impact of the hedges'
ineffectiveness, transactions not qualifying for hedge
accounting and discontinuance of hedges, to the
Company's financial statements was insignificant. Refer
to Note 8 for disclosures of movements in Accumulated
Other Comprehensive Income.
NOTE 3 - INCOME TAXES
The worldwide effective income tax rates for the fiscal
first quarters of 2006 and 2005 were 28.4% and 27.7%,
respectively. The increase in the effective tax rate
of 0.7% was primarily due to the Guidant termination
fee, less associated expenses, of $622 million before
tax recorded at a 40.8% tax rate, partially offset by
increases in taxable income in lower tax jurisdictions
relative to taxable income in higher tax jurisdictions.
8
NOTE 4 - INVENTORIES
(Dollars in Millions)
April 2, 2006 January 1, 2006
Raw materials and supplies $1,078 $931
Goods in process 1,038 1,073
Finished goods 2,124 1,955
$4,240 $3,959
NOTE 5 - INTANGIBLE ASSETS & GOODWILL
Intangible assets that have finite useful lives are
amortized over their estimated useful lives. Goodwill
and indefinite lived intangible assets are assessed
annually for impairment. The latest impairment
assessment of goodwill and indefinite lived intangible
assets was completed in the fiscal fourth quarter of
2005 and no impairment was determined. Future
impairment tests will be performed annually in the
fiscal fourth quarter, or sooner if warranted by
economic conditions.
(Dollars in Millions)
April 2, 2006 January 1, 2006
Trademarks (non-amortizable) - gross $1,395 $1,400
Less accumulated amortization 133 134
Trademarks (non-amortizable) - net 1,262 1,266
Patents and trademarks - gross 4,337 4,128
Less accumulated amortization 1,445 1,370
Patents and trademarks - net 2,892 2,758
Other intangibles - gross 3,729 3,544
Less accumulated amortization 1,445 1,383
Other intangibles - net 2,284 2,161
Total intangible assets - gross 9,461 9,072
Less accumulated amortization 3,023 2,887
Total intangible assets - net 6,438 6,185
Goodwill - gross 7,176 6,703
Less accumulated amortization 716 713
Goodwill - net 6,460 5,990
Goodwill as of April 2, 2006 as allocated by segment of business
is as follows:
(Dollars in Millions)
Consumer Pharm Med Dev Total
& Diag
Goodwill, net of
accumulated amortization
at January 1, 2006 $1,090 874 4,026 $5,990
Acquisitions - - 454 454
Translation & Other 11 4 1 16
Goodwill, net as of
April 2, 2006 $1,101 878 4,481 $6,460
9
The weighted average amortization periods for patents
and trademarks and other intangible assets are 15 years
and 17 years, respectively. The amortization expense
of amortizable intangible assets for the fiscal first
quarter ended April 2, 2006 was $134 million and the
estimated amortization expense for the five succeeding
years approximates $565 million, per year.
NOTE 6 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
SALES BY SEGMENT OF BUSINESS(1)
(Dollars in Millions)
Fiscal First Quarters
April April Percent
2, 2006 3, 2005 Change
Consumer
U.S. $1,150 1,114 3.2%
International 1,205 1,166 3.3
2,355 2,280 3.3
Pharmaceutical
U.S. 3,701 3,783 (2.2)
International 1,925 1,972 (2.4)
5,626 5,755 (2.2)
Medical Devices &
Diagnostics
U.S. 2,520 2,361 6.7
International 2,491 2,436 2.3
5,011 4,797 4.5
U.S. 7,371 7,258 1.6
International 5,621 5,574 0.8
Worldwide $12,992 12,832 1.2%
(1) Export and intersegment sales are not significant.
OPERATING PROFIT BY SEGMENT OF BUSINESS
(Dollars in Millions) Fiscal First Quarters
April April Percent
2, 2006 3, 2005 Change
Consumer $465 438 6.2%
Pharmaceutical 1,927 2,076 (7.2)
Medical Devices &
Diagnostics 2,160* 1,448 49.2
Segments total 4,552 3,962 14.9
Income/(expense) not
allocated to segments 63 (35)
Worldwide total $4,615 3,927 17.5%
*Includes Guidant termination fee, less associated
expenses, of $622 million before tax. Excluding the
Guidant termination fee operating profit growth for the
fiscal first quarter of 2006 versus the same period
last year was 6.2%.
10
SALES BY GEOGRAPHIC AREA
(Dollars in Millions)
Fiscal First Quarters
April April Percent
2, 2006 3, 2005 Change
U.S. $7,371 7,258 1.6%
Europe 3,071 3,176 (3.3)
Western Hemisphere,
excluding U.S. 822 725 13.4
Asia-Pacific,
Africa 1,728 1,673 3.3
Total $12,992 12,832 1.2%
NOTE 7 - EARNINGS PER SHARE
The following is a reconciliation of basic net earnings per share
to diluted net earnings per share for the fiscal first quarters
ended April 2, 2006 and April 3, 2005.
(Shares in Millions) Fiscal Quarters Ended
April 2, April 3,
2006 2005
Basic net earnings per share $1.11 $0.96
Average shares outstanding - basic 2,974.5 2,972.1
Potential shares exercisable under
stock option plans 233.2 219.8
Less: shares which could be
repurchased under treasury stock
method (218.9) (178.3)
Convertible debt shares 3.9 10.1
Adjusted average shares outstanding -
diluted 2,992.7 3,023.7
Diluted earnings per share $1.10 $0.94
The diluted earnings per share calculation included the
dilutive effect of convertible debt that was offset by
the related reduction in interest expense of $1 million
and $4 million for the fiscal first quarters ended
April 2, 2006 and April 3, 2005, respectively.
The diluted earnings per share calculation excluded 47
million and 46 million shares related to options for
the fiscal first quarters ended April 2, 2006 and April
3, 2005, respectively, as the exercise price per share
of these options was greater than the average market
value, resulting in an anti-dilutive effect on diluted
earnings per share.
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The total comprehensive income for the fiscal first quarter
ended April 2, 2006 was $3.4 billion, compared with
$2.7 billion for the same period a year ago. Total
comprehensive income included net earnings, net
unrealized currency gains and losses on translation,
net unrealized gains and losses on securities available
for sale and net gains and losses on derivative
instruments qualifying and designated as cash flow
hedges. The following table sets forth the
components of accumulated other comprehensive income.
11
(Dollars in Millions)
Total
Unrld Gains/ Accum
For. Gains/ Pens (Losses) Other
Cur. (Losses) Liab on Deriv Comp
Trans. on Sec Adj. & Hedg Inc/
(Loss)
January 1, 2006 $ (520) 70 (320) 15 $(755)
2006 Three Months changes
Net change associated
with current period
hedging transactions - - - (11)
Net amount reclassed to
net earnings - - - (5)*
Net three months
changes 157 (19) - (16) 122
April 2, 2006 $ (363) 51 (320) (1) $(633)
Amounts in accumulated other comprehensive income are
presented net of the related tax impact. Foreign
currency translation adjustments are not currently
adjusted for income taxes, as they relate to permanent
investments in international subsidiaries.
*Primarily offset in net earnings by changes in value
of the underlying transactions.
NOTE 9 - MERGERS, ACQUISITIONS AND DIVESTITURES
During the fiscal first quarter of 2006, the following
companies were acquired: Animas Corporation, a leading
maker of insulin infusion pumps and related products;
Hand Innovations LLC, a privately held manufacturer of
fracture fixation products for the upper extremities;
and Future Medical Systems S.A., a privately held
company that primarily develops, manufactures and
markets arthroscopic fluid management systems.
On January 25, 2006 the definitive agreement to acquire
Guidant Corporation was terminated by Guidant in
accordance with its terms. Pursuant to the terms of
the agreement, Guidant paid the Company a fee of $705
million. The Company recorded the Guidant termination
fee, less associated expenses, of $622 million before
tax in other income during the fiscal first quarter of
2006.
The 2005 acquisitions included: TransForm
Pharmaceuticals, Inc., a company specializing in the
discovery of superior formulations and novel
crystalline forms of drug molecules; Closure Medical
Corporation, a company with expertise and intellectual
property in the biosurgicals market; Peninsula
Pharmaceuticals, Inc., a biopharmaceutical company
focused on developing and commercializing antibiotics
to treat life-threatening infections; and rights to all
consumer and professionally dispensed REMBRANDT(R)
Brand of oral care products, such as whitening
toothpastes, strips, systems and mouth rinses.
12
NOTE 10 - SHARE BASED COMPENSATION
At April 2, 2006, the Company had 16 share based
compensation plans. The shares outstanding are for
contracts under the Company's 1995 and 2000 Stock
Option Plans, the 2005 Long Term Incentive Plan, the
1997 Non-Employee Director's Plan and the Centocor,
Innovasive Devices, ALZA, Inverness and Scios Stock
Option Plans. During 2006, no options were granted
under any of these plans except the 2005 Long Term
Incentive Plan. The compensation cost that has been
charged against income for these plans was $153 million
for the fiscal first quarter of 2006 and $135 million
for the fiscal first quarter of 2005. The total income
tax benefit recognized in the income statement for
share based compensation arrangements was $54 million
and $47 million for the fiscal first quarters of 2006
and 2005, respectively. Share based compensation costs
capitalized as part of inventory were insignificant.
Stock options expire 10 years from the date they are
granted and vest over periods that range from one to
five years. All options are granted at current market
price on the date of grant. Under the 2005 Long Term
Incentive Plan, the Company may issue up to 260 million
shares of common stock. Shares available for future
grants under the 2005 Long Term Incentive Plan were
223.1 million at April 2, 2006.
The Company settles employee stock option exercises
with treasury shares. Treasury shares are replenished
throughout the year for the number of shares used to
settle employee stock option exercises.
The fair value of each option award is estimated on the
date of grant using the Black Scholes option valuation
model that uses the assumptions noted in the following
table. Starting in 2006, expected volatility
represents a blended rate of 4-year daily historical
average volatility rate, and 5-week average implied
volatility rate based on at-the-money traded
Johnson & Johnson options, with a life of 720 days.
Prior to 2006, expected volatility was based on
5-year weekly historical volatility rate. Historical
data is used to determine the expected life of the option.
The risk-free rate is based on the U.S. Treasury yield
curve in effect at the time of grant.
The weighted average fair value of options granted was
$12.22 for fiscal first quarter of 2006, $15.48 in
2005, and $13.11 in 2004. The fair value was estimated
based on the weighted average assumptions of:
Fiscal First Quarter Fiscal Year Fiscal Year
2006 2005 2004
Risk Free Rate 4.60% 3.72% 3.15%
Expected Volatility 19.6% 25.0% 27.0%
Expected Life 6 yrs 5 yrs 5 yrs
Dividend Yield 2.50% 1.93% 1.76%
13
A summary of option activity under the Plan as of
January 2, 2006, and changes during the year then ended
is presented below.
Weighted
Weighted Avg Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Shares Price Term (000)'s
Outstanding at January 2, 2006 248,542 $53.05
Options granted 28,799 $58.36
Options exercised (3,419) $39.78
Options canceled/forfeited (1,537) $58.49
Outstanding at April 2, 2006 272,385 $53.75 6.52 $1,806,078
Exercisable at April 2, 2006 153,288 $49.19 $1,539,363
The total intrinsic value of options exercised during
2006 was $69.2 million. As of April 2, 2006, the total
unrecognized compensation cost was $1,153.9 million,
which has a weighted average period of 1.66 years to be
recognized.
During 2006, the Company granted 7.3 million shares of
Restricted Stock and Restricted Stock Units, at an
average fair value of $54.15, using the fair market
value at the date of grant. The fair value of
Restricted Stock Units is discounted for lack of
dividends. The outstanding shares of Restricted Stock
and Restricted Stock Units as of April 2, 2006 were 7.3
million. The fair value of Restricted Stock and
Restricted Stock Units vested during the fiscal first
quarter of 2006 was $1.7 million.
The Company settles employee stock issuances with
treasury shares. Treasury shares are replenished
throughout the year for the number of shares used for
employee stock issuances.
As previously discussed, the Company elected to adopt
SFAS 123(R) under the modified retrospective
application method. The Company believes that the
modified retrospective application of this standard
achieves the highest level of clarity and comparability
among the presented periods. Accordingly, financial
statement amounts for the prior period presented in
this Form 10-Q have been restated to reflect the fair
value method of expensing prescribed by SFAS 123(R).
The Company has filed a Current Report on Form 8-K on
April 17, 2005 with restated data to reflect the
modified retrospective application.
The following table details the retroactive application
impact of SFAS 123(R) on previously reported results.
(Dollars in millions, except per share amounts)
As Previously
For the quarter ended April 3, 2005 Restated Reported
Earnings before provision for taxes
on income $ 3,927 $ 4,062
Net earnings 2,839 2,927
Basic net earnings per share 0.96 0.98
Diluted net earnings per share 0.94 0.97
Net cash flows from operating
activities 2,635 2,654
Net cash used by financing
activities $(1,200) $(1,219)
14
NOTE 11 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Components of Net Periodic Benefit Cost
Net periodic benefit cost for the Company's defined
benefit retirement plans and other benefit plans for
the fiscal first quarters of 2006 and 2005 included the
following components:
(Dollars in Millions)
Retirement Plans Other Benefit Plans
April 2, April 3, April 2, April 3,
2006 2005 2006 2005
Service cost $ 126 110 $ 18 13
Interest cost 140 118 26 26
Expected return on
plan assets (173) (132) (1) (1)
Amortization of prior
service cost 3 3 (2) (1)
Amortization of net
transition asset - (1) - -
Recognized actuarial
losses 63 57 10 11
Net periodic benefit cost $ 159 155 $ 51 48
Company Contributions
The Company contributed $12 million during the fiscal
first quarter of 2006 to its U.S. and international
retirement plans. The Company does not expect a
minimum statutory funding requirement for its U.S.
retirement plans in 2006. International plans will be
funded in accordance with local regulations.
NOTE 12 - LEGAL PROCEEDINGS
PRODUCT LIABILITY
The Company is involved in numerous product liability
cases in the United States, many of which concern
adverse reactions to drugs and medical devices. The
damages claimed are substantial, and while the Company
is confident of the adequacy of the warnings and
instructions for use that accompany such products, it
is not feasible to predict the ultimate outcome of
litigation. However, the Company believes that if any
liability results from such cases, it will be
substantially covered by existing amounts accrued in
the Company's balance sheet, and where available by
third-party product liability insurance. One group of
cases against the Company concerns a product of the
Company's subsidiary, Janssen Pharmaceutica Inc.
(Janssen), PROPULSID(R) (cisapride), which was
withdrawn from general sale and restricted to limited
use in 2000. In the wake of publicity about those
events, numerous lawsuits were filed against Janssen
and the Company regarding PROPULSID(R) in state and
federal courts across the country.
In February 2004, Janssen reached an agreement with the
Plaintiffs' Steering Committee (PSC) of the
PROPULSID(R) Federal
15
Multi-District Litigation (MDL),
to resolve federal lawsuits related to PROPULSID(R).
The agreement was to become effective once 85% of the
death claimants, and 75% of the remainder, agreed to
the terms of the settlement. In addition, 12,000
individuals who had not filed lawsuits, but whose
claims were the subject of tolling agreements
suspending the running of the statutes of limitations
against those claims, also had to agree to participate
in the settlement before it became effective.
In March 2005, it was confirmed that the PSC of the MDL
had enrolled enough plaintiffs and claimants in the
settlement program to make the agreement effective.
Those participating in the settlement will submit
medical records to an independent panel of physicians
who will determine whether the claimed injuries were
caused by PROPULSID(R) and otherwise meet the standards
for compensation. If those standards are met, a court-
appointed special master will determine compensatory
damages. Janssen has paid into a compensation escrow
account $77.6 million, established an administrative
fund of $15 million, and paid legal fees to the PSC of
$22.5 million, which amount was approved by the court.
No additional funds will be contributed to the first
settlement program.
In December 2005, Janssen reached agreement with the
MDL PSC and the plaintiffs' State Liaison Committee
(SLC) to create a second settlement program for
resolving the state and federal lawsuits not subject
to, or not participating in, the first settlement
program, as well as the remaining unfiled claims
subject to tolling agreements. The new program becomes
effective once 90% of the plaintiffs representing
decedents, 95% of the other plaintiffs and 5,000 of the
remaining tolled claims, agree to the terms of the
settlement. Janssen will pay as compensation a minimum
of $14.5 million and a maximum of $15 million into the
second settlement program, depending upon the
percentage of enrollment above the 90% and 95%
thresholds. Janssen will also establish an
administrative fund not to exceed $3 million and pay
legal fees not to exceed $4 million subject to court
approval. Funds remaining in the compensation
account, after resolution of all filed claims, will be
returned to Janssen and the Company.
Janssen and the Company believe they have adequate self-
insurance accruals and third-party product liability
insurance with respect to these cases. In
communications to the Company, the excess insurance
carriers raised certain defenses to their liability
under the policies and to date have declined
voluntarily to reimburse Janssen and the Company for
PROPULSID(R)-related costs despite demand for payment.
In May 2005, hearings were held in London in the
arbitration proceeding commenced by Janssen and the
Company against Allianz Underwriters Insurance Company,
which issued the first layer of applicable excess
insurance coverage, to obtain reimbursement of
PROPULSID(R)-related costs. That proceeding was
resolved in a fashion satisfactory to Janssen and the
Company in November 2005. In May 2005, the Company
commenced arbitration against Lexington Insurance
Company, which issued the second layer of excess
insurance coverage. In the opinion of the Company, the
excess carriers remain legally obligated to provide
coverage for the PROPULSID(R)-related losses at issue.
16
AFFIRMATIVE STENT PATENT LITIGATION
In patent infringement actions tried in Delaware
Federal District Court in late 2000, Cordis Corporation
(Cordis), a subsidiary of Johnson & Johnson, obtained
verdicts of infringement and patent validity, and
damage awards against Boston Scientific Corporation
(Boston Scientific) and Medtronic AVE, Inc. (Medtronic)
based on a number of Cordis vascular stent patents. In
December 2000, the jury in the damage action against
Boston Scientific returned a verdict of $324 million
and in December 2000, the jury in the Medtronic action
returned a verdict of $271 million. These sums
represent lost profit and reasonable royalty damages to
compensate Cordis for infringement but do not include
pre or post judgment interest.
In March and May 2002, the district judge granted
Boston Scientific a new trial on liability and damages
and vacated the verdict against Medtronic on legal
grounds. In August 2003, the Court of Appeals for the
Federal Circuit found the trial judge erred in vacating
the verdict against Medtronic and remanded the case to
the trial judge for further proceedings. In March 2005,
the remaining issues were tried in the remanded case
against Medtronic and the retrial proceeded against
Boston Scientific. Juries returned verdicts of
infringement and patent validity in favor of Cordis in
both retrials. In March 2006, the district judge
entered judgment on liability for Cordis, but deferred
deciding on damages pending appeal to the Court of
Appeals for the Federal Circuit. Those appeals will
now follow. Cordis also has an arbitration claim
against Medtronic AVE accusing Medtronic of
infringement by sale of stent products introduced by
Medtronic subsequent to its GFX(R) and MicroStent(R)
products, the subject of the earlier action referenced
above. Those products were found to have been licensed
pursuant to a 1997 license by an arbitration panel in
March 2005. Further arbitration proceedings will
determine whether royalties are owed for those
products.
In January 2003, Cordis filed a patent infringement
action against Boston Scientific in Delaware Federal
District Court accusing its Express2(TM),Taxus(R) and
Liberte stents of infringing the Palmaz patent that
expired in November 2005. The Liberte stent was also
accused of infringing Cordis' Gray patent that expires
in 2016. In June 2005, a jury found that the
Express2(TM), Taxus(R) and Liberte stents infringed the
Palmaz patent and that the Liberte stent also infringed
the Gray patent. Boston Scientific has filed post-trial
motions seeking to vacate the verdict or obtain a new
trial. If those motions are denied, there will be a
trial on damages and willfulness in the future.
PATENT LITIGATION AGAINST VARIOUS JOHNSON & JOHNSON
SUBSIDIARIES
The products of various Johnson & Johnson subsidiaries
are the subject of various patent lawsuits, the
outcomes of which could potentially adversely affect
the ability of those subsidiaries to sell those
products, or require the payment of past damages and
future royalties. With respect to all of these matters,
the Johnson & Johnson subsidiary involved is vigorously
defending against the claims of infringement and
disputing, where appropriate, the validity and
enforceability of the patent claims asserted against
it.
17
In July 2005, a jury in Federal District Court in
Delaware found that the Cordis CYPHER(R) stent
infringed Boston Scientific's Ding `536 patent and that
the Cordis CYPHER(R) and BX VELOCITY(R) stents also
infringed Boston Scientific Corporation's Jang `021
patent. The jury also found both of those valid. Cordis
has asked the judge to overturn the jury verdicts or
grant a new trial. If the judge does not overturn the
jury verdicts, there will be a damage and willfulness
trial in 2006 and Boston Scientific will seek an
injunction against CYPHER(R). If upheld by the trial
court, Cordis will appeal the jury verdicts to the
Court of Appeals for the Federal Circuit.
Trial of Boston Scientific's case asserting
infringement by the CYPHER(R) stent of another Boston
Scientific patent, which had been scheduled for trial
in March 2006, has been adjourned without a new date.
In that case as well, Boston Scientific seeks an
injunction and substantial damages.
In January 2005, the Federal District Court for the
Southern District of Florida granted Cordis summary
judgment dismissing a breach of contract and patent
infringement suit filed against Cordis by Arlaine and
Gina Rockey seeking royalties on the sales of all
Cordis balloon expandable stents. Plaintiffs filed an
appeal to the Court of Appeals for the Federal Circuit
which, in March 2006, affirmed the judgment of the
district court.
In an action filed in Belgium by Boston Scientific
under its Kastenhofer patent, Boston Scientific is
seeking a pan-European injunction against the sale of
infringing catheters, i.e., an injunction that would be
effective not just in Belgium but in all of the
countries served by the European Patent Office. Trial
has not been scheduled but could occur during 2006.
In Germany, Boston Scientific has several actions based
on Ding patents pending against the Cordis CYPHER
stent. No trial has been scheduled in those cases.
The following chart summarizes various patent lawsuits
concerning products of Johnson & Johnson subsidiaries.
J&J Plaintiff/
Product Company Patents Patent Holder Court Trial Date Filed
Drug Eluting Cordis Grainger Boston Scientific D. Del. * 12/03
Stents Corp.
Drug Eluting Cordis Ding Boston Scientific Germany * 04/04
Stents Corp. 11/04
Stents Cordis Boneau Medtronic Inc. D. Del. * 04/02
Two-layer Cordis Kasten- Boston Scientific N.D. Cal * 02/02
Catheters hofer Corp. Belgium * 12/03
Forman
18
Stents Cordis Israel Medinol Multiple E.U. * 05/03
jurisdictions
Contact Lenses Vision Nicolson CIBA Vision M.D. Fla. * 09/03
Care
* Trial date to be established.
LITIGATION AGAINST FILERS OF ABBREVIATED NEW DRUG
APPLICATIONS (ANDAS)
The following chart indicates lawsuits pending against
generic firms that filed Abbreviated New Drug
Applications seeking to market generic forms of
products sold by various subsidiaries of the Company
prior to expiration of the applicable patents covering
those products. These ANDAs typically include
allegations of non-infringement, invalidity and
unenforceability of these patents. In the event the
subsidiary of the Company involved is not successful in
these actions, or the 30-month stay expires before a
ruling from the district court is obtained, the firms
involved will have the ability to introduce generic
versions of the product at issue resulting in very
substantial market share and revenue losses for the
product of the Company's subsidiary.
As previously communicated and noted from the following
chart, 30-month stays have or are scheduled to expire
during 2006 with respect to ANDA challenges regarding
ORTHO TRI-CYCLEN(R) LO, RISPERDAL(R) and TOPAMAX(R).
Trial did not occur before the expiration of the stay
with respect to ORTHO TRI-CYCLEN(R) LO, is unlikely to
occur with respect to RISPERDAL(R), but could occur in
the case of TOPAMAX(R). Unless 30-month stays are
extended or preliminary injunctions granted, outcomes
which are uncertain, final FDA approval to market will
occur shortly after expiration of the 30-month stays.
Because a firm that launches an ANDA product before
trial would be liable potentially for lost profits if
found at trial to infringe a valid patent, typically
ANDA products are not launched under such
circumstances. Nonetheless, such "at risk" launches
have occurred in cases involving drugs of Johnson &
Johnson subsidiaries, and the risk of such a launch
cannot be ruled out.
Brand Name Patent/NDA Generic Trial Date 30-Month
Product Holder Challenger Court Date Filed Stay Expires
ACIPHEX(R) 20 Eisai Teva S.D.N.Y. * 11/03 02/07
mg delay (for Janssen) Dr. Reddy's S.D.N.Y. * 11/03 02/07
release Mylan S.D.N.Y. * 01/04 02/07
tablet
AXERT(R) 6.25 Almirall Teva S.D.N.Y. * 03/06 11/08
and 12.5 mg Ortho-McNeil
Neurologics
CONCERTA(R) McNeil-PPC Impax D.Del. * 09/05 None
18,27,36 and ALZA Andrx
54 mg
controlled
release
tablet
19
DITROPAN Ortho-McNeil Mylan D.W.V. 02/05 05/03 09/05
XL(R), ALZA Impax N. D.Cal. 12/05 09/03 01/06
5, 10, 15 mg
controlled
release
tablet
LEVAQUIN(R) Daiichi, Mylan D.W.V. 05/04 02/02 07/04
Tablets JJPRD
250,500, Ortho-McNeil Teva D.N.J. * 06/02 11/04
750 mg
tablets
LEVAQUIN(R) Daiichi,JJPRD Sicor (Teva)D.N.J. * 12/03 05/06
Injectable Ortho-McNeil
Single use
vials and
5 mg/ml premix
LEVAQUIN(R) Daiichi,JJPRD American D.N.J. * 12/03 05/06
Injectable Ortho-McNeil Pharmaceutical
Single use Partners
vials
QUIXIN(R) Daiichi, Hi-Tech D.N.J. * 12/03 05/06
Ophthalmic Ortho-McNeil Pharmacal
Solution
(Levo-
floxacin)
Ophthalmic
solution
ORTHO TRI Ortho-McNeil Barr D.N.J. * 10/03 02/06
CYCLEN(R) LO
0.18 mg/0.025
mg 0.215 mg/
0.025 mgand 0.25
mg/0.025 mg
PEPCID(R) McNeil-PPC Perrigo S.D.N.Y. * 02/05 06/07
Complete
RAZADYNE(TM) Janssen Teva D. Del 06/07 07/05 01/08
Mylan D. Del 06/07 07/05 01/08
Dr. Reddy's D. Del 06/07 07/05 01/08
Purepac D. Del 06/07 07/05 01/08
Barr D. Del 06/07 07/05 01/08
Par D. Del 06/07 07/05 01/08
AlphaPharm D. Del 06/07 07/05 01/08
RISPERDAL(R) Janssen Mylan D.N.J. * 12/03 05/06
Tablets Dr. Reddy's D.N.J. * 12/03 06/06
..25,0.5,
1,2,3,4
mg tablets
RISPERDAL(R) Janssen Dr. Reddy's D.N.J. * 02/05 07/07
M-Tab Barr D.N.J. * 10/05 02/08
0.5,1,2,3,
4 mg
RISPERDAL(R) Janssen Apotex D.N.J. * 03/06 08/08
Oral
Solution
1 mg/ml
TOPAMAX(R) Ortho-McNeil Mylan D.N.J. * 04/04 09/06
25,50,100, Cobalt D.N.J. * 10/05 03/08
200 mg tablet
TOPAMAX(R) Ortho-McNeil Cobalt D.N.J. * 12/05 05/08
SPRINKLE
25,50 mg
capsule
ULTRACET(R) Ortho-McNeil Kali (Par) D.N.J. * 11/02 04/05
37.5 tram/ Teva D.N.J. * 02/04 07/06
325 apap tablet Caraco E.D. Mich * 09/04 02/07
* Trial date to be established
20
In the action against Mylan and Dr. Reddy's
Laboratories regarding RISPERDALr, a preliminary
injunction motion is scheduled to be heard by the
district court in New Jersey on June 28 and 29, 2006.
In the action against Mylan Pharmaceuticals USA (Mylan)
involving the Company's subsidiary Ortho-McNeil
Pharmaceutical, Inc.'s (Ortho-McNeil) product, DITROPAN
XL(R) (oxybutynin chloride), the court in September
2005 found the DITROPAN XL(R) patent invalid and not
infringed by Mylan's ANDA product. Ortho-McNeil and
ALZA Corporation (ALZA), a subsidiary of the Company,
have appealed. In the action against Impax, Impax also
received judgment of invalidity based on the decision
in the Mylan suit and Ortho-McNeil and ALZA have
appealed that decision. Both appeals have been
consolidated. Neither Mylan nor Impax has received
final FDA approval to launch its ANDA product, but such
approval could come at any point.
In December 2005, Mylan announced that it had entered
into two agreements with Ortho-McNeil regarding
oxybutynin chloride extended release tablets. One
agreement relates to Ortho-McNeil's supply of certain
dosages of oxybutynin chloride extended release tablets
and the second relates to a patent license to ALZA
intellectual property regarding DITROPAN XL(R). These
agreements, which are confidential, have been submitted
to the Federal Trade Commission.
In the weeks following the adverse ruling in the
DITROPAN XL(R) ANDA litigation against Mylan in
September 2005, Ortho-McNeil and ALZA received six
antitrust class action complaints filed by indirect
purchasers of the product. The complaints were filed in
various federal courts, but all claim damages based on
the laws of over 25 states. They allege that Ortho-
McNeil and ALZA violated the antitrust laws of the
various states by knowingly pursuing baseless patent
litigation, and thereby delaying entry into the market
by Mylan and Impax.
In the action against Mylan involving Ortho-McNeil for
LEVAQUIN(R) (levofloxacin), the trial judge in December
2004 found the patent at issue valid, enforceable and
infringed by Mylan's ANDA product and issued an
injunction precluding sale of the product until patent
expiration in late 2010. In December 2005, the Court of
Appeals for the Federal Circuit affirmed the judgment
of validity, enforceability and infringement. Mylan
filed a motion for rehearing by the Court of Appeals,
which has been denied.
In the consolidated actions against Teva, Sicor, Hi-
Tech Pharmacal, and American Pharmaceutical Partners
involving the ANDAs for various levofloxacin
preparations, summary judgment was granted for Ortho-
McNeil and ALZA in March 2006 on the claim that the
LEVAQUIN(R) patent was obtained by inequitable conduct
and was therefore unenforceable.
21
In the action against Kali involving Ortho-McNeil's
ULTRACET(R) (tramadol hydrochloride/acetaminophen),
Kali moved for summary judgment on the issues of
infringement and invalidity in October 2004 and a
decision is expected anytime. With respect to claims
other than that at issue in the litigation against
Kali, Ortho-McNeil has filed a reissue application in
the U.S. Patent and Trademark Office seeking to narrow
the scope of the claims. Notice of allowance of that
patent was received in October 2005. Kali obtained
final approval of its ANDA at expiration of the 30-
month stay in April 2005, and launched its generic
product the same day. If Ortho-McNeil ultimately
prevails in its patent infringement action against
Kali, Kali will be subject to an injunction and
damages.
In the action against Teva Pharmaceuticals USA (Teva)
involving Ortho-McNeil's ULTRACETr(tramadol
hydrocholoride/acetaminophen), Teva has moved for
summary judgment on the issues of infringement and
validity. The briefing on that motion was completed in
March 2005. A ruling could issue at any point. Barr
Laboratories has been joined in the suit as a
codefendant as the successor to Teva's ANDA.
In the action against Caraco involving Ortho-McNeil's
ULTRACET(R) (tramadol hydrocholoride/acetaminophen),
Caraco's motion for summary judgment of non-
infringement was granted in October 2005. Ortho-McNeil
has appealed that decision. Caraco launched its generic
ULTRACET(R) "at risk" in December 2005.
With respect to all of the above matters, the Johnson &
Johnson subsidiary involved is vigorously defending the
validity and enforceability and asserting the
infringement of its own or its licensor's patents.
AVERAGE WHOLESALE PRICE (AWP) LITIGATION
Johnson & Johnson and its pharmaceutical subsidiaries,
along with numerous other pharmaceutical companies, are
defendants in a series of lawsuits in state and federal
courts involving allegations that the pricing and
marketing of certain pharmaceutical products amounted
to fraudulent and otherwise actionable conduct because,
among other things, the companies allegedly reported an
inflated Average Wholesale Price (AWP) for the drugs at
issue. Most of these cases, both federal actions and
state actions removed to federal court, have been
consolidated for pre-trial purposes in a Multi-District
Litigation (MDL) in Federal District Court in Boston,
Massachusetts. The plaintiffs in these cases include
classes of private persons or entities that paid for
any portion of the purchase of the drugs at issue based
on AWP, and state government entities that made
Medicaid payments for the drugs at issue based on AWP.
In the MDL proceeding in Boston, plaintiffs moved for
class certification of all or some portion of their
claims. On August 16, 2005, the trial judge certified
Massachusetts only classes of private insurers
providing "Medi-gap" insurance coverage and private
payers for physician-administered drugs where payments
were based on AWP. The judge also allowed plaintiffs to
file a new complaint seeking to name proper parties to
represent a national class of individuals who made co-
payments for physician-administered drugs covered by
Medicare. The Court of Appeals declined to allow an
appeal of those issues and in January 2006, the court
certified the national class as noted above.
22
OTHER
In June 2003, the Company received a request for
records and information from the U.S. House of
Representatives' Committee on Energy and Commerce in
connection with its investigation into pharmaceutical
reimbursements and rebates under Medicaid. The
Committee's request focuses on the drug REMICADE(R)
(infliximab), marketed by the Company's Centocor, Inc.
(Centocor) subsidiary. In July 2003, Centocor received
a request that it voluntarily provide documents and
information to the criminal division of the U.S.
Attorney's Office, District of New Jersey, in
connection with its investigation into various Centocor
marketing practices. Subsequent requests for documents
have been received from the U.S. Attorney's Office.
Both the Company and Centocor responded, or are in the
process of responding, to these requests for documents
and information.
In December 2003, Ortho-McNeil received a subpoena from
the United States Attorney's Office in Boston,
Massachusetts seeking documents relating to the
marketing, including alleged off-label marketing, of
the drug TOPAMAX(R) (topiramate). Ortho-McNeil is
cooperating in responding to the subpoena. In October
2004, the U.S. Attorney's Office in Boston asked
attorneys for Ortho-McNeil to cooperate in facilitating
the subpoenaed testimony of several present and former
Ortho-McNeil employees before a federal grand jury in
Boston. Cooperation in securing the testimony of
additional witnesses before the grand jury has been
requested and is being provided.
In January 2004, Janssen received a subpoena from the
Office of the Inspector General of the United States
Office of Personnel Management seeking documents
concerning sales and marketing of, any and all payments
to physicians in connection with sales and marketing
of, and clinical trials for, RISPERDAL(R) (risperidone)
from 1997 to 2002. Documents subsequent to 2002 have
also been requested. An additional subpoena seeking
information about marketing of and adverse reactions to
RISPERDAL(R) was received from the United States
Attorney's Office for the Eastern District of
Pennsylvania in November 2005. Janssen is cooperating
in responding to these subpoenas.
In April 2004, the Company's pharmaceutical companies
were requested to submit information to the U.S. Senate
Finance Committee on their use of the "nominal pricing
exception" in calculating Best Price under the Medicaid
Rebate Program. This request was sent to manufacturers
for the top twenty drugs reimbursed under the Medicaid
Program. The Company's pharmaceutical companies have
responded to the request. In February 2005 a request
for supplemental information was received from the
Senate Finance Committee, which has been responded to
by the Company's pharmaceutical companies.
In August 2004, Johnson & Johnson Health Care Systems,
Inc. (HCS), a Johnson & Johnson subsidiary, received a
subpoena from the Dallas, Texas U. S. Attorney's Office
seeking documents relating to the relationships between
the group purchasing organization Novation and HCS and
other Johnson & Johnson subsidiaries. The Company's
subsidiaries involved have responded to the subpoena.
23
In September 2004, Ortho Biotech Inc. (Ortho Biotech),
a Johnson & Johnson subsidiary, received a subpoena
from the U.S. Office of Inspector General's Denver,
Colorado field office seeking documents directed to
sales and marketing of PROCRIT(R) (Epoetin alfa) from
1997 to the present, as well as to dealings with U.S.
Oncology Inc., a healthcare services network for
oncologists. Ortho Biotech has responded to the
subpoena.
In March 2005, DePuy Orthopaedics, Inc. (DePuy), a
Johnson & Johnson subsidiary, received a subpoena from
the U.S. Attorney's Office, District of New Jersey,
seeking records concerning contractual relationships
between DePuy and surgeons or surgeons in training
involved in hip and knee replacement and reconstructive
surgery. Other leading orthopaedic companies are known
to have received the same subpoena. DePuy is responding
to the subpoena.
In June 2005, the United States Senate Committee on
Finance requested the Company to produce information
regarding its use of educational grants. A similar
request was sent to other major pharmaceutical
companies. In July 2005, the Committee specifically
requested information about educational grants in
connection with the drug PROPULSID(R). A follow up
request was received from the Committee for additional
information in January 2006. The Company is in the
process of responding to the most recent request.
In July 2005, Scios Inc. (Scios), a Johnson & Johnson
subsidiary, received a subpoena from the United States
Attorney's Office, District of Massachusetts, seeking
documents related to the sales and marketing of
NATRECOR(R). Scios is responding to the subpoena. In
early August 2005, Scios was advised that the
investigation will be handled by the United States
Attorney's Office for the Northern District of
California in San Francisco.
In September 2005, Johnson & Johnson received a
subpoena from the United States Attorney's Office,
District of Massachusetts, seeking documents related to
sales and marketing of eight drugs to Omnicare, Inc., a
manager of pharmaceutical benefits for long-term care
facilities. The Johnson & Johnson subsidiaries involved
are in the process of responding to the subpoena.
In January 2006, Janssen received a civil investigative
demand from the Texas Attorney General seeking broad
categories of documents related to sales and marketing
of RISPERDAL(R). Janssen is in the process of
responding to the request.
In February 2006, Johnson & Johnson received a
subpoena from the Securities & Exchange Commission
requesting documents relating to the participation by
several Johnson & Johnson business units in the United
Nations Iraq Oil For Food Program. The Company is
cooperating with the SEC in producing responsive
documents.
24
In September 2004, plaintiffs in an employment
discrimination litigation initiated against the Company
in 2001 in Federal District Court in New Jersey moved
to certify a class of all African American and Hispanic
salaried employees of the Company and its affiliates in
the U.S., who were employed at any time from November
1997 to the present. Plaintiffs seek monetary damages
for the period 1997 through the present (including
punitive damages) and equitable relief. The Company
filed its response to plaintiffs' class certification
motion in May 2005. The Company disputes the
allegations in the lawsuit and is vigorously defending
against them.
The Company, along with its wholly owned Ethicon and
Ethicon Endo-Surgery subsidiaries, are defendants in
three federal antitrust actions challenging suture and
endo-mechanical contracts with group purchasing
organizations and hospitals in which discounts are
predicated on a hospital achieving specified market
share targets for both categories of products. In each
case, plaintiffs seek substantial monetary damages and
injunctive relief. These actions are: Applied Medical
v. Ethicon Inc. et al. (C.D.CA, filed September 5,
2003); Conmed v. Johnson & Johnson et al. (S.D.N.Y.,
filed November 6, 2003); and Genico v. Ethicon, Inc. et
al. (E.D. TX, filed October 15, 2004). The Applied
Medical case is scheduled for trial in July 2006. In
December 2005, two purported class actions were filed
on behalf of purchasers of endo-mechanical instruments.
These actions, captioned Delaware Valley Surgical
Supply Co., Inc. v. Johnson & Johnson et al. and
Niagara Falls Memorial Medical Center v. Johnson &
Johnson et al., were both filed in the Federal District
Court for the Central District of California.
After a remand from the Federal Circuit Court of
Appeals in January 2003, a partial retrial was
commenced in October and concluded in November 2003 in
Federal District Court in Boston, Massachusetts in the
action Amgen, Inc. (Amgen) v. Transkaryotic Therapies,
Inc. (TKT) and Aventis Pharmaceutical, Inc. (Aventis).
The matter is a patent infringement action brought by
Amgen against TKT, the developer of a gene-activated
EPO product, and Aventis, which held marketing rights
to the TKT product, asserting that TKT's product
infringes various Amgen patent claims. TKT and Aventis
dispute infringement and are seeking to invalidate the
Amgen patents asserted against them. On October 15,
2004, the district court issued rulings that upheld its
initial findings in 2001 that Amgen's patent claims
were valid and infringed. An appeal to the Court of
Appeals for the Federal Circuit was argued on December
7, 2005. The Amgen patents at issue in the case are
exclusively licensed to Ortho Biotech in the U.S. for
non-dialysis indications. Ortho Biotech is not a party
to the action.
In November 2005, Amgen filed suit against Hoffmann-
LaRoche, Inc. in the United States District Court for
the District of Massachusetts seeking a declaration
that the Roche product CERA, which Roche has indicated
it will seek to introduce into the United States,
infringes a number of Amgen patents concerning EPO.
Ortho Biotech has sought to intervene in the case. The
suit is in its preliminary stages.
25
The Company is also involved in a number of other
patent, trademark and other lawsuits incidental to its
business. The ultimate legal and financial liability of
the Company in respect to all claims, lawsuits and
proceedings referred to above cannot be estimated with
any certainty. However, in the Company's opinion, based
on its examination of these matters, its experience to
date and discussions with counsel, the ultimate outcome
of legal proceedings, net of liabilities already
accrued in the Company's balance sheet, is not expected
to have a material adverse effect on the Company's
financial position, although the resolution in any
reporting period of one or more of these matters could
have a significant impact on the Company's results of
operations and cash flows for that period.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Analysis of Consolidated Sales
For the fiscal first quarter of 2006, worldwide sales
were $13.0 billion, with a total increase of 1.2% and
an operational increase of 3.5% over 2005 fiscal first
quarter sales of $12.8 billion. Currency had a
negative 2.3% impact on total reported fiscal first
quarter 2006 sales.
Sales by U.S. companies were $7.4 billion in the fiscal
first quarter of 2006, which represented a total
increase of 1.6% over the same period last year. Sales
by international companies were $5.6 billion, which
represented a total increase of 0.8%, an operational
increase of 6.1%, and a negative impact from currency
of 5.3% over 2005 fiscal first quarter sales.
Sales by companies in Europe experienced a decline of
3.3%, with operational growth of 5.3% and a negative
impact from currency of 8.6%. Sales by companies in
the Western Hemisphere, excluding the U.S., experienced
growth of 13.4%, operational growth of 5.7% and a
positive impact from currency of 7.7%. Sales by
companies in the Asia-Pacific, Africa region posted
sales growth of 3.3%, with operational growth of 8.1%
and a negative impact from currency of 4.8%.
Analysis of Sales by Business Segments
Consumer
Consumer segment sales in the fiscal first quarter of
2006 were $2.4 billion, an increase of 3.3% over the
same period a year ago, with 4.5% of operational growth
and a negative impact from currency of 1.2%. U.S.
consumer segment sales increased 3.2%, while
international sales increased 3.3%, including
operational growth of 5.7% and a negative currency
impact of 2.4%.
Major Consumer Franchise Sales
(Dollars in Millions)
Fiscal Quarters Ended
April 2, April 3, Total Operations Currency
2006 2005 Change Change Change
Skin Care $659 $620 6.2% 8.7% (2.5)%
OTC Pharm & Nutr 653 685 (4.6) (3.7) (0.9)
Baby & Kids Care 406 379 7.2 7.9 (0.7)
Women's Health 399 377 5.9 6.5 (0.6)
Other 238 219 8.7 9.6 (0.9)
Total $2,355 $2,280 3.3% 4.5% (1.2)%
26
Consumer segment sales growth was attributable to
strong sales performance in the major franchises in
this segment including Skin Care, Baby & Kids Care and
Women's Health franchises, partially offset by a
decline in the OTC Pharmaceutical & Nutritionals
franchise. The Skin Care franchise operational growth
of 8.7% was driven by strong performances from AVEENO(R),
Neutrogena(R) and RoC(R) in the U.S., and AVEENO(R) and
JOHNSON'S(R) Adult outside the U.S. Solid operational
growth was related to new products introduced in 2005,
as well as a number of new products introduced during
the first quarter of 2006. The Baby & Kids Care
franchise operational growth of 7.9% was the result of
continued success with JOHNSON'S(R) SOFTWASH(R) and
SOFTLOTION(TM) product lines and baby gift sets. The
Women's health franchise achieved operational growth of
6.5% with strong contributions from K-Y(R) and STAYFREE(R)
product lines. The OTC Pharmaceuticals and
Nutritionals franchise experienced an operational
decline of 3.7% due to the negative impact of retail
restrictions implemented on products containing
pseudoephedrine. In response, several upper
respiratory products not containing pseudoephedrine
were launched during the fiscal first quarter of 2006.
Pharmaceutical
Pharmaceutical segment sales in the fiscal first
quarter of 2006 were $5.6 billion, a decrease of 2.2%
over the same period a year ago. Currency had an
adverse impact of 1.8%, and 0.4% of the change was due
to operational sales declines. U.S. Pharmaceutical
sales declined by 2.2%, while international
Pharmaceutical sales declined by 2.4%, including
operational growth of 2.9% and a negative impact from
currency of 5.3%.
Major Pharmaceutical Product Revenues
(Dollars in Millions)
Fiscal Quarters Ended
April 2, April 3, Total Operations Currency
2006 2005 Change Change Change
RISPERDAL(R)/
RISPERDAL(R)
CONSTA(R) $1,018 $844 20.6% 24.2% (3.6)%
PROCRITr/EPREX(R) 786 836 (5.9) (4.0) (1.9)
REMICADE(R) 681 577 18.0 18.0 -
TOPAMAX(R) 471 406 15.9 17.1 (1.2)
LEVAQUIN(R)/FLOXIN(R) 401 440 (8.9) (9.0) 0.1
DURAGESIC(R)/Fentanyl
Transdermal 325 450 (27.8) (24.3) (3.5)
Aciphex(R)/Pariet(TM) 306 278 10.0 12.9 (2.9)
Hormonal
Contraceptives 254 302 (16.0) (15.7) (0.3)
Other 1,384 1,622 (14.7) (13.0) (1.7)
Total $5,626 $5,755 (2.2)% (0.4)% (1.8)%
Sales growth within the segment was led by strong
performances from RISPERDAL(R) (risperidone), REMICADE(R)
(infliximab) and TOPAMAX(R) (topiramate). Generic
competition related to DURAGESIC(R) (fentanyl transdermal
system), ULTRACET(R)(tramadol hydrochloride/acetaminophen),
SPORANOX(R) (itraconazole) and hormonal contraceptives
continued to negatively impact sales during the fiscal
first quarter of 2006.
27
RISPERDAL(R) (risperidone), a medication that treats the
symptoms of schizophrenia, and RISPERDAL(R) CONSTA(R)
(risperidone) long acting injection, achieved
operational growth of 24.2% in the fiscal first
quarter. Sales growth was positively impacted due to a
retroactive change in the methodology used to calculate
the average manufacturing price for calculating
Medicaid rebates. This increased fiscal first quarter
growth for RISPERDAL(R)/RISPERDAL(R) CONSTA(R) by
approximately 4%.
PROCRIT(R) (Epoetin alfa) and EPREX(R) (Epoetin alfa)
performance continued to be adversely affected by
competition. Combined, these two products had an
operational sales decline of 4.0% as compared to prior
year fiscal first quarter, due to competitive pressure.
REMICADE(R) (infliximab), a biologic approved for the
treatment of Crohn's disease, ankylosing spondylitis,
psoriasis, psoriatic arthritis, ulcerative colitis and
use in the treatment of rheumatoid arthritis,
experienced strong operational growth of 18.0% over
prior year fiscal first quarter. This continued growth
was driven by increasing demand due to expanded
indications.
TOPAMAX(R) (topiramate), which has been approved for
adjunctive and monotherapy use in epilepsy, as well as,
for the prophylactic treatment of migraines,
experienced strong operational growth of 17.1%.
LEVAQUIN(R) (levofloxacin) experienced an operational
decline of 9.0% over prior year, due to a milder flu
season as compared to prior year.
DURAGESIC(R)/Fentanyl Transdermal (fentanyl transdermal
system) experienced an operational sales decline of
24.3%, primarily driven by the negative impact of
generic competition in the U.S. beginning in January
2005. Additionally, generic versions of DURAGESIC(R)
have been launched in Europe.
The hormonal contraceptive franchise experienced an
operational sales decline of 15.7% primarily resulting
from generic competition in oral contraceptives. This
was partially offset by strong growth in ORTHO TRI-
CYCLEN(R) LO (norgestimate/ethinyl estradiol), a low
dose oral contraceptive. ORTHO
EVRA(R)(norelgestromin/ethinyl estradiol), the first
contraceptive patch approved by the FDA, experienced a
significant decline in sales as a result of labeling
changes and negative media coverage concerning product
safety.
CONCERTA(R) (methylphenidate HCl), a product for the
treatment of attention deficit hyperactivity disorder,
achieved operational sales growth of 20.2% over the
fiscal first quarter of 2005. At present, the FDA has
not approved any generic version that is substitutable
for CONCERTA(R). Abbreviated New Drug Applications
(ANDAs) for generic versions of CONCERTA(R) are pending
and may be approved at any time. Recent negative
publicity and FDA activities concerning attention
deficit hyperactivity products may impact CONCERTA(R)
sales in 2006.
28
NATRECOR(R) (nesiritide), a product for the treatment
of patients with acutely decompensated congestive heart
failure who have dyspnea at rest or with minimal
activity, has experienced a significant decline in
demand due to recent negative media coverage regarding
a meta analysis of selected historical clinical trials.
The Company believes that there is no new data
supporting the conclusions of these medical and
consumer publications and the currently approved label
for NATRECOR(R) reflects all available data to date.
Medical Devices and Diagnostics
Medical Devices and Diagnostics segment sales in the
fiscal first quarter of 2006 were $5.0 billion, an
increase of 4.5% over the same period a year ago with
7.9% of this change due to operational growth and a
negative impact from currency of 3.4%. The U.S.
Medical Devices and Diagnostics sales increase was
6.7%, while the growth in international Medical Devices
and Diagnostics sales was 2.3%, including operational
growth of 9.0% and a decrease of 6.7% related to the
negative impact of currency.
Major Medical Devices and Diagnostics Franchise Sales
(Dollars in Millions)
Fiscal Quarters Ended
April 2, April 3, Total Operations Currency
2006 2005 Change Change Change
CORDIS(R) $1,075 $969 10.9% 14.7% (3.8)%
DEPUY(R) 1,039 993 4.7 7.6 (2.9)
ETHICON ENDO-
SURGERY(R) 794 767 3.5 7.0 (3.5)
ETHICON(R) 774 787 (1.7) 1.9 (3.6)
LIFESCAN(R) 504 501 0.7 3.0 (2.3)
Vision Care 441 407 8.2 13.2 (5.0)
ORTHO-CLINICAL
DIAGNOSTICS(R) 370 355 4.3 7.4 (3.1)
Other 14 18 (16.7) (22.2) 5.5
Total $5,011 $4,797 4.5% 7.9% (3.4)%
The Cordis franchise was a key contributor to the
Medical Devices and Diagnostics segment results, with
operational growth of 14.7%. The primary growth driver
of the Cordis franchise was the CYPHER(R) Sirolimus-
eluting Stent in both U.S. and international markets.
Solid double-digit growth was also achieved by Biosense
Webster.
In April and July of 2004, the Cordis Cardiology
Division of Cordis Corporation received Warning Letters
from the FDA regarding Good Manufacturing Practice
regulations and Good Clinical Practice regulations. In
response to the Warning Letters, Cordis has made
improvements to its quality systems and has provided
periodic updates to the FDA. The Clinical Warning
Letter issues have been resolved to the FDA's
satisfaction. With respect to the Quality System
Warning Letter, in addition to the improvement updates,
the Cordis Juarez and stent supplier locations were
inspected in 2006 with acceptable results. Cordis is
now preparing for second and/or third quarter re-
inspections in the Miami Lakes, Puerto Rico and
possibly Warren locations.
29
The DePuy franchise's operational growth of 7.6% was
primarily due to DePuy's orthopaedic joint
reconstruction products including the hip and knee
product lines. Strong performance was also reported in
Mitek sports medicine products.
The Ethicon Endo-Surgery franchise experienced
operational growth of 7.0% over prior year. This
growth was mainly driven by
endocutter sales that include products used in
performing bariatric procedures for the treatment of
obesity, an important focus area for the franchise.
Additionally, strong results were achieved with the
success of the HARMONIC SCALPEL(R), an ultrasonic cutting
and coagulating surgical device, which received
approval in January 2006 for expanded indications to
include plastic surgery.
Ethicon worldwide sales grew operationally by 1.9% from
the same period in the prior year. Sales of both
GYNECARE products and DERMABOND(R) had strong results in
the first quarter of 2006 as compared to the same
period in the prior year.
The LifeScan franchise experienced operational growth
of 3.0%. Strong performance was achieved in the
ONETOUCH(R) ULTRA(R) product line. During the first
quarter of 2006, the acquisition of Animas Corporation
was completed, providing LifeScan with a platform for
entry into the insulin pump segment of the diabetes
market.
The Vision Care franchise operational sales growth of
13.2% was led by the continued success of ACUVUE(R)
ADVANCE(TM) brand contact lenses with HYDRACLEAR(TM), 1-DAY
ACUVUE(R), and ACUVUE(R) OASYS(TM) with HYDRA-CLEAR(TM).
The Ortho-Clinical Diagnostics franchise achieved
operational growth of 7.4% over prior year. This
growth was mainly driven by the continued market
penetration of automated blood typing products, ongoing
growth of the ECI product line and the success of the
VITROS(R) 5, 1 FS Clinical Chemistry system.
Cost of Products Sold and Selling, Marketing and
Administrative Expenses
Consolidated costs of goods sold increased to 27.8%
from 27.2% of sales over the same period a year ago.
The increase resulted from an unfavorable product mix,
partially offset by cost improvement initiatives.
Consolidated selling, marketing and administrative
expenses decreased 0.8% over the same period a year
ago. Selling, marketing and administrative expenses as
a percent to sales were 31.5% versus 32.2% in the
fiscal first quarter of 2005. The decrease is
attributable to cost containment efforts across many of
the Company's businesses.
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
30
with governmental regulations for the protection of
consumers and patients. Worldwide costs of research
activities for the fiscal first quarter of 2006 were
$1.5 billion, an increase of 10.7% over the same period
a year ago. As a percent to sales, the level of
research and development spending increased to 11.8% in
2006, from 10.8% during the same period a year ago.
This incremental increase in research and development
reflects both the significant number of pharmaceutical
projects in late stage development and higher levels of
investment in research projects in the Consumer and
Medical Devices and Diagnostics segment.
In-Process Research & Development
In the fiscal first quarter of 2006 the Company
recorded an aggregate in-process research & development
(IPR&D) charge of $37 million before tax and $29
million after tax related to the acquisitions of Hand
Innovations LLC and Future Medical Systems S.A.
Other (Income) Expense, Net
Other (income) expense included gains and losses related
to the sale and write-down of certain equity securities
of the Johnson & Johnson Development Corporation, losses
on the disposal of fixed assets, currency gains & losses,
minority interests, litigation settlement expense, as
well as, royalty income. The favorable change in other
(income) expense as compared to the same period a year
ago was due to the Guidant termination fee, less
associated expenses, of $622 million before tax.
OPERATING PROFIT BY SEGMENT
Consumer Segment
Operating profit for the Consumer segment as a percent
to sales in the fiscal first quarter of 2006 was 19.7%
versus 19.2% over the same period a year ago. This
increase was primarily due to a reduction in consumer
promotions and advertising in the OTC Pharmaceutical
and Nutritionals franchise.
Pharmaceutical Segment
Operating profit for the Pharmaceutical segment as a
percent to sales in the fiscal first quarter of 2006
was 34.3% versus 36.1% over the same period a year ago.
Operating profit was negatively impacted by increased
research and development spending, as well as, lower
gross profit margins.
Medical Devices and Diagnostics Segment
Operating profit for the Medical Devices and
Diagnostics segment as a percent of sales in the fiscal
first quarter of 2006 was 30.7% versus 30.2% over the
same period a year ago. The primary driver of the
improved operating profit in the Medical Devices and
Diagnostics segment over the same period a year ago was
the Guidant termination fee, less associated expenses,
of $622 million before tax. An additional contributor
was enhanced gross profit, resulting from cost
reduction programs, and favorable product mix, which
offset increased research and development spending.
31
Interest (Income) Expense
Interest income in the fiscal first quarter of 2006
increased by $113 million over the fiscal first quarter
of 2005, due primarily to the higher rates of interest
earned on the Company's cash holdings, as well as, the
improved cash position. The cash balance, which
included marketable securities, was $17.2 billion at
the end of the fiscal first quarter of 2006. This is
$3.5 billion higher than the same period a year ago.
Interest expense in the fiscal first quarter of 2006
remained flat versus fiscal first quarter of 2005.
Provision For Taxes on Income
The worldwide effective income tax rates for the fiscal
first quarters of 2006 and 2005 were 28.4% and 27.7%,
respectively. The increase in the effective tax rate
of 0.7% was primarily due to the Guidant termination
fee of $622 million, less associated expenses, before
tax recorded at a 40.8% tax rate, partially offset by
increases in taxable income in lower tax jurisdictions
relative to taxable income in higher tax jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash generated from operations provided the major
sources of funds for the growth of the business,
including working capital, capital expenditures, and
acquisitions. Other uses of cash include share
repurchases, dividends and debt repayments. In the
fiscal first quarter of 2006, cash flow from operations
was $3.5 billion, an increase of $0.8 billion over the
same period a year ago. The major factors contributing
to the increase was a growth in net income of $0.5
billion, which includes the Guidant termination fee,
less associated expenses, of $368 million after tax,
and an increase in accounts payable and accrued
liabilities of $0.9 billion. This was partially offset
by a $0.4 billion increase in other current and non-
current assets. Net cash used by investing activities
decreased by $0.4 billion due to a $1.2 billion net
decrease in purchases of investments offset by a $0.8
billion increase in acquisition activity. Net cash
used by financing activities remained flat at $1.2
billion. Cash and current marketable securities were
$17.2 billion at the end of the fiscal first quarter of
2006 as compared with $16.1 billion at fiscal year end
2005.
Dividends
On January 4, 2006, the Board of Directors declared a
regular cash dividend of $0.33 per share, paid on March
14, 2006 to shareholders of record as of February 28,
2006. This represented an increase of 15.8% from the
fiscal first quarter of 2005 dividend.
On April 27, 2006, the Board of Directors declared a
regular cash dividend of $0.375 per share, payable on
June 13, 2006 to shareholders of record as of May 30,
2006. This represented an increase of 13.6% in the
quarterly dividend rate and was the 44th consecutive
year of cash dividend increases. The Company expects
to continue the practice of paying regular cash
dividends.
32
OTHER INFORMATION
New Accounting Standards
The Company implemented SFAS 123(R), Share Based
Payment, in the fiscal first quarter of 2006. The
Company applied the modified retrospective transition
method to implement SFAS No. 123(R). Previously
reported financial statements were restated to reflect
SFAS No. 123 disclosure amounts.
The Company implemented SFAS 151, Inventory Costs, an
amendment of ARB No. 43 in the fiscal first quarter of
2006. The adoption of this statement did not have a
material effect on its results of operations, cash
flows or financial position.
Economic and Market Factors
Johnson & Johnson is aware that its products are used
in an environment where, for more than a decade,
policymakers, consumers and businesses have expressed
concern about the rising cost of health care. Johnson
& Johnson has a long-standing policy of pricing
products responsibly. For the period 1995 through 2005
in the United States, the weighted average compound
annual growth rate of Johnson & Johnson price increases
for health care products (prescription and over-the-
counter drugs, hospital and professional products) was
below the U.S. Consumer Price Index (CPI).
Inflation rates, even though moderate in many parts of
the world during 2005, continue to have an effect on
worldwide economies and, consequently, on the way
companies operate. In the face of increasing costs, the
Company strives to maintain its profit margins through
cost reduction programs, productivity improvements and
periodic price increases. The Company faces various
worldwide health care changes that may result in
pricing pressures that include health care cost
containment and government legislation relating to
sales, promotions and reimbursement.
The Company also operates in an environment
increasingly hostile to intellectual property rights.
Generic drug firms have filed Abbreviated New Drug
Applications seeking to market generic forms of most of
the Company's key pharmaceutical products, prior to
expiration of the applicable patents covering those
products. In the event the Company is not successful in
defending a lawsuit resulting from an Abbreviated New
Drug Application filing, the generic firms will then
introduce generic versions of the product at issue,
resulting in very substantial market share and revenue
losses. For further information see the discussion on
"Litigation Against Filers of Abbreviated New Drug
Applications" in Note 12.
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.
33
Forward-looking statements are based on current
expectations of future events. The Company cannot
guarantee that any forward- looking statement will be
accurate, although the Company believes that it has
been reasonable in its expectations and assumptions.
Investors should realize that if underlying assumptions
prove inaccurate or that unknown risks or uncertainties
materialize, actual results could vary materially from
the Company's expectations and projections. Investors
are therefore cautioned not to place undue reliance on
any forward-looking statements. The Company assumes no
obligation to update any forward-looking statements as
a result of new information or future events or
developments.
Risks and uncertainties include general industry
conditions and competition; economic conditions, such
as interest rate and currency exchange rate
fluctuations; technological advances, new products and
patents attained by competitors; challenges inherent in
new product development, including obtaining regulatory
approvals; challenges to patents; U.S. and foreign
health care reforms and governmental laws and
regulations; trends toward health care cost
containment; increased scrutiny of the health care
industry by government agencies; product efficacy or
safety concerns resulting in product recalls or
regulatory action.
The Company's Annual Report on Form 10-K for the fiscal
year ended January 1, 2006 contains, as an Exhibit, a
discussion of additional factors that could cause
actual results to differ from expectations. The Company
notes these factors as permitted by the Private
Securities Litigation Reform Act of 1995.
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
There has been no material change in the Company's
assessment of its sensitivity to market risk since
its presentation set forth in Item 7A, "Quantitative
and Qualitative Disclosures About Market Risk," in its
Annual Report on Form 10-K for the fiscal year ended
January 1, 2006.
Item 4 - CONTROLS AND PROCEDURES
Disclosure controls and procedures. At the end of the
period covered by this report, the Company evaluated
the effectiveness of the design and operation of its
disclosure controls and procedures. The Company's
disclosure controls and procedures are designed to
ensure that information required to be disclosed by the
Company in the reports that it files or submits under
the Securities Exchange Act is recorded, processed,
summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure
controls and procedures include, without limitation,
controls and procedures designed to ensure that
information required to be disclosed by the Company in
the reports that it files or submits under the
Securities Exchange Act is accumulated and communicated
to the Company's management, including its principal
34
executive and principal financial officers, or persons
performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
William C. Weldon, Chairman and Chief Executive
Officer, and Robert J. Darretta, Vice Chairman and
Chief Financial Officer, reviewed and participated in
this evaluation. Based on this evaluation, Messrs.
Weldon and Darretta concluded that, as of the date of
their evaluation, the Company's disclosure controls and
procedures were effective.
Internal control. During the period covered by this
report, there were no changes in the Company's internal
control over financial reporting that have materially
affected, or are reasonably likely to materially
affect, the Company's internal control over financial
reporting.
Part II - OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS
The information called for by this item is incorporated
herein by reference to Note 12 included in Part I, Item
1. Financial Statements (unaudited) - Notes to
Consolidated Financial Statements.
Item 1A - RISK FACTORS
Not applicable.
Item 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS
(c) Purchases of Equity Securities by the Issuer and
Affiliated Purchasers.
On March 8, 2006, the Company announced that its Board
of Directors approved a stock repurchase program,
authorizing the Company to buy back up to $5 billion of
the Company's common stock. The program has no time
limit and may be suspended for periods or discontinued.
The following table provides information with respect
to Common Stock purchases by the Company during the
fiscal first quarter of 2006. Common Stock purchases
on the open market are made as part of a systematic
plan to meet the Company's compensation programs.
Fiscal Month Total Average Total Number Remaining
Number of Price of Shares Maximum
Shares Paid per Purchased as Number of
Purchased(1) Share Part of Shares that
Publicly May Be
Announced Purchased
Plans or Under the
Programs Plans or
Programs (2)
January 2, 2006
through January
29, 2006 709,000 $61.93 N/A N/A
January 30, 2006
through February
26, 2006 497,000 $57.39 N/A N/A
35
February 27, 2006
through April 2,
2006 5,486,600 $59.78 5,086,600 79,286,709
(1) The Company repurchased an aggregate of 5,086,600
shares of Johnson & Johnson Common Stock pursuant to the
repurchase program that was publicly announced on
March 8, 2006 and an aggregate of 1,606,000 shares of
Johnson & Johnson Common Stock in open-market transactions
outside of the program.
(2) As of April 2, 2006, based on the closing price of
the Company's Common Stock on the New York Stock
Exchange on March 31, 2006 of $59.22 per share.
Item 5 - OTHER INFORMATION
In May 2006, Per A. Peterson, Chairman, Research and
Development Pharmaceuticals Group and a member of the
Executive Committee, advised the Company of his
intention to retire from Johnson & Johnson in early
2007.
Item 6 - EXHIBITS
Exhibit 3(i) Certificate of Amendment to the
Restated Certificate of Incorporation of the
Company effective April 28, 2006.
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.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
JOHNSON & JOHNSON
(Registrant)
Date: May 10, 2006 By /s/ R. J. DARRETTA
R. J. DARRETTA
Vice Chairman, Board of
Directors; Chief Financial
Officer and Director
(Principal Financial Officer)
Date: May 10, 2006 By /s/ S. J. COSGROVE
S. J. COSGROVE
Controller
(Principal Accounting Officer)
37