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 June 27, 2004
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. Yes (X) No
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). Yes (X) No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
On July 25, 2004, 2,968,107,066 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 -
June 27, 2004 and December 28, 2003 3
Consolidated Statements of Earnings for the Fiscal
Quarters Ended June 27, 2004 and
June 29, 2003 6
Consolidated Statements of Earnings for the Fiscal
Six Months Ended June 27, 2004 and
June 29, 2003 7
Consolidated Statements of Cash Flows for the Fiscal
Six Months Ended June 27, 2004 and
June 29, 2003 8
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 29
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 40
Item 4. Controls and Procedures 40
Part II - Other Information
Item 1 - Legal Proceedings 41
Item 4 - Submission of Matters to a Vote of
Security Holders 41
Item 5 - Exhibits and Reports on Form 8-K 42
Signatures 43
2
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
ASSETS
June 27, December 28,
2004 2003
Current Assets:
Cash and cash equivalents $ 5,681 5,377
Marketable securities 5,105 4,146
Accounts receivable, trade, less
allowances for doubtful accounts
$192(2003, $192) 7,142 6,574
Inventories (Note 4) 3,528 3,588
Deferred taxes on income 1,599 1,526
Prepaid expenses and other
receivables 1,602 1,784
Total current assets 24,657 22,995
Marketable securities, non-current 62 84
Property, plant and equipment,
at cost 17,257 17,052
Less accumulated
depreciation 7,700 7,206
Property, plant and equipment, net 9,557 9,846
Intangible assets (Note 5) 14,715 14,168
Less accumulated amortization 2,910 2,629
Intangible assets, net 11,805 11,539
Deferred taxes on income 995 692
Other assets 3,095 3,107
Total assets $50,171 48,263
See Notes to Consolidated Financial Statements
3
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 27, December 28,
2004 2003
Current Liabilities:
Loans and notes payable $ 491 1,139
Accounts payable 3,829 4,966
Accrued liabilities 2,740 2,639
Accrued rebates, returns
and promotions 2,743 2,308
Accrued salaries, wages and
commissions 929 1,452
Accrued Taxes on income 1,330 944
Total current liabilities 12,062 13,448
Long-term debt 2,962 2,955
Deferred tax liability 769 780
Employee related obligations 2,328 2,262
Other liabilities 1,998 1,949
Shareholders' equity:
Preferred stock - without par
value (authorized and unissued
2,000,000 shares) - -
Common stock - par value $1.00
per share (authorized
4,320,000,000 shares; issued
3,119,842,000 shares) 3,120 3,120
Note receivable from employee
stock ownership plan (11) (18)
Accumulated other comprehensive
income (Note 8) (526) (590)
Retained earnings 33,627 30,503
4
Less common stock held in treasury,
at cost (152,076,000 & 151,869,000
shares) 6,158 6,146
Total shareholders' equity 30,052 26,869
Total liabilities and shareholders'
equity $50,171 48,263
See Notes to Consolidated Financial Statements
5
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; dollars & shares in millions
except per share figures)
Fiscal Second Quarter Ended
June 27, Percent June 29, Percent
2004 to Sales 2003 to Sales
Sales to customers
(Note 6) $11,484 100.0 10,332 100.0
Cost of products sold 3,162 27.5 2,966 28.7
Gross Profit 8,322 72.5 7,366 71.3
Selling, marketing and
administrative expenses 3,711 32.3 3,396 32.9
Research expense 1,182 10.3 1,082 10.5
Purchased in-process
research and
development - - 900 8.7
Interest income (35) (.3) (43) (.4)
Interest expense, net of
portion capitalized 52 .4 50 .4
Other (income)expense, net (23) (.1) (75) (.7)
Earnings before provision
for taxes on income 3,435 29.9 2,056 19.9
Provision for taxes on
income (Note 3) 977 8.5 846 8.2
NET EARNINGS $2,458 21.4 1,210 11.7
NET EARNINGS PER SHARE
(Note 7)
Basic $ .83 .41
Diluted $ .82 .40
CASH DIVIDENDS PER SHARE $ .285 .24
AVG. SHARES OUTSTANDING
Basic 2,968.2 2,967.7
Diluted 3,005.3 3,015.9
See Notes to Consolidated Financial Statements
6
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; dollars & shares in millions
except per share figures)
Fiscal Six Months Ended
June 27, Percent June 29, Percent
2004 to Sales 2003 to Sales
Sales to customers
(Note 6) $23,043 100.0 20,154 100.0
Cost of products sold 6,529 28.3 5,688 28.2
Gross Profit 16,514 71.7 14,466 71.8
Selling, marketing and
administrative expenses 7,351 31.9 6,649 33.0
Research expense 2,278 9.9 2,018 10.0
Purchased in-process
research and
development - - 918 4.6
Interest income (74) (.3) (81) (.4)
Interest expense, net of
portion capitalized 97 .4 88 .4
Other (income)expense, net (77) (.3) (112) (.5)
Earnings before provision
for taxes on income 6,939 30.1 4,986 24.7
Provision for taxes on
income (Note 3) 1,988 8.6 1,705 8.4
NET EARNINGS $4,951 21.5 3,281 16.3
NET EARNINGS PER SHARE
(Note 7)
Basic $ 1.67 1.11
Diluted $ 1.65 1.09
CASH DIVIDENDS PER SHARE $ .525 .445
AVG. SHARES OUTSTANDING
Basic 2,968.1 2,967.9
Diluted 3,004.4 3,015.2
See Notes to Consolidated Financial Statements
7
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
Fiscal Six Months Ended
June 27, June 29,
2004 2003
CASH FLOWS FROM OPERATIONS
Net earnings $ 4,951 3,281
Adj. to reconcile net earnings to cash flows:
Depreciation and amortization of
property and intangibles 1,027 868
Purchased in-process research and
development - 918
Increase in deferred taxes (429) (138)
Accounts receivable provisions 2 (9)
Changes in assets and liabilities, net
of effects from acquisition of businesses:
Increase in accounts receivable (624) (756)
Decrease (increase) in inventories 23 (186)
(Decrease) increase in accounts
payable and accrued liabilities (1,146) 101
Decrease (increase) in other
current and non-current assets 248 (570)
Increase in other current
and non-current liabilities 729 184
NET CASH FLOWS FROM OPERATING
ACTIVITIES 4,781 3,693
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant
and equipment (714) (914)
Proceeds from the disposal of assets 233 333
Acquisition of businesses, net of cash
acquired (300) (2,781)
Purchases of investments (5,654) (2,868)
Sales of investments 4,684 2,580
Other (113) (96)
NET CASH USED BY INVESTING
ACTIVITIES (1,864) (3,746)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to shareholders (1,559) (1,321)
Repurchase of common stock (760) (842)
Proceeds from short-term debt 332 1,441
Retirement of short-term debt (911) (436)
Proceeds from long-term debt 16 1,009
Retirement of long-term debt (1) (43)
Proceeds from the exercise of
stock options 311 195
NET CASH PROVIDED/(USED)BY FINANCING
ACTIVITIES (2,572) 3
8
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (41) 124
INCREASE(DECREASE) IN CASH AND CASH
EQUIVALENTS 304 74
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 5,377 2,894
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 5,681 2,968
ACQUISITION OF BUSINESSES
Fair value of assets acquired 339 3,096
Fair value of liabilities assumed (39) (315)
Net cash paid for acquisitions $ 300 2,781
See Notes to Consolidated Financial Statements
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - The accompanying unaudited interim financial
statements and related notes should be read in conjunction
with the Consolidated Financial Statements of Johnson &
Johnson and Subsidiaries (the "Company") and related notes as
contained in the Annual Report on Form 10-K for the fiscal
year ended December 28, 2003. The unaudited interim financial
statements include all adjustments (consisting only of normal
recurring adjustments) and accruals necessary in the judgment
of management for a fair presentation of such statements.
NOTE 2 - FINANCIAL INSTRUMENTS
The Company follows the provisions of SFAS 133
requiring that all derivative instruments be recorded
on the balance sheet at fair value.
As of June 27, 2004, the balance of deferred net
losses on derivatives included in accumulated other
comprehensive income was $101 million after-tax. For
additional information, see Note 8. The Company expects
that substantially all of this amount will be
reclassified into earnings over the next 12 months as a
result of transactions that are expected to occur over
that period. The amount ultimately realized in earnings
will differ as foreign exchange rates change. Realized
gains and losses are ultimately determined by actual
exchange rates at maturity of the derivative.
Transactions with third parties will cause the amount
in accumulated other comprehensive income to affect net
earnings. The maximum length of time over which the
Company is hedging is 18 months.
For the first fiscal six months ended June 27, 2004,
the net impact of the hedges' ineffectiveness to the
Company's financial statements was insignificant. For
the first fiscal six months ended June 27, 2004, the
Company has recorded a net loss of $1 million after tax
in the "other (income) expense, net" category of the
consolidated statement of earnings, representing the
impact of discontinuance of cash flow hedges because it
is probable that the originally forecasted transactions
will not occur by the end of the originally specified
time period.
NOTE 3 - INCOME TAXES
The worldwide effective income tax rates for the
first fiscal six months of 2004 and 2003 were 28.6%
and 34.2%. The decrease in the effective tax rate for
the first fiscal six months of 2004 compared with the
same period a year ago was due to acquisition-related
In-process Research and Development (IPR&D) charges in
the second quarter of 2003 that are non-deductible for
tax purposes. The 2003 tax rate excluding the effect
of IPR&D was 28.9%
10
NOTE 4 - INVENTORIES
(Dollars in Millions)
June 27, 2004 December 28, 2003
Raw materials and supplies $ 1,052 966
Goods in process 1,114 981
Finished goods 1,362 1,641
$ 3,528 3,588
NOTE 5 - INTANGIBLE ASSETS
Intangible assets that have definite useful lives are
amortized over their useful lives. Goodwill and non-
amortizable intangible assets are assessed
annually for impairment. The impairment assessment
was completed in the fiscal fourth quarter of 2003
and no impairment was determined. Future impairment
tests will be performed in the fiscal fourth
quarter, annually.
(Dollars in Millions)
June 27, 2004 December 28, 2003
Goodwill $ 6,288 6,085
Less accumulated amortization 718 695
Goodwill - net 5,570 5,390
Trademarks (non-amortizable) 1,129 1,098
Less accumulated amortization 136 136
Trademarks (non-amortizable)- net 993 962
Patents and trademarks 4,005 3,798
Less accumulated amortization 966 818
Patents and trademarks - net 3,039 2,980
Other amortizable intangibles 3,293 3,187
Less accumulated amortization 1,090 980
Other intangibles - net 2,203 2,207
Total intangible assets 14,715 14,168
Less accumulated amortization 2,910 2,629
Total intangibles - net $11,805 11,539
11
Goodwill as of June 27, 2004 as allocated by segment of
business
is as follows:
(Dollars in Millions)
Med. Dev
Consumer Pharm & Diag Total
Goodwill, net of
accumulated amortization
at December 28, 2003 $882 781 3,727 5,390
Acquisitions 175 21 6 202
Translation & other 1 (5) (18) (22)
Goodwill as of
June 27, 2004 $1,058 797 3,715 5,570
The weighted average amortization periods for patents
and trademarks and other intangible assets were 16
years and 18 years, respectively. The amortization
expense of amortizable intangible assets for the first
fiscal six months ended June 27, 2004 was $258 million
before tax and the estimated amortization expense for
each of the five succeeding years approximates $500
million before tax.
NOTE 6 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
(Dollars in Millions)
SALES BY SEGMENT OF BUSINESS
Fiscal Second Quarter
Percent
2004 2003 Change
Consumer
U.S. $ 987 931 6.0
International 1,013 888 14.1
2,000 1,819 10.0%
Pharmaceutical
U.S. $ 3,643 3,278 11.1
International 1,784 1,606 11.1
5,427 4,884 11.1%
Med Devices and Diagnostics
U.S. $ 2,038 1,903 7.1
International 2,019 1,726 17.0
4,057 3,629 11.8%
U.S. $ 6,668 6,112 9.1
International 4,816 4,220 14.1
Worldwide $ 11,484 10,332 11.1%
12
Fiscal Six Months
Percent
2004 2003 Change
Consumer
U.S. $ 2,067 1,931 7.0
International 1,980 1,679 17.9
4,047 3,610 12.1%
Pharmaceutical
U.S. $ 7,286 6,541 11.4
International 3,517 3,009 16.9
10,803 9,550 13.1%
Med Devices and Diagnostics
U.S. $ 4,233 3,652 15.9
International 3,960 3,342 18.5
8,193 6,994 17.1%
U.S. $ 13,586 12,124 12.1
International 9,457 8,030 17.8
Worldwide $ 23,043 20,154 14.3%
OPERATING PROFIT BY SEGMENT OF BUSINESS
Fiscal Second Quarter
Percent
2004 2003 Change
Consumer $ 382 372 2.7
Pharmaceutical(1) 2,108 1,091 93.2
Med. Dev. & Diag.(2) 1,055 671 57.2
Segments total 3,545 2,134 66.1
Expenses not allocated
to segments (110) (78)
Worldwide total $ 3,435 2,056 67.1%
Fiscal Six Months
Percent
2004 2003 Change
Consumer $ 829 784 5.7
Pharmaceutical(3) 4,194 2,951 42.1
Med. Dev. & Diag.(4) 2,118 1,401 51.2
Segments total 7,141 5,136 39.0
Expenses not allocated
to segments (202) (150)
Worldwide total $ 6,939 4,986 39.2%
13
(1) Includes $730 million of In-process Research and
Development (IPR&D) charges related to acquisitions for
the fiscal second quarter of 2003.
(2) Includes $170 million of IPR&D charges related to
acquisitions for the fiscal second quarter of 2003.
(3) Includes $737 million of IPR&D charges related to
acquisitions for the first fiscal six months of 2003.
(4) Includes $181 million of IPR&D charges related to
acquisitions for the first fiscal six months of 2003.
SALES BY GEOGRAPHIC AREA
Fiscal Second Quarter
Percent
2004 2003 Change
U.S. $ 6,668 6,112 9.1
Europe 2,779 2,451 13.4
Western Hemisphere,
excluding U.S. 622 555 12.1
Asia-Pacific, Africa 1,415 1,214 16.6
Total $ 11,484 10,332 11.1%
Fiscal Six Months
Percent
2004 2003 Change
U.S. $ 13,586 12,124 12.1
Europe 5,486 4,669 17.5
Western Hemisphere,
excluding U.S. 1,219 1,027 18.7
Asia-Pacific, Africa 2,752 2,334 17.9
Total $ 23,043 20,154 14.3%
14
NOTE 7 - EARNINGS PER SHARE
The following is a reconciliation of basic net
earnings per share
to diluted net earnings per share for the fiscal
second quarters ended June 27, 2004 and June 29, 2003.
(Shares in Millions)
Fiscal Second Quarter Ended
June 27, June 29,
2004 2003
Basic net earnings per share $ .83 .41
Average shares outstanding
- basic 2,968.2 2,967.7
Potential shares exercisable under
stock option plans 152.8 177.9
Less: shares which could be repurchased
under treasury stock method (130.5) (144.6)
Convertible debt shares 14.8 14.9
Adjusted average shares
outstanding - diluted 3,005.3 3,015.9
Diluted earnings per share $ .82 .40
The diluted earnings per share calculation included
the dilutive effect of convertible debt that was
offset by the related decrease in interest expense
of $3 million each for the fiscal second quarters
ended June 27, 2004 and June 29, 2003, respectively.
The diluted earnings per share excluded 91 million
and 46 million shares related to options for the fiscal
second quarters ended June 27, 2004 and June 29,
2003, respectively, as the exercise price per share
of these options was greater than the average market
value, resulting in an anti-dilutive effect on
diluted earnings per share.
The following is a reconciliation of basic net
earnings per share
to diluted net earnings per share for the fiscal six
months ended June 27, 2004 and June 29, 2003.
(Shares in Millions)
Fiscal Six Months Ended
June 27, June 29,
2004 2003
Basic net earnings per share $ 1.67 1.11
Average shares outstanding
- basic 2,968.1 2,967.9
Potential shares exercisable under
stock option plans 152.7 177.9
Less: shares which could be repurchased
under treasury stock method (131.2) (145.5)
Convertible debt shares 14.8 14.9
Adjusted average shares
outstanding - diluted 3,004.4 3,015.2
Diluted earnings per share $ 1.65 1.09
15
The diluted earnings per share calculation included
the dilutive effect of convertible debt that was
offset by the related decrease in interest expense
of $7 million each for the first fiscal six months
ended June 27, 2004 and June 29, 2003, respectively.
The diluted earnings per share excluded 92 million
and 46 million shares related to options for the first
fiscal six months ended June 27, 2004 and June 29,
2003, respectively, as the exercise price per share
of these options was greater than the average market
value, resulting in an anti-dilutive effect on
diluted earnings per share.
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The total comprehensive income for the first fiscal
six months ended June 27, 2004 was $5.0 billion,
compared with $3.4 billion for the same period a
year ago. Total comprehensive income included net
earnings, net unrealized currency gains and losses on
translation, net unrealized gains and losses on
available for sale securities and net gains and
losses on derivative instruments
qualifying and designated as cash flow hedges. The
following table sets forth the components of
accumulated other comprehensive income.
Total
Unrld Gains/ Accum
For. Gains/ Pens (Losses) Other
Cur. (Losses) Liab on Deriv Comp
Trans. on Sec Adj. & Hedg Inc/
(Loss)
December 28, 2003 $ (373) 27 (64) (180) (590)
2004 six months changes:
Net change associated
with current period
hedging transactions - - - 248
Net amount reclassed to
net earnings - - - (169)*
Net six months
changes (75) 60 - 79 64
June 27, 2004 $ (448) 87 (64) (101) (526)
Note: All amounts, other than foreign currency translation, are
net of tax. Foreign currency translation adjustments are not
currently adjusted for income taxes, as they relate to permanent
investments in non-US subsidiaries.
*Primarily offset in net earnings by changes in value of
the underlying transactions.
NOTE 9 - MERGERS, ACQUISITIONS AND DIVESTITURES
There were no acquisitions in the fiscal first quarter
of 2004. DePuy's Castings business was divested in the
fiscal first quarter of 2004 and did not have a
material effect on the Company's results of operations,
cash flows or financial position.
16
On March 30, 2004, Johnson & Johnson acquired Merck's 50%
interest in the Johnson & Johnson-Merck Consumer
Pharmaceuticals Co. European non-prescription
pharmaceutical joint venture for a net purchase price
of $230 million. This resulted in Johnson & Johnson
acquiring all the infrastructure and brand assets
currently managed by the European JV including brands
contributed by Merck (DOLORMIN (r), PEPCID (r),
FRENADOL (r) and DACRYYO(r)) and those acquired by both
companies (through the acquisition of Woelm Pharma and
Laboratoires Martin).
On May 18, 2004, Johnson & Johnson completed the
acquisition of EGEA Biosciences, Inc. through the
exercise of the option to acquire the remaining
outstanding stock not owned by Johnson & Johnson. EGEA
Biosciences has developed a proprietary technology
platform called Gene Writer, that allows for the rapid
and highly accurate synthesis of DNA sequences, gene
assembly, and construction of large synthetic gene
libraries.
On June 18, 2004, Johnson & Johnson acquired the
stock of Artemis Medical, Inc. Artemis was a privately
held company founded in 1999. Its products include
ultrasound and x-ray visible biopsy site breast markers
as well as hybrid markers.
The total net cash paid for acquisitions in the first
fiscal six months of 2004 was $300 million.
On January 29, 2003, Johnson & Johnson acquired
certain assets of Orquest, Inc., a privately held
biotechnology company focused on developing
biologically based implants for orthopaedic and spine
surgery. Orquest's principal product, HEALOS Bone
Graft Substitute, is designed to reduce the time and
pain associated with standard bone graft harvesting and
represents a therapeutic advance for patients requiring
bone graft material for spine fusion. The Company
incurred a charge for IPR&D of approximately $11
million before tax and $8 million after tax.
On February 10, 2003, Johnson & Johnson acquired
OraPharma, Inc., a specialty pharmaceutical company focused
on the development and commercialization of unique
therapeutics. Orapharma's initial product, ARESTIN, is
the first locally administered, time-released antibiotic
encapsulated in microspheres that control the germs that
can cause periodontal disease. The transaction was valued
at approximately $85 million, net of cash.
On March 28, 2003, Johnson & Johnson acquired 3-
Dimensional Pharmaceuticals, Inc., a company with a
technology platform focused on the discovery and
development of potential new drugs in early stage
development for the treatment of cardiovascular disorders,
oncology and inflammation. The transaction was valued
at approximately $88 million, net of cash. The Company
incurred a before and after tax charge for IPR&D of
approximately $7 million.
On April 17, 2003, Johnson & Johnson acquired the
CORTAID(r) brand business, the #3 brand in the anti-
itch treatment segment of the first aid category. The
transaction was valued at approximately $37 million.
On May 9, 2003, Johnson & Johnson acquired Inscope,
an intraluminal multiple clip applier technology. This
transaction was valued at $26 million.
17
On April 29, 2003, Johnson & Johnson acquired Scios
Inc., a biopharmaceutical company with a marketed
product for cardiovascular disease and research
projects focused on auto-immune diseases. Scios was
acquired to strengthen the Company's business in key
therapeutic areas and technology platforms. Scios'
product NATRECOR(r) is a novel agent approved for
congestive heart failure and has several significant
advantages over existing therapies. The transaction
was valued at approximately $2.1 billion, net of cash,
and the Company incurred a charge for IPR&D of $730
million before and after tax. The purchase price was
allocated to the tangible and identifiable intangible
assets acquired and liabilities assumed based on their
estimated fair values at the acquisition date. The
excess of the purchase price over the fair values of
assets and liabilities acquired was approximately $440
million and was allocated to goodwill. Goodwill
associated with this deal will not be deductible for
tax purposes.
On June 3, 2003, Johnson & Johnson acquired Link
Spine Group, Inc., a privately owned corporation that
will provide the Company with exclusive worldwide
rights to the SB Charite (tm) Artificial Disc for the
treatment of spine disorders. Under the terms of the
agreement, the Company paid a $325 million upfront
payment with further contingent payments due upon
achievement of regulatory and other milestones, and the
Company incurred a charge for IPR&D of $170 million
before and after tax. The purchase price was allocated
to the tangible and identifiable intangible assets
acquired and liabilities assumed based on their
estimated fair values at the acquisition date. The
excess of the purchase price over the fair values of
assets and liabilities acquired was approximately $84
million and was allocated to goodwill. Goodwill
associated with this deal will not be deductible for
tax purposes.
The supplemental pro forma information for the
current interim period and the preceeding year per SFAS
No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets" are not provided
as the impact of these aforementioned acquisitions did
not have a material effect on the Company's results of
operations, cash flows or financial position.
NOTE 10 - PRO FORMA STOCK BASED COMPENSATION
At June 27, 2004, the Company had 21 stock-based
employee compensation plans. The Company accounted for those
plans under the recognition and measurement principles of
Accounting Principle Board Opinion No. 25 "Accounting
for Stock Issued to Employees" and its related
Interpretations. Compensation costs were not recorded
in net income for stock options, as all options granted
under those plans had an exercise price equal to the
market value of the underlying common stock on the date
of grant.
As required by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123," the following
table shows the estimated effect on net income and
earnings per share if the Company had applied the fair
value recognition provision of SFAS No. 123, "Accounting
for Stock-Based Compensation," to stock-based
employee compensation.
18
(Dollars in Millions
Except Per Share Data) Fiscal Second Quarter Ended
June 27, 2004 June 29, 2003
Net income,
as reported $ 2,458 1,210
Less:
Compensation
expense(1) 88 90
Pro forma $ 2,370 1,120
Earnings per share:
Basic - as reported $.83 $.41
- pro forma .80 .38
Diluted - as reported $.82 $.40
- pro forma .79 .37
(1) Determined under fair value based method for all
awards, net of tax.
(Dollars in Millions
Except Per Share Data) Fiscal Six Months ended
June 27, 2004 June 29, 2003
Net income,
as reported $ 4,951 3,281
Less:
Compensation
expense(1) 166 174
Pro forma $ 4,785 3,107
Earnings per share:
Basic - as reported $1.67 $1.11
- pro forma 1.61 1.05
Diluted - as reported $1.65 $1.09
- pro forma 1.59 1.04
(1) Determined under fair value based method for all
awards, net of tax.
19
NOTE 11 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Components of Net Periodic Benefit Cost
Net periodic benefit costs for the Company's defined
benefit retirement plans and other benefit plans for
the fiscal second quarter of 2004 and 2003 include the
following components:
(Dollars in Millions)
Retirement Plans Other Benefit Plans
Fiscal Second Quarter ended
June 27, June 29, June 27, June 29,
2004 2003 2004 2003
Service cost $ 104 82 11 7
Interest cost 106 98 25 17
Expected return on
plan assets (127) (124) - (1)
Amortization of prior
service cost 3 4 - (1)
Amortization of net
transition asset - (1) - -
Recognized actuarial
losses (gains) 59 17 11 1
Curtailments and
settlements - 1 - -
Net periodic benefit
cost $ 145 77 47 23
Net periodic benefit costs for the Company's defined
benefit retirement plans and other benefit plans for
the first fiscal six months of 2004 and 2003 include
the following components:
(Dollars in Millions)
Retirement Plans Other Benefit Plans
Fiscal Six Months ended
June 27, June 29, June 27, June 29,
2004 2003 2004 2003
Service cost $ 212 163 24 14
Interest cost 225 196 51 35
Expected return on
plan assets (258) (248) (1) (2)
Amortization of prior
service cost 7 9 (1) (2)
Amortization of net
transition asset (1) (2) - -
Recognized actuarial
losses (gains) 103 33 22 2
Curtailments and
settlements - 1 - -
Net periodic benefit
cost $ 288 152 95 47
Company Contributions
As of June 27, 2004, the Company has contributed $155
million to its U.S. retirement plans in 2004. The
Company has no statutory
20
requirements to further fund U.S. retirement plans in
2004 and does not anticipate any further funding in
2004.
NOTE 12 - LEGAL PROCEEDINGS
The Company is involved in numerous product liability
cases in the United States, many of which concern
adverse reactions to drugs and medical devices. The
damages claimed are substantial, and while the Company
is confident of the adequacy of the warnings and
instructions for use which accompany such products, it
is not feasible to predict the ultimate outcome of
litigation. However, the Company believes that if any
liability results from such cases, it will be
substantially covered by existing amounts accrued in
the Company's balance sheet under its self-insurance
program and by third party product liability insurance.
One group of cases against the Company concerns
the Janssen Pharmaceutica product PROPULSID, which was
withdrawn from general sale and restricted to limited
use in 2000. In the wake of publicity about those
events, numerous lawsuits have been filed against
Janssen, which is a wholly owned subsidiary of the
Company, and the Company regarding PROPULSID, in state
and federal courts across the country. There are
approximately 430 such cases currently pending,
including the claims of approximately 5,900 plaintiffs.
In the active cases, 418 individuals are alleged to
have died from the use of PROPULSID. These actions seek
substantial compensatory and punitive damages and
accuse Janssen and the Company of inadequately testing
for and warning about the drug's side effects, of
promoting it for off-label use and of over promotion.
In addition, Janssen and the Company have entered into
agreements (tolling agreements) with various
plaintiffs' counsel halting the running of the statutes
of limitations with respect to the potential claims of
a significant number of individuals while those
attorneys evaluate whether or not to sue Janssen and
the Company on their behalf.
In September 2001, the first ten plaintiffs in the
Rankin case, which comprises the claims of 155
PROPULSID plaintiffs, went to trial in state court in
Claiborne County, Mississippi. The jury returned
compensatory damage verdicts for each plaintiff in the
amount of $10 million, for a total of $100 million. The
trial judge thereafter dismissed the claims of punitive
damages. On March 4, 2002, the trial judge reduced
these verdicts to a total of $48 million, and denied
the motions of Janssen and the Company for a new trial.
On May 13, 2004, the Supreme Court of Mississippi
reversed the verdicts against Janssen and the Company,
and remanded the case to the trial court. The Supreme
Court found the joint trial of multiple plaintiffs'
cases against Janssen was prejudicial and directed the
trial court to return the cases of the individual
plaintiffs for separate trials to their home counties.
A motion for rehearing filed by the plaintiffs is
pending.
In April 2002, a state court judge in New Jersey
denied plaintiffs' motion to certify a national class
of PROPULSID users
21
for purposes of medical monitoring and refund of the
costs of purchasing PROPULSID. An effort to appeal that
ruling has been denied. In June 2002, the federal judge
presiding over the PROPULSID Multi-District Litigation
in New Orleans, Louisiana
similarly denied plaintiffs' motion there to certify a
national class of PROPULSID users. Plaintiffs in the
Multi-District Litigation have said they are preserving
their right to appeal that ruling, and other complaints
filed against Janssen and the Company include class
action allegations, which could be the basis for future
attempts to have classes certified.
On February 5, 2004, Janssen announced that it had
reached an agreement in principle with the Plaintiffs
Steering Committee (PSC), of the PROPULSID Federal
Multi-District Litigation (MDL), to resolve federal
lawsuits related to PROPULSID. There are approximately
4,000 individuals included in the Federal MDL of whom
approximately 300 are alleged to have died from use of
the drug. The agreement becomes effective once 85
percent of the death claims, and 75 percent of the
remainder, agree to the terms of the settlement. In
addition, 12,000 individuals who have not filed
lawsuits, but whose claims are the subject of tolling
agreements suspending the running of the statutes of
limitations against those claims, must also agree to
participate in the settlement before it will become
effective. Those agreeing to participate in the
settlement will submit medical records to an
independent panel of physicians who will determine
whether the claimed injuries were caused by PROPULSID
and otherwise meet the standards for compensation. If
those standards are met, a court-appointed special
master will determine compensatory damages. If the
agreement becomes effective, Janssen will pay as
compensation a minimum of $69.5 million and a maximum
of $90 million, depending upon the number of plaintiffs
who enroll in the program. Janssen will also establish
an administrative fund not to exceed $15 million, and
will pay legal fees to the PSC up to $22.5 million,
subject to court approval.
With respect to all the various PROPULSID actions
against them, Janssen and the Company dispute the
claims in those lawsuits and are vigorously defending
against them except where, in their judgment,
settlement is appropriate. Janssen and the Company
believe they have adequate self-insurance accruals and
third party product liability insurance with respect to
these cases. In communications to the Company, the
excess insurance carriers have raised certain defenses
to their liability under the policies and to date have
declined to reimburse Janssen and the Company for
PROPULSID-related costs despite demand for payment.
However, in the opinion of the Company, those defenses
are pro forma and lack substance and the carriers will
honor their obligations under the policies either
voluntarily or after litigation. In March 2004, the
Company commenced arbitration against Allianz
Underwriters Insurance Company, which issued the first
layer of applicable excess insurance coverage, to
obtain reimbursement of PROPULSID-related costs.
22
The Company's Ethicon, Inc. subsidiary has over the last
several years had a number of claims and lawsuits filed
against it relating to VICRYL sutures. The actions allege
that the sterility of VICRYL sutures was compromised by
inadequacies in Ethicon's systems and controls, causing
patients who were exposed to these
sutures to incur infections which would not otherwise
have occurred. Ethicon on several occasions recalled
batches of VICRYL sutures in light of questions raised
about sterility but does not believe any contamination
of suture products in fact occurred. In November 2003,
a trial judge in West Virginia certified for class
treatment all West Virginia residents who had VICRYL
sutures implanted during Class I or II surgeries from
May 1, 1994 to December 31, 1997. The certification is
subject to later challenge following the conclusion of
discovery. An October 2004 trial date has been set in
this matter and Ethicon has been and intends to
continue vigorously defending against the claims.
Affirmative Stent Patent Litigation
In patent infringement actions tried in Delaware
Federal Court in late 2000, Cordis Corporation, a
subsidiary of Johnson & Johnson, obtained verdicts of
infringement and patent validity, and damage awards,
against Boston Scientific Corporation and Medtronic
AVE, Inc., based on a number of Cordis vascular stent
patents. On December 15, 2000, the jury in the damage
action against Boston Scientific returned a verdict of
$324 million and on December 21, 2000, the jury in the
Medtronic AVE action returned a verdict of $271
million. These sums represent lost profit and
reasonable royalty damages to compensate Cordis for
infringement but do not include pre or post judgment
interest. In February 2001 a hearing was held on the
claims of Boston Scientific and Medtronic AVE that the
patents at issue were unenforceable owing to alleged
inequitable conduct before the patent office.
In March and May 2002, the district judge issued
post trial rulings that confirmed the validity and
enforceability of the main Cordis stent patent claims
but found certain other Cordis patents unenforceable.
Further, the district judge granted Boston Scientific a
new trial on liability and damages and vacated the
verdict against Medtronic AVE on legal grounds. On
August 12, 2003, the Court of Appeals for the Federal
Circuit found the trial judge erred in vacating the
verdict against Medtronic AVE and remanded the case to
the trial judge for further proceedings. Cordis filed
motions before the trial court on October 14, 2003 to
reinstate the verdicts against both Medtronic AVE and
Boston Scientific and to award interest and enter
injunctions against the stent products at issue in
those two cases (the GFX and MicroStent stents of
Medtronic AVE and the NIR stent of Boston Scientific)
and colorable variations thereof. Medtronic AVE and
Boston Scientific are resisting reinstatement of these
verdicts and will likely attempt to appeal to the Court
of Appeals for the Federal Circuit once judgments are
entered.
23
In January 2003, Cordis filed an additional patent
infringement action against Boston Scientific in
Delaware Federal Court accusing its Express2 and TAXUS
stents of infringing one of the Cordis patents involved
in the earlier actions against Boston Scientific and
Medtronic AVE. In February 2003, Cordis moved in that
action for a preliminary injunction seeking to bar the
introduction of the TAXUS stent based on that patent.
On November 21, 2003, the district judge denied that
request for a preliminary injunction and that decision
was affirmed by the Court of Appeals for the Federal
Circuit in May 2004. Cordis also has pending in
Delaware Federal Court another action against Medtronic
AVE accusing Medtronic AVE of infringement by sale of
stent products introduced by Medtronic AVE subsequent
to its GFX and MicroStent products, the subject of the
earlier action referenced above.
In early June 2003, an arbitration panel in
Chicago, in a preliminary ruling, found in favor of
Cordis in its arbitration against ACS/Guidant involving
infringement by ACS/Guidant of a Cordis stent patent.
On August 19, 2003, the panel confirmed that ruling,
rejecting the challenge of ACS/Guidant. Under the terms
of an earlier agreement between Cordis and ACS/Guidant,
the arbitration panel's ruling obligated ACS/Guidant to
make a payment of $425 million to Cordis which was made
in the fiscal fourth quarter of 2003. As a result of
resolving this matter, in the fiscal fourth quarter,
$230 million was recorded in other income and expense
(approximately $142 million after tax) relating to past
periods. The balance of the award, $195 million
(approximately $120 million after tax), will be
recognized in income in future periods over the
estimated remaining life of the intellectual property.
No additional royalties for ACS/Guidant's continued use
of the technology and no injunction are involved.
Patent Litigation Against Various Johnson & Johnson
Operating Companies
The products of various Johnson & Johnson
operating companies are the subject of various patent
lawsuits, which could potentially affect the ability of
those operating companies to sell those products, or
require the payment of past damages and future
royalties. The following chart summarizes various
patent lawsuits concerning important products of
Johnson & Johnson operating companies:
24
Product J&J Patents Plaintiff/ Court Trial Date
Operat- Patent Date Filed
ing Holder
Company
Stents Cordis Jang Boston D.Del. 6/13/05 3/03
Scientific
Corporation
Drug Cordis Ding Boston D.Del. 6/13/05 4/03
Eluting Scientific
Stents Corporation
Drug Cordis Kung Boston D.Del. 10/17/05 12/03
Eluting Grainger Scientific
Stents Corporation
Stents Cordis Rockey Arlaine S.D.Fla. TBD 7/02
and Gena
Rockey
Inc.
Stents Cordis Boneau Medtronic D.Del. TBD 4/02
Inc.
Two- Cordis Kastenh Boston N.D.Cal. TBD 2/02
layer ofer Scientific
Catheters Forman Corporation
Remicade Centocor Cerami Rockefeller E.D.Tex. TBD 4/04
University
and
Chiron
Corporation
Two- Cordis Kastenh Boston Belgium 9/7/04 12/03
layer (Belgium ofer Scientific
Cath- (Schneider)
ers
Stents Cordis Israel Medinol Multiple 1st 5/2003
E.U. trial -
juris- Netherl 5/2004
dictions ands
Jan
2005
With respect to all of these matters, the Johnson
& Johnson operating company involved is vigorously
defending against the claims of infringement and
disputing where appropriate the validity and
enforceability of the patent claims asserted against
it.
Litigation Against Filers of Abbreviated New Drug
Applications (ANDAs)
The following 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,
the firms involved will then introduce generic versions
of the product at issue resulting in very substantial
market share and revenue losses for the product of the
Company's subsidiary.
25
Patent/ND Generic Trial Date
Brand Name Product A Holder Challenger Court Date Filed
Aciphex Eisai Teva SDNY TBD 11/20/03
20 mg delay release (for Dr. SDNY TBD 11/17/03
tablet Janssen) Reddy's
Mylan SDNY TBD 01/28/04
Ditropan XL Ortho Mylan DWV 02/08/05 05/02/03
McNeil,
5, 10, 15 mg ALZA Impax NDCal TBD 09/04/03
controlled release
tablet
Duragesic Janssen, Mylan D Vt 08/25/03 01/25/02
25, 50, 75, 100 ALZA
micrograms/hr patch
Levaquin Tablets Daiichi, Mylan DWV 05/24/04 02/22/02
JJPRD,
250, 500, 750 mg Ortho Teva DNJ TBD 06/11/02
tablets McNeil
Levaquin Injectable Daiichi, Bedford/ DNJ TBD 03/24/03
Single use vials and JJPRD, Ben
5 ml/mg premix Ortho Venue
McNeil
Sicor DNJ TBD 12/15/03
(Teva)
Levaquin Injectable Daiichi, American DNJ TBD 12/19/03
Single use vials JJPRD, Pharmace
Ortho uti-cal
McNeil Partners
Quixin Opthalmic Daiichi, Hi-Tech DNJ TBD 12/18/03
Solution Ortho Pharmacal
(Levofloxacin) McNeil
Opthalmic solution
Ortho Tri-cyclen LO Ortho Barr DNJ TBD 10/01/03
0.18 mg/0.025 mg, McNeil
0.215 mg/0.025 mg
and 0.25 mg/0.025 mg
Risperdal Tablets Janssen Mylan DNJ TBD 12/29/03
..25, 0.5, 1, 2, 3, 4 Dr. DNJ TBD 12/29/03
mg tablets Reddy's
Sporanox Janssen Eon Labs EDNY 05/17/04 04/15/01
100 mg capsule
Topamax Ortho Mylan DNJ TBD 04/12/04
25, 100, 200 mg McNeil
tablet
Ultracet Ortho Kali DNJ TBD 11/25/02
37.5 tram/325 apap McNeil (Par)
tablet
Teva DNJ TBD 02/25/04
In the Duragesic matter referenced above, the
district court in March 2004 found ALZA's patent valid,
enforceable and infringed by Mylan's generic. Mylan is
appealing that ruling. In June 2004, FDA ruled that
Mylan's ANDA would be subject to ALZA's period of
pediatric exclusivity ending in January 2005. In late
June, Mylan filed actions against FDA seeking to
require the agency to grant it approval to market on
July 24, 2004, the day after the Duragesic patent
expires, in both the federal district and circuit
courts for the District of Columbia. ALZA and Janssen
are seeking to intervene in Mylan's actions against the
FDA, and to provide support for the agency's action.
In the action against Mylan involving Levaquin, post-
trial papers following the second phase of the trial
were submitted to the district court in July and a
decision is expected in the fourth quarter of this
year.
In the action against Eon Labs involving Sporanox,
the district court ruled on July 28, 2004 that
Janssen's patent was valid but not infringed by Eon's
generic. Janssen will appeal this ruling to the Court
of Appeals for the Federal Circuit.
26
In the action against Kali involving Ultracet,
Kali has moved for summary judgment on the issues of
infringement and invalidity. The briefing on that
motion was completed in July 2004 and a decision is
expected in the fourth quarter of this year. 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.
In the action against Mylan involving Ditropan
XL, Mylan recently moved for summary judgment on the
issues of non-infringement and invalidity.
With respect to all of the above matters, the
Johnson & Johnson operating company involved is
vigorously defending the validity and enforceability
and asserting the infringement of its own or its
licensor's patents.
Average Wholesale Price (AWP) Litigation
Johnson & Johnson and its pharmaceutical operating
companies, along with numerous other pharmaceutical
companies, are defendants in a series of lawsuits in
state and federal courts involving allegations that the
pricing and marketing of certain pharmaceutical
products amounted to fraudulent and otherwise
actionable conduct because, among other things, the
companies allegedly reported an inflated Average
Wholesale Price ("AWP") for the drugs at issue. Most of
these cases, both federal actions and state actions
removed to federal court, have been consolidated for
pre- trial purposes in a Multi-District Litigation
(MDL) in federal court in Boston, Massachusetts. The
plaintiffs in these cases include classes of private
persons or entities that paid for any portion of the
purchase of the drugs at issue based on AWP, and state
government entities that made Medicaid payments for the
drugs at issue based on AWP.
Ethicon Endo-Surgery, Inc., a Johnson & Johnson
operating company which markets endoscopic surgical
instruments, and the Company, are named defendants in a
North Carolina state court class action lawsuit
alleging AWP inflation and improper marketing
activities against TAP Pharmaceuticals. Ethicon Endo-
Surgery, Inc. is a defendant based on claims that
several of its former sales representatives are alleged
to have been involved in arbitrage of a TAP drug. The
allegation is that these sales representatives
persuaded certain physicians in states where the drug's
price was
low to purchase from TAP excess quantities of the drug
and then resell it in states where its price was
higher. Ethicon Endo- Surgery, Inc. and the Company
deny any liability for the claims made against them in
this case and are vigorously defending against it. On
April 24, 2003, the trial judge certified a national
class of purchasers of the TAP product at issue. On
July 6, 2004, that class was decertified by the North
Carolina Court of Appeals and the matter remanded to
the trial court for additional consideration.
27
Other
The New York State Attorney General's office and
the Federal Trade Commission issued subpoenas in
January and February 2003 seeking documents relating to
the marketing of sutures and endoscopic instruments by
the Company's Ethicon, Inc. and Ethicon Endo-Surgery,
Inc. subsidiaries. The Connecticut Attorney General's
office also issued a subpoena for the same documents.
These subpoenas focus on the bundling of sutures and
endoscopic instruments in contracts offered to Group
Purchasing Organizations and individual hospitals in
which discounts are predicated on the hospital
achieving specified market share targets for both
categories of products. The operating companies
involved are responding to the subpoenas.
On June 26, 2003, the Company received a request
for records and information from the U.S. House of
Representatives' Committee on Energy and Commerce in
connection with its investigation into pharmaceutical
reimbursements and rebates under Medicaid. The
Committee's request focuses on the drug REMICADE
(infliximab), marketed by the Company's Centocor, Inc.
subsidiary. On July 2, 2003, Centocor received a
request that it voluntarily provide documents and
information to the criminal division of the U.S.
Attorney's Office, District of New Jersey, in
connection with its investigation into various Centocor
marketing practices. Both the Company and Centocor are
responding to these requests for documents and
information.
On August 1, 2003, the Securities and Exchange
Commission (SEC) advised the Company of its informal
investigation under the Foreign Corrupt Practices Act
of allegations of payments to Polish governmental
officials by U.S. pharmaceutical companies. On November
21, 2003, the SEC advised the company the investigation
had become formal and issued a subpoena for the
information previously requested in an informal
fashion, plus other background documents. The Company
and its operating units in Poland are responding to
these requests.
On December 8, 2003, the Company's Ortho-McNeil
Pharmaceutical unit received a subpoena from the United
States Attorney's office in Boston, Massachusetts
seeking documents relating to the marketing, including
alleged off- label marketing, of the drug TOPAMAX
(topiramate) which is approved for anti-epilepsy
therapy. Ortho-McNeil is cooperating in responding to
the subpoena.
On January 20, 2004, the Company's Janssen unit
received a subpoena from the Office of the Inspector
General of the United States Office of Personnel
Management seeking documents concerning any and all
payments to physicians in connection with sales and
marketing of, and clinical trials for, RISPERDAL from
1997 to 2002. Janssen is cooperating in responding to
the subpoena.
28
In April 2004, the Company's pharmaceutical units
were requested to submit information to the 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.
On July 27, 2004, the Company received a letter
request from the New York State Attorney General's
Office for documents pertaining to marketing, off-label
sales and clinical trials for Topamax, Risperdal,
Procrit, Reminyl, Remicade and Aciphex. The Company is
responding to the request.
After a remand from the Federal Circuit Court of
Appeals in January 2003, a partial retrial was
commenced in October and concluded in November 2003 in
Boston, Massachusetts in the action Amgen v.
Transkaryotic Therapies, Inc. (TKT) and Aventis
Pharmaceutical, Inc. The matter is a patent
infringement action brought by Amgen against TKT, the
developer of a gene-activated EPO product, and Aventis,
which holds marketing rights to the TKT product,
asserting that TKT's product infringes various Amgen
patent claims. TKT and Aventis dispute infringement and
are seeking to invalidate the Amgen patents asserted
against them. The district court has issued preliminary
rulings that upheld the district court's initial
findings in 2001. Further proceedings and an appeal
will follow. The Amgen patents at issue in the case are
exclusively licensed to Ortho Biotech Inc., a Johnson &
Johnson operating company, in the U.S. for non-
dialysis indications. Ortho Biotech Inc. is not a party
to the action.
The Company is also involved in a number of other
patent, trademark and other lawsuits incidental to its
business. The ultimate legal and financial liability of
the Company in respect to all claims, lawsuits and
proceedings referred to above cannot be estimated with
any certainty. However, in the opinion of management,
based on its examination of these matters, its
experience to date and discussions with counsel, the
ultimate outcome of these legal proceedings, net of
liabilities already accrued in the Company's
consolidated balance sheet, is not expected to have a
material adverse effect on the Company's consolidated
financial position, although the resolution in any
reporting period of one or more of these matters could
have a significant impact on the Company's results of
operations and cash flows for that period.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Analysis of Consolidated Sales
For the first fiscal six months of 2004, worldwide
sales were $23.0 billion, an increase of 14.3% over
2003 first fiscal six month sales of $20.2 billion.
The impact of foreign currencies accounted for 4.0% of
the total reported fiscal six month increase.
29
Sales by U.S. companies were $13.6 billion in the
first fiscal six months of 2004, which represented an
increase of 12.1% over the same period last year.
Sales by international companies were
$9.4 billion, which represented an increase of 17.8%,
of which 10.0% was due to currency fluctuations.
All geographic areas throughout the world posted
sales increases during the first fiscal six months of
2004 as sales increased 17.5% in Europe, 18.7% in the
Western Hemisphere (excluding the U.S.) and 17.9% in
the Asia-Pacific, Africa region. These sales gains
include the positive impact of currency fluctuations
between the U.S. dollar and foreign currencies in
Europe of 11.6%, in the Western Hemisphere (excluding
the U.S.) of 5.5% and in the Asia-Pacific, Africa
region of 8.6%.
For the fiscal second quarter of 2004, worldwide
sales were $11.5 billion, an increase of 11.1% over
2003 fiscal second quarter sales of $10.3 billion.
The impact of foreign currencies accounted for 2.6%
of the total reported fiscal second quarter 2004
increase.
Sales by U.S. companies were $6.7 billion in the
fiscal second quarter of 2004, which represented an
increase of 9.1%. Sales by international companies
were $4.8 billion, which represented an increase
of 14.1%, of which 6.3% was due to currency
fluctuations.
All geographic areas throughout the world posted
sales increases during the fiscal second quarter of
2004 as sales increased 13.4% in Europe, 12.1% in the
Western Hemisphere (excluding the U.S.) and 16.6% in
the Asia-Pacific, Africa region. These sales gains
include the positive impact of currency fluctuations
between
the U.S. dollar and foreign currencies in Europe of
7.4%, in the Western Hemisphere (excluding the U.S.) of
0.5% and in the Asia-Pacific, Africa region of 6.8%.
Analysis of Sales by Business Segments
Consumer
Consumer segment sales in the first fiscal six
months of 2004 were $4.0 billion, an increase of 12.1%
over the same period a year ago with 8.1% of
operational growth and a positive currency impact of
4.0%. U.S. Consumer segment sales increased by 7.0%
while international sales gains of 17.9% included a
positive currency impact of 8.6%.
Major Consumer Franchise Sales - First Fiscal Six
Months
Total Operations Currency
2004 2003 %Change %Change %Change
OTC &
Nutritionals 1,096 $ 935 17.2% 14.8% 2.4%
Skin Care 1,071 913 17.3 11.9 5.4
Women's Health 716 657 9.1 4.0 5.1
Baby & Kids
Care 703 634 10.8 5.5 5.3
30
Consumer segment sales in the fiscal second quarter
of 2004 were $2.0 billion, an increase of 10.0% over
the same period a year ago with 7.5% of operational
growth and a positive currency
impact of 2.5%. U.S. Consumer segment sales increased
by 6.0% while international sales gains of 14.1%
included a positive currency impact of 5.1%.
Major Consumer Franchise Sales - Fiscal Second Quarter
Total Operations Currency
2004 2003 %Change %Change %Change
OTC &
Nutritionals $ 532 $ 448 18.9% 16.7% 2.2%
Skin Care 509 448 13.6 10.2 3.4
Women's Health 368 344 7.0 4.1 2.9
Baby & Kids
Care 360 331 8.8 5.2 3.6
Consumer segment sales growth in the fiscal second
quarter was attributable to strong sales performance in
the major franchises in this segment including McNeil
Over-The-Counter and Nutritional products, Skin Care,
Women's Health and Baby & Kids Care. McNeil Over-The-
Counter and Nutritional products growth was driven by
the acquisition of the remaining 50% stake in the
Johnson & Johnson-Merck Consumer Pharmaceuticals Co.
non-prescription pharmaceuticals joint venture, and the
continued growth of SPLENDA(r) Tabletop brand no
calorie sweetener, partially offset by the sale of the
SPLENDA(r)ingredients business on April 2, 2004. The
Skin Care franchise sales growth was attributed to
NEUTROGENA(r),AVEENO(r), RoC(r) and CLEAN & CLEAR(r).
New products launched in the first half of 2004 have
continued to be the primary driver of growth. The Baby
& Kids Care franchise growth was led by new products,
the continued strength of BabyCenter and the sales
growth of Balmex(r) Diaper Rash Ointment, which was
acquired in 2003.
In February 2004, the Company announced an agreement
with Tate & Lyle related to the production of sucralose
and the SPLENDA brand. This transaction was completed
on April 2, 2004 and resulted in the Company being
responsible for the worldwide sales and marketing of
the tabletop category of SPLENDA(r), with Tate & Lyle
responsible for the manufacturing of sucralose and the
marketing of ingredient sales. This transaction had no
significant impact on financial results.
Pharmaceutical
Pharmaceutical segment sales in the first fiscal six
months of 2004 were $10.8 billion, an increase of 13.1%
over the same period a year ago with 10.0% of this
change due to operational increases and the remaining
3.1% increase related to the positive impact of
currency. The U.S. Pharmaceutical sales increase was
11.4% and the growth in international Pharmaceutical
sales was 16.9% which included 9.9% related to the
positive impact of currency.
31
Major Pharmaceutical Product Sales - First Fiscal Six
Months
Total Operations Currency
2004 2003 %Change %Change %Change
PROCRIT(r)/EPREX(r) $1,852 $2,012 (8.0%) (10.8%) 2.8%
RISPERDAL(r) 1,458 1,256 16.1 11.4 4.7
DURAGESIC(r) 1,011 776 30.3 25.5 4.8
REMICADE(r) 1,003 830 20.9 20.9 0.0
Hormonal Contra-
ceptives 671 555 20.8 19.6 1.2
TOPAMAX(r) 663 494 34.2 31.7 2.5
LEVAQUIN(r)/FLOXIN(r) 651 571 14.0 14.1 (0.1)
Pharmaceutical segment sales in the fiscal second
quarter of 2004 were $5.4 billion, an increase of 11.1%
over the same period a year ago with 9.1% of this
change due to operational increases and the remaining
2.0% increase related to the positive impact of
currency. The U.S. Pharmaceutical sales increase was
11.1% and the growth in international Pharmaceutical
sales was 11.1% which included 6.0% related to the
positive impact of currency.
Major Pharmaceutical Product Sales - Fiscal Second
Quarter
Total Operations Currency
2004 2003 %Change %Change %Change
PROCRIT(r)/EPREX(r) $ 875 $1,015 (13.8%) (15.6%) 1.8%
RISPERDAL(r) 727 655 10.9 7.9 3.0
DURAGESIC(r) 557 381 46.2 42.7 3.5
REMICADE(r) 539 421 28.2 28.2 0.0
Hormonal Contra-
ceptives 366 287 27.6 26.9 0.7
TOPAMAX(r) 335 263 27.5 26.0 1.5
LEVAQUIN(r)/FLOXIN(r) 269 273 (1.5) (1.2) (0.3)
Included in second quarter results was the benefit
from adjustments related to previously estimated
performance-based rebate allowances in managed care
contracts. These adjustments were made based on a
review of actual performance levels as achieved by
customers compared to expected performance levels.
These favorable adjustments added over 2.0% to
pharmaceutical segment operational growth in the fiscal
second quarter 2004.
The vast majority of the impact of this adjustment
was in the hormonal contraceptive franchise. Adjusting
for the impact of this change, sales in this category
declined by approximately 2.0%, which was consistent
with the expected impact from generic competition.
ORTHO EVRA(r) (norelgestromin/ethinyl estradiol), the
first contraceptive patch approved by the FDA, as well
as ORTHO TRI-CYCLEN(r)LO (norgestimate/ethinyl
estradiol), both had strong performance in the fiscal
second quarter 2004.
Pharmaceutical segment sales growth was adversely
affected by the sales decline of PROCRIT(r) (Epoetin
alfa) and EPREX(r) (Epoetin alfa) due to increased
competition. Combined, PROCRIT (r)(sold in the U.S.)
and EPREX(r)(sold internationally) sales declined 13.8%
in the fiscal second quarter of 2004 versus the
32
same period a year ago. Sales of PROCRIT(r) in the
fiscal second quarter were down 17.6% versus the same
period last year. However, on a unit basis, PROCRIT(r)
actually grew slightly when compared with the fiscal
second quarter 2003.
RISPERDAL(r) (risperidone), a medication that treats
the symptoms of schizophrenia, fueled by RISPERDAL(r)
CONSTA(tm) grew by 10.9% in the fiscal second quarter
2004. REMICADE(r) (infliximab), a novel monoclonal
antibody therapy indicated to treat Crohn's disease and
rheumatoid arthritis, continued to maintain its
leadership position in the growing Anti-TNF-a (tumor
necrosis factor alpha) market. TOPAMAX(r) (topiramate)
had strong growth over the same period a year ago.
Net sales for DURAGESIC(r) (fentanyl transdermal
systems) in the U.S. were positively impacted by the
filling of back orders that had adversely affected
first quarter performance. On March 25, 2004 a U.S.
District Court upheld the validity of the DURAGESIC(r)
product patent guaranteeing that generic competition
could not occur prior to July 23, 2004. The Company
submitted the judge's order to the U.S. Food and Drug
Administration (FDA) with a request that the six-month
pediatric extension granted in 2003 for DURAGESIC(r) be
honored. In June 2004, the FDA ruled that the six-
month extension is valid through January 2005. Mylan
is challenging FDA's decision in both the federal
district and circuit courts of the District of
Columbia.
Growth was also achieved in DOXIL(r) (doxorubicin),
an anti-cancer treatment, REMINYL(r) (galantamine
(HBr)), a treatment for patients with mild to moderate
Alzheimer's disease, and NATRECOR(r) (nesiritide), to
treat acute congestive heart failure.
CONCERTA(r)(methylphenidate HCI) sales continued to
grow despite the current absence of patent exclusivity
in the U.S. At present, the FDA has not approved any
generic that is substitutable for CONCERTA(r).
Medical Devices and Diagnostics
Medical Devices and Diagnostics segment sales in the
first fiscal six months of 2004 were $8.2 billion, an
increase of 17.1% over the same period a year ago with
12.0% of this change due to operational increases and
the remaining 5.1% increase related to the positive
impact of currency. The U.S. Medical Devices and
Diagnostics sales increase was 15.9% and the growth in
international Medical Devices and Diagnostics sales was
18.5% which included 10.7% related to the positive
impact of currency.
Major Medical Devices and Diagnostics Franchise Sales -
First Fiscal Six Months
Total Operations Currency
2004 2003 %Change %Change %Change
DePuy $1,678 $1,487 12.8% 8.4% 4.4%
Cordis 1,541 1,020 51.2 46.4 4.8
Ethicon 1,397 1,302 7.3 1.1 6.2
Ethicon Endo-Surgery 1,375 1,272 8.1 3.2 4.9
LifeScan 820 678 20.9 16.3 4.6
Vision Care 731 616 18.6 12.4 6.2
Ortho-Clinical
Diagnostics 619 581 6.6 1.6 5.0
33
Medical Devices and Diagnostics segment sales in the
fiscal second quarter of 2004 were $4.1 billion, an
increase of 11.8% over the same period a year ago with
8.3% of this change due to operational increases and
the remaining 3.5% increase related to the positive
impact of currency. The U.S. Medical Devices and
Diagnostics sales increase was 7.1% and the growth in
international Medical Devices and Diagnostics sales was
17.0% which included 7.3% related to the positive
impact of currency.
Major Medical Devices and Diagnostics Franchise Sales -
Fiscal Second Quarter
Total Operations Currency
2004 2003 %Change %Change %Change
DePuy $ 839 $ 748 12.2% 9.0% 3.2%
Cordis 664 599 10.8 8.0 2.8
Ethicon 716 673 6.3 2.1 4.2
Ethicon Endo-Surgery 710 649 9.5 6.1 3.4
LifeScan 420 330 27.2 24.3 2.9
Vision Care 377 317 18.9 13.8 5.1
Ortho-Clinical
Diagnostics 317 294 7.6 4.1 3.5
DePuy franchise growth in the fiscal second quarter
was primarily due to DePuy's orthopaedic joint
reconstruction products including the shoulder, ankle
and knee product lines. Strong performance was also
reported in the area of spine. The positive growth
was negatively impacted by the sale of the Castings
business in the first quarter of 2004.
Cordis growth was achieved in the endovascular,
Biosense Webster and cardiology businesses. The
primary driver of the sales growth in the cardiology
business was international sales of the CYPHER(r)
Sirolimus-eluting Stent. This was the first full
quarter with a competitive product in the U.S.
marketplace, and U.S. sales of CYPHER(r) grew by 1.0%
over the second quarter of 2003.
On April 2, 2004, Cordis Cardiology Division of
Cordis Corporation, a Johnson & Johnson Company,
received a warning letter from the FDA regarding
observations concerning Good Manufacturing Practice
regulations. These observations followed standard post-
approval site inspections completed in 2003, including
sites involved in the production of the CYPHER stent.
The company's management has submitted its response
plan to the FDA.
Ethicon franchise growth was related to strong
sales of VICRYL (r)(polyglactin 910) PLUS
antibacterial coated sutures, as well as new products
such as the Multipass needle introduced in April 2004.
Ethicon Endo-Surgery franchise experienced growth in
Endocutter sales that include products used in
performing bariatric procedures, an important focus for
the franchise. This growth was negatively impacted by
the sale of the vascular access business in the fiscal
second quarter of 2003.
34
LifeScan franchise growth was due to increased sales
of the OneTouch(r) Ultra(r) brand in both the U.S and
international
markets. Vision Care franchise growth was led by
continued success in the Japanese market as well as
strong growth in the U.S. market led by the
introduction of Acuvue(r) Advance(tm) with
HydraClear(tm), a silicone hydrogel material launched
nationwide in January 2004.
Cost of Goods Sold and Selling, General and
Administrative Expenses
Consolidated costs of goods sold for the first fiscal
six months of 2004 increased to 28.3% from 28.2% of
sales over the same period a year ago. The cost of
goods sold for the fiscal second quarter of 2004 was
27.5% of sales. The cost of goods sold as a percentage
of sales in the fiscal second quarter of 2003 was
28.7%. The favorable change in the second fiscal
quarter of 2004 was primarily in the Medical Devices
and Diagnostics segment, related to positive mix,
divestiture of low gross margin businesses, and cost
containment activities across all segments.
Consolidated selling, general and administrative
expenses for the first fiscal six months of 2004
increased 10.6% over the same period a year ago.
Consolidated selling, general and administrative
expenses as a percent to sales for the first fiscal
six months of 2004 were 31.9% versus 33.0% for the
same period a year ago, which represented an
improvement of 1.1% as a percent of sales. This
improvement was primarily due to the Company's focus on
managing expenses.
Consolidated selling, general and administrative
expenses for the fiscal second quarter of 2004
increased 9.3% over the same period a year ago. As a
percent to sales, selling, general and administrative
expenses decreased from 32.9% in the second quarter of
2003 to 32.3% in the second quarter of 2004. This
improvement was primarily attributable to the
pharmaceutical segment and reflected ongoing efforts to
control costs and leverage expenses.
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 2004 were $2.3
billion, an increase of 12.9% over the same period a
year ago. Research and development spending in the
fiscal second quarter of 2004 was $1.2 billion, an
increase of 9.2% over the fiscal second quarter of
2003.
In-Process Research & Development
In the fiscal second quarter of 2003, the Company
recorded In-process Research & Development (IPR&D)
charges of $900 million before and after tax related to
acquisitions. These acquisitions included Scios Inc.
and the Link Spine Group, Inc. Scios Inc. is a
biopharmaceutical company with a marketed product for
35
cardiovascular disease and research projects focused on
auto-immune diseases. Link Spine Group, Inc. was
acquired to provide the Company with exclusive
worldwide rights to the SB Charite Artificial Disc for
the treatment of spine disorders.
In the fiscal first quarter of 2003, the Company
recorded IPR&D charges of $15 million after tax
($18 million before tax) related to acquisitions.
These acquisitions included certain assets of Orquest,
Inc., a privately-held biotechnology company focused
on developing biologically-based implants for
orthopaedics spine surgery and 3-Dimensional
Pharmaceuticals, Inc., a company with a technology
platform focused on the discovery and development
of potential new drugs in early stage development for
the treatment of cardiovascular diseases, oncology and
inflammation.
Other (Income) Expense, Net
Other (income) expense included gains and losses
related to the
sale and write-down of certain equity securities of the
Johnson &
Johnson Development Corporation, losses on the
disposal of fixed
assets, currency gains & losses, minority interests,
litigation
settlement expense as well as royalty income. The
unfavorable change in other (income) expense in both
the first fiscal six months of 2004 and the fiscal
second quarter of 2004 as compared to the same periods
a year ago was due primarily to the gain associated
with a business divestiture in the fiscal second
quarter of 2003.
OPERATING PROFIT BY SEGMENT
Consumer Segment
Operating profit for the Consumer segment as a percent
to sales in the first fiscal six months of 2004 was
20.5% versus 21.7% over the same period a year ago.
This decrease was primarily due to ongoing costs
associated with a plant closure and investment spending
in developing markets outside the U.S. Operating
profit as a percent to sales in the fiscal second
quarter of 2004 was 19.1% versus 20.5% over the same
period a year ago. This decrease was due to increased
investment spending related to OTC brands.
Pharmaceutical Segment
Operating profit for the Pharmaceutical segment as a
percent to sales in the first fiscal six months of 2004
was 38.8% versus 30.9% over the same period a year ago.
Excluding IPR&D charges, operating profit as a percent
to sales in the first fiscal six months of 2003 was
38.6%. Operating profit as a percent to sales in the
fiscal second quarter of 2004 was 38.8% versus 22.3%
over the same period a year ago. Excluding IPR&D
charges, operating profit as a percent to sales in the
fiscal second quarter of 2003 was 37.3%. The increase
in 2004 was due to cost containment activities.
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 2004 was 25.9% versus 20.0% over
the same period a year ago. Excluding
36
IPR&D charges, operating profit as a percent to sales
in the first fiscal six months of 2003 was 22.6%.
Operating profit as a percent to sales in the fiscal
second quarter of 2004 was 26.0% versus 18.5% over the
same period a year ago. Excluding IPR&D charges,
operating profit as a percent to sales in the fiscal
second quarter of 2003 was 23.2%. The increase in 2004
was due to favorable sales mix, the impact of
divestitures of low gross margin businesses and cost
containment activities.
Interest (Income) Expense
Interest income decreased in both the first fiscal six
months and fiscal second quarter of 2004 as compared to
the same periods a year ago. The decrease was due to a
decline in the average rate on investments partially
offset by a higher average cash balance. The cash
balance including marketable securities at the end of
the fiscal second quarter of 2004 was $10.8 billion,
which was
$2.9 billion higher than the same period a year ago.
Interest expense increased in both the first fiscal
six months and fiscal second quarter of 2004 as
compared to the same periods a year ago. The increase
was due to the conversion of short term loans and notes
payable to ten and twenty year debentures at a higher
rate of interest.
Provision For Taxes on Income
The worldwide effective income tax rates for the first
fiscal six months of 2004 and 2003 were 28.6% and
34.2%. The decrease in the effective tax rate for the
first fiscal six months of 2004 compared with the same
period a year ago was due to acquisition related IPR&D
charges that are non-deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash generated from operations provided the major
sources of funds for the growth of the business,
including working capital, capital expenditures,
acquisitions, share repurchases, dividends and debt
repayments. In the first fiscal six months of 2004,
cash flow from operations was $4.8 billion, an increase
of $1.1 billion over
the same period a year ago. The major factor
contributing to the
increase in cash generated from operations was from a
net income increase of $0.8 billion, net of the non-
cash impact of 2003 IPR&D charges. Net cash used by
investing activities decreased by $1.9 billion versus
the same period a year ago due to a decrease in
acquisition activity offset by an increase in the
purchase of investments. Net cash used by financing
activities increased by $2.6 billion primarily due to a
decrease in proceeds from short and long term debt.
Dividends
On April 22, 2004, the Board of Directors declared a
regular cash dividend of $0.285 per share, payable
on June 8, 2004 to shareholders of record as of
May 18, 2004. This represented an increase of 18.8%
and was the 42nd consecutive year of cash dividend
increases.
37
On July 20, 2004, the Board of Directors declared a
regular cash dividend of $0.285 per share, payable on
September 7, 2004 to shareholders of record as of
August 17, 2004. The Company expects to continue the
practice of paying regular cash dividends.
OTHER INFORMATION
New Accounting Standards
In January 2003, the FASB issued FIN 46, "Consolidation
of Variable Interest Entities - an interpretation of
ARB No. 51", and in December 2003, issued a revised FIN
46(R), "Consolidation of Variable Interest Entities -
an interpretation of ARB No. 51", both of which address
consolidation of variable interest entities. FIN 46
expanded the criteria for consideration in determining
whether a variable interest entity should be
consolidated by a business entity, and requires
existing unconsolidated variable interest entities
(which include, but are not limited to, Special Purpose
Entities, or SPEs) to be consolidated by their primary
beneficiaries if the entities do not effectively
disperse risks among parties involved. This
interpretation was immediately applicable to variable
interest entities created after January 31,
2003. The adoption of this portion of FIN 46 did not
have a
material effect on the Company's results of operations,
cash flows or financial position. FIN 46 is applicable
in 2004 to variable interest entities in which an
enterprise holds a variable interest that was acquired
before February 1, 2003. The adoption of this portion
of FIN 46 did not have a material effect on the results
of operations, cash flows and financial position of the
Company.
In December 2003, the FASB issued FASB Staff Position
(FSP) FAS No. 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003", which is
effective for interim or annual financial statements of
fiscal years ending after December 7, 2003. The Company
elected to defer adoption of FSP FAS No. 106-1 until
authoritative guidance was issued, as allowed by the
Standard. This guidance was issued by the FASB in May
2004 via FSP FAS No. 106-2. The Company will adopt FSP
FAS No. 106-1 and 106-2 in the fiscal third quarter of
2004, as allowed by the Standards. This adoption is
not expected to have a material effect on the Company's
results of operations, cash flows or financial
position.
In July 2004 the FASB ratified the EITF consensus on
Issue 02-14, "Whether an Investor should Apply the
Equity Method of Accounting to Investments Other Than
Common Stock". The Company will adopt EITF Issue 02-14
in the fourth quarter of 2004, as prescribed by the
Standard. This adoption is not expected to have a
material effect on the Company's results of operations,
cash flows and financial position.
Economic and Market Factors
Johnson & Johnson is aware that its products are used
in an environment where, for more than a decade,
policymakers, consumers and businesses have expressed
concern about the rising cost of health care. Johnson
& Johnson has a long-standing policy of pricing
products responsibly. For the period 1993 - 2003, in
the
38
United States, the weighted average compound annual
growth rate of Johnson & Johnson price increases for
health care products (prescription and over-the-counter
drugs, hospital and professional products) was below
the U.S. Consumer Price Index (CPI).
Inflation rates, even though moderate in many parts of
the world during 2003, continue to have an effect on
worldwide economies and, consequently, on the way
companies operate. In the face of increasing costs, the
Company strives to maintain its profit margins through
cost reduction programs, productivity improvements and
periodic price increases.
The Company faces various worldwide health care changes
that may result in pricing pressures that include
health care cost containment and government legislation
relating to sales, promotions and reimbursement. On
December 8, 2003, the Medicare Prescription Drug
Improvement and Modernization Act of 2003 was enacted
that introduces a prescription drug benefit under
Medicare as well as a subsidy to sponsors of retiree
health care benefit plans. The Company elected to defer
the recognition of the Act until such time when the
authoritative guidance is issued. This guidance was
issued by the FASB in May 2004. The Company will adopt
the recognition of the Act in the fiscal third quarter
of 2004. Any measures of the accumulated
postretirement benefit obligation or net periodic
postretirement benefit cost in the Company's financial
statements do not reflect the effect of the Act.
The Company also operates in an environment which is
becoming increasingly hostile to intellectual property
rights. Generic drug firms have filed Abbreviated New
Drug Applications seeking to market generic forms of
most of the Company's key pharmaceutical products,
prior to expiration of the applicable patents covering
those products. In the event the Company is not
successful in defending a lawsuit resulting from an
Abbreviated New Drug Application filing, the generic
competition typically results in creating a loss of
market exclusivity and may result in a significant
reduction in sales. For further information see the
discussion on "Litigation Against Filers of Abbreviated
New Drug Applications" in Note 12.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-Q contains forward-looking statements.
Forward- looking statements do not relate strictly to
historical or current facts and anticipate results
based on management's plans that are subject to
uncertainty. Forward-looking statements may be
identified by the use of words like "plans," "expects,"
"will,"
"anticipates," "estimates" and other words of similar
meaning in conjunction with, among other things,
discussions of future operations, financial
performance, the Company's strategy for growth, product
development, regulatory approval, market position and
expenditures.
39
Forward-looking statements are based on current
expectations of future events. The Company cannot
guarantee that any forward- looking statement will be
accurate, although the Company believes that it has
been reasonable in its expectations and assumptions.
Investors should realize that if underlying assumptions
prove inaccurate or that unknown risks or uncertainties
materialize, actual results could vary materially from
the Company's expectations and projections. Investors
are therefore cautioned not to place undue reliance on
any forward-looking statements. The Company assumes no
obligation to update any forward-looking statements as
a result of new information or future events or
developments.
Risks and uncertainties include general industry
conditions and competition; economic conditions, such
as interest rate and currency exchange rate
fluctuations; technological advances, new products and
patents attained by competitors; challenges inherent in
new product development, including obtaining regulatory
approvals; challenges to patents; U.S. and foreign
health care reforms and governmental laws and
regulations; trends toward health care cost
containment; increased scrutiny of the health care
industry by government agencies; product efficacy or
safety concerns resulting in product recalls or
regulatory action.
The Company's report on Form 10-K for the year ended
December 28, 2003 contains, as an Exhibit, a discussion
of additional factors that could cause actual results
to differ from expectations. The Company notes these
factors as permitted by the Private Securities
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 December 28, 2003.
Item 4 - CONTROLS AND PROCEDURES-EVALUATION OF
DISCLOSURE CONTROLS
AND PROCEDURES
Disclosure controls and procedures. As of the end of
the period covered by this report, the Company
evaluated the effectiveness of the design and operation
of its disclosure controls and procedures. The
Company's disclosure controls and procedures are
designed to ensure that the Company records, processes,
summarizes and reports in a timely manner the
information the Company must
disclose in its reports filed under the Securities
Exchange Act. William C. Weldon, Chairman and Chief
Executive Officer, and Robert J. Darretta, Vice
Chairman and Chief Financial Officer, reviewed and
participated in this evaluation. Based on this
40
evaluation, Messrs. Weldon and Darretta concluded that,
as of the date of their evaluation, the Company's
disclosure controls and procedures were effective.
Internal control. Since the date of the evaluation
described above, there have not been any
significant changes in the Company's internal
control over financial reporting that have materially
affected, or are reasonably likely to materially
affect, the Company's internal control.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The information called for by this item is
incorporated
herein by reference to Note 12 included in
Part I, Notes
to Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote of Security
Holders
(a) The annual meeting of the shareholders of the
Company was held on April 22, 2004.
(b) The shareholders elected all the Company's
nominees for director and ratified the appointment of
PricewaterhouseCoopers LLP as the Company's independent
auditors for the fiscal year 2004. The shareholders
also defeated a shareholder proposal on charitable
contributions.
1. Election of Directors:
Shares For Shares Withheld
G.N. Burrow 2,337,993,118 57,807,976
M.S. Coleman 2,245,130,888 150,670,206
J.G. Cullen 2,240,879,422 154,921,672
R.J. Darretta 2,314,938,677 80,862,417
M.J. Folkman 2,331,547,839 64,253,255
A.D. Jordan 2,337,314,437 58,486,657
A.G. Langbo 2,339,857,511 55,943,583
S.L. Lindquist 2,352,643,948 43,157,146
L.F. Mullin 2,253,229,819 142,571,275
S.S. Reinemund 2,353,428,660 42,372,434
D. Satcher 2,342,337,045 53,464,049
H.B. Schacht 2,251,514,998 144,286,096
W.C. Weldon 2,336,379,709 59,421,385
41
2. Approval for Appointment of PricewaterhouseCoopers
LLP:
For 2,170,795,855
Against 199,392,147
Abstain 25,613,092
3. The shareholder proposal for charitable
contributions was defeated by over 97% of the
shares voting.
For 49,533,915
Against 1,689,367,258
Abstain 160,449,129
Item 5. Exhibits and Reports on Form 8-K
(a) Exhibit
Exhibit 99.3 Certifications Under Rule 13a-14(a)
of the Securities Exchange Act Pursuant to Section 302
of the Sarbanes-Oxley Act.
Exhibit 99.15 Certifications Pursuant to Section 906
of the Sarbanes-Oxley Act.
(b) Reports on Form 8-K
A Report on Form 8-K was furnished on July 15,
2004, which included the press release for the
period ended June 27, 2004. Also included in this
filing are the unaudited comparative supplementary
sales data and condensed consolidated statement of
earnings for this fiscal second quarter and six
month period ended June 27, 2004.
A Report on Form 8-K was filed on April 5, 2004,
which included a press release dated April 2, 2004
reporting that Cordis had received a warning
letter from the U.S. Food and Drug Administration
(FDA) regarding FDA's observations concerning the
Good Manufacturing Practice (GMP) regulations.
A report on Form 8-K was furnished on April 13, 2004,
which included the Press Release for the period ended
March 28, 2004. Also included in this filing
are the unaudited comparative supplementary sales
data and condensed consolidated statement of earnings
for the fiscal first quarter of 2004.
A report on Form 8-K was furnished on April 26, 2004,
which included a Press Release announcing an increase in
the Company's quarterly dividend.
42
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 2, 2004 By /s/ R. J. DARRETTA
R. J. DARRETTA
Vice Chairman
(Chief Financial Officer)
Date: August 2, 2004 By /s/ S. J. COSGROVE
S. J. COSGROVE
Controller
(Chief Accounting Officer)
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