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Johnson & Johnson (NYSE:JNJ)

Q4 2012 Results Earnings Call

January 22, 2013 8:30.m. ET

Executives

Louise Mehrotra – VP, IR

Alex Gorsky - Chairman of the Board and CEO

Dominic Caruso – VP, Finance and CFO

Analysts

Mike Weinstein – JPMorgan

Matt Dodds – Citigroup

Larry Biegelsen – Wells Fargo

Rick Wise - Stifel Nicolaus

Kristen Stewart – Deutsche Bank

Tony Butler - Barclays Capital

David Lewis – Morgan Stanley

Louise Mehrotra

Good morning, and welcome. I’m Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson, and it is my pleasure this morning to review our business results for the fourth quarter and full year of 2012.

Joining me on the podium today are Alex Gorsky, Chairman of the Board and Chief Executive Officer and Dominic Caruso, Vice President, Finance and Chief Financial Officer. A few logistics before we get into the details.

This meeting is being made available to a broader audience via a webcast accessible through the Investor Relations’ section of the Johnson & Johnson website. I’ll begin by briefly reviewing highlights of the fourth quarter and full year of 2012 for the corporation and highlights for our three business segments. ]

Following my remarks, Alex will comment on the 2012 results and provide a strategic outlook for the company. At the completion of Alex’s remarks Dominic will provide some additional commentary on the third quarter results and discuss guidance for 2013. We will then open the call to your questions. We will conclude our formal presentations at approximately 9:45 and following Q&A with some final remarks by Alex, we’ll conclude this portion of the meeting around 10:15.

Following a break, we will resume at 11 and begin the medical devices and diagnostics business review that was rescheduled because of Hurricane Sandy. That program will include presentations by Gary Pruden, Worldwide Chairman, Global Surgery Group; Karen Licitra, Worldwide Chairman, Global Medical Solutions Group; and Michel Orsinger, Worldwide Chairman, DePuy Synthes Companies.

We will break for lunch and the technology displays around noon, and resume the presentations at approximately 12:45. We will include a question and answer panel at the end of the presentations, and expect to close the meeting around 2:30.

Included with the press release that was issued earlier this morning is a schedule of sales for key products and/or businesses to facilitate updating your models. These schedules are available on the Johnson & Johnson website, as is the press release. Please note this webcast includes slides, which are also available on the website.

Before I get into the results, let me remind you that some of the statements made during this review may be considered forward-looking statements. The 10-K for the fiscal year 2011 identifies certain factors that could cause the company’s actual results to differ materially from those projected in any forward-looking statements made today. The company does not undertake to update any forward looking statements as a result of new information or future events or developments. The 10-K is available through the company or online.

During the review, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. These non-GAAP financial measures should not be considered replacements for GAAP results. Tables reconciling these measures to the most comparable GAAP measures are available in the press release and on the Investor Relations’ section of the Johnson & Johnson website at investor.jnj.com.

A number of the compounds and products discussed today are being developed in collaboration with strategic partners or licensed from other companies. This slide lists the acknowledgment of those relationships.

Now I would like to review our results from the first quarter of 2012. If you would refer to your copy of the press release, let’s begin with the schedule titled “Supplementary Sales Data by Geographic Area.”

Worldwide sales to customers were $17.6 billion from the first quarter of 2012, up 8% as compared to the fourth quarter of 2011. On an operational basis, sales were up 9.3% and currency had a negative impact of 1.3%.

The acquisition of Synthes was completed in the second quarter of 2012. In the fourth quarter, the acquisition, net of the impact of the divestiture of the legacy DePuy trauma business, contributed 5.6% to the worldwide operational sales growth.

In the U.S., sales were up 6.8%. In regions outside the U.S., our operational growth was 11.2%, while the effect of currency exchange rates negatively impacted our reported results by 2.3 points. The western hemisphere, excluding the U.S., grew by 18.7% operationally, while Europe grew 10.4% on an operational basis. The Asia-Pacific/Africa region grew 8.5% operationally. The success of new product launches and Synthes sales made strong contributions to the results in all regions.

If you’ll now turn to the consolidated statement of earnings, net earnings attributable to Johnson & Johnson were $2.6 billion, compared to $218 million in the same period in 2011. Earnings per share were $0.91 versus $0.08 a year ago.

Please direct your attention to the box section of the schedule, where we have provided earnings adjusted to exclude special items. As referenced in the accompanying table on non-GAAP measures, 2012 fourth quarter net earnings were adjusted to exclude special items, primarily related to an increase in the litigation accrual and program costs associated with the DePuy ASR hip, in-process research and development, and integration and transaction costs related to the acquisition of Synthes, Inc.

Fourth quarter 2011 net earnings included after-tax special items of $2.9 billion as detailed in the reconciliation on non-GAAP financial measures. Excluding these special items for both periods, net earnings for the current quarter were $3.4 billion and diluted earnings per share were $1.19, representing increases of 7.9% and 5.3% respectively as compared to the same period last year.

I would now like to make some comments relative to the components leading to earnings before we move on to the segment highlights. For the fourth quarter of 2012, cost of goods sold, at 34.2%, was up 140 basis points from the same period last year, primarily due to an inventory step up charge related to the Synthes acquisition.

Excluding the inventory step up charge, which has been treated as a special item, cost of goods sold increased 10 basis points versus the same period last year. Incremental amortization expense related to Synthes was almost completely offset by positive mix, complemented by cost reduction efforts.

Fourth quarter selling, marketing, and administrative expenses, at 32.2% of sales, were down 140 basis points due to cost containment initiatives across many of our businesses. Our investment in research and development as a percentage of sales was 13.3%, consistent with our 2011 results.

Interest expense, net of interest income of $89 million, was down $59 million versus the fourth quarter of 2011, due to a lower debt level. Other expense, net of other income, was $319 million in the fourth quarter of 2012, compared to $2.9 billion in the same period last year.

Excluding special items, other income net of other expense, up $420 million, was $81 million less than 2011 due to lower gains on divestitures. Excluding special items, the effective tax rate of 18% in the fourth quarter of 2012 compared to 14.4% in the same period last year. Dominic will provide commentary on taxes in his remarks.

Now, turning to the consolidated statement of earnings for the full year of 2012, consolidated sales to customers for the year 2012 were $67.2 billion, an increase of 3.4% as compared to the same period last year. On an annual basis, sales grew 6.1 points operationally and currency had a negative impact of 2.7 points. Synthes, net of the impact of the divestiture of the legacy DePuy trauma business, contributed 3.1% to the worldwide operational sales growth.

On the consolidated statement of earnings, I’d like to draw your attention to the box section. For the year 2012, adjusted net earnings were $14.3 billion, and adjusted earnings per share were $5.10, up 3.4% and 2% respectively versus the 2011 results.

Turning now to business segment highlights, please refer to the supplementary sales schedule highlighting key products or businesses for the fourth quarter of 2012. I’ll begin with the consumer segment.

Worldwide consumer segment sales from the first quarter of 2012 of $3.7 billion decreased 0.4% as compared to the same period last year. On an operational basis, sales increased 0.9% while the impact of currency was negative 1.3%. U.S. sales were down 3.6%, while international sales grew 3.2% on an operational basis.

Baby care products increased on an operational basis by 2.8% when compared to the fourth quarter of 2011, primarily due to international sales of powders, wipes, and haircare products. Sales in the oral care business increased 2% operationally due to strong sales outside the U.S. with the continued success of new product launches for Listerine.

From the first quarter of 2012, sales for OTC pharmaceuticals and nutritionals increased 2.6% on an operational basis compared to the same period in 2011, with U.S. sales down 3.8% and sales outside the U.S. up 5.7% on an operational basis.

Sales in the U.S. decreased primarily due to lower sales of analgesics due to supply constraints and competitive pressures in nutritional products. This were partially offset by very strong sales of upper respiratory products with the relaunch of many of them. Increased market penetration and product launches drove strong growth of analgesics, digestive health, and upper respiratory products outside the U.S..

Our skincare business declined 3.9% on an operational basis in the fourth quarter of 2012, with the U.S. down 4.5% due to divestitures and discontinued programs, while sales outside the U.S. were down 3.4% due to competitive and marketplace pressures.

Women’s health grew 5.5% on an operational basis due to international sales growth of 9.4%, with strong growth across the sanitary protection category. Wound care, other sales decreased 2.9% on an operational basis with the sales decline outside the U.S. of 8% due to competitive pressures, partially offset by growth in the U.S. of 1.8%.

That completes our review of the consumer segment, and I’ll now review highlights for the pharmaceutical segment. Worldwide net sales for the fourth quarter of $6.5 billion increased 7.1% versus the same period last year. On an operational basis, sales increased 8.5%, with a negative currency impact of 1.4 points. Sales in the U.S. increased 4.4%, while sales outside the U.S. increased on an operational basis by 12.1%.

Now, reviewing sales for the major therapeutic areas, immunology products achieved double digit operational sales growth of 10.4%. Sales in the U.S. increased 3.4% while sales outside the U.S. increased 35.7% operationally.

Simponi grew 54.8% operationally, with U.S. sales up 16.1% due primarily to strong market growth. In the quarter, sales outside the U.S. were up 96.8% on an operational basis, primarily due to increased shipments to our distribution partner and the continued success of the launch in Japan.

On an operational basis, STELARA was up 31.2%, with the U.S. up 25.4% and sales outside the U.S. up 40.1% operationally. The strong results were due primarily to market share gains, complemented by strong market growth in the major regions. Remicade grew 5.5% on an operational basis. Strong sales results were achieved in the U.S. with growth of 12.2% due to double digit market growth.

Combined export and international sales were down just over 2% on an operational basis. As I mentioned last quarter, timing of shipments due to customer inventory planning impacted the quarterly comparisons. Excluding the impact of customer inventory planning, combined export and international sales underlying growth in the quarter was approximately 8% on an operational basis.

With the strength of our portfolio, we continue to be the U.S. market leader in immunology. Sales of infectious disease products increased 22.6% on an operational basis. INCIVO, a treatment for hepatitis C, contributed approximately half of the infectious disease worldwide operational growth in the quarter. INCIVO sales nearly doubled when compared to the third quarter of 2012.

Continued momentum in market share growth of PREZISTA made notable contributions to the results, as to the combined sales of [complarent] and EDURANT. Neuroscience product sales decreased 1.6% on an operational basis. Growth was impacted by generic competition for RISPERDAL, CONCERTA, RAZADYNE, TOPAMAX, and DURAGESIC.

The long-acting injectable antipsychotics, RISPERDAL CONSTA and INVEGA SUSTENNA, or [zeplion] achieved operational growth of nearly 15% due to an increase in combined market share. INVEGA achieved strong operational growth of 18.9%, with the U.S. growth at 15.2% primarily due to market growth. Outside the U.S., sales grew 23% operationally, primarily due to strong growth in Japan.

Sales of oncology products increased 48.5% on an operational basis, due to very strong results for ZYTIGA and VELCADE. ZYTIGA is now approved to treat both chemo refractory and chemo naïve metastatic castration resistant prostate cancer. In the quarter, ZYTIGA achieved operational sales growth of over 75%, with U.S. sales growing 34.1% and sales outside the U.S. more than doubling.

VELCADE is a treatment for multiple myeloma. Sales increased 47.6% on an operational basis. Approximately 60% of the operational increase is due to the timing of tender business, which will negatively impact the growth in the first quarter of 2013. Strong performance in patient share in the frontline setting continues to drive sales growth.

Regarding Doxil/Caelyx, we had made significant progress to restore a reliable supply. An alternate manufacturing approach consisting of a collaboration between the current third-party manufacturer and another supplier to complete end-to-end production of Doxil/Caelyx was approved in the E.U. and Japan late in 2012 and in Canada earlier this month.

In the European Union, the Caelyx Managed Access Program will remain in place until a full supply of Caelyx has been restored to ensure patients can complete their full course of treatment. In the U.S., Janssen announced in October 2012 that full access to Doxil has been restored.

While Janssen continues to work with the FDA to seek approval of the alternate manufacturing solution, the agency is exercising its regulatory discretion to release Doxil manufactured through this approach to the U.S. market to ensure continued full access to Doxil for healthcare providers and their patients.

Other pharmaceutical products declined 6.8% on an operational basis, due to divestitures, lower sales of PROCRIT primarily related to market decline and Eprex and Aciphex/Pariet, primarily due to the impact of generic competition. Positively impacting results, Xarelto sales grew 40% on a sequential basis, contributing over 2.5 points to the U.S. pharmaceutical growth rate.

On the pipeline front, we had a number of approvals during the quarter. ZYTIGA was approved by both the FDA and the European Commission for the chemo naïve indication. SIRTURO, to treat pulmonary multidrug resistant tuberculosis, was approved by the FDA.

The FDA approved the expanded use of Xarelto to treat deep vein thrombosis, or DVT, and pulmonary embolism, or PE, and to reduce the risk of recurrent DVT and PE following initial treatment. And, the FDA approved PREZISTA 800 mg tablet and just last week it was also approved by the European Medicines Agency, or EMA.

Additionally, during the quarter, as an update on filings, the NDA was submitted to the FDA for Canagliflozin Metformin six-dose combination therapy to treat patients with Type II diabetes. The supplemental biologics license application for STELARA, for the treatment of active psoriatic arthritis, was submitted to the FDA, and the type II variation to the EMA. In the U.S., the two structural damage claims for Simponi will not be pursued at this time, given other priorities.

And, a decision was made to withdraw the EMA application for Simponi IV for the treatment of adults with moderately to severely active RA, pending additional manufacturing data, which would be unavailable within the current EMA review timeline required. We plan to resubmit a marketing authorization application for the IV pharmaceutical forum with this additional manufacturing information. We anticipate having greater clarity on a potential resubmission timeline during the first quarter of 2013.

That completes the review of the pharmaceutical segment. I’ll now review the medical devices and diagnostics segment results. Worldwide medical devices and diagnostic segment sales of $7.4 billion grew 14.9% operationally as compared to the same period in 2011. Currency had a negative impact of 1.2 points, resulting in a total sales increase of 13.7%.

Sales, excluding the net impact of Synthes, were up 0.8% on an operational basis, with U.S. sales down 2.2% and sales outside the U.S. up 3.2% on an operational basis.

Now, turning to the MD&D businesses starting with cardiovascular care. Cardiovascular care sales were down 5.2% operationally with the U.S. down 2.6% and sales outside the U.S. down 6.6% operationally. Excluding the impact of drug eluting stents, worldwide sales were flat on an operational basis. Endovascular sales declined versus the same period last year, due to competitive pressures and the impact of the supply disruption earlier in the year that was resolved late in the third quarter.

Biosense Webster achieved worldwide operational growth of nearly 14% in the quarter, driven by strong market share growth. The success of the THERMOCOOL catheter launches made strong contributions to the results.

During the quarter, the FDA also approved the S.M.A.R.T. Control vascular stent system for use in the superficial femoral artery. The diabetes care business operationally declined 2.6% in the fourth quarter of 2012, with the U.S. business down 10.6% due to the impact of mail order, lower price, and private label competitors.

The business outside the U.S. grew 5.2% operationally, with strong sales in emerging markets partially offset by lower sales in some of the developed markets.

The diagnostics business declined 3.3% on an operational basis, with the U.S. down 7.9% and sales outside the U.S. up 1.3% operationally in the fourth quarter. Sales were impacted by lower clinical lab sales and the divestiture of the RhoGAM business during the third quarter.

Infection prevention grew 4.9% on an operational basis, with sales in the U.S. down 8.5%. In the U.S., a customer program to upgrade systems to STERRAD systems ended in the first quarter, impacting the timing of capital purchases for the year. Excluding capital sales, U.S. growth was approximately 9% in the quarter.

Sales outside the U.S. were up 13.6% operationally due to strong consumables growth driven by the breadth of the installed base. Orthopedics sales were up 65.1% on an operational basis when compared to the same period in 2011.

Excluding the net impact of Synthes, and the divestiture in December 2011 of certain neurosurgical instruments, sales grew approximately 3.5% on an operational basis with similar results both in and outside the U.S.

Operationally, hips were up 6% worldwide, driven by 7% growth in the U.S. due to strong results in primary stem platform sales, partially offset by continued pricing pressure. Hips outside the U.S. were up 4% operationally, driven by the growth of cemented stems, heads, and acetabular products.

Knees worldwide increased 4% on an operational basis, with the U.S. up 7% driven by fixed bearing and revision platforms. Sales outside the U.S. were up 1% with growth in Asia and Latin America, partially offset by softer sales, primarily in Europe, due to competitive pressures.

Including the Synthes business in both periods, and excluding the divested DePuy trauma business in both periods, trauma grew approximately 1% on an operational basis, with the U.S. down 4% and sales outside the U.S. up 6% on an operational basis. U.S. growth was impacted by a supply disruption.

Including the Synthes business in both periods, worldwide spine was down 3% on an operational basis, with the U.S. down approximately 7%, impacted by continued softness in the market as well as the restructuring of the commercial sales organization. Outside the U.S., sales grew approximately 4% operationally.

Specialty surgery achieved operational growth of 4.4% in the fourth quarter of 2012. U.S. sales were down 0.3%, with lower sales of energy products due to competitive pressures and the impact of reprocessing. This was offset by strong growth of biosurgery products and additional sales from the acquisition of SteriMed. Sales outside the U.S. were up 9.5% on an operational basis, due to strong results for energy and biosurgical products.

Surgical care worldwide sales were flat on an operational basis, with the U.S. down 3.3% and sales outside the U.S. up 1.9% operationally.

Increased sales of endoscopy products with the success of the (Ashalon) flex powered endopouch stapler were offset by lower sales in mechanical products due to shifts, demand (inaudible) and procedures and pressure from low-cost competitors as well as lower sales in pelvic floor repair products and breast care products.

During the quarter, the FDA approved EVARREST Fibrin Sealant Patch, a novel product that rapidly and reliably aids in stopping problematic bleeding during surgery.

Rounding out the review of the medical devices and diagnostics segment, our Vision Care business achieved sales growth of 6.4% on an operational basis in the fourth quarter compared to the same period last year.

Sales in the US increased 7% while sales outside the US increased 1% on operational basis. Growth was driven by daily lenses and the stigmatism lenses.

That completes highlights for the medical devices and diagnostics segment and concludes the segment highlights for Johnson & Johnson’s fourth quarter of 2012.

It is now my pleasure to turn the meeting over to Alex Gorsky. Alex?

Alex Gorsky

Thank you very much, Louise. She always delivers that with a great deal of precision and consistency, a lot of numbers, a lot of nomenclature but thank you very much for that great start, Louise.

I want to thank all of you for participating in today’s meeting. So whether you’re with us here in New York or you’re logged into the webcast, welcome. I think you will agree that 2012 was a very important year for Johnson & Johnson.

In spite of many challenges around the globe and our market, meaningful innovation, the breadth of our businesses and the extraordinary achievements and the dedication of our people drove solid business results for the enterprise.

And as we enter 2013, I believe we’re well positioned to sustain and drive growth in this increasingly dynamic global healthcare market.

Now, I’m very pleased to be with you here today to review our 2012 business highlights and to provide you with an overview of the healthcare market, including some of the dynamics and trends affecting our industry and then I’m going to review our strategic outlook for 2013 and beyond.

Now, later today, the leaders of our MD&D segment were going to update you on their respective businesses and most of you know our MD&D meeting was postponed. It was originally to have taken place last fall but, unfortunately, Hurricane Sandy disrupted that plan.

And while in this case the storm may have caused a delay in having us review our plans and our businesses with you, the devastating impact that Hurricane Sandy had in our region really can’t be overstated.

And as expected, our employees sprang into action to help deliver supplies, rebuild communities and, very importantly, we have committed more than $5 million in products and cash to help the region that our company has called home for more than a century.

Now on a personal note, I want to say how fortunate I am to be working alongside the many great people of Johnson & Johnson. And as always, I want to start with a comment on our credo.

Together, there are more than 128,000 of us around the world with wide ranging responsibilities and capabilities and we’re united by a common purpose. At Johnson & Johnson, we’re committed to caring for the world one person at a time.

And it’s a testament to this commitment that more than 1 billion healthcare consumers each day rely upon the use of Johnson & Johnson products. So let’s start by looking at our performance.

We delivered on our financial commitments, generating significant free cash flow and maintaining our AAA credit rating. We also advanced our near-term business priorities.

First, restoring a reliable supply of our OTC products to the market has been paramount. Key products like Children’s Tylenol and Children’s Motrin return to the shelves and we’re committed to continue building trust in our OTC products.

We also made significant strides in the integration of Synthes, solidifying our leadership position in orthopedics and later today you’ll hear from our MD&D leaders on some of their new innovations.

And we continue building strong momentum in our pharmaceuticals with REMICADE, ZYTIGA, INVEGA SUSTENNA and in INCIVO. We also strengthened our focus on the future by investing in innovation, progressing some of our enterprise initiatives that I’ll take you through and expanding our global presence.

So now let’s review our financial highlights for 2012 versus 2011. As you can see, our sales for 2012 increased 3.4% or 6.1% operationally, reflecting the outstanding progress of our newly launched pharmaceutical products, the addition of Synthes, and strong growth in the emerging markets. Now, excluding the net impact of Synthes, operational sales growth was 3%. But with our continued focus on financial discipline, our adjusted earnings were $14.3 billion, up 3.4%. And adjusted EPS was $5.10, up 2%.

We also generated significant free cash flow of approximately $12.5 billion. Importantly, we continued our track record of delivering consistent performance, with 29 straight years of adjusted earnings increases, and 50 consecutive years of dividend increases, making us only one of six companies in the S&P 100 to achieve that record.

You can see our products are making a difference in the care of people around the world, as approximately 70% of our sales come from the number one or number two global market share position. And our commitment to investing in R&D is also paying off, with about a quarter of our sales being generated from products that have been introduced in just the last five years.

The solid shareholder returns are a hallmark of Johnson & Johnson. Founded in 1886 and listed on the New York Stock Exchange since 1944, our commitment to managing for the long term has made Johnson & Johnson a solid investment choice for decades. In 2012, a total shareholder return of just under 11% exceeded the Dow Jones Index.

And although a nice return, it trailed the other indices we compare to, and as we move forward, we’re focused on decisively shaping our portfolio to deliver even more meaningful innovations to patients and customers.

Here are results by segment, reflecting our broad base of leadership in healthcare. Pharmaceuticals generated $25.4 billion, or 38%, of our total sales. It had a strong operational growth rate of 6.8%. Medical devices and diagnostics, our largest segment, generated $27.4 billion, or 41%, of our total. Operational growth was 8.7%.

Excluding the net impact of the acquisition of Synthes in June, operational growth was about 1%. Overall growth in this segment was impacted by our decision to exit the drug eluting stent market and the continued economic pricing and austerity measures within these markets. And our consumer segment generated $14.4 billion in revenue, or 21% of our total.

Sales grew about 0.5% operationally, reflecting our efforts to address the issues in the OTC consumer business, targeted portfolio decisions we made over the year, and continued pressures in the marketplace.

In 2012, we generated $19.1 billion in segment pretax profit, and the margin expanded to 28.5%. We also continued to invest for sustainable growth and absorbed additional amortization related to Synthes. And even with that, we leveraged our segment pretax margin. This is a great tribute to our business leaders.

So in summary, Johnson & Johnson delivered solid results in 2012, with momentum continuing to build as sales growth accelerated. Now, let’s move to the segment highlights, and I’d like to start with our pharmaceutical group.

By any measure, we have transformed our pharmaceutical business, demonstrated first by the impact we’re having on addressing unmet medical needs of patients and by our strong growth with sales results of $25.4 billion. Recently approved products are accelerating our growth through the strong launch execution programs we’ve implemented to ensure access and reimbursement.

In Europe, the Middle East, and Africa, ZYTIGA, INCIVO, and [zeplion] transformed our product portfolio. And the most recent IMS data positions Janssen as the fastest-growing among the top 20 companies in Europe. And in Japan, we are the fastest-growing pharmaceutical company among the top 25, having launched seven new products in the last two years.

In the U.S., we hold the leadership position in total sales of new products launched since 2009. And at the same time, while focusing on that kind of execution, we made significant pipeline advancements and received FDA approval for SIRTURO at the end of December, the first therapy with a novel mechanism of action against tuberculosis that the agency has approved in more than 40 years.

Now, given the growing concern and the increasing prevalence of resistant strains of TB, I’m particularly proud the impact that this product is going to have on patients around the globe.

And we’re leading the industry with FDA approvals since 2009. Now, great example of the quality of the work that our team is doing is with ZYTIGA, which I was going to discuss with you in just a few minutes. Another is XARELTO.

But before I begin talking and discussing individual products, let me share with you another indication of the transformation that our pharmaceutical teams have produced.

This graph illustrates our accelerated growth rate in pharmaceuticals over the past 11 quarters. And I want to take a moment to comment (Paul Stopples) and (Wakim Duradco), our worldwide chairmen for the pharmaceuticals and their teams for their vision and leadership in fundamentally transforming our business.

XARELTO, it has the broadest profile of any of the novel, oral anticoagulants in the market with six distinct uses and we hope to expand this profile further with a pending indication in acute coronary syndrome.

And we are seeing XARELTO capture significant share in the US. There were more than 1 million prescriptions written last year and, according to recent IMS data, XARELTO is capturing 30% of new to brand share in its category and is up more than 8% since the DBTPE approvals in November.

We’re also starting to see it cut into the use of Warfarin as well, which is down nearly 8% during the same period.

Now XARELTO is also more than double our closest competitor in new to brand share among cardiologists, treating patients with non-valvular afib and is just three percentage points behind Warfarin in the setting.

Furthermore, the brand continues to make strong gains with 75% of patients on Medicare Part D and 85% of commercialize now having Tier II access, the preferred co-pay position, of course, for branded products.

We have an exciting and late-stage pipeline of differentiated medicines. (Canagiclosin), which has the trade name in (Vocana), is already filed for the treatment of Type II diabetes.

And (Simepravere), a TMC 435, is a potential best-in-class protease inhibitor for Hepatitis C that we’re co-developing with (Medavere) and anticipates submitting for regulatory authorization Japan, the US and the EU in the first half of this year.

So with our very focused end-to-end strategy in R&D, we’re investing in earlier-stage programs across our five therapeutic areas with the aim to reach leadership positions in each of these categories.

This focused approach allows us to position and invest in building leadership capabilities that are very specific to these disease areas. It also helps us attract the best scientists, researchers and collaborators and creates, frankly, a more efficient market approach by optimizing our sales force’s ability to sell more than one product to the same physician.

Now let’s talk about our MD&D business. It is the largest medical technology business in the world with sales of $27.4 billion. Sales grew 8.7% operationally with the inclusion of Synthes. And while overall market growth has slowed somewhat, we’ve been focusing on building our market leadership position and has sustained or grown share in the majority of our key platforms holding number one or number two positions in over 80% of them.

With Synthes, we’re further expanding our global presence with strong double-digit growth in emerging markets. And as we look to the future, we’re advancing innovative new products in our pipeline, continuing to take a disciplined approach to managing our portfolio and by adapting our businesses to the changing marketplace.

We continue to invest for long-term sustainable growth and completed the largest acquisition in our history with Synthes.

Now back in June, the (pew) in Synthes joined to form the world’s largest, most comprehensive orthopedics and neurologics organization. The leadership team is a strong combination of talent from the two companies.

As all of you know, joining two companies of this size and scale is no easy task. Yet, customer and sales integration has proceeded as planned and there are future synergy opportunities ahead, fully integrating, manufacturing R&D.

It’s going to take some time, but in the end we are confident that this endeavor is going to be good for patients, customers and for our business. I’d like to particularly recognize Michel Orsinger and his leadership team at DePuy Synthes, who have done a great job on this integration so far. In addition to Michel, we have an experienced and talented leadership team in Gary Pruden, who leads our global surgery business and Karen Licitra in global medical solutions.

These three seasoned leaders are really shaping the industry’s future by making smart, disciplined portfolio and investment decisions to even further increase our competitiveness in bringing innovative new products and solutions to patients and healthcare providers around the world. You’re going to hear from each of them later today.

Now, in the past year our consumer business generated sales of $14.4 billion, representing operational growth of 0.5%. And we are the sixth largest consumer healthcare company in the world. And as I said earlier today, we are absolutely committed to returning the consumer business to growth, and we’re starting by restoring a reliable supply of our McNeil OTC products to the market.

And as with all of our business segments, our investments in growth and consumer will be predicated on a very focused portfolio approach to deliver science-based products with local market insights, professional endorsements, and commercial excellence.

We’ve taken steps to reshape our portfolio, and have divested certain products or brands, and we’re also investing in growth and expansion in emerging markets with market specific brands like Dr. Mom Cough and Cold products in Russia and by leveraging our strong iconic brands like Johnson’s Baby.

Now, regarding McNeil, we’re continuing to operate in accordance with the consent decree, and we’ve achieved our commitments to date under our work plan, which has been agreed to with the FDA. The work to bring our plants fully online is progressing, and so we continue to take a prudent approach to production volumes.

We will return a consistent supply of key products to the market over the course of 2013, and we will make targeted investments in marketing and commercial support to ensure they regain their leadership positions over that time.

Sandy Peterson, who brings 25 years of diverse global healthcare experience to Johnson & Johnson, assumed her role last month, and is focusing on returning our consumer segment to growth together with Jesse Wu, our worldwide chairman of the consumer group and his leadership team.

So now let’s take a few moments to talk about the global market dynamics that are driving so much of this change. I think we all know, and would all agree, that there are enormous challenges and uncertainty in the global economy, and frankly in the global healthcare environment overall.

But we’ve got to break with zero sum thinking, so let’s envision for just a moment a world where creativity and innovation help remake our options. For a better tomorrow, we don’t need just new medicines and new products, we need new philosophies, new approaches, and frankly, a new mindset.

We’ve simply got to reinvent the way we think about healthcare, and patient needs must be first and foremost in this discussion. Now, traditionally, we’ve recognized that in any country, economic growth creates the demand for greater access to better quality healthcare. And what’s also true is that better quality healthcare leads to economic growth.

So, finding a clear path forward and reforming healthcare is critical to addressing the rising demands on the system, as the population ages, and requires even more healthcare than they do today. We ultimately cannot allow the uncertainties before us to impact the care of patients, and we’re eager to work with others to try to find solutions, and frankly not just with other healthcare companies, but universities, governments, NGOs, communities.

Beyond the legislative front, healthcare is an industry that is changing rapidly. It’s one of the most important and emotionally rewarding industries in the world. The healthcare market is large, it’s growing. In developed markets, approximately $5.5 trillion were spent last year. And even though compounded average growth rates as a percentage have slowed in these nations, estimates suggest that it will reach $8 trillion by 2022.

So it’s unquestionably essential that we remain focused on sustaining and expanding our leadership positions in these important markets. Meanwhile, the emerging markets present significant growth opportunities by growing at CAGR rates double that of the developed world. So we are increasingly allocating resources there to establish leadership positions in all of our segments.

Rapid expansion of the middle class is increasing demand for better healthcare in places like Brazil, India, China and Southeast Asia.

On the other dynamic is people are living longer and they’re more likely to be managing chronic healthcare conditions than ever before. A recently published report in (Lancet) on the global burden of disease showed that for the first time in history soon after 2015 there will be more individuals over the age of 65 than people younger than the age of five.

Now, this is really important because people over 65 use an average of seven times more healthcare than younger people. We’re also seeing a decrease in the ratio of economically active people to retired people in many developed and even in some of the developing countries, shrinking the revenue base for health and other public spending and this is an increasingly important issue for healthcare systems that must meet the demand to provide even more quality healthcare.

(Inaudible) cancers, mental  health disorders, diabetes will grow at the fastest rates. And we’ve aligned our businesses, our scientists, to focus on meeting the needs of these patients and markets.

And the future will require new approaches to science and technology, new and more innovative ways of delivering healthcare and new approaches to partnerships, collaborations. These types of innovations are essential to enhancing outcomes for patients and potentially bending the healthcare cost curve.

And our strategic framework focuses on us being leaders in this evolving healthcare market. You might recall that I introduced this strategic framework in July. It starts, as always, with our credo, which is the very foundation of our business.

It defines our values and drives everything we do as a business from day-to-day decisions to long-term planning. It is our aspiration that by caring, one person at a time, we will help billions of people around the world live longer, healthier and happier lives.

Now this is an important source of inspiration for our scientists, our business people and all of our employees worldwide. And our four strategic principles are as relevant today as they have ever been.

And so here is how we’re putting our strategic framework into action. We’ve identified four growth drivers. And the first I’d like to discuss with you is innovation.

Now realizing advancements in healthcare must start with identifying the unmet needs of patients; the patients have got to be at the center. And we believe in creating value in three core ways.

First, through our distinct model of innovation; next, by taking a lifecycle approach to building market leading platforms, brands and products; and third, by engaging in broad partnerships with patients, customers, payers to provide solutions and unique offerings that improve access and outcomes. I’m going to explain each of these.

Our distinct model of innovation has two key elements. It begins with accessing the very best science and then leveraging our own specialized capabilities to ultimately develop differentiated products.

We’re really agnostic as to where the ideas may emanate from and we’ll access the science internally or externally. With skilled, smart scientists in our labs, we’re leveraging our internal capabilities and exploring new approaches that will potentially lead to innovative treatments for things like infectious diseases, more effective skin care products, new ways to restore mobility.

And by capitalizing  on new technologies like predictive modeling tools, bioinformatics and biomarkers, we are able to select compounds that will ultimately have a greater probability of success and development.

Now consistent with our approach of sourcing the best science from anywhere in the world, we’ve executed roughly 100 alliances, licensing and acquisitions, collaborations, strategic partnerships across the enterprise last year.

And we’ve also established four regional innovation centers as part of a very focused approach to accessing early resource programs. Now, these centers will help us transform our pipelines and will be instrumental in unearthing future products and solutions that are going to drive future growth. The field of oncology is a particularly good example of our innovation model in action.

Consider for just a moment the unmet medical need here. While cancers today are detected earlier and treated with less toxic, more targeted therapeutics, the case for developing new oncologic drugs is painfully obvious. It is the fastest-growing disease category.

As I showed earlier, it will continue to increase, unfortunately at alarming rates. That is driving this segment to a $65 billion global market and the category is forecasted to grow at a CAGR of 8%, reaching $111 billion by 2018.

In 2008, there were $12.7 million new cases of cancer diagnosed, with 7.6 million deaths. By 2030, an estimated 22.2 million people will be diagnosed with cancer, leading to 13.2 million deaths.

But as we better understand how cancer cells work, how to interrupt their processes with better and more innovative medicines, diagnostics, and biomarkers, they will improve outcomes for these patients. And ZYTIGA is a great example of identifying the best science.

As many of you are aware, we acquired Cougar Biotechnology in July, 2009, when the Phase III trials had really just begun. We then executed a comprehensive, full development plan to ensure the clinical studies would fully support the potential of this product and make a meaningful difference to prostate cancer patients.

Now, the good news is ZYTIGA has helped to expand the market, and now in the U.S. approximately 80% of chemo refractory patients seek treatment, which is up from about 40% at the time of launch. ZYTIGA is now approved in more than 65 countries for post-chemo metastatic [unintelligible] resistant prostate cancer, and generated $960 million in sales last year, making it the most successful oral oncology launch in history.

And, the drug is broadly accessible. Here in the U.S., it holds 100% Medicare Part D coverage and coverage in 98% of commercial lives. We’re very excited. Last month we received an approval on expanded label from both the FDA and EMA, and that will allow ZYTIGA to be used even in the earlier pre-chemotherapy setting, and we are looking forward to continuing to optimizing its lifecycle, developing it in other metastatic prostate cancer settings and for potential use in breast cancer.

Ibrutnib, an oral anticancer compound that we are developing in collaboration with Pharmacyclics for B cell malignancies, is another instance of accessing the best science to serve an unmet need. We’ve seen compelling early efficacy and safety data in multiple B cell malignancies, and have initiated a comprehensive global development program.

Now in addition to the U.S. and E.U., this includes parallel development in China and Japan, and over the last 12 months, we’ve initiated three chronic lymphocytic leukemia Phase III studies and one Phase III in mantle cell lymphoma that is also ongoing, as well as a number of other earlier studies in B cell malignancies.

The EVARREST fibrin patch exemplifies how we’re leveraging opportunities across our enterprise to create value through innovation for patients within our model of innovation. As all of you know, bleeding is a potential complication of really any surgical procedure, and can pose as a significant challenge to surgeons. Severe, uncontrollable bleeding can raise mortality rates from less than 1% to 20%.

In clinical studies, EVARREST was 98% effective in stopping bleeding and maintaining hemostasis compared to the current standard of care. Gary Pruden will tell you more about this innovation in the surgical technology breakout later today.

So our lifecycle approach considers the needs of the patient. And as we build out platform approaches with brands that endure, and products that can grow and ultimately lead in the marketplace, our immunology franchise is another strong example.

The worldwide immunology market is estimated to reach $50 billion by 2018. One in six people in the United States suffers from an immune mediated disease such as rheumatoid arthritis, Crohn’s disease, psoriasis, or asthma. People of all ages are affected by these very debilitating, serious diseases that present systemic co-morbidities which impact the ability to function day-to-day, week-to-week.

Now, these diseases collectively have a multibillion dollar impact on the entire healthcare system. And while REMICADE and other anti T&F agents have clearly transformed the treatment of many of these diseases, we are aiming to still improve efficacy response rates for these patients.

Our leadership platform in immunology begins with the three currently marketed biologics and have achieved nearly $8 billion in sales in 2012. Each of these addresses significant conditions.

Now, of course, REMICADE is our foundational pipeline in a product, having received 16 FDA approvals. And we’re also developing (Symphony) and STELARA for expanded uses. (Symphony) is filed in the US and Europe for approval of subcutaneous treatment for ulcerative colitis, in the US as an intravenous therapy for rheumatoid arthritis.

We’ve also filed applications in the US and in Europe for STELARA for the treatment of psoriatic arthritis and we are running a Phase III trial in (Crone)’s disease.

So to sustain our long-term leadership position in immunology, we’ve built a robust, late-stage development pipeline of differentiated biologics that include (Sarucamab) and (Gluselcamab), formerly (inaudible) 1959.

And we’re also excited about the novel oral therapies in our pipeline and if this science and immunology evolves, we’re well positioned to continue global growth in this category.

So diabetes is another example of how we’re building platform approaches to combat a disease area. Diabetes is a global crisis that no population or country can ignore and the unmet needs are considerable.

It’s one of the most common non-communicable diseases globally and chronically affects the body’s ability to metabolize glucose. According to the International Diabetes Federation, an estimated 366 million people live with the disease, 90% of which are Type II. And the estimates grow to over 550 million by 2030.

So with our breadth of offerings, we are making a difference and helping people better manage their diabetes from wellness and prevention programs offered by the Human Performance Institute to a no-calorie sweetener in Splenda and with insulin pumps from (inaudible) as well as the new one-touch (inaudible) blood glucose meter from (Life Scan) which, when approved in the United States, will be the first meter to transmit blood glucose results to an Apple iPhone using our one-touch reveal app enabling patients to review and share their results remotely with their caregiver, a real breakthrough.

And as you can see, we’re in the process of building a comprehensive platform for the management of diabetes with these products and we’re very much looking forward to adding (Invocana), an innovative example of how we’re approaching the treatment of diabetes pharmaceutically.

Now, this is an investigational, oral, one-daily medication offering a unique insulin-independent mechanism of action that actually lowers glucose levels by directly blocking reabsorption by the kidneys.

Now studies have shown that (Invocana) is effective across the treatment paradigm. At the highest dose, it provides a statistically superior glucose lowering relative to (Amoril) and (Genuvea) with a low incidence of hypoglycemia. It also contributes to reductions in blood pressure and body weight.

Now, given its benefits, its efficacy, its safety profile, (Invocana) has the potential to be the first choice for add-on therapy to (Met Forman). And on January 10th, an FDA advisory committee voted 10 to five in support of the approval and based on the results of our 10,000 patient clinical program.

When approved by the FDA, (Invocana) will be the first in its new class of diabetes therapies available in the United States and we anticipate a decision from the agency later this quarter and from EMA in the third quarter.

So shifting from diabetes, let’s talk for a few moments about oral care. Now Listerine is truly a flagship brand and a great example of how, with our science, deep insights in the consumer needs around the world, we continue to expand the market with new products by adding claims and professional recommendations.

Last year in Asia, we launched Listerine Green Tea, tailored to local tastes, which follows by a year the successful introduce of Listerine Essencial, developed for emerging middle class customers in Latin America. Formulas launched initially in the U.S. like alcohol-free Listerine Zero are now driving market expansion in Europe and the Middle East. And the cycle continues with the recent launch of Listerine Ultra Clean in the United States.

Now, the best innovations in healthcare technology mean nothing if people can’t get them, or caregivers don’t know how to use them, and we want to be part of the solution. And across Johnson & Johnson, we’re establishing broad partnerships that provide unique offerings to patients, insurers, providers, to ensure access to our products and also increase capacity in the overall healthcare system.

Many of you are familiar with the VELCADE program in the U.K., and we’re very proud that thousands of multiple myeloma patients there have accessed this much-needed treatment since the program’s inception.

In response to the most acute nursing shortage in the history of the United States, we launched the campaign for nursing’s future, to help recruit new nurses and nurse faculty, and we’ve seen enrollment at entry level baccalaureate nursing programs nearly double and the number of young nurses has increased 62%.

And in France, prior to agreeing to reimbursement, the payers wanted to validate that RISPERDAL CONSTA would actually reduce the risk of hospitalization for patients with schizophrenia compared to other available antipsychotics. So we worked them and we initiated a one-year comparative effectiveness study that showed RISPERDAL CONSTA reduced the risk of hospitalization by 34%.

This is a win for everyone. Patients are able to be treated with a very effective medication that improves their quality of life. We are fully reimbursed. And this has had a neutral impact on the French healthcare system due to the actual savings that they get by reducing hospitalizations.

And just in December, we expanded ZYTIGA-1 support, a multichannel adherence program with an award-winning educational component that has already helped improve access and compliance for thousands of prostate cancer patients in the United States. You’re going to hear more about this program as well as other innovative partnership programs Janssen has been involved with around the world during our pharmaceuticals review that will take place in May of this year.

And later today, you’ll see how LifeScan and Animas are working with Aetna and Kaiser to help drive value and outcomes in diabetes, and how in orthopedics we’re partnering with the AO Foundation to increase access to training programs for surgeons around the world. And you’ll also have the chance to learn more about other programs when you visit the technical displays outside in the ballroom during the breaks later today.

Now, I’ve talked some already about the importance of emerging markets. Here’s a closer look at our global reach and local focus approach. As the world has changed, so has the geographical distribution of our businesses, employees, products, and sales. Today, 56% of Johnson & Johnson’s revenues come from outside the United States compared to about 40% just a decade ago.

Now, we traditionally talk with you about BRIC markets, which comprised nearly 10% of Johnson & Johnson’s total revenue in 2012. Yet the broader, emerging markets are increasingly important, approaching a quarter of our sales today, reflecting double digit growth in 2012 on an operational basis inclusive of Synthes.

Now to meet the demands of the emerging markets, the ability to capitalize on our broad base of product offerings and critical mass, it really positions us well with customers and with governments. And we’ve established and expanded our presence in global markets. We’ve leveraged our global portfolio, we’ve selectively acquired new products that are really tailored to meet the needs of specific populations. And I’ll show you how we’re doing that in China in just a minute.

To support our business approach, our regional companies have also optimized their infrastructure, and we’re continuing to invest and support dozens of institutes around the world, designed to train healthcare providers on the effective use of our products. For instance, our San Paolo Institute in Brazil trains nearly 3,000 healthcare providers annually.

An example of our commitment to offer localized healthcare solutions is also evident in India, where we’ve opened a DePuy Institute. Approximately 1,000 physicians a year are trained there in the latest orthopedics techniques and technologies to help ensure that patients get the quality care that they need and that they deserve.

Now, the work that we’re doing in China really illustrates how we’re building our businesses in important emerging markets. There are about 1.4 billion people in China and the majority are covered by some form of insurance but increases in healthcare expenditures are estimated to run to a 20% plus CAGR through 2016.

As their economy grows and more people enter the middle class, there’s a rising demand for a broader array of better healthcare solutions. And while many companies are talking about expanding their businesses in China, at Johnson & Johnson, we’ve been there for 27 years and we employ about 9000 people.

Our China business generated nearly $2.5 billion in sales last year, driven by diverse and expanding portfolio of brands that Johnson & Johnson is known for globally as well as those that we’ve acquired to meet specific local need and demand.

We have seven major manufacturing facilities in China. Our (inaudible) plant is equipped with world-class capabilities and produces over 240 million packaging units of high-quality pharmaceutical products that supply 26 countries with benchmark cost efficiency.

Our sutures plant in Shanghai provides raw materials in semi-finished silk to the US, Europe and South America where we then complete production.

We have a major new innovation center in (Sujo) and I had the pleasure of attending that opening myself. The center is supply medical device and diagnostics products specifically for the S2 market in both India and China.

And these products are targeted at specific disease space that are more prevalent in the region and they include simplified or smaller devices that are better suited for use outside the major cities in the top tier hospitals as well as multiuse products or even disposable products that are more economical.

We already have a number of these products on the market: staples, sutures, a blood glucose meter, an artificial knee, but always know there’s much, much more work that needs to be done.

And as we seek to bring the promise of good health to as many people as possible, we know we’ve got to do more.

And as you can see, our portfolio of offerings is diverse and expanding and includes iconic brands from our Johnson’s Baby and our Neutrogena franchises. Important pharmaceutical products such as REMICADE and INVEGA SUSTENNA have grown strongly in the market and they can be aided by (Resalor) and (Adorant) which are approved there late in December and also by (Symphony) and STELARA, which we expect regulatory decision on later this year.

We’re also conducting research and development in the new medicines that will address specific needs in China and, in fact, across all of Asia. Just this last May, we acquired (GuanJu) biofuel biotech which is the only approved (porcing) plasma-derived (fibrant) sealant on the market in China. This acquisition will expand our biosurgery business there.

Now, we know the model in China works and we’re applying it to other countries as well. So let’s move now to our third growth driver, execution.

Excellence in execution is extremely important. Across our enterprise, we have built greater accountability for quality into the requirements of all of our leaders. It has strengthened quality and compliance at the enterprise level by taking specific steps to reduce variation and increase governance.

We’ve also redefined standards and processes in the Johnson & Johnson supply chain to, most importantly, improve the level of execution and to deliver efficiencies that can free resources up for investment.

Our recent productivity in pharmaceutical R&D leaves the industry and our model for executing the launch of new pharmaceuticals is best in class.

In MD&D we are changing the way we sell our products here in the US by rolling out a new go-to-market strategy that Gary and Michel will walk you through later today. And we’re making decisive leadership decisions with respect to our investments.

As I’ve discussed with many of you before, there are many opportunities for us to pursue in managing our portfolio and we must – we must be more decisive and deliberate about our investment choices, the main focus on accelerating our growth and driving greater value.

Now, while we’ve invested considerably in growth opportunities, we have also exited businesses such as drug-alluding stents, and divested products and brands in each segment, including several in our consumer business as well as the professional wound care, (cogman), (theracose) and (rogan) business in MD&D.

Now, as we looked at our portfolio, relative to our growth drivers, we’ve also made a decision to explore strategic alternatives for our ortho clinical diagnostics business. We will be exploring all options, including a possible divestiture, where OCD could have greater potential from operating as part of another organization whose focus is more closely aligned with its core strengths, or as a standalone company.

In evaluating these options, we will also strive to maximize shareholder value. We continue to believe that diagnostics is important to the future of healthcare. We remain committed to exploring ways in which diagnostics can fuel our growth, such as the work we’re doing in companion diagnostics that support our pharmaceutical pipeline as well as the point of care diagnostics that you’re going to hear more about today.

Our OCD business has made, and we expect it will continue to make, significant contributions to the field of clinical diagnostics, whether or not it remains within Johnson & Johnson. OCD plays an important role in healthcare, and meets an important demand in the marketplace, with excellent product offerings.

Again, I want to reiterate that we are initiating the first steps of an exploratory process. There’s much more work to be done. In the meantime, it’s going to be business as usual. Our employees will continue to focus with their passion and expertise on meeting the needs of our customers and the patients they serve.

I now want to touch briefly on our views about leading with purpose. We take our responsibilities as a leader in healthcare very seriously, and we’re fortunate to be in an industry where human healthcare is the very basis of our business. And we measure success by improving the quality of people’s lives.

First, the most fundamental obligation in health is to expand access to care for people everywhere in the world. This is core to most healthcare reform efforts, but it’s also essential. To help address the HIV epidemic in the world’s poorest countries, we’re allowing generic drug manufacturers to responsibly produce generic versions of PREZISTA, expanding access to this important medication.

We’re also fully committed to working with health authorities around the world to make SIRTURO available to assist healthcare professionals in the fight against multi drug resistant tuberculosis, and we’re going to make sure that we manage distribution in an appropriate manner to ensure and maintain this efficacy.

Our commitment to transforming the lives of patients and communities includes our contributions of about $900 million in products and cash last year, in support of over 600 programs that address major health related issues in local communities in more than 50 countries around the world.

We’ve also made great progress toward our Healthy Future 2015 sustainability goals, as well as against our goals to reduce water consumption, carbon dioxide emissions, and waste disposal. Initiatives such as these help the entire world.

Now, all of this is possible because of the passion and the conviction of our people who are the driving force behind everything we do at Johnson & Johnson. Our commitment and resolve to global citizenship with an engaged global workforce, coupled with the scale and the breadth of our company, positions Johnson & Johnson to deliver sustainable growth for the long term.

And our financial strength, breadth of products and services, our global footprint and commitment to global citizenship, positions Johnson & Johnson to drive growth in today’s dynamic global markets. And with our credo as a foundation, we’re delivering on our commitments to patients, employees, communities, and our shareholders, and we’re committed to achieving our financial targets, which we will meet by executing against our near term priorities and our growth drivers.

Thank you very much. I’m now going to turn the program over to our CFO, Dominic Caruso, to provide some additional comments on our 2012 performance and guidance with respect to 2013. Then we’ll go into our Q&A session. Dominic?

Dominic Caruso

Thank you Alex, and good morning everyone. I’d like to provide some comments on our 2012 fourth quarter and full year results, as well as provide guidance for you to consider as you update your models for 2013.

It is a great pleasure to report solid financial results for 2012, a year where we also saw many successes that positioned us very well in the marketplace. At the beginning of 2012, I provided you with an outlook of our financial performance for the year. Specifically, we guided to net income margin that would remain at approximately the same level as in 2011, but that operating margins would improve over 2011 by 100 to 150 basis points due primarily to improved leverage across all operating expenses.

As a reminder, we updated our original guidance in July 2012 to include the impact of the Synthes acquisition, including the incremental amortization expense and we forecasted that with good expense management we could still achieve that same 100 to 150 basis point improvement in operating margins.

With the completion of the divestiture of our (Varicose) business late in the fourth quarter, the other income and expense line resulted in a higher net gain for 2012 than the guidance we had provided in October.

As has been our practice, we take the opportunity to redeploy those types of gains in higher growth areas with additional investments in the business. This additional gain was offset by additional R&D expenses related to the licensing and collaboration deals we entered into in the fourth quarter, such as the collaboration with (Astellas) for the development of a new (jack) inhibitor and milestone payments to other collaborations that have advanced in our pipeline.

Even with these additional investments and the incremental amortization expense associated with Synthes, I am pleased to report that we did improve operating margins by 100 basis points.

Also, although we are pleased with the passage of the legislation to renew the R&D tax credit retroactively for 2012 and prospectively for 2013 under the American Tax Hire Relief Act, the credit is not included in 2012 results since the legislation was not passed until 2013.

Therefore, our effective tax rate for 2012 did not benefit from this credit as we had assumed, yet I am pleased to report that we were able to implement other tax planning strategies that resulted in our effective tax rate coming within the guidance we had provided.

Now, during the fourth quarter, we recorded several special items. These special items amounted to approximately $1 billion on a pre-tax basis and consists of the following.

We increased our reserves for litigation and program costs associated with the (Depew) ASR (HIP). As we disclosed previously, changes to the accrual would be required as additional information became available.

We have taken an impairment charge for in-process research and development in the quarter related to a smaller acquisition we did several years ago where we have terminated one of the development programs.

And finally, we continue to record costs associated with the Synthes acquisition which are consistent with what we expected would be incurred as special items throughout 2012 and which we expect will continue although at a lower level in 2013 as we continue to integrate that business.

Together, these special items impacted our fourth quarter results by $0.28 per share. Excluding these special items, our adjusted earnings per share of $1.19 for the fourth quarter exceeded the mean of the (inaudible) estimates as published by first call.

To wrap up our formal presentation this morning, I would like to provide some guidance for your to consider as you update your models for 2013.

Let me begin with a discussion of cash and interest income and expense. At the end of 2012, we had approximately $5 billion of net cash. This consists of approximately $21 billion of cash and marketable securities and $16 billion of debt.

For purposes of your models, assuming no major acquisitions, I suggest you consider modeling net interest expense of between $450 million and $500 million.

Turning to other income and expenses, as a reminder, this is the account where we record royalty income as well as gains and losses arising from such items as litigation, investments by our development corporation and divestitures, asset sales or write-offs.

This account is difficult to forecast but we would be comfortable with your models for 2013 reflecting other income and expense as a net gain ranging from approximately $750 million to $850 million, a substantially lower level than what we saw in 2012.

And now a word on taxes. For 2012, the company’s effective tax rate, excluding special items, was 21.2%. We suggest that you model our effective tax rate for 2013 at approximately 20%. This effective tax rate for 2013 includes the federal R&D tax credit renewed by Congress under the American Taxpayer Relief Act for both 2012 and 2013. As always, we will continue to pursue opportunities in this area to improve upon the rate throughout the year.

Now turning to sales and earnings, our sales guidance for 2013 takes into account several assumptions and key factors that I would like to highlight, which may not be fully reflected yet in your models. Those key assumptions and factors are: we have assumed that generic competition for CONCERTA will be on the market beginning in early 2013, and along with the impact of generic competition for Aciphex/Pariet in 2013, we expect that the impact to sales from generic competition will be at the same level as it was for 2012.

We divested a number of consumer brands throughout 2011 and 2012, as well as that MD&D divestiture that I just mentioned late in 2012, which, of course, impacts the absolute level of sales in those businesses.

Looking at your models, we noted that the impact of these two items has not yet been totally reflected. If properly reflected, this would have about a 1% negative impact on our growth rate versus many of your models. As we’ve done for several years, our guidance will be based first on a constant currency basis, reflecting our results from operations. This is the way we manage our business, and we believe this provides a good understanding of the underlying performance of our business.

We will also provide an estimate of our sales and EPS results for 2013, with the impact that currency exchange rates could have. As we’ve done in the past, we will use the euro as an example.

As of the end of last week, the euro was at $1.33, and it’s strengthened along with several other major currencies versus 2012 levels. Considering the factors I just noted, we would be comfortable with your models reflecting an operational sales increase on a constant currency basis of between 5.2% and 6.2% for the year.

This would result in sales for 2013 on a constant currency basis of approximately $70.7 billion to $71.4 billion. We are not predicting the impact of currency movements, but as an example, to give you an idea of the potential impact on sales, if currency exchange rates for all of 2013 were to remain where they were as of the end of last week, our sales growth rate would increase by nearly 0.3%.

Thus, under this scenario, we would expect reported sales growth to range between 5.5% and 6.5% for a total expected level of reported sales between approximately $70.9 billion and $71.6 billion.

And now turning to earnings, our guidance reflects the following major assumptions. First, the implementation of the medical device excise tax. This has an incremental negative impact to earnings per share of $0.05, and will be recorded in cost of goods sold.

It is important to note that the overall impact to Johnson & Johnson of the provisions of the Affordable Care Act in 2013 is estimated to be the equivalent of $1 billion of cost, or approximately $0.25 of earnings per share. While this is a significant cost, we remain committed to the principle of providing broader access to healthcare for all Americans.

We will have a full year impact of amortization related to the Synthes acquisition of approximately $550 million on a pretax basis, or an incremental half year negative impact to earnings per share of approximately $0.06. Our estimated 2013 earnings include total intangible amortization expense for the entire enterprise of approximately $1.4 billion on a pretax basis.

We expect to continue to incur costs in 2013 at a similar level as we did in 2012, related to the ongoing implementation of our approved work plan for the remediation of the McNeil OTC manufacturing facilities, consistent with the consent decree.

We expect to experience pricing pressure in 2013 across many markets, particularly in Europe. The impact of this negative pricing pressure is expected to negatively impact our operating margins by approximately 50 basis points.

And finally, with respect to our shares outstanding, I’ve noticed that in many of your models you expect a lower share count than we are projecting to have. As a reminder, in connection with the financing of the Synthes transaction, we had implemented an accelerated share repurchase through Goldman Sachs and JPMorgan.

Until those two investment banks complete buying back those shares in the open market, we cannot engage in the share repurchases, even for shares issued in connection with our employee stock plans. We expect this program will be completed by the middle of this year.

Now considering the factors I just noted, we suggest that you consider full-year 2013 EPS estimates, excluding the impact of special items, of between $5.30 and $5.40 per share on an operational basis or a growth rate of between 4% and 6% on a constant currency basis.

We are not predicting the impact of currency movements but to give you an impact of the potential impact on EPS if currency exchange rates for all of 2013 were to remain where they were as of the end of last week and our reported EPS, excluding special items, would be positively impacted by approximately $0.05 per share due to exchange rate fluctuations.

We, therefore, suggest that you model our reported EPS, excluding special items, in the range of $5.35 and $5.45 per share or a growth rate between 5% and 7%. At this early stage in the year, we would be comfortable with your models reflecting the midpoint of this range.

And finally, as you update your models for the guidance I just provided, you will see that we do expect that operating margins will show a slight improvement in 2013 over 2012 levels.

We also expect that overall net income margin will be approximately the same as in 2012 as we expect to achieve net income growth consistent with sales growth despite the incremental impact of a full year of amortization expense related to the Synthes acquisition, the pricing pressure that I mentioned and, of course, the impact of the medical device excise tax.

Additionally, as a reminder, we expect to have significantly lower level of gains in the other income and expense line as compared to the prior year, so we recommend that your models reflect that lower level in the first half of the year.

Now in closing, we’re very pleased with the overall results for 2012 and we expect the continuation of the growth and momentum into 2013. We have the financial strength and breadth to execute on our near-term priorities and deliver solid results on continuing to invest in growth by following our four core growth drivers.

We are confident in the underlying strength in our business as evidenced by strong core products, exciting new product launches, robust pipelines and extraordinary global expansion opportunities.

I look forward to updating you on our progress throughout the year and now I’d like to turn the program back over to Louise to begin the Q&A session. Louise?

Question-and-Answer Session

Louise Mehrotra

Thank you, Dominic. We’ll now open the floor to your questions. As we have Alex with us, I would appreciate if you’d keep your questions at the strategic level and please wait for the microphone as we are webcasting this meeting. So (Mike), right here?  (Mike)?

Mike Weinstein – JPMorgan

So two questions, Alex and the first is you’ve identified the OCD business as one to evaluate today where you said you’d be exploring strategic options. Could you spend a minute on why that business first?  You said there was a lot you could potentially do with the portfolios. Why was that business necessarily, call it, first on the list?

And then second, you showed a great chart which showed a turn in the pharma business over the last couple of years. Can you – since we’re going to spend the day today talking about MD&D, can you spend a minute on consumer and how we think about the turn in the consumer business over the next couple of years with (McNeal) products coming back and what gets that back into a growth phase?

Alex Gorsky

Let’s start first with OCD and let me first start by making a strong statement by our continued commitment to our employees in OCD and what they’re doing each and every day to make a difference for healthcare around the world, let alone in Johnson & Johnson.

And as we talked about a number of times in the past, as we look at our strategies, as we look at our portfolio, we realize that it’s more and more important, particularly in today’s healthcare marketplace, to be very decisive and deliberate about where we believe we can make investments that, number one, make the biggest difference for patients and, number two, that can drive the greatest growth for our business.

And as we conducted a portfolio review, looking across our enterprise, when we looked at diagnostics, what we see is a business with many very good technologies. We also saw a business that did not have a number one or number two position within their respective marketplace.

We also look, obviously, at the future pipeline. Could we, in fact, and did we see a path forward to be able to be in a more competitive position. And three, how did we see it fitting in a more complementary way with some of our other businesses.

And while we certainly believe in the future of diagnostics, we think that that will more likely be in an area outside of clinical diagnostics such as molecular diagnostics, biomarkers, some of the other things that we’re already working on with some of our oncology programs.

So when we looked at that in total, we felt that stepping back and looking at broader strategic options for that business was, in fact, the best thing to do for that business longer term, as well as for more broadly across Johnson & Johnson.

And I also just think it’s indicative of the need for us to continue to look for ways, again, to make a better difference for patients and to drive growth in our organization.

Now, to your second question, if I look more broadly across consumer, I’d start by saying that we remain very committed and excited about the future of our consumer group. It’s been essential to J&J for many, many years, and as we look to the future, there’s a couple of aspects that I think are very important.

One, and something that we’ve been extremely consistent about over the past several years, is returning and repairing some of the quality and supply issues that we’ve had in our OTC, particularly in the McNeil U.S. division.

I’m very pleased with the progress that we’re making in that. We mentioned to you that the consent decree that we had designed in conjunction with the FDA was approved and reviewed in October, with very few comments. And given the breadth and scale of that agreement, we felt very good about that. We’ve had teams working hard since then. We’ve achieved all of our major milestones since we’ve submitted that agreement.

And very importantly, we’re starting to see some of that pay off in the marketplace. So over the past six months, we’ve seen the reentry of things like Children’s Tylenol, Children’s Motrin. And what we’re particularly pleased about is that if you look at some of the consumer ratings, the quality of those brands, we’ve seen them be remarkably resilient through this period. And when we get them back to the market, we see an uptake occur.

So we’re cautiously optimistic. Our plan through 2013 continues with this driving performance, consistent with the consent decree. We would expect that over the course of 2013 to return about 75% of the brands to the marketplace.

And of course as we do that, we will also begin shifting our focus, not only from making sure that we can have a consistent and reliable supply of that product, but also that we can truly relaunch, working with our trade partners, working with our great marketing teams, to reestablish those brands and their leadership positions in the market. And we’ll do that as the brands reenter over the course of 2013.

And let me just make one other comment. We are also very pleased to see, particularly in the fourth quarter, the upper respiratory strong performance of our consumer brands. So we believe that we continue to have a lot of skills and capabilities that are going to be important for us to continue to build on going forward.

Now, outside of the OTC business, I think there’s a lot of other reasons to be optimistic. And granted, as we looked at the results, we’d be the first ones to say while we’re pleased in some areas, we’re not satisfied, and we know we need to do a better job across the portfolio.

Also, some of the results were impacted by the divestitures and portfolio decisions that we made in our consumer group. But when we look at some of the core areas, such as skincare, our Neutrogena business, and some of the things that they have in cytomimic, wrinkle reduction, other technologies, really science-based technologies, and what we think we can do there.

If you take a look at things like oral care, where we’ve driven strong growth, great opportunity to build on that brand Listerine in a global fashion. When we look to an opportunity to expand and grow our business globally, particularly in emerging market - and we admit we’ve seen some setbacks in China due to some of the ingredient issues - but our teams have addressed that of the past year, and we’re confident that we have a path forward.

And finally, and last but certainly not least, our Johnson’s Baby line, which is really an iconic brand, that we still know has a lot of potential. We see it as an important driver of growth in the future.

And I think for 2013, to be clear, our projections are very consistent with many of yours. But beyond that, our consumer group remains a very important strategic driver at Johnson & Johnson.

Louise Mehrotra

Next question, Matt, fourth row.

Matt Dodds – Citigroup

Probably a little for Alex and Dominic on this one – if you look at the ’13 guidance, the out margin increasing next year, this year you got a lot of that SG&A but I would assume you also did bring down some cost in the gross margin.

If you look at ’13 broadly, should we assume it’s mostly SG&A or is there more cost on the cogs line in 2013?  And I’ll wrap into a question for Alex.

Dominic Caruso

So Matt, yes, we did see actually in ’13 a pretty dramatic reduction in SG&A costs – sorry in ’12. In ’13 we won’t have as significant of an overall pre-tax margin expansion as we saw in ’12 but we’ll still expand these operating margins, some again in the SG&A line, not so much in the R&D line but we will see cost improvements kick in in the cogs line in 2013.

Matt Dodds – Citigroup

Then Alex, just to follow up on that, with the US still sluggish in devices and consumer, can you pull out enough costs over the next couple years to maintain the margins in that business?

I know you’ve done some restructuring changes in some of the sales force, some things. Where do you look at the profits in the US if we don’t get a bit of a balance in the overall growth rates?

Alex Grosky

That was your question specifically for consumer or …

Matt Dodds – Citigroup

No, it’s overall but I think MD&D and consumer are the two where you’ve seen the weakest pharmas come back quite well.

Alex Grosky

Right, well, certainly the macroeconomic situation is something that influences, I believe, our medical device business and our consumer business to a greater degree. And as we look at some of the underlying dynamics in the market, and some of these metrics, of course, we talked about with you in the past.

If we look at hospital admissions, if we look at surgical procedure rates, if we look at things such as diagnostic rates in hospitals, in even primary care physician visits, most of those categories appear to be about between minus one and plus one depending on the specifics, like negative 4.4 plus 0.7.

So what we’re projecting is likely for a pretty flat trend to continue in the short term and I think it’s varied that we have to work our way through what happens with some of the fiscal discussions here in the United States. That’s very difficult to predict and I don’t think any of us would try to make a projection on that going forward.

I think beyond that we still see a lot of reasons to believe in underlying growth. And as procedures are delayed and – in certain areas, by the way, we are very pleased with some of the resurgence that we saw, for example, in the hip and knee categories, especially in the fourth quarter here in MD&D and (Michele) is going to take you through that later on.

But as you’ve heard in Louise’s discussion earlier, we saw a 7% growth rate in the US – or excuse me, worldwide we saw that 7% and 4%, 6% on a worldwide basis. So we’re pleased with what we’ve been seeing there and particularly pleased with that team because I think that there were some significant challenges and they seemed to be making some really good headway.

But I think overall at MD&D we would expect there to be continued pricing pressure. In consumers, in the consumer area, again, I think a lot is going to depend on the macroeconomic environment, but I would get back to some of the drivers that I mentioned as part of my last response to say why we’re still optimistic about that area going forward.

Louise Mehrotra

Next question, Larry, second row on the side here.

Larry Biegelsen – Wells Fargo

One question for Dominic, one for Alex; Dominic, the contribution from Synthes in 2013, is it similar to 2012, about 3%?  And the reason I’m asking is because your guidance, if it isn’t similar would be about 2% to 3% organic growth, which would be a lot lower than what we saw in the second half of 2012.

I understand the generic impact but you do have consumer potentially coming back, (Doxil) potentially coming back, so is the math right and why the conservatism is that’s what it is in the guidance?

And then one for Alex; just your US businesses in the fourth quarter all seem to have slowed a little bit. Were they specific issues to change or is there anything in the US market that you saw?

And then just lastly maybe an update on Europe, just the state of Europe from your big picture perspective.

Dominic Caruso

The impact of Synthes is about the same in both years. I think therefore your observation is that the growth rate ex-Synthes is also similar. And a couple of points on that. One is that yes, the consumer business is coming back, although, as Alex mentioned, throughout the year so, you know, take some time.

By the time all those products get back on the shelf, the MD&D business will do better in 2013 than in ’12. And the growth rate in the pharma business, of course in ’12, was dramatically fueled by the launch of the new products that came into the market, so the growth rate in ’12 versus ’11 is impacted by that, and we don’t have that same phenomenon in ’13 over ’12.

Those products continue to do well, but relatively speaking, compared to the two years, the growth rate in pharma would be not as dramatic as the growth rate we saw in ’12 over ’11. You asked about why the conservatism, and look, it’s early. You know, it’s January 22. So we’ll keep you posted throughout the year.

Alex Gorsky

Larry, thanks for the question. What I would say is if we look at the U.S. business, particularly in the back end of the year, as you noted I think it started strong with our pharmaceutical business. We saw very strong performance, and particularly in our launch brands: XARELTO, ZYTIGA, with some of the new indication information, data that was being released. But really across that portfolio, even the immunology as well. Very strong performance.

As we look at MD&D, we did have some challenges in certain areas of our business. I think it’s important to acknowledge that. Some of them due competitively. Some of them due to some disruptions in supply. But I would characterize those as, I think, more event-driven versus systemic in nature. And I think you’ll hear later today from Gary and Michel and Karen about their pipeline, about their competitiveness, about some of the very innovative programs they’re driving, that you’ll walk away confident with the plans that they have in place.

And just a couple of things I would note there. One was we’re really starting to see a pickup in our vision care business. For example, in the fourth quarter this year, as you heard, 6% and 7% growth respectively. We’ve got a very exciting portfolio there, and so we’re excited about opportunity. And as I just mentioned a couple of minutes ago, in Synthes in particular, in core hip and knee business, we also saw some strong performance.

And remember, offsetting that in orthopedics, in Synthes, we did have the nail recall in trauma, which was, again, more event-specific than, I think, longer term. And I really think that the DePuy Synthes team has done a great job in managing that. In fact, by later in the quarter, very early in January, we had product back in the operating rooms, and we’re real confident in our ability in managing that going forward.

Now, if I look at consumer, there were some areas of softness that, again, we think were more related to some regulatory actions earlier in the year related to our Skillman facility. But if we look more broadly, and we look at things like our OTC performance - and again, this was a business that’s been under a significant amount of pressure, in a very competitive category. And to drive the kind of growth they did in upper respiratory, we’re really proud of that team. And oral care, also, turned in a strong performance as well.

So as Dominic just mentioned, we look at all of these markets right now, given the macroeconomic issues, and we have to be realistic. But nonetheless, I think overall the trends that we mentioned we think are manageable, and you’ll see that as performance grows in 2013.

Louise Mehrotra

Okay. Rick?

Rick Wise - Stifel Nicolaus

First, for Dominic, and then for Alex, Dominic, both you and Alex have mentioned the seemingly better performance for ortho. Just can you help us understand, is it product driven? Is it comps? Was there any difference in selling days? It seemed like a nice step up versus the the quarter.

Alex, a broader, bigger question for you. I’m always fascinated by leadership and change in leadership. Every leader brings a special passion and differentiates themselves versus their predecessors, no matter how excellent. Today, you’re talking about decisiveness, many opportunities to manage the portfolio, technology. Can you help us understand how we should be holding you accountable, or thinking about your plans, or what’s truly a special sauce, if you will, you’re going to bring to the job?

Dominic Caruso

Alex will comment on the orthopedics business, as will Michel later. But just a reminder, we haven’t seen all of the orthopedic companies report yet, so we’re pleased with our results. A little too early for us to in the cape that we’ve gained share or not. But certainly these results are impressive and our early indications are that we have done better in share in both hips and knees, especially in the US but a little too early to comment on that given the fact we haven’t seen the other competitors yet.

Alex Grosky

If I could (augment) onto that, again, (Michele), the true expert, can jump on this later. But I think if we look particularly in knees, we’re seeing the market come back a bit more than in hips right now. I think Dominic’s points are spot on and that we believe, although we haven’t seen everybody else report, so it’s preliminary that we performed well in both those categories.

We saw knees come back a little bit more than hips but fundamentally we think that if you look at our product offering, too, that we have, you’re going to hear more about a new knee system that we’ll be launching through the course of 2013 with the tune.

We brought a number of new offerings in our hip portfolio out there, so we think it’s a combination of one, some return to the market. And some of it was what I call was the fourth quarter dynamic in orthopedics that you sometimes as see as people waiting until the end of the year. But overall, we’re encouraged by the signs that we saw in the back end of 2014.

And regarding the broader agenda, Rick, I think that I’ve been very fortunate in taking over a great organization from Bill and his leadership and it’s really not about my agenda. It’s about the agenda of the great leaders that we have sitting out in front of you and when you consider the scale, the breadth and the depth of our business, it’s far beyond one person.

It really takes a team of great minds working together. And what I’m particularly pleased about is that there is a strong recognition of wanting to, what I’d call, respect the past and the great heritage that we have with many of our brands in our portfolios but there’s also a real recognition on this team and a hunger for what do we need to do fundamentally differently to drive growth going forward around patients and our business?

And that became the foundation for the strategy review that we pulled together looking hard at innovation in recognizing that while we have a good track record in innovation, the market’s going to demand us to do ever more.

And whether it’s Paul Stoffels and his team, (Martin Madden) and his team and others that we have going, that throughout our portfolio, our ability to bring technology to market that really makes a difference that has the right clinical data around it, including (alchems) data, to innovate in the way that we commercialize our products in the market.

You’re going to hear a lot of information about that this afternoon is that we fundamentally believe that as customers experience the pressure – when I say customers, it can be governments, it can be hospital systems – of this increasing demand and increasing costs in a challenging economic environment that they’re going to be looking for fundamentally different ways of engaging with partners.

And we think that’s where the breadth and the scale and the depth of our portfolio across areas such as orthopedics, such as general surgery, such as diabetes, such as immunology is going to better position us by having a broader, more comprehensive offering than, frankly, any of our customers.

And you’re going to hear a lot more specific examples of that this afternoon and, in fact, in the coming weeks and months because we want to be part of the solution and work in healthcare but we also want to be competitive and we’re going to win and so that’s part of our mindset.

I think the second component of that is global. And we’re spending a lot of time focusing on how can we accelerate our growth outside the United States?  You heard the figure earlier, 56% of our sales are currently outside the US. We know we have even greater growth opportunities beyond just the brick markets but would say overall the emerging markets, hence greater investment in those areas, as well as different kind of product offerings in many cases.

And clearly those two things being topped off with a major focus on execution and leading with a purpose that really inspires our people.

Louise Mehrotra

Kristen, fourth row from the back here, (inaudible). Up here.

Kristen Stewart – Deutsche Bank

Alex, I just wanted to focus a little bit on the portfolio banishment. Obviously today the question was already asked on OCD but maybe you could just help us a little more broadly about how you think about J&J and just looking at the portfolio.

Through the past there’s been references to adding in a fourth leg. I know Dominic has mentioned that before, which seems to not necessarily be the case. I don’t know if that’s changed. And other times, they appear to talk about things like microelectronics, life science tools, structural hearts. I don’t know if [I care] is also of interest in expanding in solutions, but maybe you could just help us think about J&J as you’re going forward, looking at strategic alternatives for OCD, what the appetite for M&A might be in 2013 and beyond.

Alex Gorsky

Thank you for the thoughtful question. I think we’ve been fairly consistent in the way we’ve articulated our strategy around M&A. You know, first really starting with where is there unmet need where we feel we should or can be a part of the solution. And that can start with great technologies, that can start with great companies, and there are examples of both that we’ve had historically, that resulted in us going out and acquiring something new.

I think more and more we’re looking at the second aspect, of how does it fit in a complementary way with our other businesses, as part of making a broader offering, similar to what we’re seeing now in Synthes, and our vision. And so we’re always looking for businesses that can complement, just don’t replicate, but truly complement and synergize, with some of our existing businesses or some of our platforms.

I think the other area that we’re also acutely aware of is how do we drive additional growth globally, particularly in emerging markets. And we’ve done that, I believe, in a disciplined and selective way so far. And I mentioned the recent acquisition we did in China to expand our biologics platform.

But here we’re very excited about the patient and the business opportunity represented by our biosurgical franchise. And it’s another example of where we started with a product, a technology, and we’re building an entire platform to reshape the way that the bleeding is controlled.

And an important component of that is not only to do that in developed markets, but how do we do that in developing markets? How do we source the right kind of capabilities? So by doing this in China, we think that’s going to give us a great opportunity. We’ve done it in our consumer group, with some of the products I mentioned in Russia, Dr. Mom.

So that’s an area where we realize that if we only rely on endogenous growth in some of those markets, we won’t accelerate at the rate that we’re hoping for. That being said, we need to be very thoughtful about which companies, and how we go about it, in some of those markets. Those are a few examples of, I think, areas of interest for us.

Louise Mehrotra

Tony?

Tony Butler - Barclays Capital

Alex, one for you and then two quick ones for Dominic please. Alex, I’m just curious if we could just go back to comments you made earlier about Washington, and not knowing which way the wind blows there. And I think we all would agree, but what is your view of the dual eligibles? And do you think there’s a resolution in the near term?

And then Dominic, just two brief questions. One on VELCADE. Could you discuss the tenders, and what happened in this particular quarter, Q4, and also comments around the flatness sequentially in ZYTIGA?

Alex Gorsky

Look, our approach all along has been that it’s very important to make sure that as we work our way through healthcare reform, that we stay focused on solutions that do improve or provide access for people who are either un- or under-insured in this country. And we think it’s unacceptable there’s such a high number, and so we’ve tried to work very closely with our trade organizations, with governments, to make sure that patients can get access. So we think that’s important, number one.

Number two, specifically as it relates to dual eligibles, we try to work with our trade partners at pharma, with the government, in good faith, toward the additional ACA, and we think that by and large, that program run, Medicare Part D, has been very successful. And we just need to be aware that as we make commitments, as we create programs, that we do so in a way that leads to a consistent approach, and number two, that ensures we continue to reward innovation.

Because if we don’t reward innovation, we’re not going to have the next ZYTIGA, we’re not going to have the next ibrutnib, and some of these wonderful compounds. And by only focusing on costs, we will not cure Alzheimer’s, we will not take care of diabetes in the way that we should. And so that’s why we’re very anxious to work with a lot of other partners on coming up with the way that we’re preserving this underlying encouragement and motivator for innovation, and that’s something that we’re working on.

Dominic Caruso

With respect to VELCADE, the only thing that happened there is that typically the tender process would have called for a new tender in the early part of 2013 and actually was accelerated by the Russian government into 2012, so it was just an earlier tender and we won that tender, so we actually had the sales benefit from that in the fourth quarter.

And then ZYTIGA, the flatness can be described – can be attributed really to the patient assistance program that we initiated so that patients that can’t otherwise afford ZYTIGA for prostate cancer can still have access. If we don’t get underlying scripts, the scripts are still growing.

Louise Mehrotra

One final question from David up here and then we’ll have some closing remarks from Alex.

David Lewis – Morgan Stanley

(All I have) Alex, is one for you. You talked extensive innovation in your prepared remarks and for the last several years there’s been this big debate about what J&J spends on R&D as a percent of pharmaceutical sales and whether that number should be 15% or 20%. It’s huddling around 20%.

It sounds like, if we think about your comments innovation, should we expect that level of R&D for pharmaceuticals, Alex, to remain around that 20% level and maybe a quick comment. Can you just talk about the total corporation, how you see R&D spending under your leadership?

Alex Grosky

And I’ll keep it at a fairly high level and then Dominic, you can take it in deeper. But we believe that innovation continues to be absolutely critical to our success going forward. And if you take a look at our investment that we made in the pharmaceutical business, for example, over the last several years, I think we make a pretty compelling case that we’ve seen the results of that based upon the transformation that we’ve had in our pharmaceutical business.

Now, that being said, we realize that it’s also incumbent upon us to be as absolutely efficient as we can be as well as being effective. And Paul and his team have done I think a remarkable job on that side as well as I talked about if you look at some of the efficiency indices that are out there right now on a per patient basis, I think we’ve done a very good job of managing that end because we realize that that’s critical for us as well.

In our other groups, we also realize that, look, we are going to be under increasing pressures, whether it’s on a pricing perspective or from our markets and that’s why we’ve taken some of the actions that we have.

So Gary, Michel and Karen are going to take you through some of their ideas later on where bringing together (Epicon) and (Epicon endosurgery) the way that we did we think will provide us not only with a better ability to continue to invest in innovation and differentiation but also, frankly, better serve our customers and respond to some of the demands that they’ve had, and Michel, in a very similar way.

And the other thing that I would add onto innovation that I think makes us unique and is a real opportunity is this opportunity around conversions as well. The biosurgery business is a wonderful example but in every one of our businesses, we’ve got examples now, again, diabetes we talked about commercially but also some things scientifically.

We’ve got other things that we’re working right now in the whole biosurgery area and there’s a number of opportunities for us to work across J&J that I think allows us to not only build better capabilities but leverage scientific capabilities better than many of our competitors.

Dominic Caruso

Just an additional comment, the R&D spending is at the higher end of the industry norm, although there are other innovators in pharma that also spend at that high level. So we view ourselves as an innovator in pharma and, for that, you should expect us to be spending at the higher level.

And quite frankly, with the productivity that our R&D organization and pharma has been able to deliver, that’s a fantastic investment from my point of view.

Overall for the enterprise, we tend to average an R&D spend as a percent of sales hired in our competitive set blended. Again, that’s a much more capital efficient way of growing our business and as long as that’s productive we’re happy to invest at higher levels that our competitors.

We then have to find ways to fund that and you saw that that’s what we did this past year by the significant reduction in the SG&A cost. So as long as our R&D is productive and we can bring innovations to the marketplace, we’re happy to spend more than the industry in that regard and obviously, then, hopefully grow at a rate faster than our competitors as well.

Alex Grosky

Well, everyone, I’d like to end where I started earlier this morning and really thank all of you for participating in today’s meeting. As I said during my talk earlier, I think our strategic framework, our broad base of product offerings, critical mass, really positions Johnson & Johnson well to drive growth in today’s dynamic market.

And this year we’ll continue delivering innovative new products and solutions for consumers, for patients around the world, by implementing the long term priorities that we outlined, as well as our short term priorities. And I look forward to updating you on our progress against them as we move through the year. So I’d like to say, thank you again, and turn it back over to Louise.

Louise Mehrotra

Thank you Alex and Dominic, and we will now take a short break and resume at 11 o’clock. Thank you.

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