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Johnson & Johnson (NYSE:JNJ)

Q4 2008 Earnings Call

January 20, 2009 8:30 am ET

Executives

Louise Mehrotra - Vice President, Investor Relations

Bill Weldon – Chairman and Chief Executive Officer

Dominic Caruso - Vice President, Finance and Chief Financial Officer

Analysts

Larry Biegelsen - Wachovia

Catherine Arnold - Credit Suisse

Mike Weinstein - JP Morgan

David Roman – Morgan Stanley

Bob Hopkins - Banc of America-Merrill Lynch

Rick Wise - Leerink Swann

Matt Dodds - Citigroup

Glenn Novarro – RBC

Bruce Nudell - UBS

Louise Mehrotra

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 of 2008 and full year 2008. Joining me on the podium today are our host for today’s meeting Bill Weldon, Chairman of the Board of Directors and Chief Executive Officer of Johnson & Johnson, and Dominic Caruso, Vice President, Finance and Chief Financial Officer.

A few logistics before we get into the details, the audio and visuals from this presentation are 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 for the corporation and highlights for our three business segments. Following my remarks, Bill Weldon will comment on the 2008 results and provide a strategic outlook for the company. At the completion of Bill’s remarks Dominic Caruso will provide additional commentary on the 2008 financial results and guidance for 2009. We will then open the floor to your questions. We will conclude our formal presentation at approximately 9:30 am and following Q&A with some final remarks by Bill we’ll conclude the meeting around 10:00 am.

Distributed with the copy of the press release that you just received is a schedule with actual revenues for major products and/or business franchises. For the listening audience these are available on the Johnson & Johnson website as is a copy of the press release.

Before I get into the results, let me remind you that some of the statements made during this presentation may be considered forward looking statements. The 10-K for the fiscal year 2007 identifies certain factors that could cause the company’s actual results to differ materially from those projected in any forward looking statements made this morning. 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.

Last item, during the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. These measures are reconciled to the GAAP measures and are available on the Johnson & Johnson website. Now I would like to review our results for the fourth quarter of 2008. 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 $15.2 billion for the fourth quarter of 2008 down 4.9% as compared to the fourth quarter of 2007. On an operational basis sales were down 1% and currency had a negative impact of 3.9%. In the US sales declined 6.9%. In regions outside the US our operational growth was 5.4% while affect of currency exchange rates negatively impacted our reported results by 8.1 points.

Our strongest performing region was the Asia/Pacific/Africa region which grew 9.9% on an operational basis. The Western Hemisphere excluding the US grew by 6% operationally while Europe grew 2.7% operationally.

If you’ll now turn to the consolidated statements of earnings net earnings on a reported basis were $2.7 billion and earnings per share were $0.97. This compares to $2.4 billion and $0.82 in the same period in 2007. Please direct your attention the boxed section of the schedule where we have provided adjusted earnings information.

As referenced in the footnote fourth quarter 2008 results were adjusted to exclude special items including charges for in process research and development and the after tax net gain from several litigation matters. In the fourth quarter of 2007 results were adjusted to exclude the write down of the intangible asset related to Natrecor and a tax gain associated with the restructuring of certain international subsidiaries. Net earnings on an adjusted basis were $2.6 billion and earnings per share were $0.94 up 3.1% and 6.8% respectively versus the fourth quarter of 2007.

I would now like to make some additional comments relative to the components leading to earnings before we move on to the segment highlights. Cost of goods sold at 28.8% of sales was 90 basis points less than the same period in 2007. In 2007 the results were impacted by one time charges. The 2008 results had some favorable impact of one time items which were substantially offset by charges in other income and expense. Excluding one time items, cost of goods sold would have increased approximately 30 basis points due to the ongoing changing mix of the business.

Selling, marking and administrative expenses at 37.3% of sales were up 150 basis points versus last year. As we discussed last quarter we planned some investment spending in the fourth quarter. The increase in selling, marketing and administration is a combination of this investment spending and the change in the mix of our business driven by the growth in the consumer business and the lower sales in the pharmaceutical business.

Our investment in research and development as a percent to sales was 13.9%, 70 basis points less than the fourth quarter of 2007 due to a combination of a change of mix of businesses and lower spending in our pharmaceutical business. Interest expense net of interest income of $17 million compares to $35 million of net interest income in the fourth quarter of 2007. This change in net expense was due to lower interest income resulting from lower rates on invested cash and higher interest expense due to a higher average debt position in the quarter versus the same period last year as we continue buying back shares as part of the repurchase program.

Other income net of other expense was $638 million in the fourth quarter 2008 compared to $877 million of net other expense in the same period last year. During the fourth quarter of 2008 we closed on the sale of the Professional Wound Care business. The resulting gain as well as the net gain from litigation settlement that I mentioned earlier are included in this account. In the fourth quarter of 2007 the write down of the intangible asset related to Natrecor was recorded in this account.

With regard to taxes please direct your attention the affective tax rate excluding special charges shown in the boxed section of the schedule. Taxes were 19.9% in the fourth quarter 2008 versus 15.3% in the fourth quarter 2007. Dominic will provide additional commentary on both other income and expense and taxes in his remarks.

Looking at full year data, consolidated sales to customers for 2008 were $63.7 billion an increase of 4.3% as compared to 2007. On an operational basis growth was 1.9% and currency had a positive impact of 2.4 points. On the consolidated statement of year to date earnings I’d first like to draw your attention to the boxed section.

In 2008 and 2007 net income and earnings per share have been adjusted for special items. In both years charges for in process research and development have been excluded. Additionally, in 2008 the after tax net litigation gains have been excluded. In 2007 the after tax costs associated with the restructuring program, the non cash charge related to Natrecor write down and the one time gain associated with the restructuring of certain international subsidiaries have been excluded.

With these adjustments net earnings for the 12 months of 2008 were $12.9 billion or $4.55 per share up 6.8% and 9.6% respectively as compared to the same period in 2007.

Turning now to business segment highlights please refer to the supplementary sales schedule highlighting major products or business franchises. I’ll begin with the consumer segment. Worldwide consumer segment sales for the fourth quarter 2008 of $3.9 billion increased 1.2% as compared to the same period last year. Operational growth was 6.9% while the impact of currency was -5.7 points. US sales were up 1.8% while international sales grew 10.6% on an operational basis.

For the fourth quarter of 2008 sales for the over the counter pharmaceutical and nutritionals increased 8.5% on an operational basis compared to the same period in 2007. Sales in the US were up 4.7% due to the successful US launch of Zyrtec, partially offset by lower sales of cough and cold products due to the slower start to the season versus last year. Sales outside the US were up 12.6% operationally driven by strong growth of adult Tylenol, Nicorette, upper respiratory products and nutritionals.

Our skin care business achieved operational sales growth of 11.5% in the fourth quarter of 2008 with sales in the US growing at 6.2% and sales outside the US up 15.3% on an operational basis. Strong growth was driven by the newly acquired products from Dabao, the leading moisturizer in China. Johnson’s Adult, Aveeno, Neutrogena also made significant contributions to the growth in the quarter.

Baby care products achieved operational growth of 3.2% when compared to the fourth quarter 2007. Sales in the US were down 6% primarily due to the lower sales for BabyCenter.com. Solid growth across most product lines resulted in an operational increase from sales outside the US of 5.7%.

Women’s health achieved operational growth of 1.1%. Sales in the US were flat, while sales outside the US were up on an operational basis by 1.6%. Solid growth in external sanitary protection was partially offset by sales declines in other products.

Operational sales growth in the oral care franchise was 10.5% with US sales up 1.6%. In the US strong growth in Rembrandt products has been partially offset by slower sales in floss and mouth fresheners. Sales outside the US increased 19.3% operationally driven by very strong growth for Listerine across the major regions.

Sales in the wound care other category were down 6.1% on an operational basis with the US down 17.2% and the business outside the US up 7%. The lower sales in the US were due to increased competition and a reduction to the trade inventory levels. 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 $5.7 billion were down 11.1% versus the same period last year. On an operational basis sales were down 7.8% with a currency impact of -3.3 points. Sales in the US decreased 13% while sales outside the US increased on an operational basis by 0.5%. Our results continue to be impacted by generic competition on some of our products namely Duragesic, Razadyne, and Risperdal Oral.

The patent for Risperdal expired in the US at the end of June, 2008, and there are generic competitors for Risperdal in most markets. Generic competitors for Razadyne entered the US market in the latter half of the year. The combined impact of these three products has reduced the fourth quarter worldwide pharmaceutical operational growth rate by approximately 9.5 points, with the US impact estimated at approximately 13% and the impact outside the US estimated at 4%. Excluding the impact of generic competition, operational sales growth was approximately 1.5%.

Now reviewing the major products. AcipHex as its known in the US market and Pariet outside the US is a proton pump inhibitor, or PPI that we co-market with Eisai. On an operational basis sales were down 15.6% with similar results both in and outside the US. In the US script share has been negatively impacted by additional generic launches in the PPI category. Sales have also been impacted by the market entry in Canada of generic Rabeprazole, the active ingredient in Pariet.

Concerta, a product for attention deficit hyperactivity disorder grew 3.1% operationally in the fourth quarter as compared to the same period last year with sales in the US down 6.3%. In the US market growth has been offset by lower market share. The FDA approval earlier this year of the adult indication for Concerta will enable us to compete in the broader ADHD market. Sales outside the US were up 34% operationally with strong growth seen across the major regions.

Sales of Levaquin our anti infective were down 4.2% on an operational basis when compared to the same period a year ago due to lower prescription share. Share was negatively impacted by generics in the category.

Procrit/Eprex declined operationally by 5.9% during the quarter as compared to the same period last year with Procrit down 3.9% and Eprex down 8.2% operationally. New competition and a softening of the market have contributed to the lower sales results for Eprex. Procrit results have been impacted by a decline in the market versus the fourth quarter of 2007 estimated at 13% partially offset by an increase in overall market share. Procrit aggregate share across all markets was approximately 49% in the fourth quarter 2008 up four points versus the same period last year.

Sales of Remicade, a biologic approved for the treatment of a number of immune mediated inflammatory diseases were down 2.4% when compared to the fourth quarter 2007. Sales growth in the US was 1.7%. Sales were impacted by lower customer inventory levels as well as a lower market share due to increased competition. Sales to our customers for markets outside the US were down 15% due to the timing of shipments related to production scheduling due to maintenance. Excluding this impact sales outside the US are estimated to have grown over 20%.

Risperdal Consta, our long acting injectable formulation achieved fourth quarter sales growth of 16.3% on an operational basis. US sales growth was 8.3% while sales outside the US were up 20.9% operationally with continued positive momentum in share.

Sales of Topamax which is approved for the treatment of epilepsy and migraine prophylaxis increased operationally by 6.4%. Sales in the US were up 7.7% while sales outside the US were up 0.9% on an operational basis. In the US market share in the migraine category increased versus the same period last year. Outside the US strong growth was achieved in many market offset by generic entries in certain other markets.

Velcade, a treatment for the relapse multiple myeloma is being co-developed with Millennium Pharmaceuticals. We have commercialization rights in Europe and the rest of the world outside the US. Operational sales growth was 33.5% with very strong results achieved across the regions.

Wrapping up the review of the Pharmaceutical segment, after careful consideration, all research and commercial activities related to Ionsis have been stopped. Technical challenges with Ionsis led to this decision. We remain committed to exploring novel delivery technologies and believe strongly in the potential that innovative drug device combinations may offer.

Additionally regarding TMC 207 a compound for the treatment of tuberculosis, the planned filing is now projected for the 2011 timeframe. The compound looks very promising; however, patient enrollment in the clinical trials is taking longer than anticipated.

Regarding Ustekinumab we have submitted our response to the FDA complete response letter.

I’ll now review the medical devices and diagnostic segment results. Worldwide medical devices and diagnostic segment sales of $5.6 billion grew 1.6% operationally as compared to the same period in 2007. Currency had a negative impact of 3.5 points resulting in total sales decline of 1.9%. Sales in the US were down 3% while sales outside the US increased on an operational basis by 5.6%. Results have been impacted by lower sales of drug eluting stents. Sales excluding the impact of lower sales of drug eluting stents grew nearly 4.5% operationally.

Now turning to the franchises starting with Cordis. Cordis sales were down 15.5% operationally with the US down 35.8% and sales outside the US up 1.3%. Cordis results were impacted by lower sales of Cypher, our Sirolimus-eluting stent, and endovascular products partially offset by the solid growth in our Biosense Webster business. Cypher sales were approximately $270 million down 34% on an operational basis versus the prior year. Sales in the US of approximately $70 million were down 63%.

In comparison to the fourth quarter of 2007 the US drug eluting stent market growth is estimated at 17%. Penetration rates are estimated at 73% up from 61% a year ago while PCI procedures are up approximately 4% in the quarter versus the same period last year. The estimated price for Cypher in the US is down approximately 6% versus the fourth quarter of 2007. Estimated share in the US of 15% was down eight points sequentially and down 32 points from the fourth quarter of 2007 due to the market entry of two new competitors in 2008.

Sales outside the US of approximately $200 million declined 10% operationally. The estimated market share in the quarter of 32% was up two points on a sequential basis and down four points from the fourth quarter 2007. Increased competition has impacted the share outside the US. Cypher estimated worldwide share for the quarter was 25% down three points sequentially and down 15 points from the fourth quarter 2007. Endovascular sales were impacted by the recall of a reentry catheter.

Biosense Webster, our electro physiology business achieved solid operational growth in the quarter driven by disposable catheter products.

Our DePuy franchise had operational sales growth of 8.3% when compared to the same period in 2007 with the US growing 10% and the business outside the US growing by 6.2% operationally. Hip growth on a worldwide basis was 11% operational, outpacing the market growth in both the US and international businesses. On an operational basis worldwide knee growth was 6% while spine grew 8%. The rate of growth in our spine business has accelerated throughout the year due to the successful launch of a number of products.

Mitek, our sports medicine business, grew 12% operationally outpacing the estimated market growth.

The Diabetes franchise was down 6.1% operationally in the fourth quarter of 2008 with the US business down 18.4%. The US results were impacted by an adjustment to prior period estimates of sales rebate reserves. Excluding this adjustment US sales in the quarter would have been down approximately 2%. Positive momentum in share has been offset by pricing pressure and slower category growth. Outside the US sales increased 7.5% operationally due to the successful launch of a number of new products.

Animas, our insulin pump business grew 40% on an operational basis due to new product launches and continued development of the international market.

Ethicon Endo-Surgery achieved operational growth of 9% in the fourth quarter of 2008 with the US sales growing 7.1% and sales outside the US growing on an operational basis by 11.6%.

The Harmonic technology business achieved strong double digit operational growth due to the global success of recently launched products and the underlying strength of this platform.

Also contributing to growth in the quarter was the realized gastric band launched earlier this year in the US and the strong performance of the endoscope products in the international markets driven by increased awareness of the benefits on minimally invasive procedures as well as the metabolic benefits of obesity surgery.

Ethicon worldwide sales grew operationally by 3.3% with the US up 2.8% and sales outside the US up 3.5%. Slower growth in sutures due to lower distributor inventory levels and the divestiture of the Professional Wound Care business in December impacted growth in the quarter. This impact has been offset by strong double digit growth in homeostasis, meshes and bio-surgical.

Ortho clinical diagnostic achieved operational growth of 1.7% in the fourth quarter. Sales growth in the US was 1.2% while sales outside the US were up 2.3% on an operational basis. Results have been impacted by order timing and lower sales and donor screening.

Rounding out the review of the medical devices and diagnostic segment our vision care franchise achieved operational sales growth of 5.7% in the fourth quarter compared to the same period last year. Sales in the US increased 5.8%. Sales outside the US grew 5.5% on an operational basis. The rate of growth has been impacted by the softness in the lens category overall and competitive launches. Acuvue Oasys, One-Day Acuvue Moist, and the Acuvue Oasys for Astigmatism were major growth drivers in the quarter.

That completes highlights for the medical devices and diagnostic segment and concludes the segment highlights for Johnson & Johnson fourth quarter 2008. It is now my pleasure to introduce Bill Weldon.

Bill Weldon

Many of us are going to remember 2008 as a year of extraordinary economic events that shook our financial markets and global economy. With that backdrop as context I’m extremely proud of Johnson & Johnson’s accomplishments in 2008 and the way our people met our commitments with continued sales and earnings growth with significant progress in our pipelines and product launches and with continued investments in the future growth of our business.

We faced and will continue to face challenges but our people, our products, our pipelines and our financial strength give me confidence that we are well positioned for the future. This morning I’ll briefly review Johnson & Johnson’s 2008 business and financial results and provide an update on how we are executing against our strategic plans for leadership and growth in the healthcare industry. I will also explain how we are preparing to deal with recent economic events and seize new growth opportunities.

I’d like to leave you today with a deeper understanding of what we have done to prepare our business for 2009 and the longer term. From this, you’ll see why I am confident that Johnson & Johnson will emerge from the period stronger and even better positioned for growth as the economy and healthcare markets recover.

In 2008 we delivered on our financial commitments despite the near term pressures on our business and non-foreseen shifts in the economic climate. We strengthened our core businesses and made significant progress in launching new products and line extensions and advancing our pipelines. In addition to the growth that comes from our internal R&D we also pursued licensing agreements and acquisitions that provided us new capabilities in medical devices and diagnostics and a stronger consumer presence in markets like China.

In 2008 we have largely implemented the major cost structure improvements we outlines for our pharmaceuticals and Cordis business in mid 2007 and we have realized approximately $1.6 billion in annual savings from these actions which is at the higher end of our earlier guidance. Meanwhile the integration of the Pfizer consumer healthcare business is on track. We are comfortable that we will achieve cost synergies at the higher end of our previously disclosed range of $500 to $600 million by the end of 2009. We still expect this transaction to be break even or modestly accretive this year, one year ahead of schedule of the original schedule.

We also continued throughout the year with our $10 billion share repurchase program. As of the end of December we had purchased approximately $8.1 billion of stock. Our business, driven by committed financial discipline continued to deliver strong adjusted earnings growth and solid sales growth when considering the generic challenges we faced.

Our broad base of consumer pharmaceutical and medical device and diagnostics businesses increases sales to $63.7 billion despite the loss of exclusivity of Risperdal Oral for half the year, continuing pressures on our drug eluting stent and Procrit business and the additional impact of the economic decline.

We achieved strong adjusted earnings growth of 6.8% and adjusted EPS growth of 9.6% which was higher than earnings due to our share repurchase program. We also generated a strong free cash flow of approximately $12.2 billion.

I’d like to remind you of the expectations we set at this meeting last January. We said we expected operational sales in 2008 to increase 1% to 2% as we faced the patent expiration and business pressures I mentioned a moment ago. We delivered 1.9%. This is a significant achievement when you take into account the additional economic challenges that arose later in the year. In January we projected an adjusted EPS range of $4.39 to $4.44. At the end of the year we generated an adjusted EPS of $4.55 and 9.6% increase.

In terms of sales by segment, consumer generated approximately $16 billion in revenue or 25% of our total. Pharmaceuticals approximately $24.6 billion or 39% of our total. MD&D generated $23.1 billion or 36% of our total.

Our consumer business once again provided the premier consumer healthcare company in the world. With its science based innovations and iconic global brands consumer segment sales grew 8.3% operationally year over year.

In the OTC nutritional business the successful launches of Zyrtec as an over the counter allergy medicine was a major contributor to this growth. Strong sales of other consumer products like Neutrogena, Aveeno, Listerine and our international baby care brands helped drive significant growth in our other franchises.

The pharmaceutical segment saw an operational sales decline of 3.1% for the year. Excluding the impact of generic competition and continued declines in Procrit, pharmaceutical sales would have grown by 6% operationally. Nine products had sales of more than $1 billion including Remicade, Risperdal Consta, and Topamax. In addition, we saw strong sales growth from newer promising products like Prezista, Velcade and Invega. With these newer drugs and promising compounds and our late stage pipeline we see positive momentum building for the longer term.

Our medical device and diagnostic business is the largest medical technology business in the world with sales of $23 billion. More than 80% of MD&D sales were derived from businesses where we hold the number one or number two market position. We continue to see solid growth and performance in six of our seven franchises in the face of tough competition. MD&D sales grew by 3.5% operationally. Excluding the impact of lower drug eluting stent sales operational growth would have been a healthy 6%.

Some of the key growth drivers included vision care with products like Acuvue Oasys and One-Day Acuvue Moist, Ethicon Endo-Surgery harmonic technology and realized adjustable gastric band and the DePuy orthopedic and Mitek sports medicine products.

Our Cordis business continued to see the impact of new entrants in the drug eluting stent market but it succeeded in broadening the strength of the cardiovascular franchise by continuing to build momentum in Biosense Webster and neurovascular business. Operating profit for 2008 was $17.3 billion and 27% to sales. That compares to $15.9 billion or 26% in 2007. This 110 basis point increase can be attributed to the excellent job our leadership team did in managing their businesses and containing costs during the year, even as the volatile economic climate began driving increases in commodity costs and shifts in consumer and patient behaviors.

Thanks to the people at Johnson & Johnson we have managed through difficult economic cycles many times throughout our history. The past year presented its own extraordinary challenges. Some we anticipated and planned for, others could not be foreseen and required decisive actions during the year. Despite these challenges we continued a legacy of performance that few if any companies can claim.

During 2008 stock indices like the Dow Jones Industrial Average and S&P 500 were down more than 30%. Other drug and healthcare indices were down about 20% to 30% in terms of total return to shareholders. Comparatively Johnson & Johnson’s total return to shareholders declined just 8%. While we’re never pleased with declines in our returns we were the third best performer in the Dow for 2008. When you look at our total shareholder returns over three, five and 10 year periods we beat and consistently beat the major indices that we compare to.

I’d like to spend the rest of my time talking to you about how we plan to execute against our strategies for leadership and growth in healthcare. This chart will be familiar to most of you; it sizes the global healthcare market for 2007 at $4.1 trillion and breaks out those areas where we compete today and the areas of healthcare where we have not yet entered.

About $1.3 trillion of that figure includes a variety of healthcare product areas where we do compete. Consumer, pharmaceutical, medical devices and diagnostics and where we hold about 5% market share. The remaining $2.8 trillion consists of healthcare markets that include providers, payers, administration, fitness, health information and many others. There is plenty of opportunity for Johnson & Johnson in the global healthcare market as we grow share in our existing markets and move into fertile grounds for expansion.

I’d now like to turn a discussion of four major factors that will influence our business performance in 2009. These are the general healthcare environment and trends that are shaping the future, our own near term business pressures, the macro economic factors that every business is facing and the volatility of currency.

To begin, there are many forces shaping healthcare environment that we have considered in our planning. For instance, an aging world population is creating incredible demand. In fact, every three and a half seconds somewhere in the world is turning 65. People are becoming increasingly interested in knowing about and managing their own health, not just their illnesses. As the movement to wellness and prevention gains more momentum even medical practitioners are more concerned with keeping patients healthy rather than just treating them when they become ill.

Chronic diseases such as diabetes, cardiovascular disease and obesity are on the rise, driving up the cost of healthcare. Significant changes in healthcare systems and reimbursement models are being considered in the United States and elsewhere. These and other trends are putting more pressure than ever on healthcare systems to meet demands for innovation, quality healthcare and do that in more effective cost efficient ways.

The second factor for discussion includes a near term business pressures that we have known about and been preparing for. These include a well understood and during the past year our companies made adjustments to their business plans to address the conditions we anticipated. Generic competition for some pharmaceutical products, aggressive new competitors in some of our surgical and comprehensive care businesses and low cost brands fighting for market share with our consumer products.

We have made modifications where and when appropriate. These included streamlining our infrastructure to reduce our cost basis, prioritizing our R&D investments to ensure the success of the most promising products, continuing our investment in new product launches, focusing on emerging markets and expanding our presence in new and adjacent markets. While some of these actions have been difficult, all were necessary to ensure the strength of our business. We should see the full year benefits of a number of these actions in 2009.

The third factor we must consider in 2009 is the macro economic environment that every business is facing. Over the past several months we have experienced a global financial and business slowdown unlike anything we have seen during our lifetimes. Much has already been written or reported about the early affects the economic slowdown is having on healthcare spending and behaviors. IMS projects a slowing growth in the US prescription drug market down 1% to 2% a year from 4.2% in 2007.

According to the Kaiser Family Foundation with unemployment on the rise people have begun avoiding healthcare treatment or cutting back even for serious conditions. Many analysts have reported that surgeries, especially elective procedures are being postponed. Hospitals and healthcare providers are tightening their inventory levels and budgets while consumers are watching their spending more closely. In Johnson & Johnson we are seeing early affects in a few parts of our business.

For example, while growth is still strong in an area like sports medicine we have recently seen slight declines in growth rates in the market. Also in markets that require more out of pocket spending like diabetes test strips and contact lenses we are seeing some signs that consumers and patients are becoming more frugal.

Thanks to the strength of our leadership team our broad base of businesses and our fiscal discipline I remain very optimistic about our ability to adjust to the evolving economic conditions. I’m also very excited about the new products and strong pipelines that position us well for the future.

The fourth factor that could have a significant impact on our business in 2009 is currency. The fluctuation in exchange rates over the last six months has been dramatic. These fluctuations could have a significant impact on our future financial results. Dominic will discuss the potential impact of currency in more detail during his remarks.

Every challenging period brings with it a corresponding opportunity for growth and this one is no exception. By working in a disciplined way Johnson & Johnson will emerge stronger than ever remaining the worlds leading company in addressing human health and well being. I believe this for several reasons.

As always, success starts with leadership and we are fortunate to have an experience management team in place with the right skills to capitalize on market conditions and build businesses for the long term growth. We are strengthening our core franchises, advancing our pipelines and introducing new products that will replenish and grow our revenue streams.

We are building our market leadership positions and venturing into new growth spaces for Johnson & Johnson. We are maintaining our financial strength and flexibility with a combination of strong cash flows and a AAA credit rating which gives us access to credit at favorable rates. We have implemented cost structure improvements that should reap benefits for the bottom line and help us operate more efficiently.

We are actively participating in the dialogues on public policy that will shape our business environment for years to come. In the meantime we continue to implement our strategic plan which will strengthen our company for long term growth. In addition, we are looking for new opportunities that may exist for our businesses under today’s unique market conditions. Whenever the economy and healthcare markets return to a more robust growth we will be stronger and better positioned for leadership in the markets where we choose to compete.

Now I would like to spend my remaining time discussing the progress we have made on the four business priorities that we outlined last year. At the foundation of Johnson & Johnson’s business is a fundamental commitment to our credo which provides the common set of values for our approximately 120,000 employees around the globe. The four tenants of our credo provide a clear focus and mindset for how we approach every decision. Patients and customers first then our employees, our communities and our shareholders.

We also work under an operating model that has served us well for decades. Its four elements are being broadly based in human healthcare, managing our businesses for the long term, taking a decentralized management approach, and focusing on our people and values.

Last year I introduced four enterprise wide business priorities that continue to be critical to achieving our long term growth plans. They are winning in healthcare, capitalizing on convergence, accelerating growth in emerging markets, and developing leadership and talent.

Let me begin by discussing what we mean by winning in healthcare. There are three major elements to winning in healthcare. First is growing our existing businesses. This encompasses advancing the pipeline, launching new products and extensions and enhancing our core strengths and franchises. Second is building new platforms for growth. These include making acquisitions and executing licensing agreements and also building new businesses in healthcare markets where we do not currently compete. Third is actively participating in the dialogue around public policy that will help shape the healthcare landscape for the future.

Developing our own products and technologies within the Johnson & Johnson family of companies is the most efficient way to grow our existing businesses. We have continued to make significant investments in R&D across the business with approximate spending of $7.6 billion in 2008. As planned, our R&D investments began leveling off last year because we had substantially increased investments over the past several years to accommodate progress in our late stage pipeline.

At our investor meeting in 2007 we set new goals for our pharmaceutical pipeline. We said we would file seven to 10 new products for approval between the beginning of 2008 and the end of 2010. Despite some setbacks we remain on course with that commitment. We have eight new compounds currently in registration and five of those were filed with the FDA in 2008. Tapentadol, an immediate release tablet for the relief of moderate to severe pain was also approved later in the year. We plan to file several more compounds by the end of 2010.

At our investor meeting in June we briefed you on many of the exciting developments in our medical devices and diagnostics businesses. We have robust pipelines in both our surgical care and comprehensive care groups. Here’s an updated look at our surgical care pipeline. There are many projects on this comprehensive list worth highlighting but in the interest of time let me just mentioned just two.

In surgical care we have developed the first computer assisted personalized sedation system called Sedasys. The device which is currently under review by the FDA will make it earlier for a physician and nurse teams to deliver propofol to patients undergoing screening and diagnostic procedures for colorectal cancer and disorders of the upper GI tract. By integrating drug deliver and patient monitoring the Sedasys system has the potential to change the way sedation is delivered.

We talked in June about the Prineo skin closure system. Prineo will be used in surgical applications that require significant inter-dermal suturing time like body contouring procedures. This time saving system allows for a significant reduction in OR time for the hospital and a reduction in general anesthesia time for patients which should improve patient outcomes. Prineo is currently used in Europe and is expected to launch in the United States this year.

In the comprehensive care pipeline we are also seeing good progress on several fronts. Again, in the interest of time let me mention just a few. In 2008 we received approval for two new diagnostic systems. Vitros 5600 integrated system shown here which is uniquely designed to integrate clinical chemistry and immunoassay testing to increase laboratory productivity. The Vitros 3600 a high through put system used for immunoassay and infectious diseases. Both of these next generation platforms can simultaneously run more than 100 tests and are designed to run innovative high impact diagnostic tests in the future.

We feel very positive about the progress we are making on clinical trials for our Nevo Sirolimus-eluting stent. This cobalt chromium stent features a bio absorbable polymer and a unique reservoir technology. The first clinical trial for Nevo resolution one completed patent enrollment ahead of schedule and we plan to present six month primary end point data from this trial at the Euro PCR conference in May. We expect to file Nevo for CE mark approval in Europe in 2009.

Within our Biosense Webster business we are awaiting FDA approval for an atrial fibrillation indication for the Navistar Thermocool Ablation Catheter. In December an FDA advisory panel unanimously recommended approval for this indication which will make Biosense Webster the first and only company in the United States with an approved A-Fib indication opening up a market with a penetration rate of less than 2%.

The foundation of our consumer product success has always been based on superior science and technology. With recent development like helioplex technology for sunscreens or rapid release gel technology for OTC medications. We feature a wide array of scientific research competencies in areas like skin biology, pharmaco kinetics, drug delivery and microbiology to name a few.

We have built a significant portfolio of proprietary technologies including dissolvable strips and taste masking for oral care and OTC drug delivery. Active naturals and fragrances used in skin care and cellular resuscitation and advanced adhesives for wound care and healing.

We also continue to enhance our clinical trial expertise and expand our R&D capabilities around the world, developing products for emerging markets where our business has grown considerably.

Now let’s turn to our existing and new products that result from our investments as well as our acquisition and licensing activities. Our existing franchises make up the broadest space of healthcare businesses in the world and are well known leaders across our three segments, holding the number one or number two market leadership positions in various markets.

In 2008 approximately 70% of our revenues came from products with these market leading positions. Last year across all three of our businesses we launched hundreds of new products and line extensions some of which are highlighted on the screen. In addition to the products we developed internally we have made several acquisitions to add technology platforms, brands and market presence in areas where we saw opportunities.

We acquired Dabao cosmetics in China which brings with it the countries number one moisturizer and a brand that is well known and respected among Chinese consumers. This acquisition also opens up opportunities to do more business in mid tier markets expanding the base of consumers we can serve in this region.

In late 2008 we announced several other acquisitions in our surgical care business. We acquired Omrix Biopharmaceuticals, a company we knew well through existing partnerships and distribution agreements. Omrix develops and markets bio-surgical immunotherapy products. It will strengthen our presence in active biologic based homeostasis as well as convergent products for surgical procedures like the fibrin pad which is in clinical trials.

Another is Mentor Corporation, a highly respected market leader for breast augmentation and reconstructive procedures. Once completed this acquisition will establish a major presence for Johnson & Johnson in aesthetics medicine.

We also acquired SurgRx whose end seal products complement our harmonic technology and broaden the energy franchise in our ethicon endo-surgery business. In comprehensive care we acquired two companies, Immunicon and Amic for new diagnostic capabilities.

Last year I introduced the office of strategy and growth as a new organization that would be looking at the white spaces in healthcare for Johnson & Johnson. Places where we envision building new businesses. We have defined the area of wellness and prevention as one of those opportunities and we have taken initial actions to establish this new business platform.

In late 2008 we made two acquisitions to begin laying the groundwork for this new business. HealthMedia is a provider of web based behavioral interventions that emulate a health coaching session without the human intervention. The Human Performance Institute is developing science based training programs to improve employee engagement and productivity. We expect this new business to contribute to the performance of workforces through products and services that are designed to keep employees healthy, engaged and productive.

Lastly, it is more important than ever that Johnson & Johnson be an active participant in the dialogues that are taking place around the world to improve healthcare. We are invited to participate in these discussions because of our well established reputation as a healthcare leader and the unique perspective we can provide based on the diverse set of businesses we manage.

We’ve been willing to experiment and innovate new ways to address the problems inherent in today’s healthcare systems. We believe any discussion of healthcare policy reform must put the needs of the patients and consumers first.

Now let’s turn to our second priority which is capitalizing on convergence. This is an area where we can leverage the breadth and combination of our businesses for a unique competitive advantage. We look at convergence in three ways, the combination of products and technologies, the development of patient centric solutions and the collective power and breadth of the Johnson & Johnson enterprise.

The most conventional view of convergence is in the combination of products and technologies across the non-traditional boundaries. Drugs delivered on a stent using a reservoir technology like Nevo, medication delivered on a contact lens to treat allergic systems in the eye, or Sedasys and the fibrin pad which I mentioned earlier.

When we established our comprehensive care group last year we talked about convergence in the form of patient centric solutions that ignored product silos and looked at a patient’s continuous cycle of diagnosis, treatment and recovery. We asked what were the needs we could serve or gaps in this cycle we could fill with our products, expertise and knowledge of diseases and healthcare.

Let me give you just one example in this area. Last year we mentioned the role that ortho clinical diagnostics is playing in convergence as it works with our other businesses on the use of companion diagnostics in areas like oncology, metabolics and cardiovascular disease. By identifying mile markers and patients who will benefit most from cancer drug or by targeting early indications that occur before the first signs of heart failure we are uniquely positioned to assist patients from the moment of diagnosis through monitoring and on to therapeutic intervention or treatment with our full range of products.

Finally, we look at convergence in the way we leverage the power of our enterprise across business segments for unique insights and solutions. Our launch of Zyrtec was a powerful example of how we used experience and knowledge in both our pharmaceuticals and consumer businesses to help with the largest prescription to over the counter switch in our history. It was sighted in the tan sheet as a model for any OTC switch.

McNeil Consumer Healthcare worked with our pharmaceutical business to educate and inform healthcare plans, pharmacy benefits managers, national retailers and employers about the switch. Thanks to these efforts millions of consumers received Zyrtec switch information from their healthcare plans while many more received similar communication from their employers. This tremendous collaboration enabled Zyrtec to achieve 26% market share since its launch in 2008.

A decentralized management approached is fundamental to the success of our operating model. Our operating companies and local management teams know their markets the best and they execute their business strategies with great autonomy. There are many common functions where standardization can benefit Johnson & Johnson with greater efficiency, faster processes, better use of our talent and more leverage to the bottom line.

We must increasingly use our scale as an advantage and we are in the midst of efforts to build more standardized approaches in areas like finance, human resources, procurement and information technology. These are not changes that can be implemented overnight in a global enterprise like Johnson & Johnson but we have the resources committed to ensure we reap the benefits of the work we have already begun.

Our third priority is accelerating growth in emerging markets. Johnson & Johnson has been a global company since the 1920s when we established our first international affiliate in Canada and first overseas affiliate in Great Britain. We have continued since then to build businesses throughout the world. Today we have facilities in 57 countries and almost half our revenues come from outside of the United States.

The emerging markets look to provide the most robust healthcare opportunities over the next decade and we are preparing our businesses to capitalize on this growth. We define high growth emerging markets on a business by business basis. We typically include countries like Brazil, Russia, India and China usually called the BRIC countries along with other important growth areas such as Turkey and Mexico.

While the current economic crisis might temper these markets growth rates from the high shown here the opportunities remain significant. Over the next five years Russia, India, China, and Turkey are now projected to grow at the high single digit rates while more developed markets are seeming to grow even slower.

This growth and maturity of these markets will globally impact healthcare through the products and medicines being developed, where and how clinical trials are being carried out and the way we run our businesses. Our business in the BRIC countries grew 19% operationally in 2008 and we continue to build our local capabilities and presence to strengthen these efforts.

We are not new comers to these countries. We have a significant presence and well established roots. For instance, we began operations in Brazil and India in the 30s and 40s and China and Russia in the 80s and 90s. Our commitment to these markets continues to grow. I mentioned the Dabao cosmetic acquisition in China earlier.

In 2007 we opened the emerging markets innovation center in Shanghai to develop new and affordable products addressing the consumer needs of emerging markets. One of the centers first successes was the launch of Johnson’s Baby Long Protecting Cream in 2008 which addressed the dry skin that babies can experience in cold weather. The team used local market research, natural ingredients and a competitively priced $25,000 package to meet the need of China’s emerging market.

We also continue to invest in professional education in these and other markets to help teach physicians how to use our medical technology and to prepare markets for the introduction of new healthcare practices. Our MD&D businesses have more than 20 training centers outside the United States and are dedicated to just this type of work. Our vision care business for example has been using this approach establishing training centers in the US and around the world to train more than 30,000 practitioners and introduce them to the latest breakthroughs in contact lenses and eye care research.

Finally, our most important priority is developing leadership and talent because none of our other strategies and priorities can succeed without the talented and dedicated people at Johnson & Johnson. When you look at our credo our operating model and our business priorities people are the common thread. It is because of them that I am confident in our ability to continue meeting our patients and customer needs while furthering our excellent track record in performance.

With more than 250 operating companies around the world we have the capability to develop leaders by exposing them to a wide variety of businesses with ever increasing responsibilities. We look for people who can work in a decentralized environment, develop winning strategies and execute the plans that lead to success across our business segments. We allow them to take prudent risks as they enhance their own judgment and business building capabilities. Ultimately my confidence in our future stems from the talents of our people and their individual commitments to living our credo responsibilities in their daily work.

In closing, I would like to reinforce for you our commitment to growth. For us this means competing in the most attractive spaces in healthcare. It means building and sustaining leadership positions through our pipelines, people and strategic acquisitions and licensing agreements. Finally, it means growing our sales faster than the markets where we compete and growing our earnings faster than sales through a thoughtful disciplined management approach.

Johnson & Johnson has delivered a strong track record of performance over time. We have managed through difficult economic cycles in the past and we are confident that our people, our products, our pipelines and our financial strength position us well for continued leadership and growth in healthcare.

I’d like to thank you for your attention. Now I’d like to turn podium over to Dominic for some additional comments and then we’ll have Q&A.

Dominic Caruso

To wrap up our formal presentation I would like to touch briefly on our results for 2008 and then provide some comments for you to consider as you refine your models for 2009. As Bill indicated we are pleased with our solid financial results for 2008. While we recognize there are challenging factors in today’s economic environment such as currency volatility and uncertainty surrounding the depth and length of the current recession, we are positioned well for long term profitable growth.

Our sales results for 2008 reflected solid performances across many of our businesses. As I am sure you are aware we experienced significant volatility in currency exchange rates during the year. In fact, currency positively impacted our sales results by 2.4% for the year but negatively impacted our sales results by 3.9% for the fourth quarter. Similarly, regarding EPS, changes in currency positively impacted our full year EPS results by 1.9% but negatively impacted our fourth quarter EPS results by 3.4%.

Our strong earnings performance demonstrated again our ability to continue managing costs and improving margins all the while continuing to invest to advance our pipeline of new products or enter into new markets through licensing and acquisitions.

Before we discuss 2009 I’d like to point out some items in our fourth quarter results. Our adjusted earnings per share results in the fourth quarter exclude special items such as in process research and development charges related to the acquisitions we made in the fourth quarter and several litigation matters.

The most significant of these litigation matters is related to the judgment in our favor of long standing stent litigation with Medtronic which was previously announced. The receipt of the payment related to this litigation judgment of approximately $520 million was partially offset by amounts related to several other litigation matters. This net impact has been reflected in other income and expense but has been excluded from the adjusted earnings results.

Additionally, during the fourth quarter we closed on the sale of the professional wound care business to OneEquity Partners. You will remember that during my discussion of our third quarter results this transaction was not included in my guidance for 2008. Since we view this transaction as in essence a decision to reshape our portfolio we expected then that any gain from this divestiture would be used to make additional investments or other business decisions that would enhance our long term growth.

During the fourth quarter we took these actions. You will note that our other income and expense line item reflects net higher other income than my previous guidance as it now includes the gain from this divestiture of approximately $500 million as well as some offsetting items of approximately half that amount.

Additionally you will note some higher level selling, marketing and administrative expenses in the fourth quarter which reflect the use of the remaining half of this gain to make the investments and other business decisions as we had expected.

Now I’d like to provide some guidance for you to consider as you refine your models for 2009. This guidance takes into consideration the addition of Omrix Biopharmaceuticals and other acquisitions made in 2008, the divestiture of Professional Wound Care business which was completed in 2008 as well as the pending acquisition of Mentor Corporation which is expected to close later this month.

As previously disclosed the Mentor acquisition is expected to be dilutive to 2009 EPS by approximately $0.03 to $0.05 per share. This dilutive affect includes the transaction costs which are now expensed according to the new accounting guidelines related to business combinations.

Let’s start with a discussion of cash and interest income and expense. During 2008 we continued to generate strong cash flows. In fact, as Bill pointed out earlier we generated free cash flow or cash flow after necessary capital expenditures of approximately $12.2 billion. At the end of 2008 we had approximately $1 billion of net cash. This consists of approximately $12.8 billion of cash and investments and $11.8 billion of debt. This is an improvement of $1.2 billion in our overall net cash position from year end 2007.

Our financial position remains strong and we continue to have good access to the credit markets for our financing needs at reasonable rates. For purposes of your models assuming no major acquisitions and assuming the completion of the share repurchase program during the early part of 2009 I’d suggest you consider modeling net interest expense of between $150 and $250 million.

Turning to other income and expense, as a reminder this is the account where we record royalty income as well as one time gains and losses arising from such items as litigation, investments by our development corporation and asset sales or write offs. This account is difficult to forecast but assuming no major one times gains or losses I would recommend that you consider modeling other income and expense for 2009 as a net gain ranging from approximately $150 to $250 million.

Now a word on taxes. For 2008 the company’s effective tax rate excluding special items was 22.9%. We suggest that you model our effective tax rate for 2009 in the range of 24% to 25%. This rate takes into consideration changes in the mix of our business for 2009 as well as the extension of the R&D tax credit for 2009. As always we will continue to pursue opportunities in this area to improve upon this rate throughout the year.

Now turning to sales and earnings. As I previously mentioned we experienced significant volatility in terms of currency exchange rates especially late in the year. As you can see from this chart it is very difficult to predict movements in currency exchange rates especially given the current economic conditions and the resulting monetary policy changes that governments around the world are employing to address the situation.

Some of these actions have had an impact on interest rates and a resulting impact on the volatility of currency exchange rates. It appears that additional actions are likely to be taken that may continue to impact the volatility of exchange rates even further.

Therefore, our guidance for 2009 will be based first on a constant currency basis reflecting our results from operations assuming that average currency rates for 2009 will be the same as they were for 2008. This is the way we manage our business and we believe this provides a good understanding of the underlying performance of the business. I will then provide an estimate of our sales and EPS results for 2009 with the impact at current exchange rates could have showing the Euro as an example.

Of course the actual impact is dependent upon many currencies but the Euro represents about 50% of this impact. I believe this will provide you with some helpful insight for your modeling purposes.

Turning to sales, the mean of the analysts estimate as published by First Call indicates sales of $63.7 billion for 2009. As we looked at the various models it appears that not all the analysts have updated for currency fluctuations and some of those that have, have not fully reflected what the impact could be at current exchange rates.

Taking into consideration the loss of US Patent exclusivity of both Risperdal Oral and Topamax which have about a 4% to 5% impact to our overall sales growth rate, we would be comfortable with your models reflecting operational sales change on a constant currency basis of between -1% and 1%. This would result in sales for 2009 on a constant currency basis of between $63 and $64 billion.

While we are not predicting the impact of currency movements, to give you an idea of the potential impact if currency exchange rates for all of 2009 were to remain where they were as of last week that our sales growth rate would be negatively impacted by approximately 4% or approximately $2.4 billion. Thus under this scenario we would the expect reported sales to decline to a range between 3% and -5%, for a total expected level of reported sales of between $61 and $62 billion.

Now turning to earnings. When I last checked, the First Call mean estimate for our EPS for full year 2009 was $4.61 per share which excludes the dilutive impact of the Mentor acquisition. It appears that many of the analyst models include a 2009 tax rate that is lower than the guidance I just provided. As I noted earlier it does not appear that all the models have been updated to reflect the potential impact of currency at current rates.

I suggest you consider full year 2009 EPS estimates excluding the impact of special items of between $4.60 and $4.70 per share on an operational basis that is assuming same average exchange rates for 2009 as we saw in 2008. This represents an operational growth rate of 1% to 3%. While we are not predicting the impact of currency movements to give you an idea of the potential impact on EPS if currency exchange rates for all of 2009 were to remain where they were as of last week then our EPS growth rate would be negatively impacted by approximately 3% or approximately $0.15 per share.

Thus under this scenario we would then expect total reported EPS excluding special items of between $4.45 and $4.55 per share. Throughout 2009 we will provide you with the operational growth rates for our actual sales and EPS results in order to give you the visibility to the underlying performance of the business. We will also provide the impact of currency on our actual results.

As you refine your models for 2009 I want to remind you to consider the impact to our results from the loss of US Patent exclusivity of Risperdal Oral at the end of June 2008 and the loss of US Patent exclusivity of Topamax at the end of March 2009. These events will obviously have significant impacts to comparisons.

As you work through the guidance I provided a few minutes ago we would be comfortable with your models reflecting an improvement in pre-tax operating margins for 2009. While operating margins may vary by business segment year to year, may be impacted from time to time by short term dilutive impact of acquisitions, improving the overall pre-tax operating margin by growing income faster than sales over time is a fundamental discipline we use in managing our business.

In closing, I’d like to offer these final thoughts. Johnson & Johnson is a company that is financially strong. We continue to be committed to growth as Bill has pointed out. I am very proud of the financial performance we delivered in 2008 and I look forward to updating you on our progress for 2009 throughout the year. Louise back to you.

Louise Mehrotra

We’ll now begin the Q&A session. Please wait for the microphone before asking your question as this meeting is being webcast. As we have Bill Weldon with us today please keep your questions more strategic.

Question-and-Answer Session

Larry Biegelsen – Wachovia

On the Pharma side many of your competitors have reevaluated their strategy in this difficult environment, could you by focusing for example on specialty markets or certain therapeutic categories could you articulate J&J’s strategy in the Pharmaceutical business? Second in services the other area that you’re targeting the pace that we saw in 2008 in terms of two small acquisitions is that what we can expect going forward or something more accelerated?

Do you see 2009 as a one time event in terms of EPS growth? In other words, do you expect to return to historical EPS growth rates in 2010?

Bill Weldon

The first one is really the strategy around our Pharm business, we’ve historically been very focused on the specialty markets so when you look at the impacts we have much less of the impact but like everyone else really assessed our sales force, different ways of going to market but we have identified the specific therapeutic areas where we continue to focus on continue to develop our products where we think there is high potential whether its here in the United States or around the world.

I would say that we modified our strategy but haven’t really changed it other than some of the ways we go to market with sales organization and new ways of looking at promoting our products that we think make us more efficient. As far as the specialty area it’s been an area that we’ve historically been focused on and will continue to be focused on. We think it gives us a lot of leverage and a lot of strength.

The second question was really around acquisitions?

Larry Biegelsen – Wachovia

The areas you don’t participate in today this year and last year you showed us that pie chart. You had two small acquisitions I’m just wondering if that’s the pace that we can expect going forward in terms of penetrating that segment.

Bill Weldon

Let me comment on the wellness and prevention area and what has really driven us into that because I think with the new administration and truly the focus on obesity around the world and diabetes and the problems that are there that more and more people are getting focused on taking care of their own health and I think the administrations are starting to look at how do we reimburse and treat these people and keep people healthy which is really the answer to the long term healthcare costs that we have to deal with.

We took last year really and tried to look across the landscape, we looked at health information technology for example. We zeroed in on prevention and wellness and the two acquisitions we have coupled with the experiences we’ve had over the last two decades at Johnson & Johnson. We think there’s a very strong business model looking at that in that today we pay about $400 less per employee for our healthcare costs than the normal company would pay. The reason for that is for two decades now we have 4% tobacco users at J&J where a normal population is about 20%.

We have a focus on obesity and weight loss; we have a focus on cholesterol, hypertension and the areas that really many of the co-morbidities associated with obesity and keeping people healthy and well. We think that will also drive to engagement, absenteeism. We know, we’ve documented it in our own programs.

By looking at the behavior modification technology that HealthMedia has coupled with the Human Performance Institute which looks at nutrition, exercise, recovery and the critical pieces. Putting it together with the facts we have we think we have a very strong model to go to governments and other businesses with to improve the health of their employees.

I wouldn’t expect you’d see us going into large acquisitions trying to move things forward but build from the base that we have in wellness and prevention as we continue to assess other opportunities.

Dominic Caruso

Your question was really related to the level of EPS growth that our guidance for 2009 versus what could happen in 2010 or how that might change. I think 2009 is a year that’s very well understood by everyone. We know the business pressures we are facing in 2009 and in fact that’s now coupled with some economic pressures that we’re beginning to see as well. I would say that we’ve been able to manage through that very well both in 2008 where you saw increase in pre-tax operating margins and my guidance indicates an increase again in 2009 in pre-tax operating margins obviously impacts our EPS growth.

Moving into 2010 I think a few things will change. One is that our comparisons obviously be a little easier when the business pressures are a little bit further behind us. More importantly than that we have a great deal of confidence in our new platforms for growth; our products, our pipeline and our leadership in terms of their ability to manage through these difficult times while at the same time preparing ourselves for continued growth in the future.

When we look at managing our business although its very difficult to manage pre-tax operating margin increases in difficult times like 2008 and 2009 we did that and I guess that’s the way we manage our business and I’d see that we would continue doing that going forward. I can’t give you a specific outlook for 2010 but we’re confident with our products, we’re confident with our ability to manage our business appropriately.

Catherine Arnold - Credit Suisse

I was wondering with a lot of your competitors talking about going down the path of bio-similars or bio-betters as some of them like to call it, if you would have a similar interest given your capabilities and expertise in that area and how you might see that changing the landscape of your participation in biologics in general.

Secondly, you mentioned that we should expect operating margin improvement in ’09 clearly that’s at the same time that you’re undergoing a significant amount of cash cow loss particularly in the pharmaceutical business and the med device business. Could you give us a little bit more color around that? As I look at your gross margin for instance in the quarter there may have been some currency noise and so forth but it’s surprisingly higher than we would have expected. SG&A you still are pretty robust and to me it seems like you have an opportunity to contract there?

Bill Weldon

We continue to assess whether its generics, bio-similar or anything else we’ll continue to assess it. We don’t see it as a real opportunity at the moment and part of that is because with bio-similars you’re probably going to still have to show because of the size of the molecule and everything else the way it forms, the way it shapes, the way it fits into the receptor there is going to have to be clinical trials so its going to require a significant investment.

Our belief is we need to keep focused on creating new opportunities in the marketplace, driving them forward through the products that we can. As far as getting into the bio-similar area we don’t see any opportunity for us at this point in time.

Dominic Caruso

With respect to improving operating margins in ’09, you’re right, the ’08 fourth quarter in particular cogs number had some one time items as did the fourth quarter ’07 as Louise pointed out those items in ’08 were essentially offset by some other items in other income. That level is not the level we would expect going into 2009. We’d expect gross margin to be under pressure in 2009 as compared to 2008.

Offsetting that we do have these various programs in place which Bill has talked about and I’ve talked about in the past which is our standardization efforts. We also have the general notion that our business leaders run the business in an appropriate way considering economic times. We would expect that both our SG&A and R&D costs as a percent of sales would be lower in ’09 versus ’08 which is in fact one of the major drivers of the pre-tax operating margin improvements.

Bill Weldon

Dominic has talked about the standardization initiatives and we’ve been investing in these over time and I think we’re starting to implement now we’re going to start to see the benefits of these through 2009 and beyond because it’s really been the investment phase we’ve been going through and we’ll continue to go through. I think we’re getting to the point we’re starting to execute and really implement some of these programs that are going to start to yield some of the benefits as we go forward.

Mike Weinstein - JP Morgan

Do you have the plan in place to achieve operating margin expansion in 2009 and the face of the fundamental pressures you’ll have? Is everything already in place to make that happen? The tax rate guidance for 2009 is that a function of decline in sales in pharmaceutical products manufactured out of Puerto Rico is that what’s driving that?

The company is in a great position financially ’09 is going to be a tough year but financially you’re in great position you manage the company for the long term. Should we be thinking about 2009 as we model impact of events in 2009 should we assume that J&J is likely to be an acquirer over the course of 2009 taking advantage of your financial strength when a lot of companies are going to be relatively weak.

Dominic Caruso

Yes, the plans are in place for 2009 operating performance that would improve pre-tax operating margins over 2008. As a reminder, we started on this path back in 2007 where we conducted the restructuring of the pharmaceutical business and the Cordis business. Again, 2009 was not a surprise for us, we knew about this for some time.

To put the plans in place now as Bill said we’re executing on a number of those plans we’re very happy we’re able to achieve the higher end of our cost improvement guidance that we provided earlier. We have of course the higher level of the PCH integration synergies happening in 2009 so those plans are in place, we feel comfortable with that.

The tax rate increase from year over year is primarily due to the fact with lower pharmaceutical sales revenues especially products like Risperdal and Topamax we lose some tax benefit there that we’ve enjoyed over the last couple years so that’s the primary driver of that change.

Bill Weldon

We’re always looking for the right opportunities and we think that the pressures in the economy right now are going to create very unique opportunities for us. We have our list of candidates that we think would be good opportunities and other ones are going to be popping up and coming to us as the year progresses. We are very focused on the unique opportunities that will be presented to us based on the market conditions that we see today.

David Roman – Morgan Stanley

One of the areas you highlighted on the slides where you’re not currently participating is disease management. Can you talk a little bit about the avenues you might use to enter that a little more whether its IT services or diagnostics? On the guidance there are clearly a lot of moving parts in 2009 there’s probably some contribution from new pharmaceutical products, some slowing you mentioned in elective procedures. Could you talk to us a little bit more about the drivers of the 200 to 400 basis point deceleration in operational top line growth outside of the obvious being Topamax and Risperdal.

On the buy back that probably will be completed shortly what’s in the assumption on share count for 2009?

Bill Weldon

Disease management is kind of a bad word to be using these days because a lot of the programs that have been run have not been successful. The way we’re trying to look at it is basically looking at a patient and saying how do we deal with that patient in taking the resources that J&J has and putting them against it. When we look at the management of the patient we’re talking about the area of diabetes for example and metabolic disease. Part of it goes to what we were talking about before this wellness and prevention.

If you look at obesity here in the United States or around the world its one of the biggest drivers of problems. If you extrapolate that out to the co-morbidities associated with obesity if we can get obesity under control and that may be through surgical intervention which could be bypass or realized gastric band, it could be through some of the behavior modification programs and diet and exercise. Those are the things that we’re thinking about in that area.

As far as diabetes specifically we have the onemous pump now, the glucose strips but we also have, if you look at Splenda, we look at surgical intervention, we look at the behavior modification programs so we’re actually looking at how do we approach the patient in a way that offers them the comprehensive treatment and bringing that out to further looking at bio-markers in earlier indicators through our ortho-clinical diagnostics programs, it will allow for a treatment of an individual and the management of an individual throughout the whole continuum of care as opposed to just trying to put a piece together here.

We think that it’s not really disease management its really patient management and the behavior that we can influence in effect through our products or resources.

Dominic Caruso

I think you were referring to the operational sales guidance excluding any impact on currency. As you know, both Risperdal and Topamax together impact our growth rate 4% to 5% year over year. In addition to that just a couple factors that we considered. One is that we’ve seen some impact in several franchises that are impacted by consumer behavior. For example, in our consumer business or in businesses where consumer discretionary spending is a major factor such as diabetes test strips or in vision care with contact lenses. We’ve seen some impact there that we’ve taken into consideration.

We’ve also seen some greater pricing pressure especially in countries outside the US as countries tend to look for ways to balance their budgets or improve their budgets by reducing the price or the cost of healthcare. Also in medical devices and diagnostics we mentioned before we’ve seen some impact already in elective procedures or procedures where there are some higher out of pocket expenditures.

Finally, in the pharmaceuticals business I think the way to best characterize it is until we see the FDA approvals come forward for some of the products that are waiting FDA approval we generally are fairly conservative in the way we model those new products. We think that’s a prudent way for us to manage the business going into the year.

Bill Weldon

Let me add two more comments to that that I think are really important. Dominic talked about the elective surgery and some of the disposable income that individuals may have, the consumer have. I think you also have to look at the pharmaceutical business where we are seeing a slowing down in the rate of growth. You go back earlier in the year where people are saying prescriptions were actually declining but we think that’s kind of reversed itself and there’s a 1% to 2% growth I think IMS is forecasting for the coming year. There’s a slowdown there.

The one element that we all have to, we kind of talk around it but it’s the whole economic environment. If you just take unemployment here in the United States I don’t know what the numbers are going to be but we know they’re going to get greater, we know there’s going to be an impact and we know that many of the people that will become unemployed are people that have insurance today. Those people are going to stop going to the doctor, they’re going to stop getting their prescriptions filled, and they’re going to stop having elective surgery.

There’s going to be downward pressure on all of these areas so I think the economic conditions that we’re dealing with today are going to create downward pressure in lots of areas in healthcare but in other areas also. I think we have to be realistic about the impact that that can have on the whole healthcare market here in the United States.

I think it’s also you can take it Venezuela or to Russia when you look at the price of oil. We have an economic decline around the world that is going to affect the total healthcare expenditures.

Dominic Caruso

On the buyback question we assume that we’ll complete the $2 billion left of the $10 billion share buyback in the early part of 2009 so our share count estimates reflect that and they do not reflect any assumption of any additional buyback in 2009.

Bob Hopkins - Banc of America-Merrill Lynch

On the consumer side I know you don’t give line item guidance but I’m just curious from a 50,000 foot perspective you expect that business to be a growth business in 2009. You talked a lot about policy in Washington DC and I think it’s a critically important topic. Specifically for 2009 what major changes do you anticipate happening if any? Beyond 2009 what emphasis on any major changes that you as CEO of J&J are anticipating beyond 2009 to the way healthcare policy is formed in this country?

Dominic Caruso

On the consumer business we don’t give guidance by sector but generally speaking we still look at our consumer business as a growth business. Just to reminder that in 2008 obviously we had the fantastic launch of Zyrtec in our ’08 results so that will be a tougher comparison for the consumer business in ’09.

Bill Weldon

When you look at policy in Washington we’ve used the term access and affordability for a long time. I think that the administration is talking about coverage and costs and they really mean the same thing. We do believe that we have to look at how do people gain more access at more affordable prices. There are lots of different ways to look at it and I think we’ll wait and see what the administration has to do here. We’ll work closely with them and try and support and work in ways that is going to allow patients to get better healthcare.

I think the critical thing right now though is addressing the economic situation that we have. I think that’s going to be first and foremost so when you look at 2009 there are lots of things that could be done to have short term impacts. You can look at negotiating the pricing; you can look at all of these things and can have some short term. They’ll be some changes and some affects in those areas. As you look out further I think we’re all going to have to get together and really look at how do we get better healthcare.

The one area that I think is a unique opportunity for J&J today and I keep going back to this is the whole area of dealing with, I was at a group in Washington where they asked a group of us to get together and look at some of the challenges whether it’s the economy, trade, energy or healthcare. The single largest issue that has to be dealt with is obesity.

When you start looking at prevention and wellness and dealing with obesity, if we don’t get childhood obesity under control, if we don’t start dealing with this they say today one out of three children born today will have diabetes. The healthcare costs of today will be nothing compared to what they’re going to be. I think there will be a real focus on this area of prevention and keeping people healthy rather than letting them get sick and treating them.

I think there will be a focus on that but I think the first and foremost the administration is going to have to address the economic conditions. I think that will have a positive impact but I do believe whether you want to call it coverage and costs, if you want to call it access and affordability. I think you have to also look at the whole area in health and prevention.

Rick Wise - Leerink Swann

You highlighted the customer inventory draw downs do you think there’s a lot further to go and maybe you could quantify the impact if you had on the fourth quarter?

Bill Weldon

Most of the, whether they be hospitals or major companies like Wal-Mart or others I think they’ve all been very tightly looking at their inventories as we’ve looked at ours. I think its just prudent today in the environment we’re in to try and get your inventories down and manage your capital. We’re doing that and everyone else is. I think that the draw down has taken place significantly but I think it’s hard to tell if there’s more to come and there may be ways of doing business that may change. I think there’s been a significant drawn down in many areas of inventories.

Dominic Caruso

I can’t quantify it for the fourth quarter. We do expect it to continue throughout 2009. The impact that we saw in the fourth quarter other than currency was really the impact of not shipping some Remicade at the end of the year due to our production scheduling and maintenance schedule which of course is not a significant impact, significant in the quarter but not a sign of anything other than the timing of that.

Rick Wise - Leerink Swann

Let me come with the strategic issue on the cash use a little differently. Clearly you have the cash, maybe your and the Board’s priorities is it continuing with share buyback, is it making acquisitions? Do you think Pharma growth will be positive in 2010? I’m not looking for a precise forecast?

Bill Weldon

Our Pharma or Pharma in general?

Rick Wise - Leerink Swann

Your Pharma business will it have positive year over year growth?

Bill Weldon

You know I’m not going to answer that question. The priorities for us have never changed. They’re simple. Our first priority is to make sure we have the money to pay our dividends. That’s 40% of what we have available. When you start to look at what we then want to do with the money it’s invest in the business. If we had an opportunity to make an acquisition or to do something that would be really positive for the business that would take precedence even over completing the share buyback.

Our intent is to ensure that we continue to look at opportunities that are going to bring strategic value to the business and growing. I was mentioning this earlier to a couple people; I think the opportunities this year are going to be extraordinary. I think it’s a matter of sitting on what we have, making sure we understand where our priorities are and what opportunities might be there. If they present themselves then we’ll be in a great position to move on them. Absolutely this economic environment creates opportunities that we may never see again so we need to be positioned to capitalize on them if they present themselves.

Matt Dodds - Citigroup

When you look at the R&D even though you spent less in Pharma this year you’re still spending more than the average. I’m wondering as you’ve moved through ’08 how are you thinking about the cost benefit of those dollars first in the US how much harder is it going to get a return. Does the worldwide potential offset that, how you’re viewing that?

On Sedasys you highlight that a lot is that a capital spend product and is the potential for that lower now given the environment?

Bill Weldon

As far as the R&D goes probably two or three years ago we actually increased our percent of sales up into 20% plus range, the industry is around 16%, 15%. We did that because we had what we really believe and still believe is such a rich pipeline. As products started to mature we made early investments six or seven years ago in early stage discovery and early products. They came to fruition and of course the cost of bringing a product to market is much greater. We’ve moved a lot of our clinical trials outside of the country so we’re getting a lot bigger bang for the buck today then we’ve ever gotten before.

We’re starting to see a leveling off now because we think we’re going to get to a steady state which will be pretty much the same as an industry norm in the ability to invest in the products and its not that we don’t have confidence in our pipeline going forward and don’t need the investment its that we’ve been able to really be more efficient in the way we manage our clinical trials and the way we manage our go to market.

Yes, we’ll see a leveling off of the expenses, we’ll see it more normalize against what the industry norms would be but the increase as we said for the last few years has really been because of the strength of the late stage development in our pipeline.

You talked about the returns in the US, our feeling and belief and we hope this strongly is that we will get a strong person in charge of the FDA. We do hope its science will progress and be able to make scientific decisions for approval of products. It puts more pressure on the industry to do better research and to make sure we’re doing really good research that’s going to pay us the scrutiny of this. We think that’s an advantage to us.

It’s an advantage to the industry to have a really strong regulatory body. Then we will reap the benefits of the products that we have coming. I think there’s going to be a lot more pressure on both pricing as well as the cost of brining the products to market. I think we’ll see more and more reviews and discussions about additional work that may be required.

The benefit of innovation and bringing better products to market will more than offset the incremental costs if there are any that we’re going to have to deal with both here in the US. As you mentioned the emerging markets in some of these areas are making significant investments in healthcare in their countries and we think that we’re able to not only bring the products we have but modifications and the innovation center we have in China to bring better products there. You’ll see a leveling off but we’ll continue to work in that area.

As far as Sedasys yes there is some capital equipment in that area but its not huge capital equipment cost and we have some unique ways of helping to move that to the consumer that will allow them to pay, we’re not going to be a bank but to buy these things over time or usage upon the product that will pay for itself in a short period of time. We’re looking at unique ways to help offset some of the costs for the consumer or the doctor.

Glenn Novarro – RBC

Another question on M&A and particularly on the Pharma side. It dovetails a little bit with your comment you just made. In the past you’ve talked about a challenging FDA and a challenging regulatory body. If you look over the last couple years your deals have been more outside the Pharma side on consumer and devices.

I’m wondering is the reason why we haven’t seen something on the Pharma side in recent years is it because the company has made a strategic decision to diversify away from Pharma or is it more because the price wasn’t right or the culture of the company that you may have been looking at didn’t fit. I’m curious why we haven’t seen more on the Pharma side on the M&A.

Bill Weldon

It’s a bit of all of the above. If you look at the balance we were becoming way out of balance in the Pharma area and the PCH acquisition really helped balance our portfolio in that way. The regulatory bodies in many parts of the world especially here in the US have been struggling. They’ve been struggling to make decisions to approve products and with some of the adverse events they had they became risk diverse. It was very hard and it continues to be difficult getting products approved.

The strategy that we have is if we have whether its in pharm, medical devices, diagnostics, consumer or any place else if it’s the right acquisition or the right license that will afford us the opportunity to advance the long term and create shareholder value we’re going to do it. We haven’t shied away from it we’ve just seen the prices have been very high.

You have to look at where the products in their life cycle and where is the pipeline and do you gain access to something that’s going to bring real value, vis-à-vis what you already have in your investments. If you buy something there’s going to be lots of biotech companies. Everyone talks about biotech companies are going to come up right?

The quest for the biotech company isn’t the important thing, it’s the cost of the investment to bring the product to market and is it going to bring value that’s going to be important. We have to look at the total investment and make sure that whether its pharmaceuticals, medical devices, diagnostics or consumer that we’re making the right investment that’s going to bring the benefit to our shareholders. We haven’t shied away from it we’ve just recognized that there were challenges that maybe made it more difficult.

Bruce Nudell - UBS

Structurally a decent chunk of your cash is ex-US does that create relative advantages for acquisition versus share buyback? I wanted to clarify with regard to Remicade the scale of the de-stocking and from what I thought I just heard it was more internal timing as to manufacture rather than credit issues or share issues in the marketplace.

Dominic Caruso

With respect to our capital structure and ex-US versus in US cash I would say generally speaking we’re comfortable with the level of cash we have and obviously we’re also very comfortable today given our strong financial position on our access to credit markets at reasonable rates. The cash location isn’t that much of a factor for us because of our ability to access capital when we need it at very reasonable rates.

The Remicade issue was in the several hundred million dollar range of sales that due to scheduling issues in the production plan due to maintenance in the plan was simply deferred due to the timing of completing those events and it had nothing to do with any credit issues or any other issues with respect to the product.

Bill Weldon

I’d like to first of all thank you all for coming today I know it’s a very important day for a lot of reasons but we do appreciate your interest and your support of J&J. I also want to say in parting that I was asked a question earlier and that is about the morale of the people at J&J because a lot of things are going on around the world.

I want to tell you that the people at J&J look at this year as an extraordinary opportunity and an opportunity that if we stay true to what we believe in, stay true to our plans and stay focused on our business that we can come out of 2009 in a much strong way than we’ve ever gone into it and we’ve gone into it in a very strong way. I want to let you all know that the people of J&J are very committed and that’s what makes me feel so optimistic about the year.

Thanks very much and we’ll see you later.

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Source: Johnson & Johnson Q4 2008 Earnings Call Transcript
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