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Executives

Louise Mehrotra - Vice President of Investor Relations

Dominic J. Caruso - Chief Financial Officer, Vice President Finance

Analysts

Mike Weinstein - J.P. Morgan

Bruce Nudell - UBS

Tao Levy - Deutsche Bank

Larry Biegelsen - Wells Fargo

Rick Wise - Leerink Swann

Matthew Dodds - Citigroup

David Lewis – Morgan Stanley

Matt Miksic - Piper Jaffray

Glenn Novarro - RBC Capital Markets

Sara Michelmore - Cowen

Bob Hopkins - Banc of America

Derek Sung - Sanford C. Bernstein

Johnson & Johnson (JNJ) Q2 2009 Earnings Call July 14, 2009 8:30 AM ET

Operator

Good morning and welcome to the Johnson & Johnson second quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the conference call over to Johnson & Johnson. You may begin.

Louise Mehrotra

Good morning and welcome. I’m Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson and it is my pleasure this morning to review our business results for the second quarter of 2009. Joining me on the call today is Dominic Caruso, Vice President of Finance and Chief Financial Officer.

A few logistics before we get into the details -- this review is being made available through a broader audience via a webcast accessible through the investor relations section of the Johnson & Johnson website.

I will begin by briefly reviewing highlights of the second quarter for the corporation and highlights for our three business segments. Following my remarks, Dominic will provide some additional commentary on the second quarter financial results, an update on the many positive developments in the quarter, and guidance for the full year of 2009. We will then open the call to your questions.

We expect the call to last approximately one hour.

Included with the press release that was sent to the investment community earlier this morning is a schedule showing sales for the major products and/or business franchises to facilitate updating your models. These are also available on the Johnson & Johnson website, as is the press release.

Before I get into the results, let me remind you that some of the statements made during this call may be considered forward-looking statements. The 10-K for the fiscal year 2008 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 in the press release or on the Johnson & Johnson website.

Now I would like to review our results for the second quarter of 2009. 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 second quarter of 2009, down 7.4% as compared to the second quarter of 2008. On an operational basis, sales were down 1.4% and currency had a negative impact of 6%.

In the U.S., sales declined 6.7%. Outside the U.S., our operational growth was 3.9% while the effect of currency exchange rates negatively impacted our reported results by 11.9 points. The Western Hemisphere excluding the U.S. grew 11.7% on an operational basis. The Asia-Pacific Africa region grew by 3.7% operationally while Europe grew 1.8% operationally.

If you’ll now turn to the consolidated statement of earnings, net earnings on a reported basis were $3.2 billion and earnings per share were $1.15. This compares to $3.3 billion and $1.17 in the same period in 2008.

Please direct your attention to the boxed section of the schedule where we have provided adjusted earnings information. As referenced in the footnote, the 2008 results have been adjusted to exclude the after-tax impact of the in-process research and development charge of $40 million.

There were no adjustments to the results for the second quarter of 2009. Net earnings on an adjusted basis were down 4.7% and adjusted earnings per share were down 2.5%.

I would now like to make some additional comments relative to the components leading to adjusted earnings before we move on to the segment highlights.

Cost of goods sold at 29.2% of sales was 30 basis points higher than the same period in 2008 due to unfavorable mix in our pharmaceutical business partially offset by cost containment initiatives across the businesses.

Selling, marketing, and administrative expenses at 31.5% of sales were down 200 basis points versus last year, driven by leverage across the businesses. Our investment in research and development as a percent to sales was 10.7%, 80 basis points less than the second quarter of 2008 due to a change in the mix of the businesses and reductions in spending levels.

Interest expense net of interest income of $85 million compares to $16 million in the second quarter of 2008. The increase in net expense was due primarily to lower interest rates on our cash balances.

Other expense net of other income was $6 million in the second quarter of 2009 compared to $135 million of net other income in the same period last year. Dominic will provide more commentary in his remarks.

Taxes were 24.7% in the second quarter of 2009 versus 23.7% in the second quarter of 2008, reflecting the change in the mix of the businesses.

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 second quarter of 2009 of $3.9 billion decreased 4.5% as compared to the same period last year. On an operational basis, sales increased 3.1% while the impact of currency was negative 7.6 points. U.S. sales were up 0.8% while international sales grew 4.7% on an operational basis.

For the second quarter of 2009, sales for the over-the-counter pharmaceuticals and nutritionals increased 0.3% on an operational basis compared to the same period in 2008 with similar results both in and outside the U.S. Intensified competitive pressures including private label have impacted the growth in this category.

Our skincare business achieved operational sales growth of 5.9% in the second quarter of 2009 with sales in the U.S. growing at 8.4% and sales outside the U.S. up 3.8% on an operational basis.

Growth was driven by AVEENO with the launch of the nourish plus hair care line in the U.S., NEUTROGENA, and by our [Debow] products acquired in the third quarter last year.

Baby care products were down 2.2% on an operational basis when compared to the second quarter of 2008. Sales in the U.S. were down 6.3% primarily due to lower sales for babycenter.com. Baby center has exited the online retail business and will focus on online content.

Sales outside the U.S. were down 1.2% operationally with growth in hair care and powder offset by softness in other categories, primarily lotions and creams.

Women’s health achieved operational sales growth of 4.8%. Sales in the U.S. were down 3.8% due to lower sales of napkins and family planning products. Sales outside the U.S. were up on an operational basis by 8.8% due to the acquisition of the Vania products.

Operational sales growth in the oral care franchise was 2.4%. In the U.S., sales were down 5.9% due to softness in the category. Sales outside the U.S. increased 9.5% operationally driven by strong growth for LISTERINE.

Sales in the women’s care other category were up 15.7% on an operational basis due to the recent acquisitions in wellness and prevention and the Vania acquisition.

That completes our review of the consumer segment and I’ll now review highlights for the pharmaceutical segment.

Worldwide net sales for the second quarter of $5.5 billion were down 13.3% versus the same period last year. On an operational basis, sales were down 8.5% with a currency impact of negative 4.8 points. Sales in the U.S. decreased 16.4% while sales outside the U.S. increased on an operational basis by 3.3%.

Our results continue to be impacted by generic competition on some of our products, namely RISPERDAL Oral, [RAZADINE], and TOPAMAX. The marketing exclusivity for RISPERDAL expired in the U.S. at the end of June 2008 and there are generic competitors for RISPERDAL in most markets. The marketing exclusivity for TOPAMAX expired at the end of March this year and multiple generics have entered the market while generic competitors for [RAZADINE] entered the U.S. market in the latter half of 2008.

The combined impact of these three products has reduced the second quarter worldwide pharmaceutical operational growth rate by approximately 17 points, with the U.S. impact estimated at over 25 points and the impact outside the U.S. estimated at 2.5 points.

Excluding the impact of generic competition on these products, worldwide operational sales growth was approximately 9%.

Now reviewing the major products -- sales of REMICADE, a biologic approved for the treatment of a number of immune mediated inflammatory diseases, were up 24.4% when compared to the second quarter of 2008. Sales growth in the U.S. was 12.7% due to strong market growth. Sales to our customers from markets outside the U.S. were up over 60%.

As we previously mentioned, the second quarter 2008 sales included a significant inventory reduction due to inventory planning on our customers’ part. Excluding the impact of inventory changes in both periods, sales outside the U.S. were estimated to have grown approximately 16%.

PROCRIT/EXPREX declined operationally by 6% during the quarter as compared to the same quarter last year, with PROCRIT down 4.6% and EXPREX down 7.6% operationally. A softening of the market has contributed to the lower sales results for EXPREX.

PROCRIT results have been impacted by a decline in the market versus the second quarter of 2008, estimated at 9%, partially offset by an increase in overall market share. PROCRIT aggregate share across all markets was approximately 49% in the second quarter of 2009, up five points versus the same period last year.

Sales of LEVAQUIN, our anti-infective, were up 4.1% on an operational basis when compared to the same period a year ago. The U.S. anti-infective market in terms of scripts is estimated to be flat in the quarter. LEVAQUIN dollar share was up in the quarter on both a sequential basis and versus second quarter 2008.

RISPERDAL CONSTA, our long-acting injectible formulation, achieved second quarter sales growth of 12.1% on an operational basis. U.S. sales growth was 9.2% while sales outside the U.S. were up 13.7% operationally, driven by increased share.

CONCERTA, a product for attention deficit hyperactivity disorder, grew 18.7% operationally in the second quarter as compared to the same period last year, with sales in the U.S. up 12% due in part to strong market growth. Sales outside the U.S. were up 38% operationally with strong growth seen across the major regions.

ACIPHEX, as it’s known in the U.S. market, and PARIET outside the U.S. is a proton pump inhibitor, or PPI, that we co-market with [ASI]. On an operational basis, sales were down 13.3% with U.S. sales down 16.3% and sales outside the U.S. down 10.6% operationally.

In the U.S., growth was impacted by the relative strength of the second quarter 2008. Dollar share in the second quarter was the same in both periods. Sales outside the U.S. ad been impacted by the market entry in Canada of generic Rabeprazole, the active ingredient in PARIET, and reimbursement pressure for the PPI category in Russia.

VELCADE, a treatment for multiple myeloma, is being co-developed with Millennium pharmaceuticals. We have commercialization rates in Europe and the rest of the world outside the U.S. Operational sales growth was strong at 26.2%, driven by the additional approval last year for first line therapy.

PREZISTA, a protease inhibitor for the treatment of HIV, grew operationally 71% with the U.S. growing 51.2% and sales outside the U.S. growing 90%.

Expanded labeling to include treatment of [naïve] patients contributed to the continued positive momentum in share.

INVEGA, our newest atypical anti-psychotic, grew operationally 36.6% with the U.S. growing 8.1%. Sales outside the U.S. grew over 160%, driven by steady progress in market share growth.

Wrapping up the review of the pharmaceutical segment, as an update on the status of the [REVEROXABAN] complete response, we met with the FDA in June to review our initial proposal to address their questions. Additional meetings with the FDA are planned this summer to agree on next steps to address the points raised on the complete response letter. The outcome of these discussions will be a key determinant in establishing the timeline for the submission of our complete response. Consequently, we do not expect to submit our response until the fourth quarter of this year at the earliest. We plan to provide an update on the progress during the third quarter analyst meeting in October.

In the quarter, the FDA also approved the supplemental new drug application for the use of RISPERDAL CONSTA as both a monotherapy and adjunctive therapy in the maintenance treatment of bipolar one disorder and in Japan, the marketing authorization for RISPERDAL CONSTA was granted.

I will now review the medical devices and diagnostic segment results. Worldwide medical devices and diagnostic segment sales of $5.9 billion grew 2.9% operationally as compared to the same period in 2008. Currency had a negative impact of six points, resulting in total sales decline of 3.1%.

Sales in the U.S. were up 1.9% while sales outside the U.S. increased on an operational basis by 3.7%. Results have been impacted by lower sales of drug eluting stents. Sales excluding the impact of lower sales of drug eluting stents grew nearly 6% operationally.

Now turning to the franchises, starting with Cordis -- Cordis sales were down 12.6% operationally with U.S. down 23.2% and sales outside the U.S. down 5.5% operationally. Cordis results were impacted by lower sales of Cypher, our Sirolimus-eluting stent, partially offset by the solid growth in our bio-sense Webster business. Cypher sales were approximately $235 million, down 38% on an operational basis versus the prior year. Sales in the U.S. of approximately $70 million were down 59%.

In comparison to the second quarter of 2008, the U.S. drug eluting stent market growth is estimated at 2%. Penetration rates are estimated at 74%, up from 66% a year ago. The estimated price for Cypher in the U.S. is down approximately 5% versus the second quarter of 2008.

Estimated share in the U.S. of 14% was down one point sequentially and down 23 points from the second quarter of 2008, due to the market entry of two new competitors in 2008.

Sales outside the U.S. of approximately $165 million declined 23% operationally. The estimated market share in the quarter of 27% was down two points on a sequential basis and down three points from the second quarter of 2008. Increased competition has impacted the share outside the U.S.

Cypher estimated worldwide share for the second quarter was 22%, down one point sequentially and down 11 points from the second quarter of 2008. Bio-sense Webster, our electro-physiology business, achieved 11% operational growth in the quarter due to the strong performance of both specialty diagnostic and therapeutic catheters.

The neuro-vascular business previously reported in our Cordis franchise, and the [Cognan] business that is part of our Depuy franchise, had been combined to form a global neuro-science business that is now reported in the Depuy franchise. A schedule of 2008 results by quarter reflecting this structure is available on our website and the 2009 comparisons reflect the new reporting in both periods.

Our Depuy franchise had operational growth of 6% when compared to the same period in 2008, with the U.S. growing 5.5% and the business outside the U.S. growing by 6.5% operationally. Pressure on pricing has increased as a result of the economic trends; however, positive mix has mitigated much of the impact.

Hip growth on a worldwide basis was approximately 5% operational, with the U.S. growth at approximately 6% and the growth outside the U.S. at 3% on an operational basis.

On an operational basis, worldwide knee growth was approximately 4%, with the U.S. up 5% and outside the U.S. up 2%.

Spine achieved strong operational growth of approximately 11% due to the successful launch of a number of products. Similar results were achieved both in the U.S. and outside the U.S.

Mitek, our sports medicine business, grew approximately 10% operationally with the U.S. growth at 11% and growth outside the U.S. at 9%.

The diabetes franchise was down 3.7% operationally in the second quarter of 2009, with the U.S. business down 9.5%. While the market in terms of volume stabilized in the second quarter, pressure on pricing continues. Outside the U.S., sales increased 2.2% operationally.

Animas, our insulin pump business, grew nearly 30% on an operational basis due to new product launches and continued development of the international market.

Ethicon worldwide sales grew operationally by 9.7% with the U.S. up 20.9% and sales outside the U.S. up 3.2% operationally. The acquisitions of Mentor and [Almrichs] partially offset by the divestiture of the professional wound care business, added approximately 5.5 points to the worldwide operational growth.

Sales in the U.S. for our newly acquired aesthetics products for Mentor were in line with 2008.

On a worldwide basis, double-digit growth was achieved in bio-surgical, meshes, and women’s health.

Ethicon endo-surgery achieved operational growth of 6.3% in the second quarter of 2009, with the U.S. sales growing 1% and sales outside the U.S. growing on an operational basis by 10.7%.

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. Additionally in the U.S., strong growth for the realized gastric band and the newly acquired [N-Seal] products contributed to the results. This was partially offset by lower sales in the U.S. for advanced sterilization products, or ASP, which had been impacted by tighter capital budgets in the hospitals.

Outside the U.S., in addition to the harmonic technology mentioned earlier, strong contributors to growth were endoscopy products and ASP products.

Ortho-clinical diagnostics achieved operational growth of 9.2% in the second quarter. Sales growth in the U.S. was 13.6% while sales outside the U.S. were up 4.2% on an operational basis. The launch of the [Bitro] 5600 and 3600 made strong contributions to the worldwide results this quarter. Also contributing to the growth in the U.S. were the strong results for donor screening.

Rounding out the review for the medical devices and diagnostics segment, our vision care franchise achieved operational sales growth of 1.9% in the second quarter compared with the same period last year. Sales in the U.S. increased 1.8%; sales outside the U.S. increased 2% on an operational basis. The lens market overall is estimated to be flat to down slightly compared to the same period last year.

Estimated worldwide market share was in line with the same period last year and up two points on a sequential basis. Despite the softness in the markets, Acuvue Oasys, one-day Acuvue Moist , and the Acuvue Oasys for stigmatism achieved strong double-digit growth.

That completes highlights for the medical devices and diagnostic segment and concludes the segment highlights for Johnson & Johnson second quarter of 2009. I will now turn the call over to Dominic Caruso. Dominic.

Dominic J. Caruso

Thank you, Louise and good morning, everyone. As you know, this was one of the most challenging quarters for year-over-year comparisons in our history but this was expected and accounted for in our plans. We saw significant impact to our second quarter results from the loss of U.S. market exclusivity for RISPERDAL and TOPOMAX, as expected. We are very pleased with our solid operational results this quarter, which were better than expected and reflect the actions we’ve taken to mitigate the economic and near-term pressures on our business.

As I have said many times before, the people of Johnson & Johnson always manage the business very well and always rise to any challenge, and this quarter was certainly no exception as the efforts of our talented and dedicated people are reflected in our results, exceeding even our own expectations.

We continue to implement plans to deal with the business and macroeconomic pressures of 2009 and we are making prudent investments that will grow our business for the long-term.

In my remarks today, I would like to walk you through some additional points about the quarterly results, discuss some of the recent positive developments and investments we have made in the business, and provide a few updates to our guidance for full-year 2009.

When we met with you in January, we outlined several factors that would influence our 2009 business performance and those continue playing out much as we expected. As we have indicated before, the economic environment continues to create tighter consumer spending and increased constraints on some healthcare spending. This has been reflected in lower sales again this quarter for some of our consumer products where we saw slower growth in certain markets, some increased private label competition, and some lower levels of retail inventories.

Despite those trends, we continue to see solid performances in our skincare products and Listerine outside the U.S. The scientific innovations that differentiate our products and the longstanding consumer trust in our brands continue to serve our business well.

As we expected, we also continued to feel the effects of tighter customer spending in the more consumer facing parts of our medical device businesses, which typically require out-of-pocket expenditures, such as compact lenses and diabetes test strips.

However, our medical device business saw strong growth in orthopedics and surgery and excluding the impact of additional competitors in the drug eluting stent market, the MD&D segment grew nearly 6% operationally for the quarter.

As Louise pointed out, our pharmaceutical business saw the continued impact of generic competition and excluding that impact, the business grew approximately 9% operationally for the quarter.

Overall, excluding the impact of generics and the launch of new drug eluting stent competitors, the underlying business is growing at approximately 6% operationally despite the general economic slow-down. And normalized for the net impact of acquisitions and divestitures, we saw a slight up-tick in the underlying growth of the business as compared to the first quarter of 2009.

Meanwhile, our earnings performance in the quarter demonstrated once again our financial discipline and the ability of our business leaders to continue managing costs and improving margins. Our second quarter results reflect an improvement in our pretax operating margin, which we expected for the year when we provided our annual guidance in January.

Finally, I would like to mention the impact of a recently announced legal settlement with [Matronic]. We received a $270 million payment from [Matronic] during the quarter to settle a royalty dispute over certain patents. This payment is accounted for in other income and expense but it was largely offset by several other litigation matters which were individually smaller in amounts, as well as asset write-downs and other charges in the quarter which are also reflected in this line. So on net basis, the impact of other income in the quarter was not significant.

This quarter, we continued to experience significant impacts from fluctuating currency exchange rates, which can cause significant volatility in our reported results. The impact of currency translation on sales was approximately negative 6% and the impact on earnings per share was approximately negative by $0.06 per share based on an actual average Euro rate of $1.34 for the second quarter.

Therefore, our second quarter 2009 EPS of $1.15 reflects approximately $0.03 of operational EPS growth, offset by the approximately $0.06 of the negative currency translation impact versus the second quarter of 2008.

Now I’d like to turn to a few of the highlights in the quarter that illustrate the progress we are making in advancing our pipelines and where we are headed with some of the long-term investments in the business.

On June 4th, our pharmaceutical leadership team spoke with you about the strategy, pipeline, and future milestones of that business. Based on our recent launches, approvals, and filings, as well as the early stage compounds we discussed that day, you saw that we have one of the most robust pharmaceutical pipelines in our history and one of the most competitive in the industry.

This confidence stems from the fact that we have seven compounds with filings pending in the U.S. and Europe, we expect another three filings between now and 2010, and potentially another eight from 2011 to 2013.

Since June 4th, we have launched Nucynta, a new prescription pain medication in the U.S., and Simponi, a once monthly subcutaneous treatment for rheumatoid arthritis, psoriatic arthritis and ankylosing spondylitis, received a positive opinion from the CHNP in Europe.

In addition to our organic pipeline, we have continued to look for opportunities to add capabilities through acquisitions and partnerships. For example, in July, we announced an agreement with the Elan Corporation to acquire substantially all of the assets and rights to the all-timers immunotherapy program through a newly formed Johnson & Johnson subsidiary. We are excited about the potential new products emanating from this transaction, particularly bapineuzumab, which has the potential to slow the progression of Alzheimer’s Disease, a key therapeutic area of focus for our research efforts.

Traditionally, with our 18.4% equity investment in Elan, we will benefit on a pro-rata basis with other shareholders of Elan from the potential new compounds emerging from the world class neuro-science research team in the treatment or prevention of neuro-degenerative conditions.

Just last week we completed our acquisition of Cougar Biotechnology, which gives us a promising late stage compound for the treatment of prostate cancer and strengthens our position in the global oncology market, another key therapeutic area for our pharmaceutical business.

We had several other positive developments across the business this quarter, but let me just mention a few for the sake of time. We released important data on the Nevo Sirolimus-eluting coronary stent in May. Nevo’s unique reservoir, or res technology, reduces contact between the stents polymer and the vessel wall by 75%, and the polymer is fully biodegradable, leaving behind what is in essence a bare metal stent after approximately three months.

Based on this accumulating positive data and the unmatched body of clinical evidence on Sirolimus, we believe that Nevo will offer a unique combination of safety, efficacy, and deliverability that is going to be tough to beat.

In the surgical space this quarter, an FDA advisory panel recommended approval of our Sedasys system, the first computerized personalized sedation system which integrates drug delivery and patient monitoring. This recommendation covers minimal to moderate [propypol] sedation during screening and diagnostic procedures for colorectal cancer and the upper gastrointestinal tract.

We also received FDA approval of our investigation device exemption application to conduct the first study of devices designed for us in natural orifice transluminal endoscopic surgery, or NOTES, which eliminates the need for external incisions in surgery. Ethicon endosurgery is the first company to receive an IDE for NOTES procedures.

So we continue to invest broadly across our base of businesses and feel positive about the progress we are making with these innovations and other potentially new products.

Now I’d like to provide some guidance for you to consider as you refine your models for 2009. Let’s start with a discussion of cash and interest income and expense.

At the end of the second quarter, we had approximately $1.1 billion of net cash. This consists of approximately $14.7 billion in cash and investments, and $13.6 billion of debt. During the quarter, we used approximately $300 million to repurchase shares of our stock in connection with our $10 billion share repurchase program, which began in 2007. To date, we have purchased approximately $8.9 billion of our stock. We have slowed the pace of our share repurchase through the deployment of cash for the acquisition of Cougar and the agreement with Elan.

As we state when we initiated the share repurchase program, we would always remain flexible should opportunities arise to deploy our cash to build the business. We still expect to complete the remaining $1.1 billion under this repurchase program but at a slower pace than we previously anticipated.

Our financial position remains strong. We generated strong cash flows and maintain a triple A credit rating, allowing us to continue to have good access to the credit markets for our financing needs at reasonable rates.

As always, we will examine the best uses of our financial strength to invest in the long-term growth of our business and to return value to our shareholders.

For purposes of your models, assuming no major additional acquisitions and a slower pace of completion of the share repurchase program, I suggest you consider modeling net interest expense of between $200 million and $300 million, consistent with our previous guidance.

Now 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 arriving 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-time gains or losses, I would recommend that you consider modeling other income and expense for 2009 as a net gain ranging from approximately $200 million to $300 million, consistent with our previous guidance.

And now a word on taxes -- through the end of the second quarter of 2009, the company’s effective tax rate was 24.6%. We suggest that you model our effective tax rate for 2009 in the range of 24% to 25%, consistent with our previous guidance. 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, it remains very difficult to predict movements in currency exchange rates and their impact on sales and earnings, especially given the ongoing economic volatility and the resulting monetary policy changes that governments around the world are employing to address the situation.

As we told you in January, our guidance for 2009 will continue to be based first on a constant currency basis, reflecting our results from operations, assuming that average currency rates for 2009 would 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 operational performance of the business.

We will also continue to provide an estimate of our reported sales and EPS results for the year, with the impact the currency exchange rates could have using the Euro as an example.

So turning to sales and taking into consideration the loss of U.S. market exclusivity of both RISPERDAL Oral and TOPOMAX, which have about a 4% to 5% impact on our overall sales growth rate, we would be comfortable with your models reflecting an operational sales change on a constant currency basis of between negative 1% and positive 1%, consistent with our previous guidance. This would result in sales for 2009 from operations on a constant currency basis of between $63 billion and $64 billion. While we are not predicting the impact of currency movements, to give you an idea of the potential impact, if average currency exchange rates for the remainder of 2009 were to remain where they were as of last week, using the Euro as an example, this would imply an average rate for the Euro of $1.36 for the year, which means our sales growth rate would be negatively impacted by approximately 4%, or approximately $2.5 billion.

Thus, under this scenario, we would expect reported sales to decline to a range of between negative 3% and negative 5% for a total expected level of reported sales between $61 billion and $62 billion, slightly above our previous guidance range but due solely to the impact of currency movements.

And now turning to earnings -- when I last checked, the recent first call mean estimate for our EPS for full year 2009 was $4.51 per share. As a reminder, the recently completed acquisition of Cougar Biotechnology will have a $0.02 to $0.03 dilutive impact on 2009 earnings per share, and assuming the closing of the pending transaction with Elan, we would expect an additional estimated dilutive impact of $0.02 to $0.03 on 2009 earnings per share. This transaction could also close in the third quarter of 2009.

Due to the overall strength of our operating results, and taking into account the dilutive impact of these transactions, which aggregate to $0.04 to $0.06 per share in the second half of this year, we are maintaining our full-year operational EPS guidance excluding special items. Therefore, 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 the same average exchange rates for 2009 as we saw in 2008. This represents an operational growth rate of 1% to 3%, consistent with our previous guidance.

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 the remainder of 2009 were to remain where they were as of last week, with the average Euro for the year at a rate of $1.36, then our EPS growth rate would be negatively impacted by approximately 3% or approximately $0.15 per share. Although currency rates have fluctuated, this is the same estimated impact we provided back in January. Therefore, we would be comfortable with your models reflecting full-year reported EPS excluding special items around the mid-point between $4.45 and $4.55 per share, consistent with our previous guidance.

As you update your models, please consider that TOPOMAX in the third quarter of 2008 was stronger than in the second quarter of 2008. Therefore, generic erosion of TOPOMAX will continue to significantly impact our third quarter 2009 results as well.

Finally, as a reminder when updating your models, please consider the dilutive impact of the two transactions I mentioned previously of $0.04 to $0.06 per share, since the Cougar transaction closed last week and the Elan transaction could also close in the third quarter, a portion of that impact could reasonably be reflected in our third quarter results.

Now, Louise, back to you.

Louise Mehrotra

Thank you, Dominic. Elizabeth, could you please provide the instructions for the Q&A session?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mike Weinstein with J.P. Morgan.

Mike Weinstein - J.P. Morgan

Thank you. Good morning. Can you hear me okay? A couple of items, if you wouldn’t mind -- first, the commentary on the [inaudible] timing, if you could provide any additional insights into your conversations with the FDA. Do you have visibility at this point as to what the FDA would like to see prior to a resubmission? Is it just the complete outlook data that you presented at the panel or is there additional data that they would like to see from the subsequent trials?

And then if you could comment as well, to the degree with which you can, on the dispute with sharing relative to anti-TNF rights and just help us a little bit with the process from here with regard to that dispute. Thanks.

Dominic J. Caruso

Sure, and Louise, you can help me with the [Zorelto] timing. Louise mentioned the timing would be not before the -- later in the year, fourth quarter, as we are going to continue to meet with the FDA through the summer months. I would characterize the request this way -- no new additional clinical data was requested. The FDA did request to see the data from the ongoing clinical trials of [Zorelto] in other indications and of course this involves the involvement of the committees that reviewed those ongoing clinical trials, so that’s one aspect of the request. And the other aspect of the request relates to additional information on some of the study sights in the trial.

With respect to sharing [trial] disputes, we’re not going to comment on that matter, Mike. I could give you the current status, however, is that we, as you know, we filed to comment the arbitration proceedings, so we are awaiting that commencement.

Mike Weinstein - J.P. Morgan

Okay, let me ask you just one follow-up and then I’ll let some others jump in -- Dominic, there was a commentary in the prepared remarks about the orthopedic business and pressure on pricing has increased. That’s being offset at this point by mix. Could you just add a bit more to what the business is seeing out there relative to pricing?

Dominic J. Caruso

Sure. Well, just as an overall comment, you know, the overall market for orthopedics was growing in the prior years at roughly 8% or 9% and now our estimate and many of the published estimates indicate about 4% to 5% in terms of overall market growth. We’re seeing hospitals basically putting some pressure on the price for the products that they are willing to buy from us and that of course has been offset by some newer products that we have launched, which is the mix comment that Louise made earlier. So I would say a little bit softer in terms of the ability to gain price in the current -- with the current market conditions.

Mike Weinstein - J.P. Morgan

Okay, thanks.

Louise Mehrotra

Thank you. Next question, please.

Operator

Your next question comes from Bruce Nudell with UBS.

Louise Mehrotra

Good morning, Bruce. Bruce?

Operator

Your line is open.

Bruce Nudell - UBS

Sorry. To follow-up on Mike’s question, it looks like the market is in your business around 4% to 5%. Is that principally volume? Is that a -- can I just confirm that?

Dominic J. Caruso

We haven’t seen much price at all in the orthopedics market.

Bruce Nudell - UBS

So basically is the 4% to 5% that you are seeing principally volume?

Louise Mehrotra

Okay, so in the second quarter, on a worldwide basis, the price for the Depuy, not with mix in there, just price was down about half-a-point, and in the U.S. it was down about 1.5 points.

Bruce Nudell - UBS

Okay. All right. Thank you, and then I had a question about the Elan transaction. Clearly it’s going to be a huge therapeutic category but bapineuzumab also had kind of a mixed trial result. Could you comment on the extent to which the investment really reflects full belief in bapineuzumab as opposed to gaining a seat or a footprint in what’s going to be an exciting therapeutic category?

Dominic J. Caruso

Right. Well, obviously when we did the investment, which is two-fold, is we considered not only the Alzheimer’s immuno-therapy program but also an investment in Elan Corporation, a very talented group of researchers in neuro-degenerative diseases, so there are two aspects of the transaction I just wanted to remind you about.

In terms of the Alzheimer’s immuno-therapy program, you are referring to the Phase II trials which showed some mixed results. We of course did significant due diligence prior to entering the transaction with Elan. We saw some of the very positive results in the sub-group analysis, which I think some of you are aware of, especially with the non-carriers of the APO for Gene, which those results were remarkable. And of course the Alzheimer’s immuno-therapy program includes not only bapineuzumab but also includes back-up compounds, that particular compound, and also a vaccine for Alzheimer’s, which is in early development. So hopefully that summarizes the level of interest that we had in the overall arrangement with Elan, Bruce.

Bruce Nudell - UBS

Spoken like a biotech guy. Thanks, Dominic.

Louise Mehrotra

Thank you. Next question, please.

Operator

Your next question comes from the line of Tao Levy with Deutsche Bank.

Tao Levy - Deutsche Bank

Thanks. Good morning. I was wondering if maybe you could comment just briefly on your expectations for Tylenol through the course of the year, maybe next year. Obviously there’s been a lot of media attention. Do you expect pressure on that business? I didn’t hear you call it out in the prepared remarks.

Dominic J. Caruso

Sure, thanks. Well, a couple of things -- I am sure you all followed the FDA advisory panel proceedings. Just a couple of comments on that -- one, we’ve been very clear that we strongly disagree with the committee’s recommendation. We have made a number of recommendations to the FDA for their consideration. Of course, the FDA will have to consider these recommendations along with the committees finding the recommendations and then proceed in a drafting process and a finalization process that will likely be ongoing discussions with the FDA. I can’t give you any timing per se but this will -- I think will take some time to sort out.

And we basically look forward to working with the FDA as they consider both the recommendations of the panel as well as our recommendations to make sure the products are safe and effective as prescribed and taken as directed, which we feel pretty strongly about.

Tao Levy - Deutsche Bank

And in terms of your guidance overall, that incorporates things just staying status quo?

Dominic J. Caruso

Yeah, our overall guidance -- you know, we won’t comment on any particular product but we take everything into consideration in providing the guidance. But I think it will take some time to work through these issues with the FDA.

Tao Levy - Deutsche Bank

And then just the last thing, on the other line, do you suggest, you know, the back half, is it easily split Q3, Q4? Are there any specific events that might happen in Q3 versus Q4 in terms of modeling purposes for the other line?

Dominic J. Caruso

Yeah, I can’t -- well, Tao, we don’t really want to give particular quarterly guidance. I think the 200 to 300 overall number for the year, if you’re talking about other income and expense --

Tao Levy - Deutsche Bank

Yeah, exactly.

Dominic J. Caruso

-- is a good number. You know, I can’t think of anything that’s going to be material that will pop out in either one of those quarters.

Tao Levy - Deutsche Bank

Okay, thanks.

Louise Mehrotra

Thank you. Next question, please.

Operator

Your next question comes from the line of Larry Biegelsen with Wells Fargo.

Larry Biegelsen - Wells Fargo

Good morning. Thanks for taking my question. First, Dominic, can you please confirm that the operational EPS guidance that is still $4.60 to $4.70, that includes the two deals, the Elan and the Cougar deal? So you are essentially absorbing the dilution from that?

Dominic J. Caruso

That’s correct, Larry. The $4.60 to $4.70, which is the same guidance we provided before, now includes the dilutive impact of $0.04 to $0.06 on the two deals.

Larry Biegelsen - Wells Fargo

And second, we’ve seen two industries already strike specific deals with the government to reduce healthcare costs. I think pharmaceuticals and hospitals. And there’s report that the insurance industry is next. But devices are not reimbursed directly by payers, so what -- how should investors view this? Do you think device manufacturers -- do you think they are immune from these deals or do you think at some point there will have to be some kind of compromise with the government? Thanks.

Dominic J. Caruso

Yeah, it’s a great question, Larry. One of the things to keep in mind is that we are going to work closely with [AvaMed], which is the industry association that represents the medical device manufacturers. It would be fair to assume that the medical device businesses in the U.S. would probably feel some impact from the current deal, you know, that’s been struck and I’m going to call it a deal with quotes -- with the current deal that’s been struck with the Hospital associations, right? So you’ll remember that I think last week some time, there was an announcement of about $155 billion deal over 10 years. With the hospital association, we would expect that the medical device manufacturers would be contributing to that, obviously indirectly through pressure that the hospitals may face.

Larry Biegelsen - Wells Fargo

Thank you.

Louise Mehrotra

Thank you. Next question, please.

Operator

Your next question comes from Rick Wise with Leerink Swann.

Rick Wise - Leerink Swann

Let me turn to REMICADE -- in the first quarter there was a lot of concern based on some of the reported numbers that higher priced biologics like REMICADE were being hurt by the economy but you were up in the U.S. now $75 million sequentially. What’s the read-through here? Market growth rebounding, you guys doing better? Less push-back? And maybe as well you can update us on the launch of Simponi and how that's going.

Dominic J. Caruso

Just a couple of comments from my end and then I’ll ask Louise to comment. You know, we did see market growth that Louise mentioned in the quarter and I think our overall growth rate was consistent with the market growth in the U.S.

Secondly, just as a reminder, REMICADE is an infusion therapy compared to the other products on the market, which are sub-queue, including our own SIMPONI but that’s obviously not on the market yet.

And I would say that we haven’t seen as much push-back as was touted in the industry just a couple of months ago with REMICADE, so we’ll leave it at that and maybe Louise, you can comment on SIMPONI’s early results.

Louise Mehrotra

We’re excited about the access that SIMPONI has received in the U.S. and it’s very, very early on but at this point, good signs.

Rick Wise - Leerink Swann

Okay. Just a couple of follow-ups -- just one more on Depuy; I just want to make sure I understood what you all were saying. Clearly it’s more price but your U.S. numbers were sequentially lower by just a couple million. Are you seeing stable slowing procedure growth? Just any perspective and any look ahead to the second half? Are you concerned that we see further slowing on the procedure side?

Louise Mehrotra

So in terms of the market, Rick, we’re the first one out so I can just give you first quarter market data that we have but in the U.S., we believe the hips market was up about 6%; on a worldwide basis in constant currency up about 4%. And the knee market we think is up both U.S. and worldwide on about a 4% basis. That’s slightly lower than last year but it’s still growing nicely.

Rick Wise - Leerink Swann

Okay. And just last quick one, Ethicon endo was up 1%. Ethicon looks much stronger and I realize again this [inaudible] and everything but again, are you seeing procedures slow? Is this market share loss? Just any perspective would be welcome. Thank you.

Dominic J. Caruso

Sure. Yeah, I think in -- we’ve continued to see the elective procedures in surgery continue to slow versus prior years but that was a continuation that we saw early in the year and I would say another, a little bit newer phenomenon that we saw was more pressure from hospital and capital purchases and within our ethicon endo business is our advanced sterilization products business, which has a portion of their business which is capital purchases. So we did see some slower capital purchases by hospitals in the quarter.

Rick Wise - Leerink Swann

Okay. Thanks so much, Dominic.

Louise Mehrotra

Next question, please.

Operator

Your next question comes from Matthew Dodds with Citigroup.

Matthew Dodds - Citigroup

Good morning, a couple of questions -- first, Dominic, on the Western Hemisphere, which jumped in the second quarter, is that where the REMICADE comparisons are really easy or is there something else going on there?

Dominic J. Caruso

So in the Western Hemisphere excluding the U.S., basically the markets are Brazil and Venezuela are the biggest markets there, and I wouldn’t say that that had anything to do with REMICADE.

Matthew Dodds - Citigroup

So the O-U.S. REMICADE, it wasn’t in Canada or one of the --

Dominic J. Caruso

No, Louise has that data. Just a minute, Michael.

Louise Mehrotra

Yeah, so just a reminder on the O-U.S. REMICADE, so last year at this time, we talked about the inventory management on our customers part, so [Sharing Plow’s] part, and this year we’re having favorable inventory comparisons. So if you take out the two inventory builds in both periods for REMICADE O-U.S., as I said in my remarks, it’s up about 16%.

Matthew Dodds - Citigroup

Okay, so there’s nothing large or one-time that caused that jump in the Western Hemisphere, just that market accelerated?

Dominic J. Caruso

Yeah, I think that’s right. I think once you take out the inventory builds, you still had about -- what Louise said, about 16% growth in the business.

Matthew Dodds - Citigroup

Dom, I was talking the broader, the whole Western Hemisphere market, not just REMICADE.

Dominic J. Caruso

Yeah, I don’t think there’s anything significant in there. We have a broad base of businesses across the Western Hemisphere, so I wouldn’t single out anything in particular, Matt.

Matthew Dodds - Citigroup

Okay, and then on Tylenol, can you at least give us some breakdown of how large the business is now in OTC, in either worldwide or in the U.S., just to know what kind of size we’re talking about?

Dominic J. Caruso

So Tylenol in the U.S. is about $1 billion product.

Louise Mehrotra

For the adult.

Dominic J. Caruso

For the adult Tylenol, it’s about a $1 billion product. And so that excludes the pediatric business. And of that $1 billion product, about 50% or so is this extra strength version, the 500 milligram adult Tylenol. So hopefully that sizes up the business for you.

Matthew Dodds - Citigroup

It does. All right, thank you, Dominic. Thanks, Louise.

Louise Mehrotra

Thank you. Next question, please.

Operator

Your next question comes from David Lewis with Morgan Stanley.

David Lewis - Morgan Stanley

Good morning. Dominic, just one quick question on margins -- it seemed like in this quarter it was pretty encouraging. You saw gross margin benefit, you saw it falling down to the EBIT line, so I wonder, given the expected top line acceleration of your business specifically pharmaceuticals given the pipeline, and the previous cost controls you’ve talked about, how should we be thinking about leverage going forward in the business? Historically it’s been a pretty predictable ratio. I wonder if we think that ratio should be better, worse, or the same than we’ve seen historically?

Dominic J. Caruso

Great question, David. So over long periods of time, we’ve grown our earnings faster than sales, which of course is a reflection of margin expansion. This quarter, just to correct you a little bit before I make my comment, this quarter we did see gross margin deterioration a bit, right, because losing products such as RISPERDOL and TOPOMAX to generic competition has a significant impact. I think our business has done a great job of offsetting some of that but you still saw some gross margin deterioration in this quarter.

We had great progress, as you saw, in SG&A costs and R&D, as we said many times, will trend lower to the level of comparable to industry norms because we were a bit higher than that.

So it’s hard to predict. I can’t give you the exact number but I’d say that we would still grow earnings faster than sales but given some gross margin pressure in the business until the new products start ramping up, maybe not at the rate that you saw over like a 10 or a 20-year period.

David Lewis - Morgan Stanley

Okay, so if historically you were growing outside, I was referring to gross margin versus our number, which is what I’m more focused on, of course, but in terms of the ratio, I think, Dom, I guess really kind of 1.4, 1.5 type of ratio? So you would grow the bottom line 1.5 times faster than the top? Is that the kind of ratio you should be thinking about?

Dominic J. Caruso

Well, I think, David, that has to do with two things. Number one, if the markets we compete in on the top line are growing faster, than obviously we should be able to grow faster than those markets and then our earnings would grow faster than that, so it all depends on what your prediction is for the rate of growth in the markets. So to the extent that the market growth would be slower then it’s been historically, I would say that our overall ratio would be lower than historic norms.

David Lewis - Morgan Stanley

Okay, and then one other question here, related to Bruce’s question on [inaudible] but just taking a broader sense, looking at your pipeline, you’re at the cusp of significant re-acceleration in your organic pharmaceutical pipeline and at the cusp of that, you’re still taking risks with Elan and with Cougar, so is this sort of a shift in JNJ's philosophy or are you seeing more opportunities? Are you trying to say something inherently about your organic pipeline? Or are you saying something more about just the returns you are getting on your cash?

Dominic J. Caruso

I don’t think there’s anything new in what we’ve done. I think historically we’ve had a good mix of organic R&D investment supplemented by partnerships. As you know, the current robust pipeline that we have is probably equally composed of partnered products and organically developed products. And then finally supplementing all of that with selective acquisitions in areas that we think we can gain access to exciting either compounds or technologies.

So I wouldn’t read much into this in terms of a major shift. It’s always been a mix of organic licensing and partnerships and then selective acquisitions along the way.

David Lewis - Morgan Stanley

Great. Well, thank you very much.

Louise Mehrotra

Thank you. Next question, please.

Operator

Your next question comes from Matt Miksic with Piper Jaffray.

Matt Miksic - Piper Jaffray

Good morning. Thanks for taking the question. I have one clarification, if I could, on something you said earlier, Dominic, and then I just had two quick questions here. So one was on this question of healthcare reform and so the agreement that was struck with pharma, the one that was struck here with hospitals, it sounds like you would expect from what we know today, and it seems like you have pretty good exposure to the discussion, that pricing objectives throughout this reform process would be achieved indirectly kind of through the agreement that was struck with the hospitals. Is that -- I’m speaking of pricing objectives with respect to devices. Is that fair?

Dominic J. Caruso

My comment referred to the fact that although no specific arrangement was reached with the medical device industry, that the hospital arrangement, it would be safe to assume that some contribution from the medical device industry would be required in order to make those numbers from the hospital industry come to life. So I think it’s just reasonable to assume that any pressure that the hospitals feel going forward would be reflected indirectly in the medical device industry.

Matt Miksic - Piper Jaffray

Okay, thanks and then just two quick ones here, one on price -- in orthopedics, you talked, Louise, about this 1.5% negative price approximately in the U.S. Just based on what you are seeing from hospitals and the current reform environment in mind and what we just discussed, can you help us understand how you see pricing playing out going forward? In other words, should we dial in something like this for the level of pressure absent of mix, or is this something where this could get potentially worse? Is there some rational for why this is an adjustment during this period that converge back to something slightly negative? Anything -- any color there you could provide would be helpful.

Louise Mehrotra

Okay, so we’re not going to get into predicting price going forward for the Depuy or the orthopedics industry, but within the quarter there’s nothing, there’s no anomalies within the quarter so this type of pricing could play out for the year. And then price net of mix we’re expecting to be in the very modest potentially negative area for the remainder of the year.

Matt Miksic - Piper Jaffray

And Louise, to push on that just a bit, I mean, if you compare orthopedics to -- I mean, there’s other businesses where you live with something like a minus 3% or minus 5% price per annum going forward and almost in perpetuity, it’s just a way of doing business. Is there anything about orthopedics that you could speak to that would make it different or the same than some of these other markets?

Louise Mehrotra

I think we are seeing just more pressure from the hospitals in terms of pricing and if you looked at historically, the last few years in the orthopedics industry, it was modestly positive price and now it would be modestly negative price.

Matt Miksic - Piper Jaffray

Fair enough -- and then one last on just the -- on the M&A front. Dominic, in light of some of the investments that you’ve made, you know, a couple of device transactions, you know, visible transactions and a couple on the pharma side, could you, as you look at the general field of opportunities across consumer pharma devices, do you see the risk profile or [richest] of targets sort of rising or falling in any of those areas, given the stage we’re in with respect to the consumer downturn at this point or the reform environment? You know, anything that’s making one or another of these areas potentially more or less attractive, just from the standpoint of risk?

Dominic J. Caruso

Yeah, Matt, great question -- I would say that given the uncertainty over the whole healthcare reform impact in the U.S. as well as outside the U.S. in terms of pressure on healthcare spending, and given the fact that the depth and length of the recession is still uncertain and the type of rebound we would get is still uncertain, I would say generally speaking when looking at acquisition candidates, we would consider the risk profile a bit higher now than it has been in the past.

Now, having said that, we’re interested in growing our business. We’re interested in adding capabilities to our business. We’re interested in doing or acquiring assets or technologies where we think in our hands, we can do much better than the current market valuations indicate. So we’re always looking but I would say generally speaking, the risk profile because of the uncertainty is a bit higher than it has been.

Matt Miksic - Piper Jaffray

Great. Thanks for taking the question.

Louise Mehrotra

Next question, please.

Operator

Your next question comes from Glenn Novarro with RBC Capital Markets.

Glenn Novarro - RBC Capital Markets

Thank you. Just a couple of pharma questions -- one on what’s happening at the wholesale or distributor level. Is it fair to say that wholesalers and distributors destocked in the first quarter and now here in the second quarter, they are restocking, or at least going back to normal buying patterns? That’s question number one.

Two, very quickly -- were there any major price increases in the pharmaceutical products in the quarter?

And then lastly, just any update you can give us on [STILERA] and [teleperadome palmacate]. Thanks.

Dominic J. Caruso

Sure. So let’s see -- do you have the data handy on the distributor inventories, Louise?

Louise Mehrotra

Okay, so I have second quarter versus -- ’09 versus ’08, so if you took out what I had spoken about in terms of REMICADE O-U.S., the change in the inventories is pretty much the same as what we saw last year. So there’s nothing specific in terms of inventory changes going on, with the exception of REMICADE O-U.S. in the quarter.

Dominic J. Caruso

And then on pricing, you know, obviously we have selective pricing throughout the businesses and on selective products, but our pricing overall has always been very modest and actually in the second quarter on an overall basis, it was less than a tenth of a point. It was basically flat overall in pricing.

And then on [STILERA], Louise, the most recent update on [STILERA] we have is we responded back to the FDA with some additional information. They indicated another review would take another 30 -- or three months to review that data, so we are expecting to hear back from the FDA in the October timeframe.

Louise Mehrotra

And [teleperadome palmacate], the PDUFA is August 3rd.

Glenn Novarro - RBC Capital Markets

Okay, so just in general, just what’s happening on the distributor level for J&J and industry wide, it’s back to more normalized levels because when you look at the first quarter of many of the drug companies experienced a lot of destocking at the wholesale level, so I’m just trying to get a sense of are things back to normal here in the second quarter.

Louise Mehrotra

Okay, so I think some of that had to do with the anti-TNF category and REMICADE is a different model than the others in the industry. I think that’s what you are probably referring to.

Glenn Novarro - RBC Capital Markets

Okay. All right, well, thank you.

Louise Mehrotra

Thank you. Next question, please.

Operator

Your next question comes from Sara Michelmore with Cowen.

Sara Michelmore - Cowen

-- taking the question. You know, Dominic, just back on the gross margin discussion, obviously we know what the negative dynamics in terms of mix were in the quarter but it was a fairly strong performance and I’m just wondering specifically what the positive offsets were and just trying to get a sense of what was just for this quarter and what is sustainable there in terms of the underlying trend, as you exit the RISPERDOL generic comparisons in Q3? Thanks.

Dominic J. Caruso

Yeah, it’s a great question. Thanks for noting the strong performance. I think our people did an excellent job in managing the business, quite frankly, and keeping a rein on costs and being judicious about where we can make investments and where we can otherwise operate more efficiently.

You know, an interesting factor is that if you look at the impact of RISPERDOL and TOPOMAX alone in the second quarter, that’s about $1 billion of lost sales compared to the second quarter of ’08. That’s pretty significant, you know, in any business and if you look at our overall EPS performance, I mentioned in my remarks that currency had about a $0.06 negative impact to our EPS. So our EPS of $1.15 would have been $1.21 on a constant currency basis, compared to last year’s $1.18. So the fact that our business leaders are able to manage costs and manage the business in a way that generates positive EPS growth in light of this pretty significant impact to the top line is remarkable and speaks to the resiliency of our people and the fact that they are committed to managing the business well as they always do.

So I would say general cost control was a major factor in the business during the quarter.

Now, going forward, I’d say that some of that is obviously sustainable because we want to -- we don’t basically cut costs. We try to develop ways of doing business better or smarter or more efficiently, so some of it is sustainable.

But as we launch new products and we get opportunities to invest in the future, we’re going to take those opportunities and we’ll obviously be clearer with you all about when we see some up-tick in those spending levels which obviously we think would be the prudent thing to do for the business.

So I wouldn’t extrapolate necessarily this quarter to all future quarters. I mean, that will be on a case-by-case basis as we see the opportunities unfold.

Sara Michelmore - Cowen

Okay, that’s helpful. And then on the R&D line as well, I know that the pharmaceutical spending, you guys have been targeting a much lower percent of sales, trying to get more in line with the industry. Is that the main driver of the reduction of the percent on sales for R&D or are there other parts of the business where you are getting some leverage as well?

Dominic J. Caruso

Yeah, I think that that is one main driver. The other driver is the mix of the business, right, because as consumer sales become a larger portion of the total, obviously that part of the business has a relatively lower R&D spend than the overall rest of the business.

Sara Michelmore - Cowen

Okay, and just one last one, big picture, what’s your latest thinking on corporate tax reform, Dominic?

Dominic J. Caruso

Yeah, well, I would say that I am generally more encouraged than I was a month or so ago. I visited in Washington recently and I would say that the general consensus coming away was that the impact to deferral or the elimination or reduction of deferral of U.S. tax on international operations is most best handled in an overall tax reform discussion and not as a single pay-for in healthcare reform. That’s what the current thinking seems to be. We’re very supportive of that kind of thinking and I am encouraged by that kind of thinking.

Sara Michelmore - Cowen

Okay. Thanks so much for taking the questions.

Louise Mehrotra

Thank you. So with respect to everybody’s time, we’ll take two more questions. Next question, please.

Operator

Your next question comes from Bob Hopkins with Banc of America.

Bob Hopkins - Banc of America

Just a couple of quick follow-ups -- Dominic, first of all, just to clarify your position on healthcare reform and some of the deals that have been cut, is it your opinion that we should not expect the medical device industry to cut a deal similar to what we’ve seen with hospitals and with pharmaceuticals, or is that still a possibility?

Dominic J. Caruso

Yeah, I would say it would be premature for me to offer an opinion on that. I think the dialog is still ongoing but I think the dialog would have to consider the impact to the medical device industry of the hospital deal. That’s what I meant by that so -- but I can’t predict whether it will be a deal or not.

Bob Hopkins - Banc of America

Okay. Thank you from that. And then another clarification on the ethicon endo U.S. sales growth of 1%, is it possible to quantify the negative impact from advanced sterilization and capital equipment drag, and what the rest of ethicon endo grew excluding that? Do you have a sense for that?

Dominic J. Caruso

I don’t have it handy. We can give you generally what the impact was. We don’t break out ASP sales but Louise, you have a general indication of the impact there?

Louise Mehrotra

Yes, so if you took out the impact of ASP, it would grow about the 3% range in the U.S.

Bob Hopkins - Banc of America

Okay. So just what other color on the medical device business -- are we still talking about the same sort of timing on Nevo that you guys have articulated previously?

Dominic J. Caruso

Yes, Bob, it’s on track.

Bob Hopkins - Banc of America

Okay, great. Thanks, that’s all I had. Appreciate it.

Louise Mehrotra

Okay, last question, please.

Operator

Your last question comes from Derek Sung with Sanford Bernstein.

Derek Sung - Sanford C. Bernstein

Thanks for squeezing me in. Could you elaborate on the hospital spending, hospital capital spending comment that you made? Are you seeing incremental on a quarter to quarter basis, incremental pressure on hospital capital spending or is it sort of the same as it was perhaps last quarter?

Dominic J. Caruso

We saw slightly more incremental pressure in hospital capital spending in the most recent quarter than we had seen earlier. And now just a reminder, our business is not heavily dependent upon that but we did see it in certain pockets of our business where we do have capital spending as a major component of those specific businesses.

Derek Sung - Sanford C. Bernstein

Okay, thanks. And a similar type of question regarding to the economic sensitivities in your consumer business, OTC, and also in your med-tech businesses like Vision and diabetes -- are you seeing incremental economic sensitivities there on a quarterly basis or is it about the same as it was last year?

Dominic J. Caruso

Louise, do you have that? We’re just looking at the data right here to make sure we give you an accurate assessment.

Louise Mehrotra

Yeah, I can give you a couple of data points for it. So for consumer, if you took a look at a 52-week rolling average of growth in the category, at the end of 2008 it was about 4% growth. If you took a look at the March/April timeframe, which is the latest period we have, it’s down about half-a-point. And you see the same type of trend if you look at eight-week periods as well, down about half-a-point.

And then in my commentary, I provided some growth rates on vision care and on -- in terms of diabetes care, we’re actually seeing some pricing pressure, more pricing pressure.

Derek Sung - Sanford C. Bernstein

Great. Thank you very much.

Louise Mehrotra

Thank you. So that will end the Q&A session. We’ll now have some final remarks by Dominic.

Dominic J. Caruso

Thanks, Louise. Well, in closing, I’d like to offer these final thoughts -- we continue to see that the underlying growth of our business is solid and improving, as I mentioned earlier. And 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 remain financially strong and well-positioned for long-term profitable growth. We are launching new products, advancing our pipelines, and making prudent investments that will strengthen our business.

Thanks to the dedication and focus of the talented people across the Johnson & Johnson family of companies. I am confident in our ability to innovate and execute on growth opportunities while managing our business in a way that will make us an even stronger, more competitive leader in the global healthcare industry.

I look forward to updating you on our progress throughout the year and we’ll see you in October when we will provide an update on our MD&D segment in addition to reporting on our quarterly results.

Thanks and have a great day.

Operator

Thank you. This concludes today’s Johnson & Johnson second quarter 2009 earnings conference call. You may now disconnect.

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