Johnson & Johnson Q4 2009 Earnings Call Transcript

Jan.26.10 | About: Johnson & (JNJ)

Johnson & Johnson (NYSE:JNJ)

Q4 2009 Earnings Call

January 26, 2010 8:30 am ET


Louise Mehrotra – VP, IR

Bill Weldon – Chairman and CEO

Dominic Caruso – VP, Finance and CFO


Rick Wise – Leerink Swann

David Lewis – Morgan Stanley

Jami Rubin – Goldman Sachs

Michael Weinstein – J.P. Morgan

Matt Dodds – Citigroup

Tao Levy – Deutsche Bank

Bob Hopkins – Bank of America, Merrill Lynch

Glenn Novarro – RBC

Bruce Nudell – UBS

Matt Miksic – Piper Jaffray

Louise Mehrotra

Good morning and welcome. I’m Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson and it is my pleasure this morning to review our business results for the fourth quarter of 2009. Joining me on the podium today are 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 2009 results and provide a strategic outlook for the company. At the completion of Bill’s remarks, Dominic Caruso will provide some additional commentary on the 2009 financial results and guidance for the full year of 2010. We will then open the floor to your questions.

We will conclude our formal presentation at approximately 9:30 and following Q&A with some final remarks by Bill, we’ll conclude the meeting around 10 o’clock.

Distributed with a 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 2008 identifies certain factors that could cause the company’s actual results to differ materially from any projections 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 fourth 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 $16.6 billion for the fourth quarter of 2009, up 9% as compared to the fourth quarter of 2008. On an operational basis, sales were 4.5% and currency had a positive impact of 4.5%. I would like to point out that our 2009 results included a 53rd week. The J&J fiscal calendar is based on four 13-week quarters, so every five or six years, we have an additional week. Since this 53rd week occurs during a holiday period, we do not achieve a full week of revenue. The estimate of approximately half the operational growth in the quarter was due to the extra shipping days. While the 53rd week adds some additional days to sales, I should point out that it brings with it a full week’s worth of operating costs. Therefore bottom line impact is negligible.

In the US, sales increased 2.6%. Outside the US, our operational growth was 6.4%, while the effect of currency exchange rates positively impacted our reported results by 9.2 points. The Western Hemisphere excluding the US grew 19% on an operational basis. Europe grew by 5.1% operationally, while the Asia-Pacific, Africa region grew 2.3% operationally.

If you will now turn to the consolidated statement of earnings, net earnings on a reported basis were $2.2 billion and earnings per share were $0.79. That compares to $2.7 billion and $0.97 per share in the same period in 2008. Please direct your attention to the boxed section of the schedule where we have provided earnings information adjusted to exclude special items. As referenced in the footnote, fourth quarter results in both years exclude the after-tax net gains from several litigation matter. In addition, the fourth quarter 2009 results have been adjusted to exclude the after-tax impact of the restructuring charge and fourth quarter 2008 results were adjusted to exclude the in-process research and development charge. Net earnings on an adjusted basis were $2.8 billion and earnings per share were $1.02, up 8.4% and 8.5% respectively versus the fourth quarter of 2008.

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 32.1% of sales was 330 basis points higher than the same period in 2008. As we discussed last year, the 2008 results were favorably impacted by one-items. In addition, the change in the mix of the business and certain charges related to the restructuring program that are not treated as special items contributed to the higher costs.

Selling, marketing, and administrative expenses at 34% of sales were down 330 basis points versus last year. As noted, the fourth quarter of 2008 included investments spending. Also contributing to the favorability is cost management across the businesses. Our investment in research and development as a percent of sales was 13.4%, 50 basis points less than the fourth quarter of 2008, due to a change in the mix of the businesses and reductions in spending levels due in part to increased efficiency.

Interest expense, net of interest income of $81 million compares to $17 million in the fourth quarter of 2008. The increase in net expense was due primarily to a lower interest rate on our cash balances. Other income net of other expense was $361 million in the fourth quarter of 2009 compared to $638 million in the same period last year. In both 2008 and 2009, this account includes the impact of net litigation matters. In addition, in 2008, the resulting gain from the divestiture of the professional wound care business was included in this account.

Our effective tax rate excluding special items was 16.4% in the fourth quarter of 2009 versus 19.9% in the fourth quarter of 2008. Dominic will provide more commentary on taxes in his remarks. Now, turning to the consolidated statement of earnings for the year of 2009. Consolidated sales to customers for the full year of 2009 were $61.9 billion, a decrease of 2.9% as compared to the same period a year ago. On a year-to-date basis, sales declined operationally by 0.3% and currency having negative impact of 2.6 points. On the consolidated statement of annual earnings, I would first like to draw your attention to the boxed section where we have provided net income and earnings per share information excluding special items.

In both years, the after-tax net litigation gains have been excluded. Additionally in 2009, the after-tax cost associated with the restructuring program has been excluded. In 2008, the charge for in-process research and development has also been excluded. With these adjustments, net earnings for the 12 months of 2009 of $12.9 billion were in line with 2008. Adjusted earnings per share of $4.63 were up 1.8% as compared to 2008.

Turning now to business segment highlights, please refer to the supplementary sales schedule highlighting major products and/or business franchises. I will now review fourth quarter highlights for our three business segments, beginning with the Consumer segment.

Worldwide Consumer segment sales for the fourth quarter of 2009 of $4.2 billion increased 10.2% as compared to the same period last year. On an operational basis, sales increased 5.2%, while currency positively impacted sales by 5 points. US sales were up 3.4%, while international sales grew 6.5% on an operational basis.

For the fourth quarter of 2009, sales for the over-the-counter pharmaceuticals and nutritionals increased 4.2% on an operational basis, compared to the same period in 2008, with US sales up 5.9% and sales outside the US up 2.2% on an operational basis. Growth was driven by analgesics and other respiratory products, due to a strong flu season, as well as nutritional products, partially offset by lower sales of smoking cessation products.

Our Skin Care business achieved operational sales growth of 8.1% in the fourth quarter of 2009, with sales in the US up 10.2% and sales outside the US up 6.7% on an operational basis. New launches drove growth at NEUTROGENA, AVEENO, and Dabao products.

Baby Care products were up 3.4% on an operational basis when compared to the fourth quarter of 2008. Sales in the US were down 2.8% due to lower sales for At the end of 2008, babycenter exited the online retail business, while continuing to focus on online content. Sales outside the US were up 5% operationally, due to growth in hair care and baby wipes.

Women’s Health achieved operational sales growth of 5.2%. Sales in the US were down 8.8% primarily due to lower sales of external sanitary protection products. Sales outside the US were up on an operational basis by 12.5%, primarily due to the acquisition of the Vania products.

Sales in the Oral Care franchise were down 1.7% on an operational basis. In the US, sales were down 13% due to softness in the category, lower sales of toothbrushes and the fourth-quarter divestiture of certain products. Sales outside the US increased 9.1% operationally, driven by strong growth of Listerine.

Sales in the Women’s Care Other category were up 20% on an operational basis, primarily due to the acquisitions of two businesses in our wellness and prevention platform and the Vania Polive acquisition. Strong sales of Curel also contributed to growth.

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

Worldwide net sales for the fourth quarter of $6 billion were up 5.4% versus the same period last year. On an operational basis, sales were up 1.6%, with a positive currency impact of 3.8 points. Sales in the US decreased 2.7%, while sales outside the US increased on an operational basis by 8%.

Our results continue to be impacted by generic competition on some of our products, namely Risperdal Oral, Topamax and Razadyne. The marketing exclusivity for Risperdal expired in the US at the end of June 2008 and there are generic competitors for Risperdal in most markets. The marketing exclusivity in the US for Topamax expired this past March and multiple generics have entered the market, while generic competitors for Razadyne entered the US market in the latter half of 2008.

The combined impact of these products has reduced the fourth quarter worldwide pharmaceutical operational growth rate by approximately 14 points, with the US impact estimated at 20 points and the impact outside the US estimated at 5 points.

Contributing to the double-digit growth excluding generics were a number of core products, which I will discuss in a moment and importantly, the new products introduced over the last two years, (inaudible).

Now, reviewing the major products. Sales of Remicade, a biologic approved for a treatment of a number of immune mediated inflammatory diseases, were up 28.4%, when compared to the fourth quarter of 2008, with sales growth in the US at 12.8%. In the US, strong double digit market growth was partially offset by lower market share, due to new competitive entrants and additional indications for competitive products.

Export sales to our customers for markets outside the US were up 79.4% and adjusting for the fluctuation in inventory levels, growth was estimated at 11%. As a reminder, fourth-quarter 2008 sales were impacted by timing of shipments related to production scheduling due to maintenance.

Procrit Eprex declined operationally by 1.9% during the quarter, as compared to the same quarter last year, with Procrit down 3.1%. The US market declined slightly in the fourth quarter compared to the same period a year ago, while Procrit aggregate share across all markets of approximately 48% was down one point. Sales of Eprex were down 0.3% operationally, market share stabilized. However, the market declined slightly.

Sales of Levaquin, our anti-infective were up 9.8% on an operational basis when compared to the same period a year ago. Total prescription growth in the US anti-infective market was estimated to be double digits in the quarter, due to the strength of the flu season. Increased competition from generic products has impacted market share. Levaquin script share was down versus the same period a year ago due to increased competition from generic products.

Risperdal Consta, our long-acting injectable formulation of Risperadone achieved fourth quarter sales growth of 18.1% on an operational basis. US sales growth was 13.7%, with increased script share and market growth contributing to the results. Sales outside the US were up 20% operationally, with double-digit sales growth in all the major regions and the launch earlier this year of Risperdal Consta in Japan.

Concerta, our product for attention deficit hyperactivity disorder, increased 33.4% operationally in the fourth quarter as compared to the same period last year. Double-digit market growth contributed to the sales results in the US. Sales outside the US were up approximately 31.2% on an operational basis, with strong growth seen across the major regions.

Aciphex, as it is known in the US market and Pariet outside the US is a proton pump inhibitor or PPI that we co-market with Aci. On an operational basis, sales were up 8%, with US sales up 12.9% and sales outside the US up 2.7% operationally. In the US, dollar market share in the fourth quarter was up approximately 0.5 points.

Velcade, a treatment for multiple myeloma, co-developed with Millennium Pharmaceuticals, continued to improve its market leadership position. Operational sales growth was strong at 26.5%, driven by additional approval in 2008 front line therapy.

Prezista, a protease inhibitor for the treatment of HIV, grew operationally 86.5%, with the US growth at 76% and sales outside the US growing 98.7% on an operational basis. Expanded labeling to include treatment naïve patients contributed to the continued positive momentum in share.

Invega, an atypical anti-psychotic, grew operationally 8.4%. Sales in the US were up 2.9%, in line with market growth. Sales outside the US grew 23.8% operationally, driven by steady progress in market share growth.

Wrapping up the review of the pharmaceutical segment is an update on (inaudible). Results of a recently-completed Phase III study evaluating (inaudible) for the adjunctive treatment of partial onset features failed to meet its primary endpoint. Based on the findings of this trial, we will not pursue an epilepsy indication. However, we will continue to study (inaudible) for the treatment of neuropathic pain.

I’ll now review the medical devices and diagnostic segment results.

Worldwide medical devices and diagnostic segment sales of $6.3 billion grew 6.8% operationally as compared to the same period in 2008. Currency had a positive impact of 5%, resulting in total sales growth of 11.8%. Sales in the US were up 9.1%, while sales outside the US increased on an operational basis by 4.9%. Results have been impacted by lower sales of drug eluting stents due to increased competition. Sales excluding the impact of lower sales of drug eluting stents grew over 8% operationally.

Now turning to the franchises, starting with Cordis. Cordis sales were down 3.2% operationally, with US sales up 1.7% and sales outside the US down 5.8% operationally. Cordis results were impacted by lower sales of Cypher, our sirolimus-eluting stent, partially offset by the solid growth in balloons and our Biosense Webster business. Cypher sales were approximately $225 million, down 23% on an operational basis versus the prior year. Sales in the US of approximately $55 million were down 20%.

In comparison to the fourth quarter of 2008, the US drug-eluting stent market is estimated to be down 11%. PCI procedures were down 11%, while penetration rates were estimated at 77%, up from 73% a year ago. The estimated price for Cypher in the US is down approximately 4% versus the fourth quarter of 2008. Estimated share in the US of 12% was flat on a sequential basis and down 3 points from the fourth quarter of 2008 due to the increased competition.

Cypher sales outside the US of approximately $170 million declined 24% operationally. The estimated market share in the quarter of 24% was down 2 points on a sequential basis and down 7 points from the fourth quarter of 2008. The increased competition has impacted the share outside the US. Cypher estimated worldwide share for the quarter was 20%, down one point sequentially and down 5 points from the fourth quarter of 2008.

Biosense Webster, our electro physiology business achieved 14% operational growth in the quarter, driven by the successful launch of CARTO 3 in the US this quarter, and launches in Europe and Canada earlier in the year.

Our DePuy franchise had operational growth of 10.1% when compared to the same period in 2008, with the US growing 11.3% and the business outside the US growing by 8.3% operationally. Pressure on pricing continued as a result of the economic trends, however, positive mix due to continuing product innovation has mitigated much of the impact. Hip growth on a worldwide basis was approximately 12%, with the US growth at 15% and the growth outside the US at 9% operational. Our market share leadership position in the US has widened during 2009. On an operational basis, worldwide knee growth is approximately 9%, due to the strength of the underlying business, complemented by the new product launches. US growth for the quarter was 10% and outside the US, growth was 7% operational. Spine achieved strong operational growth of approximately 9% due to the successful launch of a number of products, with US up 9% and sales outside US up 10% operationally.

Mitek, our sports medicine business grew approximately 15% operationally, fueled by new product launches. US growth was 17% and the growth outside the US was 12% operational. The diabetes franchise grew 8% operationally in the fourth quarter of 2009, with US business growing 13.8%. As we discussed last year, the fourth quarter 2008 results were impacted by an adjustment to sales rebate reserve. Excluding this adjustment, sales declined 2%, with the US down 7% due to both lower volumes and continued pressure on pricing. Outside the US, sales increased 2.9% operationally. Animas, our insulin pump business grew nearly 20% on an operational basis, due to new product launches and continued development of the international market.

Ethicon worldwide sales grew operationally by 14.8%, with US up 26.2% and sales outside the US up 7.5% operationally. The acquisitions of Mentor and Omrix partially offset by the divestiture of the professional wound care business added approximately 7.5 points to the worldwide operational growth. Sutures, biosurgicals, and meshes strong contributions to the results this quarter. As an update on the fibrin pad, we have elected to move the targeted filing date to ensure a robust submission and we believe that we will be in a position to file the BLA sometime during the first half of 2010. The fibrin pad is a novel product that combines two biomaterials and two biologics, which we believe has significantly enhanced patient care.

Ethicon Endo-Surgery achieved operational growth of 7% in the fourth quarter of 2009, with the US sales growing 3.3% and sales outside the US growing on an operational basis by 10.5%. Strong results for both the endoscopy products and the harmonic were driven by the strong performance in markets outside the US. Additionally, the recently acquired NCL products from our acquisition of SurgRX contributed to the results.

Ortho-Clinical Diagnostics achieved operational growth of 6.9% in the fourth quarter. Sales growth in the US was 4%, while sales outside the US were up 10.6% on an operational basis. The recently launched Vitros 5600 and 3600 made strong contributions to results this quarter.

Additionally, conversion from manual testing to automated procedures drove sales results in our immunohematology business.

Rounding up the review of the medical devices and diagnostics segment, Vision Care sales declined 2.6% on an operational basis in the fourth quarter compared with the same period last year. Sales in the US decreased 6.5%, while sales outside the US decreased 0.7% on an operational basis. The worldwide lens market is estimated to be flat to up slightly compared to the same period last year. Estimated fourth quarter worldwide market share based on prescriptions to spend was the same versus a year ago.

Despite the softness in the market, Acuvue Moist and Acuvue Oasys for astigmatism achieved strong double-digit growth. Additionally, the introduction of One-Day Acuvue True Eye in major markets in Europe made a strong contribution to the results this quarter.

That completes highlights for the medical devices and diagnostics segment and concludes the segment highlights for Johnson & Johnson’s fourth quarter of 2009. I’ll now turn the podium over to Bill Weldon. Bill?

Bill Weldon

Thanks Louise. Thank you all for being here today. I am looking forward to speaking to you about our people’s extraordinary achievements in one of the most difficult years in the company’s history. Faced with significant patent expirations worth nearly $3 billion in sales and increasingly competitive business environment on many fronts, an unprecedented economic pressures around the globe, our people delivered results that met or exceeded expectations for 2009.

Despite a decline in sales, which we had forecast, we grew our adjusted earnings per share by 1.8% and maintained our long-term management focus. We also made many important investments for growth and a number of restructuring decisions that have positioned us well for growth and continued leadership in the global healthcare market.

As we begin 2010, our business is focused, energized and well positioned to take on the leadership and growth opportunities before us. We built the foundation for a promising future for our patients, customers, our employees and our investors. And here is a brief agenda of what I will cover today. It’s often useful to begin a review like this by looking at what we said we would do a year or two earlier and then asking what we have accomplished. When we met with this group in January of 2008, we looked ahead at the business challenges we would see over the next two years and we spoke about building our foundation for growth, and we discussed many of the steps we were taking to do that.

We were in the midst of completing the restructuring our pharmaceuticals in quarter’s businesses to deal with significant patent expirations and competitive pressures. Those restructurings were completed. We were completing the integration of the Pfizer Consumer Healthcare business with our consumer and OTC businesses and looking ahead to further developing iconic brands like LISTERINE and Zyrtec. These integrated consumer businesses are seeing solid performance.

We were continuing to make investments in emerging markets, including the traditional BRIC markets, Brazil, Russia, India and China as well as other fast-growing developing markets like Mexico and Turkey. We continued to advance our pipeline of pharmaceutical and medical device products with many of those we highlighted now in the market we are nearing approval. We continue to identify wide spaces in healthcare, investing in two acquisitions as cornerstones to our new wellness and prevention business.

Beyond that, we have made eight major acquisitions since the beginning of 2008, and invested in several strategic licensing or collaboration agreements over that same period. These details are complementary; these deals are complementary to our internal pipelines and bring us new capabilities to assess new growth opportunities and platforms. In January of 2009, we spoke for about further executing on these plans for leadership in growth and healthcare. Even as the economy presented everyone with new challenges, we have met important progress this year.

Today, our businesses are well-positioned for growth and focused on expanding their leadership positions in healthcare. We are strengthening our core businesses and investing in launches of recently approved innovative products. Our investments in R&D for the last several years are coming to fruition in exciting and meaningful ways, and in 2009, we invested another $7 billion in R&D.

In addition to advancing our pipelines for a internal development, we are also continuing to acquire, invest, and collaborate with other companies to generate new platforms for growth; Cougar Biotechnology and Oncology, a clearant for minimally invasive sinus surgery, Elan for Alzheimer’s disease, Crucell for vaccines, Gilead Sciences for HIV therapies, and Mentor for aesthetic medicine.

We are also continuing to expand our global presence, including building operations and expanding our reach in our BRIC countries and fast-growing developing markets. Our operational growth in the BRIC countries in 2009 was 5%. Excluding Russia and the impact of the severe economic issues that they had, our growth has been double digits.

We are also playing a role in helping shape healthcare policy around the world, given our broad perspective on the business of healthcare.

Finally, we are continuing to attract and retain and develop our people, the talented individuals and teams who work every day to address the unmet needs of our patients and customers.

As you can see here, our sales for 2009 declined by 2.9%; but we are essentially flat operationally, reflecting the loss of revenues from the patent expirations that were mentioned earlier. Our broad base of consumer pharmaceutical and medical device and diagnostics businesses performed well, even as we saw increased economic and competitive pressures throughout the year.

Our adjusted earnings were $12.9 billion and adjusted EPS was $4.63, up 1.8%, which is a higher rate of growth and earnings due to our share repurchase program. We also generated a record free cash flow of approximately $14.2 billion. Last January, we set expectations for our financial results but affected the difficult business and economic challenges we anticipated, including a forecast of the first reported sales decline for the company in 76 years. Our people took on these challenges and produced results that under these conditions were as impressive as any we have ever achieved. Thanks to their diligence, our results were in line with our guidance for sales and exceeded our guidance for both reported and operational earnings, as you can see here.

In terms of sales by segment, consumer generated approximately $15.8 billion in revenue, or 26% of our total. Pharmaceuticals, approximately $22.5 billion or 36% of our total and MD&D generated approximately $23.6 billion or 38% of our total, making it now our largest segment.

Our consumer products business is the world’s premier consumer health business. Its total sales grew 2% operationally, despite the soft economy and a rise in private label competition during the year. Operational sales in our skin care, women's health, oral care and wound care franchises all increased, with growth in several product lines, including LISTERINE, NEUTROGENA, AVEENO, and SPLENDA. Consumer also continued to increase its market presence outside the US, with brands from Dabao skincare products in China and Vania in Europe.

Our Pharmaceuticals segment, with sales of $22.5 billion, represents the world's seventh largest pharmaceutical business and fourth largest biotech business. The segment saw an operational sales decline of 6.1% for the year, reflecting a loss of nearly $3 billion in sales, due exclusively to the loss of RISPERDAL, OROS, and TOPAMAX. Excluding the impact of generic competition, pharmaceutical sales grew by 7%. We saw significant growth from some of our larger products, REMICADE, CONCERTA, and RISPERDAL CONSTA. In addition, we saw strong growth from newer products like PREZISTA, DELCADE, and INVEGA.

Our medical device and diagnostics business is the largest medical technology business in the world, with sales of $23.6 billion. Sales grew 4.2% operationally for the year. We achieved strong growth in four of our seven franchises, while facing tough competition for drug eluting stents and tighter out-of-pocket spending on products like contact lenses and diabetes test strips. Excluding lower sales of drug eluting stents, our MD&D business grew 6.5% operationally. Our growth franchises at MD&D span a wide range of treatment categories. Ethicon’s wound care products and biosurgicals, Ethicon Endo-surgery’s energy-based surgical instruments and REALIZE Adjustable Gastric Band, the DePuy Orthopedic, Spine and Mitek Sports Medicine business, and ortho clinical diagnostics products.

In the other three MD&D franchises, we saw significant growth in some of their specific products. For example, our Cordis business saw strong performance in cardiovascular products like balloons and catheters and its Biosense Webster business.

Our vision care business saw significant growth in its ACUVUE Oasis and ACUVUE moist contact lenses. In diabetes care, our ONI MSK business achieved very strong double-digit growth.

Operating profit for 2009, excluding special items was $17.4 billion and 28.1% of sales. That is an increase from $17.3 billion or 27.1% in 2008, a year when operational sales were essentially flat. This 100 basis points increase can be attributed to the excellent job our leadership team did in managing their businesses and containing costs during the year, even as they stay committed to investing in key products opportunities for the future. In fact, all three segments increased their operating profit as a percent of sales in 2009.

This slide on our constant performance looks different this year. We extended our track record of adjusted and earnings and increases to 26 years, and we have 47 consecutive years of dividend increases. But as I mentioned earlier, we did not continue our run of 76 consecutive years with reported sales growth, due exclusively to two major patent expirations. Nonetheless, last year’s overall performance in this environment speaks to the character of our leaders and our disciplined management approach. We have always taken a long-term view of our business, and we would not take short-term actions just to continue a record of consecutive years of sales growth. We faced difficult choices, made prudent decisions, and relied on our people to deliver the results we forecast, while positioning ourselves for the future.

With this approach, and by staying focused on scientific innovation, we have built enduring market leadership. In fact, 70% of our sales are from products with number one or number two global market share positions, and approximately a quarter of our sales last year came from new products that were introduced in the last five years. More importantly, we look forward to returning to operating sales growth again this quarter, building off the momentum reflected in today's quarterly results. We also look forward to continuing our strong financial performance in the years ahead.

During 2009, we delivered a total shareholder return of 11.3%. This was a strong performance, but it was a lower rate of return for one year in the companies we compete against. However, when you look at the last two or three years, we outperformed the Dow Jones industrial average SMP 500 in other drug and healthcare industries. This reflects the fact that we performed very well and held more of our value during the large market downturn. Over the long-term, we have continued to consistently outperform most stock indexes in terms of total shareholder returns.

I would like to spend the rest of my time talking to you about how we view the future of the healthcare market and why Johnson & Johnson is well-positioned to remain the industry leader. The people of Johnson & Johnson stripe to improve the health and well-being of men, women and children around the world. This gives us a deeply-held purpose to what we do every day. The world’s need for affordable quality healthcare makes this a compelling and growing market, and history shows that as most patients GDPs and economies expand, so does their spending on healthcare.

Let us turn now to a current view of the global healthcare market and growth projections. The global healthcare market is expected to grow about 5% per year over the next five years, becoming nearly $7 trillion by 2014. This is a huge market opportunity, growing at a modest but respectable rate. Johnson & Johnson's broad base of businesses participate in about one third of the overall market. We are focused on some of the fastest-growing segments of healthcare. In fact, those where we meet our growing as fast or faster than the overall industry growth of 5%.

We are always looking for opportunities to enter new strategic areas like wellness and prevention, which complements our strengths. Meanwhile, our decentralized management approach allows us to act quickly and responsibly to specific market opportunities.

As we put 2009 behind us, it’s important to note that we are significantly better shaped than the rest of the industry when it comes to patent expirations moving forward. With the industry itself, the five-year period ending 2009 totaled approximately $85 billion of annual revenue loss due to patent expirations. We represented about 10% of that total impact, with RISPERDAL, Oral, TOPAMAX, and a few of our other products that lost exclusivity. Over the next five years, from 2010 to 2014, this cumulative loss goes from $85 billion to over $200 billion. Although we will still see additional patent expirations in our business, we estimate that our share of the industry impact will maybe about 4%, much less than our each share of the last five years.

Today, the world’s population is approaching 7 billion people. A significant number of people still lack access to adequate affordable healthcare coverage. Many nations are moving to increase the access their citizens after healthcare, and while progress has been made, sizeable opportunities still exists. For example, in the last five years, private medical insurance in Brazil has increased by 60%, but that still only covers 30% of the population.

In India, the covered population is expected to double to $220 million by 2015, and in China, a nation with more than 1.3 billion people, coverage is expected to grow from 75% today to 85% by 2012, and universal coverage is planned by 2020. Similar pushes for greater access are occurring in other emerging markets like Mexico, Russia, Turkey and elsewhere. Increased access to quality healthcare means more patients, more investment and more opportunity for innovation and growth.

Increasing access is also an important issue in the United States, and I would like to offer the following perspectives on healthcare reform. First, given the Senate election results in Massachusetts, another factor, healthcare reform in the US is obviously a moving target. And while there could be additional cost to our industry as a result of proposed reforms, there could also be an increased access and opportunities for healthcare leaders like Johnson & Johnson to bring new innovative products and solutions to more patients and customers.

We need to stay cautious however about how any expansions would be paid for, and about how quickly new patients would receive access. These are significant factors and their potential impact to our industry should not be dismissed as inconsequential. As you know at this point, we don’t know what shape healthcare reform legislation will take. We know that Congress is looking at several different approaches, taking it forward. We will continue to assess it as we go along and keep you informed.

While I am mindful of the significant impact on our industry, I remain steadfast in my belief that there is no better business to be in, the differences we can make in people’s lives, the opportunity for meaningful innovations that can benefit society and the value we can bring to our shareholders remains a powerful motivator for all of us at Johnson & Johnson. We will continue to monitor to legislative process closely and update you on any significant impacts for our company if legislation is passed.

As 2010 begins, there are some business and economic headwinds that our industry must manage through. For example, persistent changes that have been seen in some consumer spending habits as more people move to private-label goods, people’s willingness to undergo elective surgery or make out of pocket expenditures for medical products like contact lenses or diabetes test scripts also remains negatively impacted. The economic downturn continues to put pressure on hospital budgets, while then numbers of Americans still unemployed constrains their access to healthcare, and the pace and cost of innovation continues to be affected by increased regulatory scrutiny. Larger more costly clinical trials and the increased complexity of the approval process are all key factors. At the same time, there are hopeful signs of recovery and tailwinds that may benefit our industry.

According to IMS data, there appears to be resiliency in prescription drug growth. According to other reports, global R&D investment is expected to grow about 4% in 2010. This indicates an ongoing commitment to innovation and bodes well for new products and potential partnerships that can spur new growth. Strong companies like ours have ready access to capital markets to help fund growth.

Finally, Johnson & Johnson’s expertise and business strategies are aligned with many of the trends that are evolving in healthcare. From personalized medicine and comparative effectiveness to the increased use of companion diagnostics and biomarkers, Johnson & Johnson is taking a leadership role in shaping this future.

We consider the evolving global environment as we planned our business restructuring last year. We felt that such changes even difficult ones involving our employees would be essential for the sustainable growth of the enterprise. The work to streamline our operations is increasing our efficiency and freeing up resources. In turn, this has allowed us to invest at long-term growth platforms and new product launches. Our work to implement these restructuring plans began shortly after our announcement in November and is continuing in accordance with the required consultation procedures in each markets.

Going forward, we will remain focused on executing and investing for growth in the context of our consistent strategic framework. We plan to capitalize on our key growth assets, our people, products, pipelines and global presence. At the foundation of Johnson & Johnson’s business is a fundamental commitment to our credo which was established in 1943 and provides a common set of values to approximately 115,000 employees around the globe. The four tenants of our credo provide a clear focus and mindset of how we approach each decision. Patients and customers first, and our employees, our communities, and our shareholders. We are very conscious of the bar we set for ourselves and that consumers expect more from us than from others because of our history and reputation. A recent consumer product recall an FDA warning letter were important reminders of this expectation and the vigilance it requires.

I want to assure you that we take these matters very seriously and nothing is more important to us than the health and safety of the people who use our products. We are undertaking a thorough review of our procedures to ensure that we identify potential improvements we could make moving forward. We believe these and other actions we are taking will address the concerns that the FDA raised in its warning letter and we will be working in close consultation with them. When McNeil Consumer Healthcare first received some complaints on a ‘musty’ odor associated with our products in 2008, the company conducted a microbiological investigation to check for the presence of bacteria and mold, which would be consistent with the presence of the odor. No bacteria or mold was found and it was believed that the complaints were likely an isolated issue.

When similar complaint trends were identified in 2009, the company initiated further investigation and novel forensic testing. McNeil determined that the reported uncharacteristic odor was caused by trace amounts of a chemical byproduct originating from the treatment of wood pallets used to transport and store product packaging materials.

Subsequently, we initiated a voluntary product recall based on broad precautionary criteria, recalling numerous product lots that had not been a subject of any customer complaints. Even as we continue our investigation, we have taken additional actions beyond the recall to assure quality product – product quality. We have required suppliers who ship materials to our plants to discontinue the use of the type of wood pallets associated with the recall. We are conducting full inspections of all materials coming into our facilities and if that outside experts evaluate our plants.

We are confident in moving forward with production and we will continue to monitor and evaluate the situation and consult with the FDA. The next slide should look familiar to you as it demonstrates the ongoing strategic framework for our business. In addition to our credo, we also work under an operating model that has served us well for decades, it has four elements. 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.

At Johnson & Johnson, our businesses rely on our credo and operating model to provide a consistent framework for decision making, while leaving the more specific business strategies to be developed at the local market or franchise level with growth to the customer. Within our strategic framework, we galvanize our enterprise around common high-level priorities that reflect a changing global environment and changing needs of our businesses. For 2010, we will focus on our business leaders on a common set of growth priorities. These growth priorities of what we believe our businesses need to focus on, and they are:

Innovative products; our growth has always been based on scientific innovations that serve unmet patient and customer needs in a meaningful way. This has led us to be market leader number one or number two in many of our businesses. We will stay focused on bringing forth innovative, accessible, and effective products, and entirely new business models that address the most prevalent healthcare needs of the day.

Robust pipelines; we must continuously target, invest, and manage the development of a robust pipeline of new medicines, devices, and products. We plan to use a mix of internal and external sources to sustain pipelines to provide a competitive advantage. We fully expect the new products coming out of our pipeline today to accelerate the proportion of our sales driven by newer products.

Global presence; as a global healthcare leader, we must continue to expand our presence and execute our strategies in the appropriate way for diverse markets and customers. Our approach will be strategic, effective, and cost-efficient to address the local needs.

Talented people; our extraordinary and diverse workforce is still our cornerstone, and we must develop our people, challenge them, motivate them, and reward them to achieve success.

You will see these growth priorities reflected throughout our individual business segment plans as we move to those.

In MD&D, we have seen some terrific innovations coming to market that strengthen our core business. Atrial Fibrillation is a condition affecting an estimated 22 million people worldwide and a leading cause of stroke. Our Cardo-3 product is a new catheter-based navigational mapping system that provides incredibly detailed full-color three dimensional images of the heart, enabling electro-physiologists to pinpoint where abnormal heart arrhythmias originate when performing catheter ablation. The physician feedback on our Cardo-3 system has been very positive. The Cardo-3 also works with our NAVISTAR THEROCOOL catheters, the first and only ablation catheters approved by the FDA for the treatment of AFib.

We received FDA approval in October for the SURGIFLO Hemostatic Matrix chip, an advanced flowable hemostat for use in a broad range of surgical procedures. This is our first product launch resulting from Ethicon’s 2008 acquisition of Omrix. The regulatory knowledge gained from this combination product will be valuable as we continue to develop and commercialize other combination products in our pipeline like the Fibrin Pad, which I will address in a minute.

We are continuing the successful rollout of 1-day ACUVUE TruEye in markets around the world. TruEye is the world's first daily disposable silicon hydrogel and the most exciting breakthrough in contact lenses technology in years. Its material and design are well suited for patients with busy, demanding, active lifestyles. Introduction in the US is expected later this year.

And we continue to make acquisitions that strengthen our portfolio and products. Acclarent in the ear, nose and throat space; Finsbury Orthopedics in the area of hip implants; and Gloster Europe in the area of decontamination technologies that help prevent hospital acquired infections, a significant and growing global concern.

We also had significant development in our MD&D pipeline, which Alex Gorsky discussed with you in October. The Pinnacle Complete Acetabular Cup System is the first ceramic on metal hip bearing vein considered for approval by the FDA, is intended for use as a primary hip replacement in adult patients suffering severe pain and disability due to structural damage in it joints from non-inflammatory degenerative joint diseases, including osteoarthritis and post-traumatic arthritis.

Clinical and laboratory data show that the Pinnacle ceramic on metal bearing combines the durability and stability of a metal-on-metal bearing and the enhanced wear characteristics of ceramic-on-ceramic bearings. It was unanimously recommended for approval by an FDA advisory panel last year, and we are awaiting the final decision from the FDA.

The NEVO Sirolimus-eluting Coronary Stent is the first and only drug-eluting stent utilizing RES technology, which incorporates hundreds of small reservoirs, each acting as a depot into which drug polymer compositions are loaded. This unique design allows drug delivery from a stent with a surface that is 75% bare metal upon insertion and which becomes purely bare metal in approximately 3 months. NEVO also contains Sirolimus, the same drug as our CYPHER stent, which has data supporting the safety and efficacy of Sirolimus in coronary applications after six years. This body of clinical evidence for Sirolimus is completely unmatched by any other drug-eluting stent. We have seen promising results from our clinical trials to date, and in terms of regulatory filings, we plan to file NEVO for CE mark approval in Europe this year, with a PMA submission in the US to follow in 2012.

SEDASYS is the first computer-assisted personalized sedation system. SEDASYS integrates drug delivery and state-of-the-art monitoring, making it possible for a physician-nurse team to provide personalized sedation, based upon a patient’s unique physiology. Using this system, physician-nurse teams could deliver the sedative Propofol during routine medical screenings for colonoscopies and upper GI tract screenings, outside of the more traditional hospital settings. SEDASYS received a favorable recommendation from an FDA advisory committee last year, and we are on ongoing discussions with the FDA.

As I mentioned earlier, Johnson & Johnson leads the industry in developing next-generation advanced hemostats to address the persistent clinical problems associated with bleeding in surgical settings, and we are very excited by the potential of the Fibrin Pad. With our human-plasma based biologics embedded directly into a proprietary matrix, the Fibrin Pad has the potential to uniquely and effectively address bleeding challenges that are hardly unmet by traditional hemostats. As Louise mentioned earlier, the BLI filing for the Fibrin Pad is now expected in the first half of this year.

MD&D has also been making important progress in expanding our global presence, especially in the BRIC markets, which are expected to grow at more than double the rate of the global MD&D market. For instance, we have established R&D centers in China and India and manufacturing facilities throughout the BRIC countries, including a new campus in Suzhou, China, where DePuy products are now being made. We also operate surgical training institutes in the BRIC markets, with our latest institute just set to be open in Sao Paulo, Brazil, in February. Globally, we now have more than 25 professional education centers around the world.

Moving on to our consumer business, we continue to distinguish ourselves with science-based innovations for consumers, based on a wide array of research and proprietary technologies. In 2009, we launched LISTERINE TOTAL CARE in the US, a multi-benefit mouthwash that works in six different ways for a cleaner, healthier mouth. We also introduced AVEENO Nourish Plus hair care products, a new line of shampoos and conditioners, and most recently, styling products. And in the coming weeks, we will be unveiling an anti-aging skin care breakthrough on (inaudible) technology. This proprietary patented technology uses essential minerals to generate an imperceptible flow of energy that follows through the surface layers of the skin to stimulate the skin’s renewal process. This technology, built on our heritage of science-based innovation and will be used in three of our beauty brands beginning in February. One of our key approaches to innovation in the consumer business is to build our iconic brands like LISTERINE, NEUTROGENA, and Clean & Clear.

Sometimes, over decades of continuous scientific advances, we built these brands. In the case of AVEENO, we have a product that was developed by dermatologists at the Mayo Clinic and first brought to market in 1945 as an oatmeal bath treatment for relieving itch. Johnson & Johnson acquired the brand in 1999, when it had $60 billion in sales. Since then, we have extended its active natural ingredients and soothing product qualities into AVEENO baby care products, body washes, skin care, and most recently, into hair care. In 2009, the brand had more than $0.5 billion in sales, reflecting a compound annual growth rate of 23% since joining Johnson & Johnson.

More than half our consumer sales come from markets outside the United States, and some of our most important acquisitions and innovations are in those markets. Last year, we acquired the remaining share of the French brand Vania, and its well known cosmetic and sanitary protection products. (inaudible) another French brand, which we acquired just over three years ago, is in the process of successfully expanding outside of its own market.

The Dabao brand continues to grow and thrive in China as a part of Johnson & Johnson. And in Shanghai, we have opened a research center dedicated to servicing emerging markets of which is now also developing ideas for well-developed markets as well as in the developing world. Our pharmaceutical business has focused its research on five therapeutic areas, with significant new products coming out of the pipeline.

In the last year, we have launched five newly approved drugs, SIMPONI and STELARA in immunology; NUCYNTA and INVEGA SUSTENNA in pain and neuroscience, and PRILIGY outside the US in sexual health. And we are driving growth in other new products like PREZISTA (inaudible) and VELCADE in oncology. In addition, we will continue to expand our core products with new indications, the practice we have done well historically with many products, including REMICADE, which has 15 indications across a broad spectrum of immune system disorders. Back in 2007, we set some aggressive goals for our NME filings and we have continued to meet them.

We currently have three products in registration including Rivaroxaban for novel oral anticoagulant that may prevent a host of thrombolytic conditions including venous thromboembolism and stroke. It is being evaluated in five different conditions. As this slide shows, we also expect to file several more new compounds between now and 2013. We have many important compounds in Phase III trials, including an oral SGLT-2 inhibitor for diabetes, bapineuzumab for Alzheimer's disease, and abiraterone acetate, an orally administered inhibitor of testosterone, which was also a first-in-class compound for the treatment of prostate cancer.

These are all addressing the kind of patient needs that affect or will affect so many of us here and our families in so many ways. You have also seen us emerging and innovative agreements, collaborations and acquisitions with companies like Elan, Crucell, Gilead and Cougar Biotechnology, which offer potentially dramatic advances in patient care, such as a potential first-in-class treatment for slowing the progression of Alzheimer's disease.

A potential universal monoclonal antibody product for the treatment and prevention of influenza. The treatment for HIV with a single combination pill and a breakthrough in prostate cancer. In terms of enhancing our global presence, our pharmaceuticals business has been strengthening our local capabilities in key markets outside the United States. For instance, we have been partnering on branded generics in India, expanding our sales reach in China, and maintaining a strong manufacturing footprint in China, Mexico and Brazil.

Developing our R&D presence in emerging markets like India and China where we have established an R&D operation in Mumbai and R&D headquarters in Shanghai, and a collaboration with Tianjin University on biomarker research. That completes our segment review around three of our growth priorities.

Now, I would like to wrap up with a discussion of our talented people who give me confidence in our ability to continue improving the health and well-being of over a billion people every day. All of the products, pipelines, and global expansions I just described rely on the people of Johnson & Johnson to make them a reality. It is their talent and commitment to our credo that has built our reputation and earned the recognitions that are mentioned here.

We continue to invest more than ever in our people. Our objective is simple, to develop leaders with the skills, judgment and integrity to carry on the Johnson & Johnson legacy. We have taken you on a bit of a journey this morning from 2008 as we faced into some future headwinds and began building our foundation for future growth.

The 2009 as we further executed on these plans, we sure do how we kept progressing on those plans, even though through one of the most challenging years of business that any of us have ever experienced. And now we have taken you into 2010 where we already see promising signs that we are driving significant growth and beginning to capitalize on the investments we have made. Certainly, we have come out of this period better positioned, with more innovative products, capable of addressing the unmet needs of the patients and customers, our pipelines have never been stronger. But importantly, our innovations are now moving into the marketplace. Our presence in promising growth areas and attractive geographies give us outstanding market access and our talented people are already driving growth. This all gives us, me and all of us enormous confidence and enthusiasm for the future.

We are proud to be the leader in human health and well-being, one of the most dynamic and important industries in the world. We look forward to keeping you updated on our progress throughout the year.

Thanks and now, I would like to turn it over to Dominic.

Dominic Caruso

Thank you Bill, and good morning everyone. We are very pleased with our solid financial results for the fourth quarter and full year of 2009, with the underlying strength demonstrated across our broad base of healthcare businesses. Our annual results and excluding the impact of special items reflect an improvement in pretax operating margins over the prior year. This is a great accomplishment in a year when our topline growth was challenged by the impact of patent expirations and the global economic slowdown.

Our financial performance for the year demonstrated again our ability to continue managing costs and improving margins, while advancing on pipeline with new products, investing in new growth platforms through licensing agreements, collaborations, and acquisitions, and launching five new molecular entities. Additionally, we were able to implement some planning strategies in the fourth quarter and throughout the year, resulting in an effective tax rate for 2009, which was about a point below our latest estimate. This slower-than-expected tax rate positively impacted our full year and fourth quarter earnings per share by approximately $0.07 per share.

However, our fourth quarter 2009 results also include costs associated with the recent recall of certain OTC products, restructuring costs that are not treated of special items, and costs associated with proactive steps taken in Venezuela. Together, these items negatively impacted our fourth quarter results by approximately $0.06 per share, nearly offsetting the entire benefit from lower effective tax rate. We have therefore exceeded our estimated earnings guidance due to the better-than-expected operating performance, resulting primarily from the return to operational sales growth in the fourth quarter.

To wrap up our formal presentation this morning, I would like to provide some guidance for you to consider as you refine your models for 2010. First, let me set some context around certain items that are reflected in my guidance, but may not yet be reflected in your models. Regarding our previously announced restructuring plans as we noted at the time of the announcement in November, in addition to the savings which are being invested in 2010 in growing the business and in funding the impact of the acquisitions we made in 2009, these actions will also have a dilutive impact on our earnings from such items as accelerated depreciation and other costs incurred to implement the plans. If we are now completing our plans, we estimate that the dilutive impact of these costs for 2010 is approximately $0.07 per share.

Additionally, as a reminder, we closed the acquisition of Acclarent just last week, and we expect that this acquisition will be dilutive to 2010 earnings by approximately $0.03 to $0.04 per share. Finally, it is important to understand that the following guidance does not include the potential impact of healthcare reforms. In reading many of your reports, this appears to be consistent with the way you have built your models for 2010. It remains a range of possibilities in terms of what any potential financial legislation may impel. These could have a significant impact to the industry and Johnson & Johnson, but we cannot be certain at this time what those impacts could be. We will continue to monitor the outcome of the legislative process, and we will provide an update to our guidance at a later date, if any legislation is passed and when its impact is fully understood.

Let me begin with a discussion of cash and interest income expense. During 2009, we continued to generate strong cash flows. In fact, as Bill pointed out earlier, we generated free cash flow for operating cash flow, we have the necessary capital expenditures of approximately $14.2 billion. At the end of 2009, we had approximately $14.9 billion of net cash. This consists of approximately $19.4 billion of cash and investments and $14.5 billion of debt. This is an improvement of nearly $4 billion in our overall net cash position from year-end 2008.

During 2009, we used approximately $800 million to repurchase shares of our stock in connection with our $10 billion share repurchase program, which began in 2007. Through the end of 2009, we have purchased approximately $8.9 billion of our stock under this program. As we indicated previously, we still expect to complete the remaining approximately $1.1 billion under this repurchase program, but at a slower pace and contingent upon other uses of cash to invest in building the business.

For purposes of your models, assuming no additional major acquisitions during 2010, I suggest you consider modeling net interest expense of between $350 million and $400 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-time gains or losses, I would recommend that you consider modeling other income and expense for 2010 as a net gain, ranging from approximately $200 million to $300 million.

And now, a word on taxes. For 2009, the company’s effective tax rate, excluding special items, was 22%. We suggest that you model our effective tax rate for 2010 in the range of 23% to 24%. This rate takes into consideration changes in the mix of our business for 2010, as well as the extension of the R&D tax credit for 2010. And while not yet enacted, it is our expectation that the R&D tax credit legislation will be passed, and therefore, we have included this impact in our estimate for the year. As always, we continue to pursue opportunities in this area to improve upon this rate throughout the year.

Now turning to sales and earnings. As we did throughout 2009, will be based first on a constant currency basis, reflecting our results from operations, assuming that average currency rates for 2010 will be the same as they were for 2009. This is the way we manage our business, and we believe this provides a good understanding of the underlying performance of our business. We will also continue to provide an estimate of our sales and EPS results for the 2010 with the impact that currency exchange rates could have, using the Euro as an example.

Now turning to sales. The impact from the loss of US patent exclusivity of Risperdal Oral is now largely behind us, but we must still take into consideration the loss of US patent exclusivity of Topamax, which occurred at the end of March 2009, and will still have a significant impact on year-over-year comparisons, especially in the first quarter of 2010. That being said, we would be comfortable with your models reflecting an operational sales increase on a constant currency basis of between 2% and 3% for the year. This would result in sales for 2010 on a constant currency 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 currency exchange rates for all of 2010 were to remain where they were as of last week, then our sales growth rate would be positively impacted by approximately 2% or approximately $1 billion. Thus, under this scenario, we would then expect reported sales growth to increase to a range between 4% and 5%, or a total expected level of reported sales between $64 billion and $65 billion, again prior to any potential impact on healthcare reform legislation.

Now turning to earnings. I suggest that you consider full year 2010 EPS estimates, excluding the impact of special items, of between $4.80 and $4.90 per share on an operational basis, that is, assuming the same average exchange rates for 2010 as we saw in 2009. This represents an operational growth rate of 4% to 6%. While we are not predicting the impact of currency moments, to give you an idea of the potential impact on EPS of currency exchange rates for all of 2010 were to remain where they were as of last week, then our EPS growth rate would be positively impacted by approximately 1% or approximately $0.05 per share. Thus, under this scenario, we would then expect total reported EPS, excluding special items, of between $4.85 and $4.95 per share, or an EPS growth rate of 5% to 7%.

To summarize, our guidance today does not include the impact of any potential healthcare reform legislation. Given that it is early in the year and also considering that our guidance includes the cost to implement the restructuring program, plus the dilution related to the recent closing of the acquisition of Acclarent, we would be comfortable with EPS estimates towards the mid-point of this range.

Importantly, as you consider the guidance I provided today, you would be comfortable with your models reflecting an improvement in pre-tax operating margins for 2010. And while operating margins may vary by business segment year-to-year, or maybe impacted from time-to-time by short term dilutive impact of acquisitions, improving the overall pre-tax operating margin, like growing income faster than sales over time, while continuing to invest in growth, is a fundamental discipline we use in managing our business.

In closing, Johnson & Johnson remains a company that is financially strong, and we are well positioned for leadership in growth and healthcare. I look forward to updating you on our progress throughout the year.

Now Louise, back to you.

Question-and-Answer Session

Louise Mehrotra

Thanks, Dominic. We will now open the floor to your questions. Please wait for a microphone, as we are webcasting the meeting. And as we have Bill with us today, we would appreciate it if you could keep your questions at the strategic level. Rick?

Rick Wise – Leerink Swann

Bill, let me just start with a (inaudible) picture question. Healthcare reform, I understand why you want to make cautious and diplomatic comments here. But maybe just in a more simple way, do you feel better than you did six months ago, more opportunistic that whatever is going to happen will have a less negative impact on J&J in the industry. You know, where do you think we are in this whole process?

Bill Weldon

You know, Rick, I wish, you know, as we all do, we wish we had the crystal ball and as I said, I don’t think the administration has really reached out to anybody since the Massachusetts elections. So, we only know what everyone else is hearing and what our people in Washington are telling us. You know, we were talking about this earlier with some people. I think there are some fundamental areas that everybody can support, access to healthcare is one of them, you know, coverage for pre-existing conditions and things like that. So I think that there is a way that they could probably bring something together that everybody would support and can move forward in a very positive way, and these are things that we have that if you go on our website, you can say we got this promise for healthcare for some time that has supported many of these evidence-based medicine, and compared to the effectiveness.

There are certain things that I think are really beneficial that can move that way. And that could be where everybody could come together and support it. There is another movement there that says, let us get a reconciliation, get something to prove that only needs 50 votes in the Senate and move forward with that. So you know – but again, today they are saying they don’t have enough votes to get that through. I don't think anyone really knows, I think that they would like to get something through, and I'm talking about in general now, Congress and the President and everyone else. I don't think it will be what it may have been in the past. I think if we wanted to look backwards and say, what could it have cost, and that is why both Dominic and I wanted to reference that if things moved (inaudible), it is not inconsequential. The pharmaceutical group could be up to, talking industry-wide, over a $100 billion now over 10 years, medical devices between $20 billion and $40 billion. Those are large numbers. And I think, but we don’t know what they are going to be, we don’t know what is going to happen. So I think right now, you know, it is really a matter of wait and see, we will keep you informed and it could be anything from probably from nothing to something substantial through reconciliation, or anywhere in between, and hopefully, they will come to the point that will help a lot of people and move forward in this area.

The critical piece I think of all of this is how does it get paid for? I think if you – you know, we are going to see tonight when the President makes his speech, jobs seem to be the big concern and I think we have said this all along. We have jobs and the deficit and then we have some costs over here, and how do you reconcile this and drive the economy forward while people are losing their jobs. And I think, you know, it is connecting the dots that become so important. So I wish I had a better answer for you, I really don’t. But I think there will be – and let us just say, I think hopefully they will be able to work together to move something forward that will be beneficial for everybody.

Rick Wise – Leerink Swann

Let me follow up with two quick ones. One, you talked about 5% long-term growth for the markets that you could address. I assume you would hope that through internal investment and acquisition J&J could grow faster than that. When do we get to that, let's call it, 6% to 8%, 7% to 9% growth in your view. And I think a follow-up question for Dominic. Dominic, this is the third year in a row that gross margins are lower. I understand why, but maybe you can talk us through the quarterly impact of currency and the moving pieces, and where do we go from here? Thank you.

Bill Weldon

Rick, I think, you know the answer to the first part of that is that we feel very encouraged where we are. I think when we talked about the fourth quarter, when you say there were back back-end positive growth and we’ve weathered the storms of the Risperdal Oral and Topamax. We think we are on a positive movement. If you took generics out, we said we had close to about 14% growth in the fourth quarter. When you take the generics out, we feel we are positioned very, very positively right now to move forward.

The new approvals we have and the ones I talked about that are pending, when that’s going to happen and – I shouldn’t say when it is going to happen, it is going to happen, but when are you going to see the more, even robust growth that you are talking about. As you know we are always looking for opportunities to work together whether it is to acquire or license. And I think last year, we actually took a step that is different for us and that’s the area of partnering. If you look at the Elan agreement, the Crucell agreement and the Gilead agreement which offer extraordinary opportunities for us upsides as well as mitigating risks and sharing costs.

So I think we are on a really strong trajectory. I think that the reason we wanted to go back and take you to the beginning is to show that we’ve been on a journey over the last few years. We’ve committed to you all that we were going to make these investments. We are going to do these things and we are going to build the pipeline to be able to take us to the future. We think we are there now and it is all starting to come and we think we are on a trajectory that will take us to a much better place.

Dominic Caruso

Rick, with respect to the gross margin, you are right. It is three years that there has been some deterioration in gross margin. As you might expect the largest contributor to that is the mix of the business, and the largest component of that mix, of course the patent expirations that we’ve experienced. So we are happy that that’s largely behind us now of course. And also we are launching a number of new products, five new molecular entities just last year. So new product growth plus the anniversary, if you will, of the patent expirations should help that. Most importantly, however, I would just refer you to the overall pre-tax operating margin for the enterprise which despite the pressure in gross margin has improved year over year and that’s my guidance in the K that we expect that to be continue in 2010 as well.

Louise Mehrotra


David Lewis – Morgan Stanley

David Lewis, Morgan Stanley. I guess, Dominic, first question is there were series of economic headwinds, large economic headwinds in 2009 pressuring on volumes or the capital environments of the hospital. How did you guidance sort of forecast those economic headwinds in 2009 becoming potentially tailwinds in 2010. Is there some sort of quantification you can give us in terms of the impact in ’09, how do you handle the numbers and what the guidance implies for ’10?

Dominic Caruso

It’s difficult to quantify either the impact in ’09 or the impact in 2010. It’s obvious that we did see some impact, obviously in 2009 from the economic headwinds, particularly our consumer business and some of the consumer facing aspects of our medical device business. Those trends in those businesses seem to be stabilizing to slightly improving. I think it is too early to say that we are out of the woods yet with respect to that. But our guidance takes into consideration what our folks that are close to the businesses see as a moderate stabilization and slight improvement, but again, too early to actually quantify what that could be.

David Lewis – Morgan Stanley

Bill, you mentioned increasing the life in the partnership model, maybe sort of a deviation for J&J has been in a pharmaceutical business historically. Do you think going forward to the extent the partnership model takes hold of some bigger percentage of the activities you engage in? Could you still maintain a level of profitability you’ve historically had in pharmaceuticals that you are increasing the reliant on in licensing and partnering?

Bill Weldon

Yes, I think so. I think part of the reasons for that are that we are able to bring – it’s not that we have all the best expertise in the world, in fact if you look at the Elan acquisition or the partnership we have there, if you look at Elan we think we brought together three groups of people that have extraordinary talent in development of the Alzheimer's product, and maybe able to accelerate, maybe able to better penetrate, maybe able to move into new areas and fields in the neurology area using some of these components that will afford us move over times. So we think that the sharing will be able to put us in a better position.

We also feel that we have the reliance on our internal R&D, which is also yielding significant areas of growth for us. So I think you have to look at it that these are just ways that kind of complement what we ordinarily do. But we think we will be able to continue to move forward in a very positive way. Let me also comment on the comment of the headwinds becoming tailwinds. I think we have to be careful that when you look at all indications things are picking up somewhat. But I think we have to be careful to assume that – I think it’s funny, (inaudible) somebody in Washington to meet the other day said, “Well, we don’t have to worry about healthcare reform because it will be over shortly.”

Well, I laughed and I said, “You got to be kidding me.” I think that until we fix the things that I talked about before, some of the unemployment issues and deficit in some of these other areas, I don’t know how much we can expect here to be the significant upswing. I think you are right, there will be some tailwinds or some things that we dealt with in 2009 as an industry and as a macroeconomic environment that are going to become less significant. But I still think we have a lot of challenges ahead of us that are going to continue to impact this industry.

Louise Mehrotra


Jami Rubin – Goldman Sachs

Thank you very much to both Bill and Dominic. I think part of the acceleration for J&J is predicated upon successful launch of new products, and as you said, you launched five new molecular entities in 2009. But all five of those have launched relatively slowly particularly SIMPONI, which competes in a $16 billion market and for which expectations were quite high. So I am wondering, just a few part question, what do you think is going on with these, your new product launches aren’t the only new product launches that have been disappointed, I would say, you could characterize that across the industry, but what do you’ve seen in terms of the environment? And Dominic, in terms of your guidance for 2009, how important is the contribution from new products, if you could help us to think about the importance of that to your 2010 revenue guidance.

Bill Weldon

I wouldn’t characterize at least from our expectations our products have been disappointed. We are actually I think in every one of them we are on or ahead of the targets we’ve set for ourselves to be able to move these products out. I think the environment we are in is much more complex today, but the trajectory is very good. STELARA is doing extremely well. SIMPONI is ahead of its projected numbers. NUCYNTA is doing very well. I think all of these are doing very well. But it is much more complex environment today. The thing that we feel good about SIMPONI, which we specifically spoke to, is we are starting to see that pick up. We are actually – I think it’s a largest growing in the area of rheumatology today. And we are not being inhibited at all by third party pain or anything else.

We don’t have any of these areas in front of us. So it’s not the market. It was when there was only one or two of these products out there. There is a lot more today, but we feel very good about the acceptance of it in a way it is going. STELARA, we feel very, very excited about. NUCYNTA, if you look at it compared to other product launches in a similar area in the pain area, in the high area pain, is doing equal to or better than the other launches. So we feel really actually very good. So I wouldn’t say disappointed. I don’t think in today’s environment you mention other companies or products that have the same type of – and you said, disappointment – I wouldn’t phrase it that way. I think the environment is much more complex when you start looking at the competitiveness, the number of products in the marketplace, the cost of generics that inhibit some products. So I think that there is a whole lot of factors come into play. But I would say that we are on or ahead of the targets we have set for ourselves at this point in time in each one of those products.

Dominic Caruso

And Jami, as we said before in these meetings we’ve generally modeled new product launches in a reasonably conservative way because we have to wait to get reimbursement in some cases and we generally look at probability of factors impacting their launches. But as Bill said, we are pleased already with the early signs and most of them, if not all of them are ahead of our own expectations. But I can’t quantify for you what the impact is. We don’t provide any specific product indication. But our projections for next year estimate that our plans will be implemented as we thought it would be with these product launches plus that to mention the growth in our core business, which is still progressing nicely throughout the year as well. That’s across all businesses, not just pharmaceutical, including (inaudible) and consumer.

Bill Weldon

Not to predict the future because past never predicts the future. But again I want to go back toward what we said, if you took the generics out of our pharmaceutical business in the fourth quarter, we had a 14% growth. So, we are pretty excited about where we are headed and the opportunities, and Dominic made a great point, not only the new products, but we have a lot of really good products. If you look at Prezista and Intelence, if you look at Remicade, these of all had really great trajectory of growth ahead of them and they are growing quite nicely, very substantial products that are still growing and we are investing in. So we feel very good about where we are, and we feel – the thing that we have talked about so much over the last few years is we now have RISPERDAL Oral and we have Topamax behind us. The two – I don’t know if you all realize this, they were the two largest single products the corporation had. It was like you know, we’ve lost $3 billion last year in those products. So we feel that we are really through – these were the words that we used before, we are through a lot of headwinds that we had to deal with that and feel very excited about the fourth quarter. And again, it is not a prediction for the future, but hopefully it will continue and in a very positive way.

Louise Mehrotra


Michael Weinstein – J.P. Morgan

Thank you, Mike Weinstein, J.P. Morgan, I feel of all the sides you showed, I am interested in one that struck me the most is the operating margin by segment slide, and if I look at the last couple of years, you have improved your operating margin pretty remarkably, if I look of the MD&D business, I am sure up now on a 32% operating margin, and is up 160 basis points over the last couple of years. And the consumer margin on the back of the PCH deal has had a dramatic move up as well and probably most shocking of all of that, you did lose almost $3 billion of high margin sales in the pharma business and help the pharma margins swap year over year which I don’t think (inaudible) were able to model that way. Can you address in those three different businesses, your ability to grow margins from here. If I looking at MD&D, up 32% which is at the high for the industry for consumer margins that have taken them in the back of PCH. You obviously have (inaudible) to work, but talk about the ability in those three segments to improve margins on the pharma side in a context of the deals we are doing which you have already commented on. I would be interested in hearing your thoughts.

Bill Weldon

Mike, I think a lot of the growth of margins is going to come from the growth of the business. It is not that we are going to be restructuring any more, we feel we’ve got a cost structure that is in a good place. We feel we are now in a position to be able to invest and as we are able to continue to maintain our expense or the lines we have and grow our top line, we think we are positioned in a very good way to be able to do that without having to invest. As we said earlier, we have gone through a lot of these, and we are going to take the money and invest, that’s going to be in new products, that is going to be in the development of new opportunities and actually have a trajectory of growth that will actually take us to a new place.

So the margins will improve, I think we are going to be improving by a function, I would say by a function of the top line growth, not as a function of try to manage costs out of the system. That’s what we have really done over the last few years. We knew had to do it, we knew we had to refocus ourselves, make sure right-size our expense structure, make sure, we as I said looked at the quarter’s opportunity was well as the pharmaceutical opportunity and the PCH acquisition also allowed us a big opportunity to be able to put a lot of leverage there. We feel we are in a good place now and I think you going to really see the growth coming through or the improved margins coming through a trajectory of growth. It is going to be to move us forward.

Dominic Caruso

I would agree with Bill that the best way to grow margins is to grow the top line and the reason we called these restructured efforts, restructuring they are not simply just cost cutting, it is in fact the restructuring of the way we conduct business, which we think is sustainable going forward. We talked during our restructuring call that we had some additional opportunities in our supply chain, and I think that that will help us in the future as that initiative gets moving so that will actually help us with the gross margin comments that was made earlier, but I think growing the top line with a sustainable change in the way the business is structured that formula bodes well for increasing margins.

Bill Weldon

Mike, there are comments we could make about standardization which we are trying to do and standardize across the business we talked. We talked about our operations in our manufacturing area and supply chain where we are looking at a more consolidated way of moving forward in that direction which we said will take time to look at our facilities and everything else. So there is going to be ways we are going to improve, and we are going to continue to focus on it. I didn’t mean to elude, imply that we weren’t going to be focusing continuing to manage the business really tightly and well like the real driver is going to be opportunity to drive the top line.

Michael Weinstein – J.P. Morgan

Just a couple of follow-ups. Dominic, I am assuming that in 2010 the cadent to the organic growth is it will be impacted by the timing of – with the Topamax impact in the first quarter then fading the second and third, and so if you want to comment on that. I was hoping if you could comment additional on free cash flow growth because, it is a strong year that you ended very well in terms of free cash flow generation. Do you have any thoughts on that, I know it is not part of your typical guidance commentary, but if you want to add to that. And then Bill, one last question for you, if I look at the fourth quarter and you talked about the pharmaceutical growth in the fourth quarter at generics. It probably had the biggest contribution from since fourth quarter across your existing brands that I had seen at the company and in 2009 you took probably more price in more frequently in some cases in new (inaudible) can you talk about price in pharma business going forward?

Dominic Caruso

Sure, just on the cadence of the earnings, as you know we don’t provide quarterly guidance, but you are absolutely right, the first quarter of 2010 will have the comparison of Topamax before it went, before it lost patent exclusivity in the March compared to now one year later when obviously it is at a low point loss that’s patent exclusivity. So that will be a significant impact in the first quarter of year over year comparisons. I think it is important to consider that as your modeling and we certainly expect that in our business. And then in terms of free cash flow, you are absolutely right, I think our businesses around the world have done a terrific job of managing all the aspects of the balance sheet, you know our receivables, our inventory, our expenditures, our capital expenditures, and they continue to do a good job doing that. And we have generally generated free cash flow that’s near 100% or slightly higher than out net incomes. So that’s a testament to the way we manage the business. So we do manage the P&L cost lines that come from all the efforts we talked about, but our business leaders around the world actually manage the balance sheet in a remarkable way as well, so we are part of that and it is an amazing generator of future growth opportunities that we can generate substantial free cash flow to invest in the business.

Bill Weldon

And the then the question on price. We took price Mike, but if you looked at it over the year, we have made a commitment to keep our price (inaudible) below and we did that again last year of our health care products. So they will look like there was a lot of price been taking at different points in time and we will continue to strategically use the price to help us in certain areas but we have a commitment, we had it for last decade to keep our prices below the CPI which we were able to do last year also. So it may look like at times we are taking price in different ways but we actually have a commitment to keep it at low rate and we continue to do that in 2009.

Louise Mehrotra


Matt Dodds – Citigroup

Matt, Citigroup, Bill what happened to sales in 1933?

Bill Weldon

1933, I don’t know, I wasn’t born Matt.

Matt Dodds – Citigroup

Yes, I was good to go there. So on the deals you talked about last year, you look a lot of dilution. I don’t know what the final number is and it seems like when you look at the 2010 numbers, you made out a decent amount with the restructuring, that’s a big number for a company of your size for the deals you did. I don’t – again we don’t assume this restructuring in 2010. Are you still willing to do dilution like that if the great deal comes up? Can we still assume there potentially risk these numbers on dilution, or was it a one shot deal where you did for the deals in row?

Bill Weldon

I guess, I will part of it now, let Dominic share. You know if the right deal comes along we are going to do it, no matter what. I think if you look at the resources we have in the cash regenerating, if the right deal comes along – you know the questions always asked, are we worried about protecting the AAA, are we this, are we that? We are going to make the right deals and I think you all know, but we are not going to make a deal that is not going to generate normal lines value for shareholders over time. So the if the right deal came along whatever that may be, whatever the cost may be, we are in a position to be able to take advantage of it.

Matt Dodds – Citigroup

And finally one quick for you, I think I know the answer but you can sort of probably the only one that has (inaudible) generic risk in 2010. Are we assuming that’s still okay for the year?

Dominic Caruso

My guidance for 2010 assumes concerted for the full year.

Matt Dodds – Citigroup

Thanks Bill, thanks Dominic.

Bill Weldon

In 1933, I was just trying to come up with that number, but we weren’t public, so we couldn’t tell it to you.

Louise Mehrotra


Tao Levy – Deutsche Bank

Thanks. Tao Levy with Deutsche Bank. I was wondering if you could comment on the medical device side of the business, and what you are seeing in terms of hospital pushback on pricing and whether you can still capture mix with new product, is it difficult, do you expect it to be more difficult?

Bill Weldon

I think pricing in general is going to continue to get difficult. If you look at the orthopedic business, we have seen continuing slight declines, maybe 1% decline quarter-on-quarter on price in some of those areas. I think we are going to see that. I think the area of major capital when you look at our ASP business, for example, we know the orders are there. They are just not being processed at this point in time. So, I think there is going to be – everybody is going to continue to push on price, but we are going to have to continue to innovate and bring better products, bring better results, and I think that’s the whole area of what we are trying to look at this comparative effectiveness or evidence-based medicine and moving into these areas, If we can show value, which is a critical thing, and we talk about it all the time, we can show value, you are a lot better off than just looking at the cost as a single entity, and I think there is a lot traction and Washington understanding that right now, but no matter what you are talking about, there is going to be continual pushback on price absolutely.

Tao Levy – Deutsche Bank

And on REMICADE, Louise, you mentioned it lost some market share in the quarter. If you include products, the change in products that might have been cannibalizing REMICADE such as SIMPONI and STELARA, do you think REMICADE still lost share or does it maintain or could have increased for as of January?

Louise Mehrotra

So, if you take the cannibalization question, SIMPONI is taking pretty much evenly across the class a bit. So, it’s taking some from REMICADE, but also from the other products that are on the market. If you take into account STELARA, SIMPONI, and REMICADE together, we are showing nice share in that market. Bob?

Bob Hopkins – Bank of America, Merrill Lynch

Thank you. Bob Hopkins from Bank of America, Merrill Lynch. Two questions, first for Bill. I was just wondering if you could clarify your – the comments when you talked about the global healthcare market in terms of 5% growth. Was the message there that once J&J is beyond generics, do you expect your company to be a 5% growth company or was the message do you expect to be better than that? And then just thinking about in terms of long–term growth? And then for Dominic very quickly, the contribution from the extra week in the fourth quarter, just curious, is that well bounced across the divisions of J&J, or was one division more heavily impacted from that and another? Thank you.

Bill Weldon

Yes, I think the part that the comment about the 5% growth and then the follow-up about the coverage by different area or countries and developing world is really that there is a huge opportunity out there. I mean, it’s gone to $7 trillion, you know, we are 60 plus billion dollar corporation, tons of room, whether it’s in the developing world or any place else for growth. And the markets that we are trying to concentrate and focus on are the markets that are growing much faster than the average market growth of 5%. So, if you were to extrapolate out and if we run our business properly overtime, we should be able to grow faster than the markets we compete in, which we grow faster than the market. So, we should be – when you look at it again, as you said, strategically over the long term, we will grow faster than the markets we compete in, hopefully the markets we are competing in are growing faster than the healthcare market. So, we should be doing very well.

Dominic Caruso

Bob, for the 53rd week, just one thing to clarify. It’s not a full week worth of sales, really just a few days in that week, first of all. Secondly, it’s just an estimate, I mean, it’s not an exact science, we took about half the impact of the fourth quarter growth, again just an estimate, and it doesn’t really vary by segment of business probably around the same – again not an exact size.

Bob Hopkins – Bank of America, Merrill Lynch

Thank you.

Louise Mehrotra


Glenn Novarro – RBC

Thanks. Glenn Novarro with RBC. You know, 2009 was another heavy M&A licensing year. As you look out to 2010, are there any business segments that you would look to it and say, if these segments need a little help via M&A and licensing, then conversely as you look across your portfolio of companies, I sure you get this question all the time, but are there business as you look at and say, you know what, they are better off being sold divested. And then just quickly, just any update on the timing of Xarelto filing and NEVO filing? Thanks.

Bill Weldon

Yes, you know, Glenn, we look all the time at the acquisitions, and yes, there is always opportunities to strengthen your franchises and various businesses, you know, you guys know as well as we do. There is some wonderful opportunities out there and we try and look at those and try and make sure that if we want to move some place, it’s going to strengthen us and we have all the criteria which you all know and we look at it, and it’s really to strengthen us in markets. And I think you have to be strong in franchises as we move forward, not just in a product. So, you have to really start and start looking at that. As far as divestiture is sure, we look at that all the time and say, you know, is this the right one that needs to be, should we divest these businesses, are there opportunities for growth, are the margins going to be good to expand and things like that. So, I mean, it’s – you know, I have described it as kind of a snake shedding its skin, we are looking at that all the time and feel that we have to replenish certain things and have to discard others. So, yes, we are looking at that all the time.

Dominic Caruso

The question about Xarelto and NEVO, so NEVO, our expectation is CE Mark, filing for CE Mark in the first quarter of 2010, and then US filing probably 2012. And Xarelto, we will have to wait until we complete the discussions with the FDA before we give you any update on the expected timing for that.

Louise Mehrotra

So, with respect to everyone’s time, we will take two more questions. Bruce?

Bruce Nudell – UBS

Bruce Nudell from UBS. Bill, just I was struck by the pie chart of the composition of the business. Given the regulatory toughness in pharma relative to MedTek and certainly consumer and, you know, is all set by the intrinsic profitability of the businesses. Do you see mixed shifts going forward in the portfolio for J&J?

Bill Weldon

You know, Bruce, I really don’t other than through the natural evolution of the way the businesses will grow and the way the markets themselves will grow – if you went back some time ago, consumer was by far and away our biggest and pharma is our smallest, and pharma became the biggest. It’s interesting the medical tech business or the medical devices and diagnostics have remained pretty much constant. You know, they have now taken over the largest and lot of that was because of the patent expirations and whatnot, but what we try and do is make sure that our businesses have a good distribution and that’s why we did the PCH acquisition a couple of years ago was because consumer had gotten down to about 16% to 17% of our business, and we felt it was going to becoming significant in the space, and we wanted to get it to about 25%, I think it is 26% now. So, now, I think that one of the great strengths is the diversification of the businesses of being broadly based, and I think that’s something that we have adhered to that, and as I said many times, we get challenged on it all the time. But the reality of it is that it does afford you lots of opportunities to insulate yourself to continue to grow.

I think the question of pharmaceuticals, they are becoming more expensive and more challenging, and I also think that, that is part of how we have to just get better and what we do. We also have to work with the regulatory bodies to look at, it’s called the critical path analysis in the United States. There is another program in Europe. By choosing new technology and new advances to be able to look for early approvals, earlier approval by validating, you know, cardio toxic products and taking that early on and things like that, so we can get an earlier approval with reimbursement with the post-marketing surveillance. I think there’s a lot of approaches that could be taken, but the environment whether you look at it as consumer, whether you look at it, medical devices and diagnostics in the 510(NYSE:K) that’s under challenge, and where the pharmaceutical business, I think the regulatory environment for everyone of them is going to get tougher and tougher, and we are just going to have to get better to deal with it.

Bruce Nudell – UBS

And Dominic, kind of global level, in the context of your guidance for the economically-sensitive components of the businesses, does 2010 reflect halfway recovery, three-quarter way recovery, I mean sort of where are you in that contingent? Thank you.

Dominic Caruso

All right. So, as I said earlier, our business leaders have told us that they see some stabilization in some markets, some continued improvement, too early to say that it’s over. In fact, the current rates of growth are still behind what they were a year ago. So, what we are seeing is less of a decline in growth moving forward. But the markets are still growing at a rate that's negative in some cases. (inaudible) they have been. So, I can't quantify for you, Bruce, but we do see some improvement, but we are not out of it yet.

I wish we know the answer to your question.

Louise Mehrotra

Last question from Matt.

Matt Miksic – Piper Jaffray

Hi, thanks for squeezing me in. I'm Matt Miksic from Piper Jaffray. One for Bob, you mentioned in your remarks that you are using, as you have been using, this mix –

Bill Weldon

Did you mean Bill or Dominic?

Matt Miksic – Piper Jaffray

I'm sorry, Bill. Sorry.

Louise Mehrotra


Matt Miksic – Piper Jaffray

I'll ask Bob that question later. But, I wanted to ask, in your remarks, you mentioned that you are pursuing, as you have pursued, a mix of internal or external programs to kind of fill out your pipeline. And I wanted to get a sense of greater number of new product launches required to fill a pipeline, maybe larger new product launches required as you get larger and larger. How should we think about the mix of that strategy and what are you doing maybe to change the way you invest to sort of respond to the need, if it is in fact a need for greater and greater external partnerships and so on?

Bill Weldon

I think the external partnerships are, like everything else, is whether the opportunity presents itself or not. We've been very interested in the area of, let's say, vaccines and Crucell offers us a great opportunity not only to get the vaccines that we want to work with, but also to have an investment in a company that allows us to be able to work more closely within organizations.

The mix, I think, we've identified, the therapeutic areas that we think really offer the largest opportunities for growth and many of them are tied to demographics and everything else that we will be investing in. And I don't think they are much different than many other companies. So, we all have identified those areas for growth. If you look at our farm business, if you go into medical devices and diagnostics, it ties much the same. You look at orthopedics, cardiovasculars, diabetes, if you look at these areas that are huge opportunities, so, I think at each one of them, we are going to continue to invest internally.

And obviously, the best thing is to take the $7 billion we are investing and be able to generate products like Simponi or Stelara or Sedasys or the Fibrin Pad. Like, if we see other opportunities to license or to partner, partner may be an even more strategic investment than just a license. But, we will continue to take advantage of each of those in the areas where we see again the biggest opportunities for growth in the corporation.

Matt Miksic – Piper Jaffray

One follow-up for Bill on the regulatory environment. The FDA is moving forward it seems like with more hearings and more discussion around the 510(K) process. It seems like in some of your businesses, you are already trying to do more – your 510(K) with data or this is on PMA. How do you see that affecting what you do in your device business?

Bill Weldon

It's kind of a double-edged sword. I mean the 510(K) has always been a very good regulatory pathway for products that have a pre-existing product that you can build off of. But, there's also a need for, I think, PMAs and others to be able to establish these products. They can offer a barrier of entry for others to go in instead of making it easier ways to enter into the market. But, I think they both are very important if you are going to go into a new area.

We do want to do the work to bring the science behind it to ensure that we have safety and efficacy of the products that we are going to put in the marketplace. But if we have a predicate device and you can build off of it, the PMA is still an important way to do it. And personally, for safety of patients, we want to make sure that our device is working, and working the way it's supposed to be working. So, I think that the movement to use 510(K)s is a very – or the ability to use 510(K)s is very important. I don't everybody, everything should move to the regulatory pathway, but I think with some products, you'll definitely be going through PMAs and others.

Matt Miksic – Piper Jaffray

One last follow-up for Dominic. Louis [ph], you mentioned some of the impact on cost of goods was due to restructuring expenses not taken out in the quarter. I was wondering if you help could quantify that at all.

Dominic Caruso

If you look at the change between the two years in the fourth quarter of our cost of goods sold, which I think was about negligent [ph] 30 basis points difference. Half of that is due to the mix of the business and the other half is due to either restructuring cost in 2009, not in 2008, or as Louis mentioned, there were some positive aspects in 2008 and 2009. So, half mix and half been, that's called special items and not quite special items, but one-time unusual items in the COGS.

Matt Miksic – Piper Jaffray

Great, thanks so much.

Dominic Caruso

You are welcome.

Bill Weldon

I would just like to say thanks again for everybody for coming. We appreciate your support and we look forward to keeping you informed as the year progresses. Lots of interested things will be happening, so thanks again.

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