Johnson & Johnson CEO Discusses Q4 2013 Results - Earnings Call Transcript

Jan.21.14 | About: Johnson & (JNJ)

Johnson & Johnson (NYSE:JNJ)

Q4 2013 Results Earnings Call

January 21, 2014, 8:30.m. ET


Louise Mehrotra – VP, IR

Alex Gorsky - Chairman of the Board and CEO

Dominic Caruso – VP, Finance and CFO


Matthew Dodd - Citigroup

Mike Weinstein - JPMorgan

Larry Biegelsen - Wells Fargo

Rick Weiss - Stifel Nicolaus

Bruce Nudell - Credit Suisse

Derrick Sung - Sanford Bernstein

Tony Butler - Barclays Capital

David Lewis - Morgan Stanley

Kristen Stewart - Deutsche Bank

Louise Mehrotra

Good morning, and welcome. I’m Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson, and it is my pleasure this morning to review our business results for the fourth quarter and full year of 2013.

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

This review is being made available to a broader audience via a webcast accessible through the Investor Relations section of the Johnson & Johnson website. I’ll begin by briefly reviewing highlights of the fourth quarter and full year of 2013 for the corporation and highlights for our three business segments.

Following my remarks, Alex will comment on the 2013 results and provide a strategic outlook for the company. Dominic will then provide some additional commentary on financial results and guidance for 2014. We will then open the meeting to your questions. We expect the meeting to conclude at approximately 10:15.

Included with the press release that was issued earlier this morning is a schedule of sales for key products and/or businesses to facilitate updating your models. These schedules are available on the Johnson & Johnson website as is the press release. Also, please note that the presentation of today’s remarks is available on our website.

Before I get into the results, let me remind you that some of the statements made during this review may be considered forward-looking statements. The 10-K for the fiscal year 2012 identifies certain factors that could cause the company’s actual results to differ materially from those projected in any forward looking statements made today. The company does not undertake to update any forward looking statements as a result of new information or future events or developments. The 10-K is available through the company or online.

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

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

Now I would like to review our results for the fourth quarter of 2013. 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 $18.4 billion for the fourth quarter of 2013, up 4.5% as compared to the fourth quarter of 2012. On an operational basis, sales were up 6.3% and currency had a negative impact of 1.8%.

In the U.S., sales were up 7.4% and in regions outside the U.S., our operational growth was 5.6%, while the effect of currency exchange rates negatively impacted our reported results by 3.2%.

The Asia Pacific/Africa region grew 7% operationally. Both Europe and the western hemisphere, excluding the U.S., grew by 4.8% operationally. The success of new product launches made strong contributions to the results in all regions.

If you’ll now turn to the consolidated statement of earnings, net earnings were $3.5 billion, up 37.1% compared with the 2012 results. Earnings per share were $1.23 versus $0.91 a year ago. Please direct your attention to the box section of the schedule, where we have provided earnings adjusted to exclude special items.

As referenced in the accompanying table reconciling non-GAAP measures, 2013 fourth quarter net earnings were adjusted to exclude a net charge of $42 million for after tax special items. Fourth quarter 2012 net earnings included a net charge of $809 million for after tax special items. Dominic will discuss special items in his remarks.

Excluding these special items for both periods, net earnings for the current quarter were $3.6 billion and diluted earnings per share were $1.24, representing increases of 5.5% and 4.2% respectively as compared to the same period in 2012.

I would now like to make some additional comments relative to the components leading to earnings before we move on to the segment highlights. For the fourth quarter of 2013, cost of goods sold at 32.5% was 170 basis points less than the same period last year. In the prior year, we recorded an inventory step up charge related to the Synthes acquisition that increased cost of goods sold by 130 basis points.

This charge was treated as a special item. Excluding the impact of this prior year inventory step up charge, cost of goods sold was 40 basis points lower than fourth quarter 2012, primarily due to positive mix lower costs associated with strong volume growth in our pharmaceuticals business, and cost improvement initiatives across many of our businesses.

This was partially offset by costs associated with the agreement with Vertex for Incivo related to royalties that was announced in the fourth quarter, inventory adjustments and the impact of the medical device excise tax.

Fourth quarter sales and marketing and administrative expenses were 32.2% of sales, in line with the fourth quarter of 2012. Our investment in research and development as a percentage of sales was 13.1%, down 20 basis points due to timing of milestone payments in the pharmaceuticals business.

Interest expense, net of interest income of $116 million, was up $27 million versus the fourth quarter of 2012, due in part to a higher average debt level. Other expense, net of other income, was $868 million in the fourth quarter of 2013, compared to $319 million in the same period last year. Excluding special items, other expense net of other income of $47 million compares to $420 million of other income net of other expense. 2012 included a higher level of gains on divestitures.

Excluding special items, the effective tax rate was 8.9% in the fourth quarter of 2013, compared to 18% in the same period last year. Dominic will provide some commentary on taxes in his remarks.

Now turning to the consolidated statement of earnings for the full year of 2013, consolidated sales to customers for the year 2013 were $71.3 billion, an increase of 6.1% as compared to the same period a year ago. On an annual basis, sales grew 7.7% operationally and currency had a negative impact of 1.6%. Synthes, net of the impact of the divestiture of the legacy DePuy trauma business, contributed 2.5 points to the worldwide operational sales growth.

On the consolidated statement of earnings, I’d like to draw your attention to the box section. For the year, 2013 adjusted net earnings were $15.9 billion, and adjusted earnings per share were $5.52, up 10.7% and 8.2% respectively, versus the 2012 results.

Turning now to business segment highlights, please refer to the supplementary sales schedule highlighting key products or businesses for the fourth quarter of 2013. I’ll being with the consumer segment.

Worldwide consumer segment sales for the fourth quarter of 2013 of $3.8 billion increased 2.8% as compared to the same period last year. On an operational basis, sales increased 4.4%, while the impact of currency was negative 1.6%. U.S. sales were up 5%, while international sales grew 4.1% on an operational basis.

Excluding the impact of divestitures net of acquisitions, operational growth was approximately 6%, driven by strong U.S. growth of nearly 10%. Baby care products increased on an operational basis by 6.2% when compared to the fourth quarter of 2012. Strong operational growth of 7.1% outside the U.S. drove the results, due to double digit growth of hair care and baby cleansers, complemented by the impact of the Elsker products acquired earlier this year.

Sales in the oral care business increased 2.3% operationally. Excluding the impact of the divestiture of manual toothbrushes in North America, fourth quarter operational sales grew approximately 4.5%, led by strong growth of 8.6% outside the U.S. with Listerine new product launches and new marketing campaigns.

For the fourth quarter of 2013, sales for OTC pharmaceuticals increased 6.6% on an operational basis, compared to the same period in 2012. U.S. sales were up 21.6%, driven by strong growth in analgesics and other key brands as we continue to make progress in returning a reliable cup of products to the marketplace.

Our skincare business grew 9.5% on an operational basis in the fourth quarter of 2013. Very strong results for Neutrogena and [unintelligible] with new product launches supported by robust marketing campaigns drove results in the quarter.

Women’s health declined 11.5% on an operational basis, due primarily to the impact of the divestiture of the North America sanitary protection business. Women’s care other sales increased 2.6% on an operational basis, due to strong growth for BAND-AID brands.

That completes our review of the consumer segment, and I’ll now review highlights for our pharmaceuticals segment. Worldwide net sales for the fourth quarter of $7.3 billion increased 11.8% versus the same period last year. On an operational basis, sales increased 13.1%, with a negative currency impact of 1.3%. Sales in the U.S. increased 17.9%, while sales outside the U.S. increased on an operational basis by 9%.

Now reviewing sales for major therapeutic areas. Immunology products grew 22.6% operationally, with sales in the U.S. up 19.2% and sales outside the U.S. up 31.9% operationally. Earlier this year the company made certain supply chain changes for REMICADE, resulting in sales to distributors, previously recorded as U.S. export sales, now being recorded as international sales. Adjusting the base to reflect this impact, the fourth quarter 2013 U.S. immunology growth was approximately 26% and operational growth outside the U.S. was approximately 14%.

In the U.S., REMICADE, excluding export sales, was up 12.7%. SIMPONI was up 65.6%, and STELARA was up 67.7%. Results were driven by strong market growth, complemented by increased market share for both STELARA and SIMPONI, with new indications and formulations introduced in 2013. With the strength of our portfolio, we continue to be the U.S. market leader in immunology.

REMICADE, outside the U.S., adjusted for the supply chain change just mentioned, was up approximately 2% operationally, with strong growth in Canada, partially offset by the lower sales in Latin America due to pricing pressure and timing of shipments.

STELARA made significant contributions to growth outside the U.S., through the market share gains and market growth across the major regions, while SIMPONI’s strong growth was due to increased shipments to our distribution partner and strong growth in Japan and other markets.

Sales of infectious disease products increased 9.9% on an operational basis. INCIVO declined 23.6% on an operational basis, reflecting lower sales in Europe, impacted by a combination of patient warehousing and patient enrollment in clinical trials in certain countries, partially offset by strong sales in other countries as we obtain reimbursements.

PREZISTA grew 30.3% on an operational basis due to continued momentum in market share growth in the major markets, while INTELENCE grew 12.7% operationally, due to double-digit growth in Europe.

The combined sales of [comblarent] and EDURANT also contributed to the results, as did sales of our newly launched hepatitis C product called OLYSIO in the U.S. and SOVRIAD in Japan.

Neuroscience product sales increased 0.7 operationally and were impacted negatively by generic competition. U.S. growth was 1.7% and sales outside the U.S. were flat on an operational basis. The long-acting injectable antipsychotics, RISPERDAL CONSTA and INVEGA SUSTENNA or XEPLION achieved operational growth of approximately 15% due to an increase in combined market share.

Sales of oncology products increased 37.4% on an operational basis, primarily due to the strong results for ZYTIGA. In the quarter, ZYTIGA achieved operational sales growth of over 85%, with similar results both in and outside the U.S.

In the U.S. very strong market growth of over 18% and increased market share in the combined metastatic castration resistant prostate cancer market drove results. ZYTIGA has captured nearly 34% of that market. Additional country rollouts and expansion of the label to chemo-naïve patients drove the strong results outside the U.S. ZYTIGA is approved in more than 80 countries.

VELCADE sales increased 7.4% on an operational basis. Strong performance and patient in the frontline setting, and the launch of the subcutaneous version, continued to drive sales growth, partially offset by the timing of tender business in the fourth quarter of 2012 as we discussed last year. Other oncology sales increased due to CAELYX sales.

Regarding DOXIL/CAELYX, ensuring a sufficient supply for physicians and their patients remains our urgent priority. In the U.S., we are experiencing a supply outage of DOXIL due to issues at our third-party manufacturer. We continue our discussions with the FDA regarding short term plans and other long term options for manufacturing.

The FDA has approved a generic doxorubicin hydrochloride liposome injection, which is currently available for patients. In Europe, we are continuing to supply CAELYX. In the third quarter of 2013, the Committee for Medicinal Products for Human Use, or CHMP, approved manufacturing of CAELYX from an alternate supplier as part of our long term transition to a new manufacturer.

Other pharmaceutical products increased 0.5% on an operational basis, with strong results for XARELTO and INVOKANA, partially offset by lower sales for ACIPHEX. XARELTO nearly tripled compared with the same quarter last year and grew 10% on a sequential basis, reaching over 38% of the new to brand scripts, or NBRX, in cardiology in December, surpassing warfarin by over 7 points.

Total prescription share in the broader anticoagulant market grew 1.5% on a sequential basis to 10.5%. INVOKANA contributed 2 points to the U.S. pharmaceutical growth rate and at the end of the quarter achieved 19% NBRX with endocrinologists, within the defined market of type II diabetes, excluding insulin and metformin. INVOKANA holds the number one position for branded non-insulin NBRX in that market.

Some updates of note for our pharmaceuticals business. During the quarter, the FDA granted approval of OLYSIO (simeprevir) for combination treatment of chronic hepatitis C. Simeprevir was also approved in Japan and Canada. In Japan, it is marketed as SOVRIAD, and in Canada as GALEXOS.

The FDA also approved IMBRUVICA to treat mantle cell lymphoma, or MCL, for patients who received at least one prior treatment. The European commission approved INVOKANA for the treatment of adults with type II diabetes and we expect INVOKANA to be available in Germany and in the U.K. this quarter.

A complete response letter, or CRL, was received from the FDA regarding the fixed dose combination of Canagliflozin and immediate release metformin to treat adults with type II diabetes. The CRL requests additional information to support the comparability of twice-daily dosing and the once-daily dosing of Canagliflozin as a single agent. We believe we can supply this information based on available clinical data.

In addition, SIRTURO received a positive opinion from the European CHMP for use as part of combination therapy to treat adults with pulmonary multidrug resistant tuberculosis. A marketing application was submitted to the European Medicines Agency for ibrutinib for the treatment of adult patients with relapsed or refractory chronic lymphocytic leukemia, small lymphocytic lymphoma, or relapsed or refractory MCL.

The [DLA] for [unintelligible] received a priority review designation in the U.S., and esketamine was granted breakthrough therapy designation by the FDA for treatment resistant depression.

And last week, the FDA Cardiovascular and Renal Drugs Advisory Committee voted against the approval of the use of XARELTO in patients with acute coronary syndrome. We will work with the FDA to address the questions raised.

In addition, the rights for DORIBAX were returned to Shinogi earlier this year and the U.S. exclusivity period for ACIPHEX expired in the fourth quarter and the copromotion agreement with Eisai was terminated. Eisai will continue to market and produce ACIPHEX in the U.S. The copromotion agreements in certain international companies were also terminated.

That completes the review of the pharmaceutical segment. I’ll now review the medical devices and diagnostic segment as well.

Worldwide medical devices and diagnostic sales of $7.3 billion decreased 1% versus the same period last year. On an operational basis, sales increased 1.5%, with a negative currency impact of 2.5%. Sales in the U.S. declined 1.4%, while sales outside the U.S. increased on an operational basis by 3.7%. Adjusted for divestitures and exits from certain businesses, underlying operational growth was approximately 2%.

Starting with cardiovascular care, sales were up 8.3% operationally, with the U.S. up 12.9% and sales outside the U.S. up 5.7% operationally. Biosense Webster achieved worldwide operational growth of over 13% in the quarter. The success of a number of catheter launches and market expansions made strong contributions to the results.

Diabetes care declined 11.9% on an operational basis in the fourth quarter of 2013, with the U.S. business down 25.8% due to the impact of lower price, primarily related to competitive bidding. The business outside the U.S. was flat operationally, with increased sales related to the launch of [Animas Five], offset by lower sales on meters and strips.

The diagnostics business declined 9.4% on an operational basis, impacted by the divestiture of the [unintelligible] business, while infection prevention increased 5% on an operational basis with similar results both in and outside the United States.

Orthopedics sales were up 4.2% on an operational basis when compared to the same period in 2012, with the U.S. up [4.9]% and sales outside the U.S. up 3.5% on an operational basis. Strong growth for knees and hips drove results this quarter, partially offset by slower sales for spine products. Growth was positively impacted by trauma results versus the fourth quarter last year.

Operationally, hips were up 5% worldwide, driven by 8% growth in the U.S. due to strong results in primary same platform sales, partially offset by continued pricing pressure. Hips outside the U.S. were up 2% on an operational basis.

Knees worldwide increased 8% on an operational basis, with 9% growth in the U.S. and 6% operational growth outside the U.S. The successful launch of the ATTUNE fixed bearing knee drove the results, partially offset by pricing pressure.

Trauma was up 7% on an operational basis with the U.S. up 10%. Results in the fourth quarter last year were impacted by a [nail] recall. Outside the U.S., sales were up 4% operationally, driven by growth in Asia Pacific, with new product launches.

Worldwide spine was down 2% on an operational basis with the U.S. down approximately 5%, impacted by pricing pressure, the continued softness in the market, as well as the disruption in the commercial sales organization as we integrate the businesses. Outside the U.S., sales were up approximately 2% operationally, due to growth in Asia Pacific.

Specialty surgery operational growth was 6.3% in the fourth quarter of 2013. U.S. sales were up 1.8%, and sales outside the U.S. were up 10.7% on an operational basis. International sales of energy products, and strong sales of biosurgical products, were the major contributors to growth, complemented by U.S. growth from market expansion for our [clearance] products.

Surgical care worldwide sales were up 1% on an operational basis, with the U.S. down 3.1% and sales outside the U.S. up 3.4% operationally. U.S. sales were impacted by lower sales of women’s health and mechanical products. Outside the U.S., suture sales and strong demand for EndoCutter products with the ECHELON FLEX powered [endocut] stapler were the important drivers of growth.

Rounding out the review of the medical devices and diagnostics segment, our vision care business achieved operational sales growth of 2.6% in the fourth quarter, with the U.S. down 0.4% and sales outside the U.S. up 4% operationally. Growth was driven by daily lenses and astigmatism lenses, partially offset by lower sales of reusable lenses in the U.S.

That completes highlights of the medical devices and diagnostics segment, and concludes the segment highlights for Johnson & Johnson’s fourth quarter of 2013. It is now my pleasure to turn the meeting over to Alex Gorsky. Alex?

Alex Gorsky

Well, thank you very much, Louise. I’d like to welcome all of you participating in today’s meeting, especially those, recognizing that we’ve got this big weather storm forecast, at least for those of us here on the East Coast. It’s great that you were all still able to make it. And for all of those of you who are on webcast, welcome. I hope your weather is better, and we’re glad that you could also join us for the event today.

When we look back on it, I think and hope you’ll agree, 2013 was really a significant year for Johnson & Johnson. In fact, it’s pretty hard for me to believe that it’s only been a year since we met in a hotel not too far from here in 2012 to review our performance in 2012 and also set out the goals for 2013.

And while I think time has passed relatively quickly, I’m also very proud to report just how much we’ve accomplished since last year’s meeting. So let’s start first with our near term priorities.

Number one, we’ve exceeded our financial commitments. We continue to restore a reliable supply of the majority of our over the counter products here in the U.S., and we’re working very closely with our trade partners to get product back on the shelves and really relaunch these great brands.

We’ve also made substantial progress on the integration of Synthes, and we’re creating not only the world’s largest, but the most comprehensive, orthopedics platform in business in the industry. And very importantly, as you heard Louise talk about, we’ve continued building on our strong momentum in our pharmaceutical business, which is leading the industry on so many different fronts.

We’ve made a lot of progress against the short term drivers, but we’ve also advanced our long term growth drivers as well, things like creating value through innovation, having a global reach with a local focus, excellence in execution in everything we’re doing, and leading with a purpose to really make a difference for patients, for customers, around the world.

At the same time, we are focused hard on leveraging the power of our enterprise in a number of ways that are serving to increase the overall effectiveness and efficiency of Johnson & Johnson. Let me give you just a few examples.

Number one, we’ve improved our quality programs, but we’ve also strengthened and streamlined our supply chain to ensure that we can reliably meet demand around the world. We’ve also bolstered our postmarket surveillance and safety teams. We’ve acted decisively to prioritize our product portfolios, focusing on areas where we really think we can apply our energies to make the greatest opportunities to lead the industry and ultimately make a real difference for patients. And we’ve worked hard to resolve certain complex legal matters.

Meetings like this, these types of forums, we believe provide us with a great opportunity to update you on our progress, as well as our plans and our perspectives about how we think things are going to unfold in the future. Dominic and Louise - and you all know Louise, she always has that big binder - she’s going to take us through a lot of information today. Any really tough questions we’ll make sure she can find the answer somewhere in there.

But I personally believe that while you’re going to hear a lot of different information, the most important takeaway from today is for you to better understand why all of us at Johnson & Johnson remain so optimistic about our future and our ability to positively impact the lives of patients and consumers, in spite of so many global challenges facing healthcare delivery around the world.

So let me start the way I always do. Let’s talk about our credo. 2013 was the 70th anniversary of this document, so our management teams around the world did a credo challenge, and really spent time considering what it means today to our business, what it means to us as leaders. And we collectively confirmed that it is as essentially as ever.

Now, as we’ve grown to more than 128,000 associates around the world, this brief but very powerful document really unites us with a common purpose. And I believe it remains as important and as relevant today as ever, and its principles are very deeply embedded in the way we conduct our business and the way we do everything.

As you all know, the most important driver of success is ultimately the people who make these strategies come alive. And I’m really proud of our executive management team. When you look at this group, they have a wide range of diverse backgrounds and experiences, and it’s a nice combination of long, tenured, seasoned Johnson & Johnson executives and newer additions to the leadership team with strong and diverse industry backgrounds.

And together, I believe we’re poised to lead and frankly to shape the evolving healthcare industry and market, and really bringing new ways of doing business, coming together with customers, governments, and payers.

We’re proud of our strong foundation, but we’re also embracing changes that we think are demanded by a healthcare landscape that’s changing in so many different ways. We’re decisive, we’re disciplined and focused against executing on our near term priorities, but also staying focused on our longer term growth strategies.

So with that as a bit of a foundation, let’s take a look at our performance overall for 2013. The advancements we’ve made by working with such a laser focus on our near term priorities has had a direct impact on us being able to deliver our results. And the enterprise grew 6.1% versus 2012.

As you heard earlier, that’s 7.7% operationally on strong sales of $71.3 billion. And if you net things out for the Synthes acquisition operational sales growth was still a really solid 5.2%. With our continued focus on financial discipline, our adjusted earnings were $15.9 billion, up 10.7%. And adjusted EPS was $5.52, up 8.2% versus last year.

We also generated significant free cash flow, at $13.8 billion. As the largest healthcare company in the world, our broad base of leadership is increasingly important in our ability to deliver strong results in a sustainable way over time. As you can see, our consumer segment accounted for 21% of our total sales by generating $14.7 billion, up 2.8% on an operational basis versus 2012 and nearly 4% operational growth excluding the impact of certain acquisitions and divestitures.

40% of our sales, or about $28.5 billion, come from our medical devices and diagnostics group, with operational sales growth of 6.1%, which now includes Synthes for a full year. If we exclude acquisitions and divestitures, underlying operational growth was approximately 1%. Our pharmaceuticals segment generated $28.1 billion, an outstanding 12% operational growth versus 2012, and that accounts for the remaining 39%.

On the strength of this performance, we generated $19 billion in pretax operating profit, excluding special items, a 90 basis point improvement versus the previous year. Pharmaceutical pretax operating margin grew 370 basis points due to its strong sales performance.

And we also saw a nice uptick in our consumer group. The decline, however, in MD&D was driven by lower diabetes pricing and of course the medical device tax. And our shareholders, they were rewarded with a return of almost 35%, which really outpaced about nearly every major index we benchmark ourselves against.

If you look long term, we believe our shareholder have also done well, and we’ve outpaced each of these indices over the past 10 years. We’ve delivered 30 consecutive years of adjusted earnings increases and 51 consecutive years of dividend increases, making us only one of six companies in the S&P 100 to achieve that kind of a record.

The depth of our leadership is reflected by the fact that approximately 70% of our sales come from the number one or number two market share position, and we’re seeing that our investments in research and development are helping us to continually deliver meaningful innovation to the customers, with about 25% of our sales coming from products that have been introduced or launched just within the last five years.

Now, we believe these facts demonstrate that our business is strong, and I’d really like to congratulate the associates of Johnson & Johnson around the world for their commitment to delivering this kind of success.

We’re very fortunate at Johnson & Johnson to serve more than a billion healthcare patients and consumers around the world each and every day. It’s the responsibility of everyone across our great enterprise, and we consider it a privilege, and actually a great source of pride. So let’s go through some of the highlights.

Growth in the consumer segment was achieved in part as a result of our success in restoring a reliable supply of OTC products to the United States marketplace, and we’re starting to see them gain traction as well, once they’re back in the market.

So I’d like to acknowledge Sandy Peterson for her leadership in this segment over the past year. Together with Lynn Pendergrass, who joined us in September as the worldwide chairperson for the consumer segment, they’re building a best-in-class global marketing organization to continue growing the image and share of these iconic brands.

Now, part of that effort also includes focusing the portfolio to meet the evolving needs of customers in local markets around the world. To do this, we’ve identified a select set of specific consumer need states and have developed 12 major brands that we believe are going to drive the majority of our growth.

And many of these major brands grew well in the fourth quarter, including Neutrogena, Listerine, [Baby], and particularly Tylenol and Motrin, which drove U.S. OTC growth of about 22%. And we’re going to continue backing these brands with strong scientifically based and endorsed claims to differentiate them in the marketplace.

In line with these efforts, we’re going to tighten our focus. We’ve divested in certain areas such as North America women’s sanitary protection business. We acquired Elsker, a leading Chinese baby products company. And we also continue to expand globally the launch of things like Listerine Advanced Defense Gum Therapy in places like the U.K. and Ireland and our new Johnson’s Baby Triple Protection product line, which we’re taking out to global markets this year.

As all of you know, in OTC, our priority for the past several years has been to deliver a reliable supply of products to the marketplace. And last year, very importantly, we met our objective of returning approximately 75% of our planned portfolio to the store shelves. U.S. OTC ended 2013 with the number one or number two product SKUs in both adult and pediatric pain categories. And we’re also investing in things like cross channel marketing across TV, print, social media, to really support their launch and do it in a benchmark way.

Finally, as we work to bring our plants fully back online, we’ve executed all of the milestones to date in our FDA consent decree. This is very important. So with the significant progress that we’ve made in returning our U.S. over the counter products to the shelves, a tighter strategy on focusing our portfolio, our consumer business is well-positioned to continue to grow in 2014 and beyond.

So, with MD&D, let’s talk first about the market dynamics. The early fourth quarter data we’ve seen frankly shows mixed performance. It generally indicates that rates of surgical lab procedures here in the U.S. basically remained flat over the last 12 months, and we’ve discussed that with you in prior meetings.

However, there’s also some signs, some early signs, of improvements in areas like orthopedics. So overall, we believe that as economies recover, healthcare reform starts taking hold here in the U.S. and abroad, utilization rates are going to increase, and we remain very confident in the long term prospects for this market.

Now, that said, we know that our growth long term is going to be outlined by our ability to continuously deliver innovations that ultimately make a meaningful difference for patients and for our customers around the world. As you know, Johnson & Johnson is the leading company in this segment, with 85% of our key platforms in the number one or number two position in the market.

Integrating Synthes has been our number one priority, and we’ve made good progress on that, and I’ll discuss more of that in just a moment. Our emerging markets in this segment are also a really important driver of growth, and we’ve been successful in developing, making products specifically for these markets that are driving growth within our medical devices and diagnostics segment.

And we’re also increasing our competitiveness in this dynamic global market, in order to better position our business for future growth by investing in innovations that will help us increase our leadership positions by optimizing our portfolio to ensure we’re focusing in areas where we feel we can really have the greatest impact.

Now, DePuy Synthes is the world’s largest and most comprehensive orthopedics company within a $44 billion market that has got strong fundamentals. And it is primed now to offer new, value added solutions that will help transform healthcare delivery, let alone in orthopedics.

Orthopedic operational growth for the full year of 2013 was approximately 2% worldwide, excluding the net income of the Synthes acquisition. But we finished the year strong, with solid fourth quarter operational growth of over 4%, representing our strongest quarter of the year.

Now, in the quarter itself, worldwide operational growth of 8% in things like knees, 5% in hips, were the major driver of this performance. Our primary goal during the integration of Synthes has been to continue to grow our strong market position while minimizing customer disruption.

And we clearly acknowledge we still have some more work to do, but I’ve been very encouraged, particularly as of late, to see some of the steps we’re doing in things like cross-selling initiatives that we had envisioned from the onset, as we see these things starting to take hold, as well as revenue and cost savings synergies that are going to make this business extremely competitive going forward.

And the team is also taking a lot of important steps to integrate the internal systems and processes which of course these kind of things are foundational to make sure we set it up for the long term success that we know it deserves.

We have a strong leadership position in the medical device market, anchored by $11 billion plus platforms, including things like vision care, trauma, sutures, endoscopy, electrophysiology. And we’ve got a lot of others that we believe have got the potential to get there.

One of these is biosurgicals, which develops sophisticated products used to help control bleeding. This platform grew 8% operationally in 2013, and we’re especially excited about the EVARREST fibrin sealant patch, which has demonstrated a really unique ability to control bleeding in a variety of situations that’s far superior to the current standard of care.

It’s now proved in both the United States as well as in Europe, and we’re making good progress on our ability to make sure we have the right production capacity in place, because we believe we’re going to have strong demand. But in the meantime, we’re taking very thoughtful and disciplined approaches to allocating our current limited supply.

Our ability to readily develop and launch new products is ultimately what drives this business, and so in the last two years alone, we’ve invested approximately $3.5 billion in research and development to advance this portfolio even further. And it’s brought some strong, dynamic products to the market over that time span, including things like the ATTUNE knee system, which now we have over 23,000 implanted worldwide. It’s off to a very successful start.

The ENSEAL G2 articulating tissue sealer is making it easier for surgeons worldwide to assess difficult to reach places and parts of the anatomy. It’s a great technology. And also, our THERMOCOOL SMARTTOUCH contact sensing catheter, which actually measures the contact force of a catheter’s tip inside the heart during an ablation procedure. It’s enhancing outcomes for patients in Europe, and we plan to launch it in the United States later this year.

Its uptake has helped drive double digit operational sales growth at Biosense Webster, and I had the pleasure of visiting that team earlier this month and I can tell you the team is smart, committed, passionate to delivering even more innovations for healthcare that we think are also ultimately going to drive that business forward.

The products that I have mentioned are just a few of the really exciting and dynamic innovations that demonstrate our ability to meet the needs of surgeons and healthcare systems, and I’d like to recognize our two worldwide chairs in this segment, Gary Pruden and Michel Orsinger, and their teams, are doing to grow this business.

While we’ve launched a lot of great products, and invested a lot in research and development, we’re also being prudent about how we’re allocating resources with respect to our medical devices and diagnostics portfolio. And as we’re doing across the entire enterprise, we’re realigning our organization to focus on what we believe are the most promising opportunities.

In line with our emphasis to increase the focus within our portfolios, we have a company-wide premise that we should be number one or number two in the categories where we compete, have a clear path forward to getting there, or the businesses must really complement one of our other existing businesses. And if we don’t have businesses that meet those requirements, we’re committed to considering strategic options for them.

Now, if you remember, last January we made a decision to explore strategic options for the ortho clinical diagnostics business. As we explored strategic alternatives over the course of the year, we determined that divestiture would be ultimately the best option for this business, and also create the greatest value for Johnson & Johnson.

On Thursday, we announced that we received a binding offer from the Carlyle Group to acquire it for about $4 billion, and we’re now in an acceptance period that will end on March 31. We expect that this transaction will close sometime during the middle of the year.

Ortho clinical diagnostics plays a very important role in healthcare, and we’re confident that it’s well-positioned to continue serving the interests of patients, customers, and employees. And we’re also very committed to working with the Carlyle Group to make sure that this transition goes as seamlessly as possible during this period.

Now, let’s move on to pharmaceuticals. You know, by any measure, the performance of this group has really been exceptional. We’re the fastest growing of the 10 pharmaceutical companies in the United States and Europe and Japan. We recorded 15 consecutive quarters of operational sales growth in this segment.

We believe our success is driven by several important factors. First, as always, it starts with great science, which has consistently delivered meaningful advancements for patients over existing therapies. The 13 new products that we’ve launched since 2009, coupled with the core strength of our brands, including PREZISTA, REMICADE, and VELCADE, have greatly contributed to our 2013 operational sales growth in this segment.

We’ve also continued to see great productivity in our pipeline, with the launch of three new major medicines this year: INVOKANA for the treatment of type II diabetes, IMBRUVICA for mantle cell lymphoma, and OLYSIO for the treatment of chronic hepatitis C. We’ve been very successful in sourcing these innovations, both internally as well as externally, and we expect to continue this strategy.

Next, and very importantly, I believe our teams have done a great job in executing strong clinical development programs to optimally characterize these therapies. As an example, consider the extensive number of patients we’ve enrolled in registration trials for XARELTO, and the direct comparable claims that we have on the label of INVOKANA, and multiple indications we’ve obtained for XARELTO and ZYTIGA.

Third, we’ve really solidified our commercial excellence in programs and launch execution processes. Our recently launched products have done extremely well in terms of launch uptake, and it’s really impressive when you consider some of the new competition that’s entered the market as well.

And fourth, we’ve increased our access through strong reimbursement and contracting abilities. The comprehensive drug profiles and dossiers really make a strong difference when you go to the market and help our account teams gain broad access so that patients globally can ultimately have easier, broader access to our products.

And we believe these important elements are going to continue to position us for growth well into the future. And it’s really also a testament to the great work that’s been done by Joaquin Duato and Dr. Paul Stoffels and their teams to develop and execute this plan so well.

Now, XARELTO, INVOKANA, ZYTIGA illustrate the type of dramatic launch success we’re seeing here in the United States. XARELTO total scripts in cardiology continue to increase and now have over a 20% share, even in the face of new competition. And INVOKANA’s uptake is making it rapidly becoming the world’s leading agent among endocrinologists in new to brand share in ZYTIGA. Even with new competition, it’s steadily gaining share.

And together with its 88% share in the G5 markets across Europe, ZYTIGA is a strong contributor to over $1 billion in sales that have been generated in oncology, just within the fourth quarter, which is a milestone for that therapeutic category.

Looking to the future, we’re really pleased with the focused, deep, and productive pharmaceutical pipeline. And we expect the growth of our recently launched products to continue and actually accelerate. Furthermore, we’ll continue investing in research and development that’s focused on key unmet needs for patients.

And as we announced at the pharmaceutical segment business review last May, we plan to file more than 10 NMEs for approval between 2013 and 2017, and over 25 additional line extensions for our end market products.

Looking ahead, we know that healthcare is evolving quickly, so I want to provide our perspective on where we think it’s going, and how we’re shaping and redefining our businesses to make sure that we’re ready and lead through this wave of change that we expect to happen in the healthcare marketplace.

The opportunity in healthcare is immense, with an overall spend of about $8.4 trillion, and with the demand for healthcare products worldwide services, it continues to grow and is being driven by an aging population and an increasing middle class.

At $2.5 trillion, products account for nearly 30% of that spend, growing 3-4% a year, and the health services industry, which accounts for $6 trillion, is expected to grow by more than 5%, despite going through radical changes as healthcare ministers and governments across the globe press for greater transparency around cost and quality. So yes, these dynamics, these influencers, certainly present challenges.

But they’re also creating significant opportunities for Johnson & Johnson, and we’ll optimize the breadth, the depth, the size and scale of our businesses, and manage and lead through this cycle to meet the evolving stakeholder needs, frankly, that they’re demanding.

And our position in the industry we believe provides us with a unique perspective, but also a responsibility. We believe healthcare is clearly one of the greatest challenges facing society today, for every country, every community, every company, and every family. And we believe that there are at least four imperatives for a comprehensive approach to addressing the challenges of healthcare globally.

First, our industry has got to make it a priority of expanding access to high quality, affordable, and sustainable healthcare in every community. Access to high quality healthcare isn’t just a cost. Rather, we think of it as an investment in society’s future, productivity, and frankly the overall quality of life.

Second, we’ve got to make sure that the market is designed to encourage and reward innovations that add demonstrable value in terms of improved outcomes for patients. In spite of all the advancements over the past several decades in treating thins like cardiovascular disease, cancer, HIV, and other areas, we’ve still got a lot of work to do to cure things and take care of areas such as Alzheimer’s, diabetes, other infectious disease. These things are going to create significant additional burdens on the healthcare system if we don’t make progress, and if we don’t do something about them.

Next, we believe that care integration could also help solve so many of the issues that we’re facing in healthcare. When we say care integration, it isn’t just about products. Innovating new ways of partnering reimbursement, better integrating some of the insights and data into the overall management of healthcare is essential.

And we think that it can improve outcomes, potentially increase patient satisfaction, and definitely contribute to better cost management over the long run. If we only focus on the direct costs of one particular area and aspect of healthcare, or if we fail to keep the patient at very center of how we’re doing this reform, it just won’t be successful.

Finally, we believe there’s got to be a greater focus and emphasis on wellness and prevention. Although the world is making great advances in sick care, the best answer to deal with the growing epidemic of chronic disease is healthier lifestyles, a true dedication to wellness.

And we realize that this is not easy, but as we’ve seen with our own employees, investing in health and wellness programs has a positive and long term impact on welfare and on cost. To me, that’s one of the most promising frontiers around innovation.

So with that as a backdrop, here’s our strategy for continuing to lead and succeed in this evolving healthcare marketplace. Our strategic framework for achieving our future growth goals should be very familiar to you. It naturally starts with our credo.

And it’s our aspiration that by caring for the world one patient at a time, we’re going to help billions of people around the world live longer, healthier, and happier lives. If we look at our longstanding strategic principles, we know that they’ll remain the same at the core. However, we’re also evolving these to make sure that we stay in tune with the current environment.

And we’ve discussed these principles with you many times, but I’d like to focus on one for our discussion today, which is increasingly important given some of the changes we’re seeing. And we believe that our broad base in healthcare, and the strength of Johnson & Johnson as an enterprise, will be a very important differentiator in our evolving landscape.

Think about it for a moment. The diversity of our science, technology, the product offerings, provide us with a unique perspective to address complex unmet medical needs within a rapidly changing healthcare environment. It enables us to maintain a strong footprint and presence in growth markets that represent an increasing share of our business. And it enables us to sustain consistently strong financial performance for a wide variety of business cycles.

The power of our broad base starts first with the strength of each one of our different segments. This is a snapshot of our segment by segment strategy that we’ve discussed with you on previous occasions. And this is going to continue to be the driving engine of most of our growth, and it’s our first intention to lead within each one of these segments with a strong focus on innovation, globalization, execution, and leadership.

At the same time, we intend to use the power embedded across these segments in order to advance new ideas, new products, services, that will enable us to continue to optimize our resources and scale and to outpace the rate of change in the industry. To do so, we’re dedicating teams to implement a core set of enterprise wide initiatives that will equip us to act in a more nimble and dynamic way in support of our growth strategy.

As all of you know, everything begins with innovation, and for the past five years we’ve consistently invested about 11% of our net trade sales to support our research and development efforts, that equated to over $8 billion as an enterprise in 2013. Our distinct innovation model is predicated on accessing the very best science to address unmet medical need and then leveraging our own specialized capabilities to develop differentiated products.

As you know, we’re agnostic as to where the ideas emanate from, and we’ll access the best science internally or externally. We’ve demonstrated the success of our approach first in our pharmaceutical business, and we’re applying the same philosophy across all of our other segments as well.

In fact, we’ve been relentless, and have executed over 200 alliances, licensing, and acquisitions, and strategic partnerships across the enterprise just over the last two years. Our chief scientific officer, Dr. Paul Stoffels, chairs our worldwide research and development management committee, and he works with our R&D leaders across the company to set and drive the enterprise wide innovation agenda by harnessing our deep internal expertise and platform capabilities, as well as by sourcing in external innovation to really fuel our pipelines.

We’ve gotten off to a head start on this industry model by launching four innovation centers in key research communities around the world. These teams have quickly established credibility and trust, and have already inked over 40 early stage deals. Paul has done a tremendous job in leading the innovation platform, and his leadership and track record of success is widely regarded across Johnson & Johnson, but even more importantly across the industry.

In fact, just a week ago, Paul was recognized by the leading life science CEOs with the prestigious lifetime achievement award. He really deserved it, and we’re incredibly proud of him. Congratulations, again, Paul.

In addition to doing smart deals and focusing our R&D teams to increase our productivity, we believe that we’ve also got to offer innovative solutions. As I said earlier, it only matters if the best science can really be effectively delivered to customers and patients. And we’re going to measure our long term success by our ability to leverage the specialized capability of the Johnson & Johnson enterprise to achieve three key objectives that healthcare stakeholders today are demanding.

They are improving outcomes, increasing patient satisfaction, and reducing costs and increasing access to healthcare around the world. Of all the companies in Johnson & Johnson, and in healthcare, we are uniquely positioned to create new and different partnerships that align with hospitals and payers, strategies, to transform from volume based systems to value based systems, with the ultimate goal of affordable solutions to deliver a better clinical outcome and patient experience.

We’ve already established a new deployment model and enterprise wide account team that can represent our entire portfolio in unique ways to each customer, in order to customize the best solution for that particular customer. And our teams have been working for several months to create and execute pilots with a few prominent healthcare systems here in the United States, and to enhance some of the work we’re already doing more broadly with other customers as well.

It’s early on, but I’m particularly excited about the possibilities. Now, a good example of how we can deploy differently to better serve customers is in knee replacement procedures. We actually have several comprehensive offerings, but I’ll just touch on about four of them this morning.

First, Care for Today Orthopedic Solutions focuses on improving continuity of care and recovery through patient education and empowerment, but as well as by providing post-surgery support both in the hospital as well as at home.

Second, True Match brings a new level of personalized total knee replacement surgery to the OR, based on the proven philosophy of mechanical alignment with customized patient instruments and systems that are designed to really aid in knee implant positioning and to increase the efficiency of the procedure as well.

Third, with SterilMed integrated reprocessing, we aim to deliver direct savings to hospital budgets by combining both new and previously reprocessed instruments in one simple, sterile container.

Finally, we’re piloting a procedure based outcome contracting agreement that’s essentially a risk sharing program with hospitals to [unintelligible] positive readmission trends. This is just one example of an industry mindset, a changing approach, and really that’s accelerating the realization of our vision to reshape the healthcare delivery system with total solution offerings that add value to the system and ultimately expand our business.

And so as we expand our businesses, particularly in other parts of the world, we’re increasingly executing our globalization strategy with an enterprise wide lens to better drive our success in this markets. These charts demonstrate an increasing importance that these countries have to our overall business. For example, in 2013, 55% of our sales came from markets outside the United States while emerging markets accounted for roughly 22% of our total sales.

Johnson & Johnson has been operating in China for over 28 years, and while many of our competitors are currently expanding in the region, our strong heritage and business foundation provides a unique viewpoint for us to look at growth.

When I met with you last January, I discussed the potential of our business in China, which, given the population, unmet medical needs, demographic changes, and steps the government is taking to enhance the healthcare system and expand that access, we believe it represents enormous opportunity.

The Chinese market, the healthcare market, is large and growing, and healthcare expenditures are expected to increase about 14% a year through 2017. Today, it’s almost $3 billion, it’s a $2.8 billion business for us, and the dynamic environment there really demands new ways of working, which relies on the strength of our combined three businesses. It capitalizes on our scale, our breadth, as well as the very unique strength of the Johnson & Johnson brand equity.

So we’ve taken important steps to invest in continued growth there. Last fall we appointed Jesse Wu to the role of chairman of Johnson & Johnson China, a new enterprise wide leadership position. Jesse comes from the region, and he’s been a leader within our great company for more than 25 years, and he’s got a strong track record of success. But he’s working now to optimize our capabilities and really to drive growth in China by enhancing our ability to meet the country’s unmet healthcare needs.

Each of our businesses still runs their respective businesses. However, in his chairman role, Jesse is representing a consistent Johnson & Johnson interface to key external stakeholders, particularly to the government and to the talent that we’re trying to bring into the organization. And from his enterprise wide vantage point, he’s going to be better suited to identify, facilitate, and actually create opportunities for growth going forward.

The enterprise wide view looks a little bit different in Southeast Asia, where we’ve rolled out a model that we call One Johnson & Johnson. There, we’ve aligned our operations and management for nine different countries, including Thailand, Indonesia, the Philippines, and we’ve brought it into a single, $1.4 billion business. Now, in this construct, we think we’re going to be more efficient while also increasing our ability to compete in these smaller midsized markets with more streamlined approaches led by one managing director.

Also, foundational to our growth strategy is excellence in execution. It’s essential, and as we did in defining the best strategies for growing our business, we’ve also spent a considerable amount of time and energy examining our internal processes and structures as well. The entire executive leadership team at Johnson & Johnson has been focusing on ways to ensure that every product we test, that we develop, that we manufacture, achieves world-class quality standards, allowing us to responsibly meet the demand of customers and consumers and patients around the world.

And our focus has been on strengthening and streamlining our supply chain to ensure that we can reliably meet demand. And as I said earlier, we continue to meet the goals under the consent decree to bring our United States over the counter products back online.

We’ve also implemented a new quality and compliance operating model, which is ensuring more consistent standards and capabilities are in place across all of our product lines, our businesses, and different geographies.

And our chief medical and chief quality officers are setting new benchmarks in medical safety and implementing a more consistent global approach for monitoring the use of our end market products that’s very patient and consumer centric for ensuring that they are safe and performing as expected and as intended.

And while we’re pleased with the progress that we’ve made here, we’re not yet satisfied, and we’ll keep doing whatever it takes to ensure that we continue to earn the trust of consumers and patients around the world.

Stay with me for a moment on excellence in execution. Last year we kicked off an enterprise wide standards and productivity initiative to strengthen our functional capabilities around the world, in order to better enable first our businesses to grow, but also continue to improve our cost competitiveness.

We’ve already identified benefits from this effort, and we project that we’ll achieve approximately $1 billion in savings over the next three years that we can reinvest back in the business. And also, it helps us offset some of the expected pricing pressures that we anticipate on the horizon in this healthcare environment.

It’s also our belief that Johnson & Johnson holds a greater responsibility to lead with a purpose, and that by doing so, all of our stakeholders will benefit as defined by our credo. Our success is measured by our ability to advance the health and wellness, by improving the quality of people’s lives. And through contributions of about $1 billion in products and cash, we’ve supported over 500 community programs in more than 60 countries in 2013 to address the unique needs of families and communities around the world.

First, we’re committed to advancing global health to fight multi drug treatment resistant tuberculosis and are working with health authorities to make SIRTURO, which has received a positive CHMP recommendation for approval in the European Union, and was just approved in Russia, more available also in other parts of the world.

We’re also continuing to enter royalty free licensing agreements to make SIRTURO and other important lifesaving medications available in other developing countries. And we’ve got a strong track record of doing this, and today 66 countries have at least two of our four HIV medicines available at special effort pricing.

We also believe in wellness, and we’re proud to be sponsoring a program right here in the United States, in fact right here in our backyard, in cities such as Atlanta and with school systems in Houston and Philadelphia and Newark, working with our Human Performance Institute, which trains high performing athletes and executives to work at peak levels.

We’ve engineered and launched a Johnson & Johnson seven-minute workout app. It’s a fast, scientifically proven, app, simple, for your mobile device. So there’s no more excuses. It’s got over 1,000 exercise options, and it’s free on iTunes and on Android. I hope you’ll download it and give it a try. New Year’s resolution.

Our engaged teams do a tremendous job every day, and I’ve been talking with you for about the last 45 minutes about the collective results that we’re very proud of. And I’d like to again thank each and every one of our associates around the world for their continued commitment to the success of Johnson & Johnson.

As we enter this year, we’re going to remain focused on driving growth with the continued execution of our long term priorities: one, achieving our financial targets; two, restoring a reliable supply of OTC products on the shelves here in the United States and relaunching them, making sure that they have best-in-class launch and support programs positioned to gain share; continuing to capitalize on some of the potential of DePuy Synthes as an innovative driver of growth in orthopedics and continuing to build on the strong momentum that we talked about with our pharmaceuticals team, as well as our long term growth drivers of globalization, innovation, execution, and leadership.

Just a few final thoughts. Never before has the healthcare industry operated in a time of such remarkable change and also creating such dramatic opportunities for us. In this environment, it’s absolutely essential that we balance our focus on our core capabilities and strengths while also adapting better to evolving customer needs. To succeed, we’re taking new approaches, working more collaboratively, and shaping our company to ultimately execute more efficiently. Johnson & Johnson is strong, and poised for growth.

Our success over time will be how we live up to the responsibilities, the commitments, laid out in our credo, and helping patients and customers live longer, healthier, and happier lives, creating an environment where our employees can be their very best, excel and innovate, of taking care of the communities by improving their access to care, and by continuing to generate a fair return for our shareholders.

I couldn’t be prouder to be part of this organization, and this incredible team, at this pivotal time. Thank you very much for your support of Johnson & Johnson.

Dominic Caruso

Thank you, Alex, and good morning everyone. I’d like to provide some comments on our 2013 fourth quarter and full year results, and then provide some guidance for you to consider as you update your models for 2014.

It’s really a great pleasure to report on our exceptional performance in 2013, which was driven by the many successes that Alex previously discussed. Our strategy and momentum positions us very well to continue our strong momentum and performance in the evolving healthcare marketplace.

At the beginning of 2013, I provided you with an outlook of our financial performance for the year. We saw continued improvement in our results throughout the year, driven by stronger sales results and good expense management. Our operational sales growth of 7.7%, as Louise described earlier, exceeded our guidance of 6% to 7% for the year.

I’m also pleased to report that we’ve improved our pretax operating margin, excluding special items, by 90 basis points, and that our net income margin, also excluding special items, expanded to 22.3%.

During the fourth quarter, we recorded several special items that netted to approximately $40 million on an after tax basis, and which consisted of the following: increased litigation accruals; a charge for in-process research and development; costs associated with the Synthes acquisition, which are consistent with what we expected we would incur as special items throughout 2013, and which we expect will continue as that integration activity continues; an increase in our estimate for the costs associated with the DePuy ASR hip program for updated information primarily related to the program outside the U.S.; and finally, during the fourth quarter cumulative losses exceeded the net worth of [sios inc.].

This necessitated the writeoff of the acquired entity for tax purposes, which was previously written down for books purposes. This resulted in a tax benefit recognized in the fourth quarter as a special item. Together, these special items negatively impacted fourth quarter results by $0.01 per share. Excluding these special items, our adjusted earnings per share were $1.24 for the fourth quarter.

During the fourth quarter, our tax planning efforts resulted in a lower tax rate, which offset some additional cost in the fourth quarter related to the buyout of a royalty agreement and the planned shutdown of certain manufacturing operations with the resulting writedown of those related assets.

Overall, the net impact of these items, along with the higher level of sales in the quarter, resulted in our EPS exceeding the mean of the analysts estimates as published by First Call.

Now, to wrap up our formal presentation this morning, I’d like to provide some guidance for you to consider as you refine your models for 2014. Let me begin with a discussion of cash and interest income and expense. At the end of 2013, we had approximately $11 billion of net cash. This consists of approximately $29 billion of cash and marketable securities and approximately $18 billion of debt.

As you know, we recently completed a $3.5 billion debt offering. We did this to lock in some attractive long term rates, and while this financing does increase the overall borrowing costs compared with shorter-term commercial paper rates, on a long term basis the rates we obtained are very attractive. For purposes of your models, assuming no major acquisitions, I’d suggest you consider modeling net interest expense of between $400 million and $500 million, reflecting a higher level of interest expense than some of you have modeled.

Now, turning to other income and expense, as a reminder, this is the account where we record royalty income as well as gains and losses arriving from such items as litigation, investments by our development corporation, and also divestitures, asset sales, and writeoffs.

This account is always difficult to forecast, but we would be comfortable with your models for 2014, reflecting other income and expense, excluding special items, as a net gain ranging from approximately $600 million to $700 million, a lower level of income than some of you have modeled.

And now a word on taxes. For 2013, the company’s effective tax rate, excluding special items, was 17.2%, which was lower than our recent guidance, as we were able to implement some tax planning items late in the year.

This effective tax rate for 2013 includes the federal R&D tax credit for both 2012 and 2013. You may recall that the 2012 portion of this credit was recorded in the first quarter of 2013. Our guidance for 2014 anticipates that the R&D credit will be renewed by Congress, although that has not yet occurred. We would be comfortable with your models reflecting an effective tax rate for 2014, excluding special items, of approximately 18.5% to 19%.

If the R&D tax credit is not approved, it will negatively impact the tax rate by approximately 0.5%. As always, we will continue to pursue opportunities to improve upon this rate throughout the year.

Now turning to sales and earnings, our sales and earnings guidance for 2014 takes into account several assumptions and key factors which I would like to highlight, which may not be fully reflected in your models. Those key assumptions and factors are as follows.

For sales, our assumption for PROCRIT is that there will not be biosimilar competition in 2014, and for INVEGA SUSTENNA and RISPERDAL CONSTA, we do not anticipate generic entries for these products this year.

And as for earnings, there are several factors to note. First, some comments about foreign currency fluctuations that impact real economic transactions as opposed to only translation, which I will discuss later.

As we discussed on our third quarter call, the Japanese yen devalued by approximately 25% versus the U.S. dollar and the euro in 2013. The impact of the yen devaluation on 2013 results was not significant because of our policy of hedging foreign currency transactions 12 to 18 months in advance.

However, the impact of the devaluation of the yen will be a significant headwind in 2014 and our 2014 guidance reflects a negative impact to gross margin in 2014 of approximately 60 basis points, or an equivalent net impact to EPS of approximately $0.11.

The yen weakened due to many factors. When foreign currency shifts are of a significant magnitude, it is not only difficult to adjust spending accordingly to offset the total impact, it’s often not prudent to do so given the long term impact of such actions compared to the potential shorter term nature of the currency impact. Our guidance assumes we will have offset some of this impact, but not all of it could be mitigated.

Likewise, in the event of a significant devaluation of any other major currency, such as the Venezuelan bolivar, we will look to mitigate that impact, again depending on the magnitude of the impact. Such a potential devaluation of the bolivar or any other currency is not reflected in our guidance.

Finally, as you know, we announced that we have received a binding offer for our clinical diagnostics business of approximately $4 billion. We expect the transaction to close within the next six months, and that the resulting gain will be treated as a special item. Therefore, it will not impact our guidance at this time. When we update our guidance after the transaction closes, we will of course indicate the impact a divestiture would have on our sales and earnings per share, excluding special items, for the remainder of the year.

As of today, we are considering how to best allocate the net after tax proceeds from the divestiture in order to minimize the go forward dilutive impact of not having that business contributing to our results in the future.

As we’ve done for several years, our guidance will be based first on a constant currency basis, reflecting our results from operations. This is the way we manage our business, and we believe this provides a good understanding of the underlying performance of our business.

We will also provide an estimate of our sales and EPS results for 2014 with the impact that current exchange rates could have on the translation of those results. As of last week, the euro had strengthened versus the U.S. dollar as compared to 2013 average levels. However, many other currencies have weakened versus the U.S. dollar as compared to their average levels for 2013.

Considering these factors I just noted, we would be comfortable with your models reflecting on an operational basis a sales increase of between 3.7% and 4.7% for the year. This would result in sales for 2014 on a constant currency basis of approximately $73.9 billion to $74.7 billion.

We are not predicting the impact of currency movements, but to give you an idea of the potential impact on sales, if currency exchange rates for all of 2013 were to remain where they were of last week, then our sales growth rate would have decreased by nearly half a percentage point. Plus, under this scenario, we would expect reported sales to range between 3.2% and 4.2% for a total expected level of reported sales of between $73.5 billion and $74.3 billion, which at the midpoint is consistent with the analyst models as reflected in First Call, even considering the headwind of recent currency rates.

Now, turning to earnings, our guidance reflects the major assumptions I noted earlier, specifically the negative impact of the weakening of the Japanese yen, which we estimate to be approximately $0.11 to EPS. As many of you are aware, we do not treat amortization expense as a special item. Our earnings guidance includes total amortization expense for the enterprise of approximately $1.3 billion on a pretax basis.

We also expect to experience pricing pressures in 2014 across many markets, particularly in Europe. The impact of this negative pricing pressure is expected to negatively impact our pretax operating margins by approximately 50 basis points. Considering the factors I just noted, we suggest that you consider full year 2014 EPS estimates, excluding the impact of special items, of between $5.70 and $5.80 per share on an operational or constant currency basis.

Again, we are not predicting the impact of currency movements, but to give you an idea of the potential impact on EPS, if currency exchange rates for all of 2014 were to remain where they were as of last week, then our reported EPS, excluding special items, would be positively impacted by approximately $0.05 per share due to exchange rate fluctuations.

We therefore suggest that you model our reported EPS, excluding special items, in the range between $5.75 and $5.85 per share, or a growth rate of 4% to 6%. At this early stage in the year, we would be comfortable with your models reflecting the midpoint of this range.

As you update your models for the guidance that I just provided, you will see that we do expect that our pretax operating margins will show a slight improvement in 2014 over 2013 levels, despite the negative impact of the devaluation of the yen on our gross margin, and the expected incremental pricing pressures. This is due to continued focus on our operating expenses. You should also see that our net income margin will be approximately flat with prior year, due primarily to the increase in our effective tax rate.

In closing, we’re very pleased with our overall results for 2013, and we expect our growth and momentum to continue into 2014. We have the financial strength and breadth to execute on our near term priorities and to deliver solid results while also continuing to invest for long term growth.

I look forward to updating you on our progress throughout the year. Thank you, and I’ll now turn it back to Louise for Q&A.

Question-and-Answer Session

Louise Mehrotra

Thanks, Dominic. We’ll now start the Q&A session. Please wait for the microphone, as we are webcasting the meeting. And as we have our CEO with us, I’d appreciate it if you could keep your questions to the strategic level.

Matthew Dodd - Citigroup

Alex, for you, and the nice thing about the slides this year and last year is there were some tables that were the same. Emerging markets was actually 23% last year. This year it was 22%. Some of that was obviously U.S. pharma. Consumer did really well. Can you give us an idea of what you’re seeing in emerging markets broadly, what you may have seen in the fourth quarter, and your expectation for ’14 maybe versus ’13 in emerging markets, particularly?

Alex Gorsky

I think overall the headline that I’d encourage you to think about is we think that there’s a big growth opportunity in emerging markets. And in spite of some quarterly ups and downs, in spite of a few shifts here and there in specific segments, or product performance, we see that these markets will likely continue to grow at about 3 to 4 times the growth rates that we’re seeing in developed markets over the next several years.

And so specifically for Q4, there were things in Q4 2012 that you’d have to think about in ’13, but overall what we’re seeing, for example in BRIC markets, growth for the year is about 12%. And we saw performance slightly lower than that in Q4, again impacted by a number of factors.

If we look at our current business, clearly MD&D is our leader in the BRIC markets, and has done very well. What you see is high teen growth, sometimes exceeding 20%, based upon the investments that we’ve made in research and development, manufacturing, and commercial presence in those markets.

Our consumer growth has also done well in them, impacted somewhat recently by some of the ingredient issues that we faced, but here too we’ve got a lot of market appropriate products. We’ve invested significantly as well in manufacturing and commercial capabilities.

And obviously our pharmaceutical group is a little bit different, because we have been very open about our strategic intent not to participate in the generic segment, which has an impact there. But we still believe there’s a lot of opportunity to address both unmet need as well as the business opportunity with some of our higher technology products.

And by the way, if you look at some of the other investments that we’ve made in companies like [unintelligible] several years ago, recently with Elsker, which expanded our presence in the baby segment. We also did the MD&D investment in our biosurgicals business, which will help us expand that platform there in the coming years. We remain very confident in the opportunities for growth there in the future.

Louise Mehrotra

If I could just add something also onto that one? We had, as I discussed in my remarks, with Russia, with the tender, VELCADE, and we also had some tender business on REMICADE. So in the emerging markets, you have a lot more of tender business, and it can cause some fluctuations.

Mike Weinstein - JPMorgan

First question, Dominic, the constant currency, or actually operational, I don’t know if operational is actually constant currency. I think it’s [unintelligible].

Dominic Caruso

Yeah, that’s the way we refer to it.

Mike Weinstein - JPMorgan

Just to be clear, you don’t have divestitures in there too, right? You have a bunch of divested products and businesses that you’re not backing out?

Dominic Caruso

Right, when I talk about operational, I’m just talking about excluding any impact of currency only.

Mike Weinstein - JPMorgan

Okay. The 3.7% to 4.7% would imply a deceleration from 2013 and certainly the way the year ended up. Could you talk about why that would be the case? Obviously it’s tough to sustain 12% revenue growth, but you’ve got a lot of momentum in that business, so what are you assuming decelerates in 2013? Or are you assuming no improvement in MD&D as well?

And then the second question, and this is both a Dominic and Alex question, but one incredibly underutilized asset at J&J is the balance sheet. We’ve been talking for years about the cash that’s trapped outside the U.S. It’s significant. It’s growing. All your cash flow is outside the U.S. after you pay your dividend. At what point do you change your thinking on this and actually start to repatriate?

Dominic Caruso

On the growth rate, I think it’s a story of a very high base in the pharmaceutical business after a tremendous year. And in fact, although the pharmaceutical business will continue to grow, it just won’t grow at the same rate that it grew at in 2013, given the high base that it’s already at after a pretty fantastic year.

So that alone, I think, accounts for the majority of the difference and what you’re referring to as a deceleration in growth. We do expect MD&D and consumer to pick up in growth. I think the pharma comparisons are tough year over year. And I think we ended the year at good, strong growth. We did have some good opportunities in the year that, again, form a base for which then to grow off of, makes it just difficult.

It’s early in the year. This is our view. We try to take everything into consideration. We provide you our estimates, but that’s our current expectation of course [unintelligible], throughout the year.

If I can give just a few comments on cash, obviously cash, we generate, as you know, mostly outside the U.S., and it does grow, because of our healthy cash position. We obviously look to maintain the increase in our dividend, so we don’t view that as a hindrance to doing that. We’re still able to do that.

And we view that as a great opportunity to invest in the long term growth market, and as you saw with the Synthes transaction, where we were able to use cash outside the U.S. for a significant acquisition.

So we’ll always look to do those kinds of things with the cash first, continue our dividend and invest in growing the business. But at some point, and I’m not prepared to give you that point today, at some point we would consider whether repatriating the cash would be a prudent thing to do.

At the current U.S. tax rate, and with the current penalty, quite frankly on the repatriation, it appears to us that that’s not a good way to utilize the cash, and it provides for a significant diminution in value to our shareholders by doing so.

Larry Biegelsen - Wells Fargo

Alex, you’ve discussed publicly that you’re reevaluating your cardiovascular medical device strategy. It’s an area where you have a strong presence in only one area. How do you view the attractiveness of those markets now, and how important is it for J&J to have a stronger presence in the cardiovascular device space?

And my follow up is, the orthopedic commentary was encouraging, that you made earlier. How confident are you that that’s not a pull-forward, ahead of the implementation of the ACA? Any signs that you can point to that give you confidence that that’s sustainable?

Alex Gorsky

Let me start with the first one. Overall, we continue to think that the cardiovascular area is certainly an area of a lot of unmet medical need, and also represents an opportunity for us. I think the decision we made several years ago, of streamlining our current cardiovascular portfolio, was in fact the right one. And if you take a look at the dynamics in the stent market, even more broadly in CRM and some other areas, they’ve been pretty challenging lately, for a number of different reasons.

And so I think making that decision helped us better focus on areas like EP and Biosense Webster, where I couldn’t be more proud of that team. I think we’ve got over 15 quarters of about 13%-plus growth. And at the same time, we made significant investments in new technology that continue to enable them to improve patient outcomes with new product launches.

I think we’ve also done a very nice job, and I compliment Gary Pruden and Shlomi Nachman on the job they’ve done in the rest of the business, in streamlining what we’re doing in the endovascular space as well. So if you look at overall performance of our cardiovascular group through some very prudent, relatively minor investments, and frankly just better execution, that business we think is on much better footing now than it was before.

We noted really over the last 24 months that we’re continuing to look at renal denervation. Of course you saw the recent information that was released by one of our competitors regarding their device. We have our own approach. We remain hopeful in this area. As we know, if we can truly achieve some of the drops in blood pressure that we’re seeing in some of the other trials, that could have a tremendous impact for patients. So we continue to pursue that.

We’re looking at AAA, obviously. We continue to be interested there. And we’re watching the other spaces accordingly. I think the transcatheter aortic valves are still in the midst of their launch, working their way through not only the technology issue. Of course they only have two options on the market. As they work their way through reimbursement, we’ll watch that closely, as well as the others. So we remain interested, but we think being where we are right now is a good place to be.

If I look at orthopedics for a moment, we were encouraged by the trends that we saw really later in the third and heading into the fourth quarter. As I mentioned during my talk, I think the data is still somewhat mixed overall, if you take a look at utilization. So let’s start with the hospital data. A lot of you share that. If you look at in patient procedures, if you look at surgical procedures, if you look at outpatient procedures, if you look at lab tests, they remained essentially flat through the end of the year. We saw physician visits up slightly, and I mean slightly, 1-2%, and of course we saw improvements in hips, knees, and trauma in the fourth quarter.

I’m really proud of what our DePuy Synthes team did in the fourth quarter. If you look at our underlying hip business, we grew 5%. On a worldwide basis, we grew 8% in the U.S. If you look at knees, we grew 8% worldwide. We grew 9% in the U.S. If you look at trauma, we grew 7% worldwide, we grew 10% in the United States. And the 10% was somewhat accelerated because of what happened in the fourth quarter of last year.

But if we look at more underlying fundamentals, what we’re seeing with accounts, what we’re seeing with customers in the field, we remain very hopeful. We think we’re going to have to watch the Affordable Care Act and its impact here in the United States closely. Just recently the Congressional Budget Office, as well as [unintelligible], if you look at their assumptions and projections about numbers of patients, I think they’ve been reduced substantially, based upon sign up rates.

So we do expect there to be some assistance there, probably not at the rate that was earlier projected. And of course there’s also the fourth quarter dynamic in the orthopedics market of, you know, people utilizing all of their healthcare benefit as well.

So we’re cautiously optimistic, I would say, regarding the fundamentals of some of these markets. Longer term, we still think they represent a very significant opportunity.

Unidentified Audience Member

One question you mentioned in your presentation, Alex, this performance based risk sharing arrangement that you’re pursuing within orthopedics, something that’s worked for you in the past [unintelligible] in RISPERDAL. If you could talk a little bit about that, and whether we’re going to see more of that in devices?

Alex Gorsky

As I mentioned, and actually as we’ve envisioned over the past several years, we have a strong belief in the evolving healthcare marketplace today that in many areas, that customers, certainly hospitals under increasing pressure, are going to be looking for, frankly, ways of creating new partnerships with customers and moving from just a volume based model to a much broader portfolio model.

And as we look at that, and we think that we’re very well-positioned, and I want to be clear that our number one focus is still on bringing new, innovative products to market, gaining share, we think there’s a lot of opportunity. But we also think that the unique depth and breadth of our portfolio, especially in areas like orthopedics, where we touch so many of the different spaces, but even more broadly, if you just think about a knee or a hip procedure, and if you combine what we do in the surgical side, with our hemostats, with our energy instrumentation, along with what you might see in the prosthetic device and instruments itself, potentially longer term even with our pharmaceutical line, we think that we have a unique offering. And so on a selective basis, right now, we have been working with customers to contract with them in a different way.

And so again, it’s still early, but we think in the right areas, this can be a substantial opportunity for us to grow our share as well as to work closely with hospitals in helping them better manage outcomes and costs.

Unidentified Audience Member

And one follow up, if I could, on spine. Not to pick on a place where you’re seeing some continued challenges, obviously very strong hips and knees, but the integration, the market, maybe share dynamics, can you give us a sense of maybe intermediate, long term strategy for getting that back to market, or better growth rates?

Alex Gorsky

That’s a good point. We continue to believe that the spine market long term is a very good opportunity. When you talk about it, I think the number two reason why someone goes to a physician, or makes a physician visit, is for back pain. We know that that market has undergone a lot of change over the past few years, and we certainly felt that.

We do feel, if we look at the overall integration of DePuy Synthes, that one challenge for us was clearly in the spine. And we recognized that going into it, when you had to bring that organization, that’s where the greatest amount of overlap versus hips, knees, and trauma, sports medicine, and other areas. And we did see higher sales force turnover, frankly, than we would have liked to see.

I think Michel and Gary Fischetti and his team have done a nice job of addressing many of those concerns. I think our performance in Q4, while still not where we want it to be, is showing some improving trends, in fact outside the United States we’re actually positive. And also, with some of the complementary nature of some of the underlying technology that we have in the other orthopedic segments, that scientifically, commercially, contractually, it will be an important piece of our business. And we’re confident that we’ll get that back to a growth rate that may not be reflective of the growth rate that you saw several years ago, that we saw several years ago in spine, and nonetheless is a healthy and sustainable one for the business.

Rick Weiss - Stifel Nicolaus

Maybe I’ll focus first, Alex, on consumer, if I could. You said that 75% of the products are back. Clearly you had a good quarter. A couple of things there. What’s it going to take to get all the way back, recapture that full revenue you lost? And maybe relative to product reformulation, like we saw a newspaper report on Sunday, article about taking certain products out, is this going to slow your progress as you reformulate?

Alex Gorsky

I’d like to note, and first of all, congratulate Sandy, Lynn, and our entire consumer team, for what I do think was strong performance throughout 2013, but certainly in Q4. And just a couple of things to note. One is we obviously have been really focused on making sure that we meet all our consent decree requirements. And we’ve learned a lot through that process. And it’s taken an integrated effort on the part of our supply chain, our information technology group, our business partners.

And sitting here today, having met all of our consent decree requirements thus far, we continue to gain confidence now in our ability going forward to do just that. So we still have a substantial volume that we would have to make up to get back to the earlier volumes that we saw, but every time we introduce the product to the market, Extra Strength Tylenol, if you look at Children’s Tylenol, Children’s Motrin, pediatric, we’re seeing customers respond.

We began not only focusing on the remediation, but really the relaunch program, on the McNeil team, particularly in the fourth quarter. I’m sure you saw some of that in the media and the advertising. We’ve seen a very nice response and uptake as a result of that.

And so we continue to bring things back online, but obviously we’ve got to do that in a very thoughtful, disciplined way, to make sure we meet all of the requirements as well as launch them.

The other factor is, though, we’re very pleased with the partnership that’s been taking place with our major trade partners. So all the major outlets have been enthusiastic about working with us to get these brands back on the shelves.

Now, while I’m very proud of that, I’m also very proud of what we’re seeing in our core brands. And so if you look at the core strength of things like baby care, up 6% for the quarter, Listerine, up 6%, actually about 8.5% outside the U.S. If we look at OTC, you heard 21-22% growth in the United States, very strong growth. Overall, skin was up over 9%. And that’s really being driven by Jennifer Anniston and the campaign, the great science and technology and Neutrogena, Aveeno turned in strong growth.

And so as you know, in the consumer group it takes great scientifically driven innovation, combined with strong innovation in advertising, great retail partnerships and programs, to really drive that together, but I think now we’re in a much better position with our core business as well as with our OTC business, to really have our consumer group deliver the kind of performance that we would expect longer term.

Rick Weiss - Stifel Nicolaus

If I could ask an MD&D bigger picture question, you’ve discussed this from several angles, but frankly, even though you’ve got some amazing franchises, we all know it, the portfolio seems relatively overweighted in mature products and mature markets. And at this point, you’re still growing, I would say it’s a lower end of the industry’s relatively depressed growth. Maybe you don’t see it that way. I’d be curious if you don’t agree with that.

You’ve emphasized the need for meaningful innovation, you’ve talked about your decisive portfolio and investment choices. What’s your thought process about getting this portfolio back to industry growth? What’s your sense of urgency? When should we think about you getting back to that sort of low to mid single digit growth for this business?

Alex Gorsky

It’s a good question. We’ve been very open about our overall strategy for the organization of always having a goal of growing slightly faster than our markets at a minimum. And that remains our goal in MD&D. Now, if we project out that the underlying growth rate in MD&D is somewhere between 3% and 4%, we clearly want to do better than that.

And if I look at performance over the course of 2013, I think there are reasons to believe and be more optimistic about what we’re seeing. Now, you always have to be thoughtful when you take a look at the numbers, but if we account for acquisitions and divestitures, and there was a significant swing also on the diabetes test strip, if we pull those things out, we’re seeing a growth rate of about 3.2%, which we think is pretty indicative of the over marketplace.

And that’s in spite of a lot of churn that we’ve had in other areas of that business. And I think as we look forward, we talked are looking at orthopedics, what we’re doing there, I think we’re in a much better position there as we’ve ended 2013 and we’re setting ourselves up for the future.

If you look at a few of the other areas in MD&D, where we know we can improve performance, we’re also making good progress. So, for example, if you look at the innovation in energy, the G2 articulating device that we have coming out, the [unintelligible] HARMONIC seven, we think is going to have us be much more competitive, and we’re introducing those to the market, literally as we speak. I think biosurgicals is another area that’s going to be a strong platform for growth going forward as well.

So we do think this should be a business that’s growing in the areas that you mentioned, and that I mentioned earlier, and it could be a very strong supporter overall for Johnson & Johnson well into the future.

Obviously, we are also looking at the portfolio. I want to congratulate the work the team did with ortho clinical diagnostics. First start by thanking our employees there through this process, for the great job that they’ve done, but also the work that the team did in working with Carlyle. And we continue to look at other areas of our portfolio as well to make sure we’re investing where we can make a big difference for patients, where we can have strong market positions and ultimately lead to future growth.

Bruce Nudell - Credit Suisse

Alex, two questions for you. Firstly, on the MD&D portfolio, diabetes has clearly had a structural change. What’s your thinking on that and the fact that those go, does that leave kind of a portfolio deficit where given diagnostics’ departure and potentially diabetes’ departure you’d like to have another growth engine there?

And secondly, you mentioned in your comments that one of the things that J&J is focusing on on the pharma side is both commercial excellence and execution as well as regulatory expertise, and you have two great drugs, INVOKANA and XARELTO, and they don’t have big categories around them. And are those areas, metabolic and cardiovascular, where there are very interesting assets out there that you might be pursuing?

Alex Gorsky

Good questions both. You know, first of all, let me start with diabetes. We remain committed in the diabetes space. The fact that there’s over 350 million people around the world that have type II diabetes, and if we look at the projections going forward and the unmet medical need that exists in that space, it’s important that we continue to do work there.

Now, over the course of 2013, given some of the changes that we saw and the over 70% reduction in some of the bidding here in the United States, we had to make necessary changes to our business model, which we did make during the course of the year. And those are always painful, but I would actually applaud the work that our teams have done in that area to quickly reorganize and focus their business. And in fact, we’re somewhat encouraged, even in Q4 of this year, we had growth outside the United States in our diabetes unit.

And we also started, with the launch of INVOKANA this year, a very unique partnership between our Lifescan group as well as our Jansen Pharmaceutical group, and we jointly focused in endocrinology, and we also feel that that partnership and the broader offering that we were able to bring into that office led to the rapid uptake in endocrinology, where we actually passed Januvia, fairly early on, and we’ve continued to maintain that.

So long term, obviously we’re going to continue to take a hard look. We’re committed to that business. We think that overall diabetes is an interesting space, but we also recognize that we’ll need to change the shape and how we function within that as we go forward.

So that would be my position on diabetes. Regarding INVOKANA and XARELTO, look, we think that these are both great products. In fact, rather than products, they’re almost platforms within products. And that’s certainly true when you have a compound like XARELTO, and the great job that Paul and his team have done on expanding the indications, rapidly getting six indications, the data that they’ve built, the very large clinical trial database, combined with the commercial excellence that Joaquin and his team have provided. I think they’ve done a great job, and we think that there’s further opportunities for growth there as well.

And certainly the same when we look at INVOKANA. We have combinations that we’ll continue to work on, and there’s still a lot of unmet need, and we’re very early in the launch process there. But we think that overall the area of cardiovascular, metabolic disease is an important one, and one where we want to play.

Derrick Sung - Sanford Bernstein

I was wondering if you could spend a few moments talking a bit about what you’re seeing in Europe, and kind of the utilization environment there broadly across your various businesses. You did, Dominic I think, call out pricing as a concern for next year. So maybe you can kind of expand on that and give us your outlook there?

Dominic Caruso

Sure, just some comments on Europe. We did see some stabilization in certain parts of Europe, where as you all know, you’re following, in southern Europe there was a significant decline in utilization. So that’s stabilized a bit, although we don’t see significant growth in utilization in those parts of Europe. And we do see, as reflected in my comments, a continued pressure on pricing, particularly in Europe and particularly in the regions that have had the lower utilization rates. Rather than a resurgence of growth, we see actually a continued decline due to pricing in those markets.

Alex Gorsky

One thing that I would add is, as we look at Europe, there’s a couple of ways to view it, I think one is clearly we saw an impact over the last few years with things like austerity measures, increased queuing in our medical devices area, and perhaps some more challenging tenders. but I’d also point out that if you look at the growth that we’ve seen in our pharmaceuticals segment in Europe over the past couple of years, it’s been exceptional.

And I think what that demonstrates is that when you do bring pharmaceutical products to the market, that are very differentiated, that have strong science, strong labels, good clinical dossiers, and you match that with great account teams, great commercial presence, you can get uptake. And I think that’s really been driving our success in that environment.

And look, we’ve got a lot of pockets. We have pockets in our consumer area that have done very well in Europe, we have other areas in our MD&D, like I mentioned the specific comments about diabetes, given some of the challenges how our business has done. Energy had done very well over the past couple of quarters there. So yes, it’s a challenging environment, but it’s also one where I think you can be successful ultimately, if you bring the right innovation the right way to the market.

Tony Butler - Barclays Capital

Really a question on the pretax margins. In pharma it’s just been exceptional for the year. Clearly a continuous driver of new product opportunity. And the question there is, are we at the goal line? Or is there still more to be squeezed out on the pretax side?

And then second is really on consumer. With the increased cost of the relaunch, is there a substantial opportunity we can still see, even in ’14, for improving pretax on that side?

Dominic Behan

Good observation. It was exceptional growth in pharmaceutical margins. You know, I pointed out that our pretax operating margins this year will still expand, despite the negative headwind of the impact of the yen. So that should point out that underlying growth in the business and pretax margins, we still have that ability, and we still see it.

We don’t view it as squeezing out, though, just to correct that a little bit, because the business, as it grows, these products can generate a marginal improvement in pretax operating margin because of the fact that they’re phenomenal products, and they’re mostly specialty products, so there isn’t a commensurate increase in the level of commercial investment. And plus, the commercial teams just do a fantastic job.

So I do think there’s more room there. This particular year, though, as I pointed out, it’s challenged because of the impact of the yen.

David Lewis - Morgan Stanley

Alex, a strategic question, obviously Synthes, for ’14, you’re pointing out as being a major strategic initiative for MD&D. I was wondering if you could help us understand, what do you see happening in ’13, and what specifically is the focus in ’14, and how it differs from ’13.

Alex Gorsky

When you take on an acquisition and integration of an enterprise that size, over $4 billion in sales, many employees, it’s a complex undertaking. And we knew from the very beginning that ultimately, looking at the number of people that are in the orthopedic space, looking at how that space is evolving, we felt very strongly the size, the scale, that the innovation technology advantage we’d get from bringing that together is essential for success long term.

But in year one, you have a lot of the nuts and bolts, frankly, of the integration, just bringing them together on the ordering systems, getting the sales forces together, the compensation systems common, human resource programs, standardizing all of our qualities, supply chain, compliance programs. All of those kinds of things were really the focus at the tail end of ’12. If you think about it, we didn’t close until the second half in 2013.

I think we made a lot of progress in each one of those areas. Admittedly, there are going to be some bumps in the road when you do things like that, and the team went through that. But I think now they’re focusing much more externally.

So what I would say is as we move through 2013, there’s still work that we need to do in bringing it together, but now the emphasis more is shifting into what does that ultimately mean for the customers. So how do we make sure that we work more broadly with the [AO] foundation to ensure physicians and surgeons are getting kind of the training and education that they desire. How can we work together even more closely in places like China, where we know that in the trauma marketplace there’s a significant opportunity.

I mentioned, I think, getting over some of the real challenges that we had in spine, bringing those two together. And frankly, in fundamentally changing this platform offering, instead of just the knee, just the hip, just bringing a much broader portfolio approach where we see a lot of interest on the part of customers, not only here in the United States, but also globally, to fundamentally transform the model. So I think that would be the fundamental shift that we’re seeing.

David Lewis - Morgan Stanley

Very helpful. Maybe just two quick questions on cash. The first is, free cash in ’13 actually came in a little stronger than we expected for the year, so nice job there. But how should we think about free cash for ’14? Should it grow in line with earnings, faster than earnings? And the next question is, just as we think about the divestiture of the DX business, is the safest way to assume that money just stays on the balance sheet for strategic alternatives, or is there a possibility we could see a dividend or repurchase based on that cash proceeds?

Dominic Caruso

Thanks for the comments on free cash flow. You know, our teams do a great job of managing not only the P&L but also the cash genomes. If you look at our history, our free cash flow essentially equates to our earnings, within a band of somewhere between 95% to 105%. So if you’re modeling it within that range, that’s about what we should expect. Obviously, there’s payments, we have to pay litigation settlements, those sorts of things. That may swing it one way or another.

But that seems to be the place that we’re able, through our efforts, and through the teams around the world, generate significant cash flows that are essentially the same as the earnings that we generate, which is a remarkable achievement.

With respect to the OCD net proceeds, as I mentioned earlier, it’s just early. We’re going to evaluate how to best use those proceeds, but rest assured that as we think about how to best use those proceeds, we want to obviously offset the dilutive impact of not having the business in our go forward results. So there are multiple ways to do that. We’ll consider the best way possible.

Louise Mehrotra

Our final question will come from Kristen.

Kristen Stewart - Deutsche Bank

Just a follow up, I guess, real quickly, before a question for Alex. Just on the [unintelligible] OCD, can you just give us a sense in terms of what the dilution would be, just assuming cash stays on and you don’t offset it, how profitable that business is?

Dominic Caruso

The clinical diagnostic industry basically operates, and you guys can look it up, at a margin that’s below the level at which Johnson & Johnson operates in total. And our ortho clinical diagnostic business is consistent with those industry margins. So think about it this way, I would size it up, you know, the sales of the business are about 2.5% of our total sales. Profitability of the business is less than that, because obviously it operates on a lower margin than the rest of our business. And if you take a half-year impact from the divestiture closing midyear, it’s not a significant impact to the overall profitability of the enterprise at all. So that’s the way I would think about it.

Kristen Stewart - Deutsche Bank

And just big picture, strategically, a couple years back, Alex, your predecessor talked about potentially adding a fourth leg to J&J. And one of the slides you had today, you talked about the different areas within healthcare and you’re looking at other areas like payers and providers, and just other general healthcare entities growing much faster than the businesses that you’re currently in. So how do you just overall look at the positioning of J&J, in businesses that you’re in today, adding a fourth leg or even just prioritizing your investments within consumer MD&D and pharma, given the differential in growth?

Alex Gorsky

We want to continue to identify and pursue areas where we think, number one, there’s a lot of unmet medical need, and two, where we can work with technology and innovation to make a meaningful difference for patients and for our customers. And we think over the last few years, within each sector, if you take a look at some of the investments that we’ve made and identified in our pharmaceutical group, that we’ve done a very good job in accomplishing that. And that’s resulted in products like ibrutinib, some of the partnerships that we’ve had in other areas of our business, XARELTO and INVOKANA.

And we would expect to continue that, and I think that our group has done a great job of identifying those kind of technologies very early, rapidly developing them, and bringing them to market in a great way.

I think in MD&D, we continue to innovate, but obviously we made a very big investment in Synthes, where we think size and scale is going to be important. But we’re also focusing a lot on looking more broadly across our MD&D portfolio, on how we might work with customers in new and unique ways.

And we’ll continue to look for both new technologies within the different sectors we have in MD&D, but also for adjacencies that we think, again, help us better serve patients, but also broaden our offerings in some cases.

And in consumer, I think the team has done a great job, particularly over the past 12 months, of really better focusing the business. I mentioned that in my talk. And now, obviously, we’ll take a hard look, but there we think there are a lot of regional opportunities. We think there are other areas of the portfolio that also we can augment. But we’ve also demonstrated, I think, over the past couple of years, that we’ve done a nice job on selected divestitures as well, to better focus some of our efforts.

So I wouldn’t say that there’s a fourth leg per se, but I think we’re always looking for big areas of unmet medical need, areas that may broaden our platforms, or that could provide a brand new platform going forward.

Louise Mehrotra

And some final remarks from Alex?

Alex Gorsky

Thank you very much, everyone. I’m not sure if it’s snowing yet outside, but I’m sure we’ll hear soon. I’d like to end, basically, where I started this morning, and thank all of you for making the effort to be here and participating in today’s meeting.

As I said earlier in my talk, I think our strategic framework and our broad base of offerings, critical mass, and positions, really puts Johnson & Johnson in a good place to drive growth in today’s marketplace. And this year we’re going to work very hard on continuing to deliver new innovative products and solutions for consumers and patients around the world, and by implementing and focusing on those near term priorities I talked about, as well as the longer term growth drivers.

We look forward to continuing to update you on our progress against them, just as we did last year. And I’d also like to ask you to please save the date for the medical device and diagnostics business review on May 22, which we’ll host in New Brunswick. Again, that’s May 22, in New Brunswick, for MD&D review.

So let me close by saying thank you, safe travels, and we’ll look forward to seeing you next year. Bye for now.

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