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Johnson & Johnson Services, Inc. (NYSE:JNJ)

Q2 2010 Earnings Conference Call

July 20, 2010 8:30 AM ET

Executives

Louise Mehrotra – Vice President, Investor Relations

Dominic Caruso – Vice President, Finance and Chief Financial Officer

Analysts

Matthew Dodds [ph] – Citigroup

Frederick Wise – Leerink Swann LLC

Michael Weinstein – JP Morgan Chase & Co.

Bob Hopkins [ph] – Bank of America

Jami Rubin – Goldman Sachs

Larry Biegelsen – Wells Fargo

Matt Miksic – Piper Jaffray

Bruce Nudell – UBS

David Lewis – Morgan Stanley

Derrick Sung – Sanford Bernstein

Glenn Novarro – RBC Capital

Mayank Gandhi – Cowen & Co.

Adam Feinstein – Barclays Capital

Operator

Good morning, and welcome to the Johnson & Johnson second quarter 2010 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference call over to Johnson & Johnson. You may begin.

Louise Mehrotra

Good morning and welcome. I'm Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson, and it is my pleasure this morning to review our business results for the first quarter of 2010. Joining me on the call today is 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 webcast, accessible through the Investor Relations section of the Johnson & Johnson website. I'll begin by briefly reviewing highlights of the second quarter for the corporation and highlights for our three business segments. Following my remarks, Dominic will provide some additional commentary on the second quarter financial results and guidance for the full year of 2010. We will then open the call to your questions. We expect the call to last approximately one hour.

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

Before I get into the results, let me remind you that some of the statements made during this call may be considered forward-looking statements. The 10-K for the fiscal year 2009 identifies certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning. The company does not undertake to update any forward-looking statements as a result of new information or future events or developments. The 10-K is available through the company or online.

Last item. During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. These measures are reconciled to the GAAP measures and are available in the press release or on the Johnson & Johnson website.

Now, I would like to review our results for the second quarter of 2010. If you would refer to your copy of the press release, let's begin with the schedule titled Supplementary Sales Data by Geographic Area. Worldwide sales to customers were $15.3 billion for the second quarter of 2010, up 0.6% as compared to the second quarter of 2009.

On an operational basis, sales were up slightly, and currency had a positive impact of 0.5%. In the U.S., sales declined 2.8%. In regions outside the U.S., our operational growth was 3%, while the effect of currency exchange rates positively impacted our reported results by 1.1 point.

Our strongest performing region was the Asia-Pacific Africa region, which grew 6.1% on an operational basis. Europe grew 1.3% operationally, while the Western hemisphere, excluding the U.S. grew by 2.6% operationally.

If you'll now turn to the Consolidated Statement of Earnings, net earnings on a reported basis were $3.4 billion, compared to $3.2 billion in the same period in 2009; an increase of 7.5%. Earnings per share were $1.23 versus $1.15 a year ago.

Please direct your attention to the boxed section of the schedule where we have provided earnings information adjusted to exclude special items. As referenced in the footnote, second quarter results in 2010 have been adjusted to exclude the after-tax impact of the gain from net litigation matters. Net earnings on an adjusted basis remain at $3.4 billion and earnings per share were $1.21, up 0.4% and 5.2%, respectively, versus the second quarter of 2009.

I would now like to make some additional comments relative to the components leading to earnings before we move onto the segment highlights. Cost of goods sold at 30.2% of sales were 100 basis points higher than the same period in 2009, primarily due to cost associated with the impact and the recall and remediation efforts in the consumer business and the impact of price reductions in our Pharmaceutical business and certain MD&D businesses.

Selling, marketing and administrative expenses, at 31% of sales, were down 50 basis points versus last year, due to cost-containment efforts.

Our investment in research and development as a percent of sales was 10.8%, similar to the second quarter of 2009. Interest expense, net of interest income of $58 million is $27 million less the second quarter of 2009, primarily due to lower interest expense on lower average debt. Excluding special items, taxes were 22.7% in the second quarter of 2010 versus 24.7% in the second quarter of 2009.

Dominic will discuss taxes in his commentary.

Now, turning to the Consolidated Statement of Earnings for the first half of 2010, consolidated sales to customers for the first six months of 2010 were $31 billion, an increase of 2.3% as compared the same period a year ago. On a year to date basis sales were flat operationally and currency have a positive impact of 2.3 points.

On the consolidated statement of year to date earnings, I first like to draw your attention to the box section. Adjusted net earnings of $7 billion in 2010 compares to net earnings of $6.7 billion in 2009. Adjusted earnings per share at $2.50 were up 3.7% versus 2009 results.

Turning now to business segment highlights, please refer to the Supplementary Sales Schedule highlighting major products or business franchises. I'll begin with the Consumer segment. Worldwide Consumer segment sales for the second quarter of 2010 of $3.6 billion decreased 5.4%, as compared to the same period last year. On an operational basis, sales declined 6.5%, while the impact of currency was positive 1.1 point. U.S. sales were down 14.3%, while international sales were down 0.2% on an operational basis.

For the first quarter of 2010, sales for the over-the-counter or OTC pharmaceuticals and nutritionals decreased 13.4% on an operational basis compared to the same period in 2009, with U.S. sales down 27.5% and sales outside the U.S. up 1.9% on an operational basis. Sales were impacted by the voluntary recalls announced earlier this year and suspension of production at the McNeil Fort Washington, Pennsylvania facility.

As an update on the products included in the January recall that are produced at our McNeil Las Piedras Puerto Rico facility, we are now at normal levels of production. Restocking commenced in the second quarter and will continue to ramp up during the third quarter. Regarding the Fort Washington facility, operations at this plant were suspended in connection with the recall of infants and children's liquid OTC products manufactured there.

The suspension of manufacturing also impacted adult OTC products manufactured at that facility. As was previously announced, we do not anticipating having ultimate sources of supply before the end of 2010 for most of the products that were produced at this site. Ultimate supply of the remainder of these products is projected to start in the first quarter of 2011 and continue to expand throughout the year.

As anticipated McNeil's submitted through mediation plan to the FDA on July 15th. The plan is comprehensive and encompasses among other items, training, resources and capital investments in quality and manufacturing systems across the McNeil organization. As the plan was just submitted to the FDA last week, it would be premature to comment further.

Finally, there are a variety of ongoing legal actions in connection with the recall including the initiation of losses against McNeil and the ongoing governmental investigation into circumstances regarding the recall. We continue cooperating with the government's investigation and request for information including the receipt of a grand jury subpoena from the U.S. Attorney's office for the Eastern District of Pennsylvania.

Now, moving on to the other businesses. Skin care business achieved operational sales growth of 1.1% in the second quarter of 2010 with sales in the U.S. growing 2.7% and sales outside the U.S. down 0.5% on an operational basis. Growth was driven by NEUTROGENA and Johnson's Adult, partially offset by the discontinuation of certain products. The launch of products featuring our patented CYTOMIMIC technology contributed to growth in the quarter.

Baby Care products achieved operational growth of 2.9% with the U.S. down 4.8% and sales outside the U.S. up 4.9% on an operational basis when compared to the second quarter of 2009. Increase competition and softer market growth impacted sales in the U.S. Powders and cleansers were the major contributors to the sales growth outside the U.S.

Women's Health declined operationally by 4.5 %. Sales in the U.S. were down 9.9%, while sales outside the U.S. were up on an operational basis by 2.1%. Increase competition and timing of previous launches impacted growth in the quarter. Sales in the Oral Care franchise were down 5.8%. In the U.S., sales were down 14.9%, while sales outside the U.S. increased 1.8% operationally. Sales were impacted by the divestiture in the fourth quarter of 2009 of the Efferdent and Effergrip brand, slower category growth in mouth rinses.

That completes our review of the Consumer Segment and I'll now review highlights for the Pharmaceutical Segment. Worldwide net sales for the second quarter of $5.6 billion were up 1% versus the same period last year on both the reported and operational basis. Sales in the U.S. decreased 2%, while sales outside the U.S. increased on an operational basis by 4.9%. The second quarter sales were negatively impacted by approximately $90 million related to U.S. health care reform legislation.

Now, reviewing the products. Contributing to the result were a number of core products, which I'll discuss in a moment and importantly, the new products recently introduced STELARA, SIMPONI, INVEGA SUSTENNA and NUCYNTA. With the successful launch of the STELARA and SIMPONI, we have achieved U.S. market leadership in immunology.

Sales of REMICADE, a biologic approved for the treatment of the number of immune-mediated inflammatory diseases were up 2.5% when compared to the second quarter of 2009. Sales growth in the U.S. was 1.6 percent due to strong market growth partially offset by lower market share in an increasingly competitive marketplace. Strong market growth partially offset by a reduction in inventory levels contributed to an increase in export sales of 4.3%. Excluding the impact of the inventory change, expert sales grew over 20%.

PROCRIT/EPREX declined operationally by 8.1% during the quarter, as compared to the same quarter last year, with PROCRIT down 7.3%, due to a decline in the market. EPREX sales were lower by 9.3% operationally, due to increase competition and they slow down in certain European markets.

RISPERDAL CONSTA, a long-acting injectable antipsychotic, achieved second quarter sales growth of 3.4% on an operational basis. Sales in the U.S. were down 12.2%. However, the total U.S. sales of our long-acting injectables, including INVEGA SUSTENNA, grew strong double digits versus a year ago due to an increase in combined market share. Sales of RISPERDAL CONSTA outside the U.S. were up 12.8% operationally driven by very strong growth in Asia.

Sales of LEVAQUIN, our anti-infective, were down 17.2% on an operational basis when compared to the same period a year ago, due to the decline in the market and increase penetration of generics. The U.S. anti-infective market is estimated to be down approximately 9% in the quarter, due to a lower incidence of respiratory illness and flu.

CONCERTA, a product for Attention Deficit Hyperactivity Disorder, was up 1.2% operationally in the second quarter as compared to the same period last year, with the sales in the U.S. down 4.3%. CONCERTA is the product most impacted by health care reform in the quarter, due to changes to Medicaid Managed Care. Sales outside the U.S. were up 16.3% operationally with strong growth seen in most major regions.

VELCADE, a treatment for multiple myeloma, for which we have commercialization rights in Europe and the rest of the world, outside the U.S. Operational sales growth was strong at 25.1% driven by strong market growth. ACIPHEX, as it's known in the U.S. market and PARIET outside the U.S., is a proton pump inhibitor, or PPI, that we co-market with Eisai. On an operational basis, sales were down 1.6% with U.S. sales down 5.4% and sales outside the U.S. up to 0.1% operationally. Script share in the U.S. was down nearly 1% due to increase competition from generic and the category.

PREZISTA, a protease inhibitor for the treatment of HIV, grew operationally 46.8%, with the U.S. growing 52.3%, and sales outside the U.S. growing 42.1% due to very strong momentum in share. INVEGA, an atypical antipsychotic, grew operationally 3.6% due to the growth of 8.3% outside the U.S.

As an update to our pharmaceutical pipeline, during the quarter, the company received a non-approval in the EU for an additional indication of Bipolar I Disorder for RISPERDAL CONSTA. As a result, we do not plan to pursue this indication in the EU and no further studies are planned. In addition, an indication for INVEGA for the treatment of patients with Bipolar Disorder will not be pursued as the data's in the recent study did not fully address questions previously raised by U.S. and EU health authorities.

With respect to 2010 filings, we are moving the plan filings Docagen [ph] and Acute Myeloid Leukemia in the EU to 2011 as we continue to analyze the results of the recently completed Phase III study. We remain on track to file Telaprevir later this year and TMC278 in the third quarter and look forward to presenting the TMC 278 base three results at the International AIDS Conference meeting this week.

Regarding Rivaroxaban, we remain on target to submit our response to the FDA complete response this year and we'll be presenting Phase III results from Einstein DVT in August. Additionally, we are on track Rivaroxaban for stroke prevention and atrial fibrillation this year. The venue for the rocket data has not yet been finalized. However, we are working towards presenting this data later this year.

I'll now review the Medical Devices and Diagnostics segment results. Worldwide Medical Devices and Diagnostics segment sales of $6.1 billion grew 3.5% operationally as compared to the same period in 2009. Currency had a positive impact of 0.6 point, resulting in a total sales increase of 4.1%. Sales in the U.S. were up 3.2%, while sales outside the U.S. increased on an operational basis by 3.9%.

Now, turning to the franchises, starting with Cordis. Cordis sales were down 3.4% operationally with the U.S. up 5.2%, and sales outside the U.S. down 8.6% operationally. Cordis results were impacted by lower sales of CYPHER, our Sirolimus eluting stent, partially offset by the strong growth in our Biosense Webster business. CYPHER sales were approximately $170 million, down 29% on an operational basis versus the prior year. Sales in the U.S., of approximately $60 million, were down 13%.

Estimated share in the U.S. of 13% was down one point from a year ago and two points sequentially, due to intensified competition. Sales outside the U.S. of approximately $110 million declined 36% operationally. The estimated market share in the quarter of 18% was down two points on a sequential basis and down seven points from the second first quarter of 2009. Increased competition has impacted the share outside the U.S. CYPHER estimated worldwide share for the quarter was 16% down two point sequentially and down five points from the second quarter of 2009.

Biosense Webster, our Electrophysiology business, achieved strong double-digit operational growth in the quarter due to increased market share. The successful launch of CARTO 3 made a strong contribution to the results.

In May, we presented 12 months data from NEVO at EuroPCR. NEVO continued to demonstrate excellent safety and efficacy outcomes compared to Taxus Liberte.

Our DePuy franchise had operational growth of 3.5% when compared to the same period in 2009 with the U.S. growing 1.8%, and the business outside the U.S. growing by 6% operationally. Pressure on pricing continued as a result of the economic trends. However positive mix, due to continuing product innovation, has mitigated some of the impact.

Operational Hip growth on a worldwide basis was approximately 6%. U.S. growth at 2% was impacted by lower volume and metal on metal bearing business. The growth outside the U.S. at 12% operationally was driven by the success of the Acetabular and cementless systems.

On an operational basis, worldwide knee growth was approximately 5% with the U.S. growth for the quarter at 3%, and outside the U.S., growth at 7% operational. Growth in the U.S. was impacted by product mix. Spine was flat on an operational basis with the U.S. down approximately 4% and sales outside the U.S. up 7% operationally. Pricing pressure in the category and [inaudible] in procedures or volumes impacted the growth in the U.S.

The Diabetes franchise was up 1.7% operationally in the second quarter of 2010, with the U.S. business up 2.3%, and the business outside the U.S. up 1.1% operationally. Macroeconomic pressure continues to pressure volume growth in the category. Intensified competition and slower category growth impacted the rate of sales growth in the quarter for Anama [ph] or Insulin pump business. However, sales outside the U.S. continued to grow double digits due continued development of the international market.

Ethicon worldwide sales grew operationally by 8.2% with the U.S. up over 12.65%, and sales outside the U.S. up 5% operationally. Growth was driven by sutures, biosurgicals and Mentor products. Additionally, the acquisitions of Acclarent this year, contributed to the growth in the quarter. Ethicon Endo-Surgery achieved operational growth of 6.6% in the second quarter of 2010, with the U.S. sales growing 3.7% and sales outside the U.S. up with an operational basis by 8.8%. Growth was driven by of the Advanced Sterilization, Endo and HARMONIC products.

Ortho Clinical Diagnostics was down 0.5 % in the second quarter, with the U.S. down 7%, while sales outside the U.S. were up 8.4% on an operational basis. Growth of VITROS 5600 and 3600 was all set by lower sales and donor screening with the mood to select the testing for certain diseases.

Rounding out the review of the Medical Devices and Diagnostics segment. Our Vision Care franchise achieved operational sales growth of 2.6% in the second quarter compared to the same period last year. Sales in the U.S. increased 0.4%, while sales outside the U.S. increased 3.9% on an operational basis. Growth in both Astigmatism and daily lenses were driven by the strength of the underlying platform and new product launches partially offset by lower sales of reusable lenses.

That completes highlights for the Medical Devices and Diagnostics segment and concludes the segment highlights for Johnson & Johnson's second quarter of 2010. I'll now turn the call over to Dominic Caruso. Dominic?

Dominic Caruso

Thank you, Louise, and good morning, everyone. I would like to provide some comments this morning about our second quarter results and highlight some of the promising new products and pipeline developments in our business.

I will also provide guidance for you to consider in refining your models for 2010 and discuss the impact we expect over the remainder of the year due to the McNeil Consumer Healthcare issues and the increased pricing pressure, driven by governmental austerity measures in Europe.

In the second quarter, we saw strong growth in a number of our recently launched products. But we also saw some increased pricing pressure in some parts of the business. And we saw a full quarter's impact of the recently enacted health care reform legislation.

The second quarter results reflect an approximately $200 million negative impact of sales and an approximately $0.05 per share negative impact to earnings per share from the McNeil Consumer Healthcare recalls and the suspension of manufacturing at McNeil's Fort Washington in Pennsylvania plant.

Our second quarter reported results of $1.23 per share includes $0.02 per share gain from the net impact of adjusting estimates previously made for litigation matters. As you would expect, we have excluded this net gain from our adjusted earnings.

Excluding this after-tax gain, our adjusted earnings of $1.21 per share were at the mean of the analyst estimates as published by First Call, a solid performance given by the additional pressures mentioned earlier. The people at Johnson & Johnson showed a tremendous ability to focus on the execution of our new product launches, and we continue to make investments to keep us well positioned for growth.

We see many positive developments and growth opportunities across all of our businesses. In the second quarter, we continue to launch new products, including the 1-Day ACUVUE TruEye contact lens in the U.S. and Japan, the two largest markets for contact lenses. The ExoSeal vascular closure device in Europe, the first vascular closure device to be marketed by Cordis, and a number of other products that were reviewed with you at our recent MD&D Day in June.

Meanwhile, our other recently launched products continued their strong results. We also continue to see positive results across our pipeline, including positive data for Telaprevir and TMC435 in the infectious disease phase, as well as connect [ph] in the area of metabolic. Finally, we continue to make strategic investments with licensing agreements and acquisitions that can complement our existing product portfolios and strengthen our capabilities to advance the standards of care.

In the second quarter, we signed an exclusive agreement with Diamyd Medical to develop and commercialize an antigen-based therapy for the treatment and prevention of Type 1 Diabetes and associated conditions, which is in Phase III clinical studies. We also entered into a collaboration agreement with metabolics for the development of treatments for Type 2 Diabetes.

We acquired RespiVert, a company focused on developing small molecule inhaled therapies for the treatment of pulmonary disease.

And just last week, we announced the agreement to acquire Micrus Endovascular Corporation, a global developer and manufacturer of minimally invasive devices that address stroke, a condition affecting about 15 million people each year. Upon completion of the deal, Micrus will join the Codman and shortlist [ph], diffused neuro device business and provide a suite of solutions for hemorrhagic stroke and promising products and development for ischemic stroke.

Let me now provide some guidance for you to consider as you refine your models for 2010.

Let me begin with a discussion of cash and interest income and expense. At the end of the second quarter, we had over $7 billion of net cash. This consists of approximately $19 billion of cash and investments and approximately $12 billion of debt. This is an improvement of more than $1 billion in our overall net cash position from the first quarter of 2010.

For purposes of your models, assuming no additional major acquisitions during 2010, I'd suggest you consider modeling net interest expense of between $300 and 400 million. This is consistent with our previous guidance.

Turning to other income and expense, as a reminder, this is the account where we record royalty income, as well as onetime gains and losses arising from such items as litigation, investments by our Development Corporation and asset sales or write-offs. This account is difficult to forecast, but assuming no major onetime gains or losses, I would recommend that you consider modeling other income and expense for 2010 as a net gain ranging from approximately $300 million to $400 million, slightly higher than our previous guidance. This excludes the impact of litigation matters, which we have treated as special items such as our settlement with Boston Scientific.

And now a word on taxes. For the first six months of 2010, the company's effective tax rate, excluding special items, was 23.6%. This does not reflect the benefit of the R&D tax credit because that legislation has yet to be passed. We suggest that you model our effective tax rate for 2010 in the range of 22.5% to 23.5%, slightly lower than our previous guidance. This rate takes into consideration changes in the mix of our business for 2010. And while it is not yet enacted, it is our expectation that the R&D tax credit legislation will be passed later this year and made retroactive for 2010 and therefore, we have included this impact in our estimate for the year. As always, we will continue to pursue opportunities in this area to improve upon this rate throughout the year.

Now turning to sales and earnings guidance. Our guidance continues to be based first on a constant-currency basis, reflecting our results from operations assuming that average currency rates for 2010 will be the same as they were for 2009. This is the way we manage our business, and we believe this operational view provides a good understanding of the underlying performance of our business.

We also continue to provide estimates of sales and EPS results for 2010, with the impact of currency exchange rates could have and we'll use the euro as an example. As a reminder, in April, we estimated that the impact of sales and earnings from the implementation of U.S. health care reform legislation would be approximately $400 million to $500 million in annual sales and approximately $0.10 per share. Despite those estimates, we held our sales guidance on a constant-currency basis at between 2% to 3% growth for the year based on the strength of our business performance and our outlook for the remainder of the year.

While our estimates on health care reform have not changed, we now face new additional impacts from the McNeil Consumer product recalls and the suspension of production at McNeil's Fort Washington and Pennsylvania facility, as well as pricing pressures primarily in the Pharmaceutical sector that are accelerating in Europe, two items that could not have been previously contemplated.

Let me explain the estimated impact of these two items. Turning to sales. While the majority of the McNeil's U.S. OTC business has not been impacted by these recalls or the suspension of manufacturing at the Fort Washington facility, the negative impact on our annual sales from not shipping products produced at this facility is estimated at approximately $600 million.

In the second quarter, as many of you have been noting, the health care industry has started to see the initial signs of additional pricing pressures resulting from increased cost-containment efforts in Europe, which we expect to accelerate for the remainder of the year, with an estimated negative impact to sales of approximately $200 million for 2010.

Given these two additional factors, we would be comfortable with your models reflecting an operational sales increase on a constant-currency basis of approximately 1% for the year. This is lower than our previous guidance, reflecting the impact of the two new developments I just mentioned. This would result in estimated sales for 2010 on a constant-currency basis of approximately $62.5 billion.

While we are not predicting the impact of currency movements to give you an idea of the potential impact if currency exchange rates for the remainder of 2010 were to stay where they were as of last week, then our sales growth rate would only be modestly impacted for the year. However, this is a decrease from our previous guidance due principally to the continued weakening of the euro from $1.35 in April to $1.29 as of last week. While the Euro has significantly weakened, that is not the case with respect to the other currencies, which have appreciated. Thus, the currency impact on our sales for the year is now expected to be negligible. Thus under this scenario, we would then expect reported sales growth to also be approximately 1% for a total expected level reported sales of approximately $62.5 million.

And now turning to earnings. Consistent with the change in sales that I just outlined, we expect that our earnings will also be impacted by the McNeil issues and European pricing pressures. We expect that the European pricing pressures will accelerate in the back half of this year. We estimate that the combined negative impact of these two items will be approximately $0.15 to $0.20 per share.

With our continued focus on financial discipline and cost management, we expect to mitigate some, but not all of these impacts. We also intend to continue investing in the business as we have always done. It is important to note that these impacts to earnings are in addition to the estimated impact of U.S. health care reform, which we have absorbed in the business and have been reflected in our previous guidance.

With that as context, I suggest that you consider full year 2010 EPS estimates excluding the impact of special items, but now including the impact of these two new factors of between $4.70 and $4.80 per share on an operational basis, that is assuming the same average exchange rate for 2010 as we saw in 2009. This represents operational EPS growth of approximately 2 to 4%.

The weakening of the Euro versus other currencies is much more impactful on our earnings than on our sales due to the mix of where our earnings are generated. While we are not predicting the impact of currency movements to give you an idea of the potential impact on EPS, if currency exchange rates for the balance of 2010 were to remain where they were as of last week, as an example with the Euro at $1.29 as compared to $1.35 earlier in the year, then the impact of currency movements, primarily the Euro, in this case, would be unfavorable by approximately $0.05 per share. And therefore, our reported EPS, excluding special items, would be between $4.65 and $4.75 per share.

That concludes my comments on our operating performance this quarter and our guidance with respect to your models. Now, Louise, back to you for Q&A.

Louise Mehrotra

Thank you, Dominic. Could you please provide the instructions for the Q&A?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Matthew Dodds with Citigroup.

Matthew Dodds – Citigroup

Good morning, Dominic. A couple of questions.

Dominic Caruso

Good morning, Matt.

Matthew Dodds – Citigroup

First, I know you don't give the product line detail, but when you look at the change in the guidance, there's a lot of moving parts. I would assume that the gross margin is taking the majority of the pressure here from, obviously, from the form of pricing pressure in Europe, but also McNeil. Is that a fair assumption?

Dominic Caruso

Yes, that's a very fair assumption.

Matthew Dodds – Citigroup

And then I know there's going to be a lot of questions on Europe, so I'm going to hit something else. U.S. Consumer, even if you back out McNeil and then the oral care divestiture, it looks like it was kind of flattish on a sort of an organic basis. Is the take there that there's still a lot of volume pressure? Or is pricing getting worse? And what do you see in consumer because I thought it was going to get better 2010 on the guidance?

Dominic Caruso

Right. Well, you're exactly right. When you take out the impact of the McNeil Consumer Healthcare issues, the business was flat to slightly down, our Consumer business. I think a couple of factors. We did have some divestitures, which you noted. We've also seen the pressure in Venezuela from the devaluation of the Venezuelan currency that many of you have been following. That, obviously, had also an impact on growth year-over-year, and the economic recovery with respect to the consumer seems to be tracking slowly, and I think they are the three main factors that we see.

Matthew Dodds – Citigroup

Are you still seeing share loss do you think to private label or is this just more volume in general? I mean you know.

Dominic Caruso

Generally speaking, I would say share that private label had been able to obtain during the economic downturn is probably sticking a little longer than it has in previous economic downturns.

Matthew Dodds – Citigroup

All right. Thanks, Dominic.

Dominic Caruso

You're welcome, Matt.

Louise Mehrotra

Next question, please.

Operator

Your next question comes from Rick Wise with Leerink Swann.

Frederick Wise – Leerink Swann LLC

Good morning, Dominic.

Dominic Caruso

Good morning.

Frederick Wise – Leerink Swann LLC

Let me start with some of the FDA issues. At this point, you received three warning letters. Obviously, this is still a situation influx, but can you help with handicap the risk of a corporate warning letter and maybe more broadly, the implementation, potentially significant cost of a larger maybe corporate quality system that maybe is not in place like we've seen in other companies.

Dominic Caruso

Right, well, let me just clarify, Rick. With respect to the McNeil matter that I think you're referring to, there's only one warning letter, and that's at the Las Piedras, Puerto Rico facility. The other facilities have received 483s, which are basically comments and observations that are issued by the FDA in connection with any inspection. So just to be clear, there are not three warning letters. There's only one.

Frederick Wise – Leerink Swann LLC

You're correct. Sorry, about that.

Dominic Caruso

OK. [Inaudible]. Then with respect to a much more comprehensive issue, it is important to note that these particular inspections obviously were focused on the McNeil Consumer Healthcare manufacturing facilities. The observations are clearly specific to those facilities. And as you might expect, all of our facilities are inspected both internally and by outside regulatory agencies on a very frequent basis.

In fact, as you know, we're launching new products, which we're pleased to report upon and the facilities involved in manufacturing those products undergo preapproval inspection. So, obviously, we haven't seen the same kinds of issues in those facilities. I would say that these issues seem to be directly and specifically related to the McNeil manufacturing systems. These are not types of issues that we aspire to, in any of our business and certainly McNeil did not aspire to have these particular issues.

We've taken them very seriously. We reported, as you know, to the FDA our mitigation and remediation plan. And we're working closely with the FDA to correct the impact from these manufacturing and quality issues at the McNeil site.

Frederick Wise – Leerink Swann LLC

OK, thank you. Next, Dominic, obviously, you're talking about the increased EU price pressures. Maybe I missed it, but during the Medical Device Day in early June, it seemed like you all hadn't seen it yet. Can you give us a little more color on what you're seeing, how you're seeing it? And obviously you're talking about the sort of an accelerating impact for the rest of this year, is this something we should be concerned about accelerating further into 2011 and beyond?

Dominic Caruso

Right, Rick. That's a great question. So, let me just be clear on the EU pricing pressure that we're seeing. They're much more significant in the Pharmaceutical business than they are in the Medical Device business. If you've been – I'm sure you've been following the various governmental austerity programs that include price reduction; those price reductions are specifically directed towards Pharmaceutical products where those governments have much more of an active role in pricing in those types of products.

With respect to the Medical Device business, that business is characterized quite differently than the Pharmaceutical business. It's characterized by largely a DRG system and largely a tender system. So, we have not yet seen much of an impact at all on pricing and medical devices. We do expect that it may begin to show up later in the year or into next year. But of the estimates that I gave you earlier of approximately $200 million from increased acceleration of pricing pressures in Europe, that is largely in the Pharmaceutical business, not in the Medical Device space.

Frederick Wise – Leerink Swann LLC

OK. Thanks very much.

Dominic Caruso

You're welcome.

Louise Mehrotra

Next question, please.

Operator

Your next question comes from Mike Weinstein with JP Morgan.

Michael Weinstein – JP Morgan Chase & Co.

Thank you. Good morning.

Dominic Caruso

Good morning, Mike.

Michael Weinstein – JP Morgan Chase & Co.

Dominic, if I look at the MD&D franchise, I think it was seven franchises, six of them decelerated operationally from the first quarter to second quarter. I recall in the April call we felt like the new number of businesses that came in relatively strong, did better than we were thinking, and it seems like this quarter, we're getting the inverse of that where a number of businesses came in light. Can you give us your thoughts on that?

Dominic Caruso

Yes, sure, Mike. One of the things about medical devices that's hard to pin down is any quarter-to-quarter fluctuation, you know especially in orthopedics. You know, I think we should look at these businesses over a rolling four quarter average or at least through midway through the year. The other players in the marketplace really haven't reported yet, so it's difficult for us to sense what's going on in the overall market.

I would say that procedure growth rates are improving slightly, but they're still tracking behind what we've seen historically. And we're seeing positive market trends in Endo-Mechanical, Electrophysiology and aesthetic medicine and the Suture business as you can see from our Ethicon business, especially even excluding I would say the impact of the Acclarent acquisition. The suture market seems to be getting back to low single digits in the last few quarters and we view that as a positive.

So, I would say it's difficult to get a sense for quarter-to-quarter changes, especially in the Medical Device business. And I'd take a look at it over a longer period of time to see trends and there, we do see trends improving then through six months as you know, we're at approximately 6% operational growth for this business, which is consistent with what we think the overall growth rates are expected to be in that market.

Michael Weinstein – JP Morgan Chase & Co.

And across the businesses, are there any of the segments that commented to you in after the call, where they felt like their markets got more difficult in the quarter or were they were signaling changes either at U.S. or at Europe, geographically?

Dominic Caruso

No, I would say that it's a little too early to tell. So, we'll have to see what others report, but we did see continued pricing pressure. We've commented about that in the Orthopedics business in particular and in Spine. I would say that's where really where we saw the most impact in terms of price and overall procedure trends in that particular segment of orthopedics. Our Spine business was essentially flat. So, that's the only one I would call out at the moment.

Michael Weinstein – JP Morgan Chase & Co.

And then last follow-up just on that. On the queue, one of the prepared comments which was relative to the impact of the metal-on-metal shift, which I have been heard in the company in the quarter. Can you give me more color on that in terms of how that was impacting your business?

Dominic Caruso

We did see some impact in the quarter, Mike. But I wouldn't say – it was not significant.

Michael Weinstein – JP Morgan Chase & Co.

OK. Great. Thank you, Dominic.

Dominic Caruso

Yes.

Louise Mehrotra

Next question, please.

Operator

Your next question comes from Bob Hopkins [ph] with Bank of America.

Bob Hopkins – Bank of America

Hi, thanks. Can you hear me OK?

Dominic Caruso

Yes. Hi, Bob. Good morning.

Louise Mehrotra

Good morning.

Bob Hopkins – Bank of America

So, first question is just on the changed guidance. I want to make sure I've got a sense for all the moving parts. So, your previous guidance was $4.80 to $4.90, but you had said that you're more comfortable with the bottom end of the range. And so you're basically coming down, say $0.10 to $0.15 from that on a net basis. Is that fair?

Dominic Caruso

Yes, and one way to characterize it is that the $4.80 to $4.90 was operational, as you remember right? Excluding currency, we think that is more appropriate at $4.70 to $4.80. So, that's $0.10. And we mentioned that the impact of the items that we discussed were $0.15 to $0.20. Obviously, we've taken some actions against that. And the additional $0.05 that I mentioned is purely related to currency which then brings guidance reported, earnings per share guidance to $4.65 to $4.75.

Bob Hopkins – Bank of America

Okay, so you are offsetting roughly $0.05 to $0.10 of the combined hit of McNeil and pricing pressure in Europe with operational efficiencies?

Dominic Caruso

That's correct. Yes.

Bob Hopkins – Bank of America

And then, I wanted to ask a second question on the pricing comments. First of all, just to be clear, pricing for DePuy Hips and Knees this quarter versus last, the pressure that you're seeing is roughly the same?

Dominic Caruso

It is the same. I thought I'd mentioned that earlier. But it is the same. I didn't want to give you the impression that it's accelerating. It's about the same type of pricing pressure that we saw in the previous quarter.

Bob Hopkins – Bank of America

Okay, and then, but as it relates to the $200 million, can you give us any more color in terms of what kind of pricing pressure are you specifically referring to in terms of, you know, percentage terms, any specific countries or drugs that you like to call out, just I am sure people would appreciate any more detail that you are going to give.

Dominic Caruso

Sure. I'll try to frame this up as I said, it's primarily the pharmaceutical business in Europe. And well, we've experience pricing pressure year-over-year in any event. So, it's not an unusual phenomenon. But there is no incremental pricing pressure. And I would say that the incremental pricing pressure on an annual basis looks like it's in the mid-single digits impact to the European businesses. And of course, the – we're seeing it accelerate now for the back half of the year. We didn't see much of an impact through the second quarter. So that mid-single digit range that we would expect on an annual basis is obviously sort of low-single digits for 2010. And that's exactly what the $200 million estimate is about, it's in the 2-3% of our European pharma business would be impacted by these pricing pressures. But we do see them as on an annual basis trending more towards the mid-single digit kind of incremental impact from what we've seen before.

Bob Hopkins – Bank of America

And are these announced austerity measures already or anticipated austerity measures, you know, going forward throughout the rest of the year?

Dominic Caruso

You know, primarily on announced austerity measures from the various countries that you've been following Greece, Spain etc. So, we tried to estimate what may happen, but we are really taking as a cue of the major countries that have announced austerity measures to date.

Bob Hopkins – Bank of America

Okay, thank you very much.

Louise Mehrotra

Next question please.

Operator

Your next question comes from Jami Rubin with Goldman Sachs.

Jami Rubin – Goldman Sachs

Thank you. Dominic, I just had a follow-up on the European pricing pressure. You said $200 million would impact prescription drug sales this year. What about 2011? Just in terms of timing of when these price cuts are being implemented, would you expect the overall impact in 2011 to be bigger than 2010?

Dominic Caruso

Sure Jami. It's like I said. I think the pricing pressure looks like it's in mid-single digits and our estimate this year is reflective only of the latter half of this year. So, we would expect it to accelerate in 2011 to a number that's in the mid-single digit range.

Jami Rubin – Goldman Sachs

Okay. Just, if I can follow up, yesterday press reports announced that 483 that was issued at your Lancaster, PA plans which I think involves the Merck-J&J Center. What are the size of those revenues? And is there a risk of a broader recall? I just felt that I understand the $600 million that will be impacted this year, you said that next year you would expect to start re-introducing those products to the market. Would you expect a full $600 million recovery in 2011 or would there be sort of a reputational or residual impact to other products that you may not see again.

Dominic Caruso

Right, well, let me just take the first question first. Lancaster, there was in fact an inspection of the Lancaster facility. This is a facility where we and Merck have a joint venture. These are products such as Pepcid and Mylanta and products that were previously prescription drugs for Merck and now we have a joint venture with Merck where we sell the products in this joint venture. The sales are not very significant. We don't break them out. And the observations were in fact very specific to that manufacturing facility. We obviously take these along with our partner at Merck, we joint venture folks take this very, very seriously. And we'll be fully committed to addressing the FDA's concern as quickly as possible. And since we got a chance to get to respond to FDA's 483 observations, it will be premature for me to comment any further on those particular observations.

With respect to the $600 million this year, that's our estimate of the fact that the Fort Washington, Pennsylvania McNeil plant, the production is temporarily suspended and the impact for not being able to produce the products alternatively yet until near the end of this year. That impact in our sales from that temporary shutdown is estimated to be a negative $600 million. We have said that we have alternative sources of supply available for those products. It must take time to bring those alternative sources of supply up and running for the stability tests and other factor that must be taken into consideration. These are part of the Johnson & Johnson normal production network that we have and we do expect that it won't be before the end of the year, but certainly in 2011, we will have the alternative sources of supply ready, in the early part of 2011 ramping up throughout the year. I can't give you an estimate of what that impact would be in 2011, however.

Jami Rubin – Goldman Sachs

Thank you.

Dominic Caruso

You're welcome.

Louise Mehrotra

Next question please.

Operator

Your next question comes from Larry Biegelsen with Wells Fargo.

Larry Biegelsen – Wells Fargo

These are my questions. Just on the pharma growth rate, it was up about 1% operationally this quarter. In the past, you'd broken it out excluding generics. I think, last quarter you said it was 5.3%. Obviously in terms of Topamax and Risperdal patent expiration in US have anniversaried. When do you expect the growth rate to get back to mid-single digits and why did see it at 1% this quarter? Thanks.

Dominic Caruso

Okay. Good morning Larry. Well, let me try to help you with that. Obviously the impact of generics now is raining, right? Because these products have begun the anniversary. Let me give you an impact. The impact of generics on our pharma business in the second quarter is about seven-tenth of a percent of growth. And the impact of healthcare reform, the full quarterly impact that I have mentioned earlier, is about 1.7. So, on a basis of excluding generics and even excluding some of the impact of healthcare reform, that 1% growth that you saw in the pharma business would be an underlying, approximately 3.5% growth.

Larry Biegelsen – Wells Fargo

Okay. And back to the OTC recall. Do you think there has been any collateral damage on other businesses from the publicity, and obviously there has been a lot of recalls recently. Can you talk about any management changes that you are making to ensure that this doesn't happen again? Thanks.

Dominic Caruso

Right, well with respect to any potential collateral damage, it's too early for us to comment on that. Obviously, our businesses have been very good over the years of innovating and assuring consumers get the kind of products that they expect and at a quality they expect. And I would like to point out that these various recalls are precautionary. In our judgment, there is no serious adverse medical reaction where it's deemed to be remote by both us and the FDA, but we did take a conservative approach and recall the products that might be impacted to ensure consumer safety as a primary concern, as a priority for the company.

With respect to anything broader than that, it's really premature to comment. We have to first and foremost remediate the Fort Washington facility. And as I had mentioned, we have submitted our plan for the FDA. So, we are entirely focused on that and we will get that back at an acceptable level of production, probably mid-way through 2011. But in the meantime, we do have these alternative sources of supply within the Johnson & Johnson network and we are confident that we'll have those available probably not by the end of this year because of the stability testing that needs to be done. But certainly in 2011, we will have alternative sources of supply of these very products that are not on the market today.

Larry Biegelsen – Wells Fargo

Dominic, management changes, could you touch upon that?

Dominic Caruso

Right, I'm not going to comment on management changes.

Larry Biegelsen – Wells Fargo

Okay and lastly BRIC growth was 12% last quarter, what was it this quarter [inaudible]?

Dominic Caruso

Larry, great question; yes, BRIC, we are seeing significant growth acceleration in the BRIC markets. Our growth in the BRIC markets this year on an operational – this quarter I should say – on an operational basis was about 16% and just as a point of reference it was 6% in the second quarter of 2009 and you're right, Larry, it was about 12% in the first quarter.

Larry Biegelsen – Wells Fargo

Thank you very much.

Dominic Caruso

You're welcome.

Louise Mehrotra

Next question please.

Operator

Your next question comes from Matt Miksic with Piper Jaffray.

Matt Miksic – Piper Jaffray

Hi, thanks for taking our questions Dominic and Louise. So follow-up on your comments that are earlier prepared remarks and then Q&A here on the metal on metal pressure and your knee biz or your hip business rather, it sounds like that had not manifested itself and now it's kind of emerging as something that you're calling out here in Q&A I think you've said that it wasn't significant. Why the change I guess and just in terms of your commentary?

Dominic Caruso

Well, I think Louise had mentioned that she saw some impact in the quarter from metal on metal, maybe Louise, you can comment a little bit on that, clear that up for Matt.

Louise Mehrotra

Sure. So sequentially first quarter versus second quarter it was about a 1% impact on the US, the metal on metal but on the total overall DePuy business, it's not significant.

Matt Miksic – Piper Jaffray

Okay and that kind of steps into this question generally on MD&D in the US, was there – just looking across most of the businesses here and maybe with the exception of ETHICON, it seems like weakness is concentrated in the US. Was there any mismatches here selling days, anything that impacted any of your businesses that would have pulled down these businesses so consistently or is it just something related to sort of surgical volumes in the US, consumer trends in the US, any comment you could provide.

Dominic Caruso

Sure Matt; I do think that, as I mentioned earlier, it's good to look at these businesses over longer periods and not just an individual quarter and again on a six months basis, these businesses are about 6% consistently in the US and outside of the US about 6% growth, which we expect to be the growth rate in these markets.

There was some impact on number of billing days in the first quarter because of the way the holidays spell. So the first quarter growth rates were probably a little bit inflated slightly from those extra billing days when you compare them to the same period in the first quarter of 2009. I would say that's the one – only the one thing I would call out in terms of your specific question on any difference in the number of days or billing days, or was that factor but it was first quarter of 2010 versus first quarter of 2009.

Matt Miksic – Piper Jaffray

Then one follow-up on spine; you mentioned that, I think Louise, lower procedure volumes as one of the factors, pricing pressure continuing what can you – any sense of what you can attribute that to? Is it a share issue or it is an overall market issue, any color would be helpful.

Louise Mehrotra

We believe the pricing pressure is an overall market issue.

Matt Miksic – Piper Jaffray

And the volume issue?

Louise Mehrotra

Some reimbursement challenges.

Matt Miksic – Piper Jaffray

Okay, so tougher reimbursement. Fair enough, thank you.

Dominic Caruso

Hey you're welcome, Matt.

Louise Mehrotra

Next question please.

Operator

Your next question comes from Bruce Nudell with UBS.

Bruce Nudell – UBS

I'm not sure I've taken my question. Just turning back to US devices, hips and knees and spine, by our estimation have enjoyed about 5% case growth over the last five-six years. Has the environment changed in your view so that the net of price and mix is going to actually go negative for the foreseeable future or remain neutral or slightly positive? There has been a sea change ascribable either to step up for reimbursement, it was, by our estimation is good, remains good and/or change in alignment and the physicians with hospitals versus manufactures; if you could just comment on that broadly.

Dominic Caruso

Alright. Well, we do see pricing in the medical device space and orthopedics in particular, as I mentioned earlier, is still under pressure. Mix has largely offset that in the past and maybe Louise, you could comment on what we saw in the second quarter with that dynamic.

Louise Mehrotra

So in the hips and knee the US market, it's slightly negative price mix like 1% down when you combine the two of them. In spine, it's more in the mid single digit negative price and mix together.

Bruce Nudell – UBS

Okay. So that's a big step up in pressure. And then just looking at the consumer businesses, skin care has been a rockstar over the previous quarters but when you look across the businesses you see weaknesses, is this something we should just kind of expect will last as long as the global economy remains under pressure and what sort of metrics and prognostications do you have internally as to what's needed to kind of break the cycle.

Dominic Caruso

Sure Bruce, thanks for the question. I don't have many prognostications to share with you quite frankly, but this is obviously a factor of unemployment. I mean it's very clear to us that as unemployment lingers or high unemployment lingers that consumer buying patterns, which have been impacted will remain impacted. So I think that's the single biggest factor that we can attribute what we see happening in the business too, the higher rate of unemployment and hopefully we'll resolve that especially here in the US, but as you know that will take some time.

Bruce Nudell – UBS

Thanks so much.

Dominic Caruso

You're welcome Bruce.

Louise Mehrotra

Next question please.

Operator

Your next question comes from David Lewis with Morgan Stanley.

David Lewis – Morgan Stanley

Good morning.

Louise Mehrotra

Good morning.

Dominic Caruso

Good morning David.

David Lewis – Morgan Stanley

Dominic, you obviously described in this call some operational weakness, pressure in earnings but over the last two reporting cycles we've seen sort of non-op tailwinds tax rate interest begin to help the company. Do you expect those non-operational tailwinds to continue to help the company throughout the year meaning could we see further improvement in some of the dynamics throughout the year to help cushion some of the operational blow?

Dominic Caruso

Yes, well we did – as you know we did lower our effective tax rate a little bit this quarter; that alone doesn't offset the operational tailwinds, it just helps mitigate it, sort of headwind it just mitigates a little bit. We always look to improve on those factors throughout the year and we'll call those out for you. I think looking at the operational impact of the business we've probably given you our best guess of what the particular growth rate in the business both sales and earnings will be at this point as we look out for the rest of the year. So I don't expect significant changes for the balance of the year.

David Lewis – Morgan Stanley

Okay and a couple of more quick ones in. Last quarter Dominic, you called out sutures as being a proper indicator of hospital utilization and you indicated they were relatively strong in the first quarter. Can you comment on how suture volumes trended sequentially?

Dominic Caruso

Sure. We did see the suture market now is in the low single digits the last few quarters. We view that as a positive sign as you know we have a significant share of that market up in the 70% to 80% market share. We've seen it at low single digits now for several quarters in a row, which I think is a good sign for procedure volumes and be stabilizing. They're not back to where they were but stabilizing.

David Lewis – Morgan Stanley

So, Dominic you'd call that roughly equivalent with the first quarter.

Dominic Caruso

Yes.

David Lewis – Morgan Stanley

Okay and just lastly Dominic just given your comments about European austerity pressuring pharma, we've seen there's certain acquisitions in the device franchise this year both Acclarent as well as Micrus. So just wondering has, what you are seeing in European austerity over the last six to nine months sort of changing the company's view about where we want to focus from an M&A perspective going forward, anymore focus on MD&D?

Dominic Caruso

No, we don't have a particular preference, David, as I've commented before. We look at each of the businesses as a broadly based healthcare company as each of our businesses are exciting business to be in. We're pleased to be in them, we look to grow them even further and that may come from acquisition, it may come from licensing and partnership and it comes obviously from organic growth. So I wouldn't put much emphasis on the European issues in terms of changing our strategies on how we grow the business.

David Lewis – Morgan Stanley

Great, thank you very much.

Dominic Caruso

You're welcome.

Louise Mehrotra

Next question please.

Operator

Your next question comes from Derrick Sung with Sanford Bernstein.

Derrick Sung – Sanford Bernstein

First Louise, could you give us some more details on the dynamics of the drug-eluting stent market. I may have missed it but I don't know if you went over kind of overall market growth, penetration [inaudible] that you are seeing there.

Louise Mehrotra

Sure. So for the US market we think it's down about 2% in the quarter. We believe the market ASPs are down about 6%; that's not our ASP, that's actually the market ASP and we believe PCIs are up about 3%; of course we are the first out to report, so that still needs to be verified; penetration rate at about 77% versus 75% a year ago.

Derrick Sung – Sanford Bernstein

Okay great, thanks. And then Dominic going back to the EU pricing pressures, do you expect to see any differences or are you hearing any differences about – differences in pricing pressure on different types of products and specifically I'm thinking about your biologic franchises versus your small molecule franchises, any color there on specific impact at different classes of products that you can provide us.

Dominic Caruso

Well, it's a little too early to comment very specifically on these matters but we do – we are members of the European organization of pharmaceutical companies we have provided statements to the European authorities and have been very clear on the fact we believe that many of the medicines especially biologics have an incredible benefit to patients and hopefully that the pricing decisions that are made can differentiate between products that provide significant values at a healthcare system overall and they're not just across the board changes.

We're continuing that dialogue with the European authorities but I think it's very clear that some of the products especially in our biologic franchise are very value products that provide a great benefit to both patients and the healthcare system and we're hopeful that the European governments will take that into consideration when determining the next steps with respect to pricing.

Derrick Sung – Sanford Bernstein

Okay and then one just quick follow-up, Louise. You mentioned reimbursement challenges on the spine front. Can you provide a little bit more color on that, is that in a private – from private payers and public payers, is that specific to a certain line of J&J products?

Louise Mehrotra

Private payers mostly and I don't want to get into the specifics on the products.

Derrick Sung – Sanford Bernstein

Okay thank you very much.

Louise Mehrotra

Next question please.

Operator

Your next question comes from Glenn Novarro with RBC Capital.

Glenn Novarro – RBC Capital

Good morning Louise, good morning Dominic.

Louise Mehrotra

Good morning.

Dominic Caruso

Hi Glenn, good.

Glenn Novarro – RBC Capital

I have two questions; one, on European pricing, so, Dominic, you mentioned that the $200 million hit was purely a function of some of the company's that – countries have already announced the cut such as Spain and Greece. Do you have any commentary that you can share with us, any thoughts about maybe what some of the bigger countries have in plan for the next quarter or two, any thoughts about what Germany, UK or France could do and what that impact would be on the pharmaceutical business? That's the first question.

The second question, you mentioned that operational efficiencies are helping to offset OTC in Europe and I'm just wondering are these efficiencies coming from the restructuring that you announced last year, in other words are the restructuring efficiencies coming faster than expected. Thanks.

Dominic Caruso

Right, good questions Glenn, thank you. Well, on the European impact of pricing that caused the pharma business in particular, we've taken into consideration what countries such as Greece, Germany, Italy, Spain, Portugal have already announced.

So for example Germany did announce increased mandatory rebates from 6% to 16% or 10% increase in some of the rebate. So we have taken those into consideration. UK and France have not yet and they've actually indicated that and hopefully this will be the case that they do not expect significant changes in pharmaceutical pricing in the UK or France.

So this is our best guess based on what countries have already indicated what they would do and as I said, it looks to be at about a mid single digit impact to the European business but what we're seeing now is only half a year impact and then with respect to the restructuring part those plans are proceeding as planned. As you remember they were started last year and it would be fully implemented this year. They are proceeding as planned.

The additional cost containment efforts that I talked about to help with the recent issues are on top of that particularly in the consumer business and so we've been able to offset some of the pressure from these new items but not all the pressures that I mentioned earlier.

Glenn Novarro – RBC Capital

Just one more follow-up; what you've said in the past is that some of the – most of the restructuring from last year you'll see more of the benefit in 2011. Should we still model the major benefit for 2011, is some of it getting pulled forward into 2010, any thoughts there would be helpful.

Dominic Caruso

I would model it as we previously indicated we're on track. As you know may know Glenn, these plans include negotiations and discussions with what [inaudible] around the world and therefore it's really not practical to accelerate some of them. So they're planned to happen over the periods that I previously described and so if you've modeled them based on that I don't have any changes in those estimates for you.

Glenn Novarro – RBC Capital

Okay, great thank you.

Dominic Caruso

You're welcome.

Louise Mehrotra

Next question please.

Operator

Your next question comes from Mayank Gandhi with Cowen & Co.

Mayank Gandhi – Cowen & Co.

Good morning thank you for taking my questions. Just on McNeil, you indicated that there are several plants that are always undergoing inspections. Can you just quantify how many plants resembled in the past 6 to 12 months that have been inspected by the FDA without any issues?

Dominic Caruso

Yes, Mayank, that's really a specific question, so I'm not going to get into those specifics but I would reiterate that many of our – we have many manufacturing facilities around the world, they're inspected frequently both internally and by outside regulatory bodies on a consistent basis and as you know, as I'm mentioned earlier, we've launched new products. All the plants have gone through pre-approval inspections to ensure the products are ready for launch but I don't want to give you – I think it's inappropriate to comment on specific numbers of plants that have or have not yet been inspected.

Mayank Gandhi – Cowen & Co.

Okay and just as you know, when you're shifting production to existing facilities what will happen to when the Fort Washington plant is back on track, will it be shifted back to that plant or how does that work?

Dominic Caruso

Well, we also announced recently last week in conjunction with submitting our plans to the FDA that we were reducing the head count in the fort Washington plant. We've reduced it unfortunately by 300 of the approximately over 400 associates that are at that plant.

Once all the plans are finished we expect that plant to come back online sometime in 2011 probably the latter half of 2011 but the actual configuration of how that plant will come back online is not yet finally determined but as I mentioned earlier the alternative supplies throughout our manufacturing network other than McNeil will be ready to supply the market in early 2011.

Mayank Gandhi – Cowen & Co.

Okay great and then on the healthcare reform, I'm not sure if you have but can you quantify the impact in 2011 on revenues?

Dominic Caruso

No, I'm not going to comment on 2011 specifically other than to say that the healthcare reform impacts across the industry for 2010 do not yet reflect all of the impacts that would be implemented under the new legislation. So it's about – currently it's about 3% of our sales and it's about a little lower than that for the industry at about 2%.

We believe that next year once all the effects are implemented, it's in the range of 5% to 6% the industry impact and we believe that our impact will be similar to the overall industry impact.

Mayank Gandhi – Cowen & Co.

Great and then one final question; is there any update on the Umera patent dispute?

Dominic Caruso

No, no update.

Mayank Gandhi – Cowen & Co.

Okay, thank you.

Louise Mehrotra

Last question.

Operator

Your next question comes from the line of Adam Feinstein with Barclays Capital.

Adam Feinstein – Barclays Capital

Great, thank you I appreciate the opportunity to ask question here. Maybe just wanted to ask about Nevo, you guys may have touched on it; I may have had missed it, most of the questions were on reimbursement, so just wanted to ask in terms of the latest there and any updates you have for us, thank you.

Dominic Caruso

So, well, with Nevo, as you know we filed in Europe. We expect to hear later this year from the European authorities and we expect to launch the product soon thereafter. So I don't have any comments to give you with respect to any reimbursement matters and we expect to file a PMA for the US somewhere in the 2012 timeframe.

Adam Feinstein – Barclays Capital

Okay great, and then just maybe one quick follow-up. Just since the theme here has been reimbursement, just curious as you know a number of hospitals have talked about new programs where they are consolidating vendors, just curious if you guys are seeing more of these types of programs and whether you are choosing to be part of these in the number of large hospital systems.

Dominic Caruso

Well, we obviously have various contracting mechanisms with various hospital systems around the US and as you know in Europe it's primarily a tender system. I can't comment on anything other than to say that we continue to negotiate based on the value that our products bring to the healthcare system and I wouldn't comment on any other specifics other than that.

Adam Feinstein – Barclays Capital

Okay thank you very much. I appreciate it.

Dominic Caruso

You're welcome. Great, well let's wrap up today. Thanks for your questions and in closing let me just say that we do remain positive about the underlying growth opportunities for our business as our new products, robust pipelines and core businesses position us well for continued growth.

We will continue to manage our business effectively through these latest challenges. Thanks to the dedication, focus and integrity of the people of Johnson & Johnson. And I look forward to updating you on our progress throughout the year and seeing you in October when we will discuss our third quarter results and also provide an update on our pharmaceutical segment. Thanks for your time this morning and have a wonderful day.

Operator

Thank you. This concludes today's Johnson & Johnson second quarter 2010 earnings conference call. You may now disconnect.

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THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Johnson & Johnson Services, Inc. Q2 2010 Earnings Call Transcript
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