Johnson & Johnson's CEO Discusses Q4 2010 Results - Earnings Call Transcript

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Johnson & Johnson (NYSE:JNJ)

Q4 2010 Earnings Call

January 25, 2011 8:30 am ET


Dominic Caruso - Chief Financial Officer, Corporate Vice President of Finance and Member of Executive Committee

William Weldon - Chairman of the Board, Chief Executive Officer, Chairman of Executive Committee and Chairman of Finance Committee

Louise Mehrotra - Vice President of Investor Relations


Matthew Dodds - Citigroup Inc

Matthew Miksic - Piper Jaffray Companies

Catherine Arnold - Crédit Suisse AG

Jami Rubin - Goldman Sachs Group Inc.

Michael Weinstein - JP Morgan Chase & Co

Robert Hopkins

Kristen Stewart - Deutsche Bank AG

Derrick Sung - Bernstein Research

Larry Biegelsen - Wells Fargo Securities, LLC

Frederick Wise - Leerink Swann LLC

Bruce Nudell - UBS Investment Bank

Louise Mehrotra

Good morning, and welcome. I'm Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson, and it's my pleasure this morning to review our business results for the fourth quarter of 2010.

Joining me on the podium today are Bill Weldon, Chairman of the Board of Directors and Chief Executive Officer of Johnson & Johnson; and Dominic Caruso, Vice President, Finance and Chief Financial Officer.

A few logistics before we get into the details. The audio and visuals from this presentation are being made available to a broader audience via webcast, accessible through the Investor Relations section of the Johnson & Johnson website.

I'll begin by briefly reviewing highlights of the fourth quarter for the corporation and highlights for our three business segments. Following my remarks, Bill Weldon will comment on 2010 results and provide a strategic outlook for the company. At the completion of Bill's remarks, Dominic Caruso will provide some commentary on the fourth quarter financial results and guidance for the full year of 2011.

We will then open the floor to your questions. We will conclude our formal presentation at approximately 9:30. And following Q&A with some final remarks by Bill, we'll conclude the meeting around 10 a.m.

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

Before I get into the results, let me remind you that some of the statements made during this meeting 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.

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

Also, in the course of today's presentation, we will discuss a number of products and compounds developed in collaboration with partners or license from other companies. Acknowledgment of those relationships shown in today's presentation can be found on the Johnson & Johnson website. Now I would like to review our results for the fourth quarter and full year of 2010.

If you'd refer to your copy of the press release, let's begin with the schedule entitled Supplementary Sales Data by Geographic Area. Worldwide sales to customers were $15.6 billion for the fourth quarter of 2010, down 5.5% as compared to the fourth quarter of 2009. On an operational basis, sales were down 5.1%, and currency had a negative impact of 0.4%.

As we pointed out last year, our 2009 results benefited from the inclusion of a 53rd week. To remind you, the Johnson & Johnson fiscal calendar is based on four 13-week quarters, resulting in an extra week every five or six years. We estimate the 2009 fourth quarter growth rate was enhanced by just over 2% and the year by approximately 0.5%.

Also impacting the quarterly comparisons were U.S. healthcare reform implemented in March and the OTC recall announced earlier this year. Adjusting for these items, the 2010 fourth quarter operational sales would have been down approximately 1%.

In the U.S., sales declined 8.1%. In regions outside the U.S., sales declined 2.3% operationally, while the effective currency exchange rates negatively impacted our reported sales by 0.8 points. Our strongest performing region was Asia Pacific and Africa region, which grew 4.2% on an operational basis. The Western Hemisphere, excluding the U.S., declined 7.6% operationally, while Europe declined 4.5% operationally.

If you'll now turn to the consolidated statement of earnings, net earnings were $1.9 billion compared to $2.2 billion in the same period in 2009, a decrease of 12%. Earnings per share were $0.70 versus $0.79 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, 2010 fourth quarter adjusted results exclude the after-tax net impact of litigation settlements, increases to the product liability reserve and costs associated with the DePuy ASR Hip recall program.

The fourth quarter 2009 results have been adjusted to exclude the after-tax impact of the restructuring charge and net litigation settlements. Net earnings on an adjusted basis were $2.9 billion, and earnings per share were $1.03, up 0.6% and 1%, respectively, versus the fourth quarter of 2009.

I would now like to make some additional comments relative to the components leading to adjusted earnings before we move on to the segment highlights. Cost of goods sold at 32.2% of sales was 10 basis points higher than the same period in 2009, primarily due to the costs associated with the impact of the recalls and related remediation efforts in the Consumer business, and the impact of price reductions in our Pharmaceutical business and certain MD&D businesses. These were largely offset by cost reduction initiatives across the businesses, and certain charges reflected in the 2009 results related to the restructuring program.

Selling, marketing and administrative expenses at 33.1% of sales were down 90 basis points versus last year due to cost containment initiatives. Our investment in research and development as a percent of sales was 12.7%, 70 basis points lower than the fourth quarter of 2009 due to lower project costs and timing of spending on projects. Interest expense net of interest income of $114 million is $33 million higher than the fourth quarter of 2009, with lower interest income due to lower average interest rate on our investment.

Other expense net of other income of $1.1 billion compares to other income net of other expense in 2009 of $361 million. Excluding special items, net other income in the quarter was $123 million compared to $25 million of net other expense in 2009. 2010 reflects less charges in write-offs as offsets to gains as compared to 2009. Taxes were 17% in the fourth quarter of 2010 versus 16.4% in the fourth quarter of 2009. Dominic will discuss taxes and special items in his commentary.

Now turning to the consolidated statement of earnings for the full year of 2010. Consolidated sales to customers for 2010 were $61.6 billion, a decrease of 0.5% as compared to the same period a year ago. On an annual basis, sales were down 1.3 points operationally, and currency had a positive impact of 0.8 points. Net earnings for the 12-month period were $13.3 billion, and earnings per share were $4.78.

I'd now like to draw your attention to the boxed section. Adjusted net earnings of $13.3 billion in 2010 compares to adjusted net earnings of $12.9 billion in 2009. Adjusted earnings per share at $4.76 were up 2.8% versus the 2009 results.

Turning now to the business segment highlights. Please refer to the supplementary sales Schedule highlighting major products or business franchises. I'll begin with the Consumer segment.

Worldwide Consumer segment sales for the fourth quarter of 2010 of $3.6 billion decreased 15% as compared to the same period last year. On an operational basis, sales declined 14.5%, while the impact of currency was negative 0.5 points.

U.S. sales were down 28.8%, while international sales were down 4.9% on an operational basis.

In addition to the 2009 53rd week impact of just over two points, the consumer sales growth in the quarter was impacted by the OTC recalls, currency devaluation in Venezuela and certain divestitures. The OTC recall impacted operational growth by approximately 6.5 points, while the devaluation and divestitures impacted operational growth by approximately one point each. Net of these items, operational sales declined approximately 4%.

For the fourth quarter of 2010, sales for the over-the-counter, or OTC pharmaceuticals and nutritionals, decreased 29.6% on an operational basis compared to the same period in 2009, with U.S. sales down 52.8% and sales outside the U.S. down 5.2% on an operational basis.

Sales were impacted by the voluntary recalls announced earlier this year and suspension of production of the McNeil Fort Washington, Pennsylvania facility. The McNeil recalls, including both Las Piedras and Fort Washington products, impacted the fourth quarter sales by approximately $300 million and total year sales by approximately $900 million.

As an update on the products produced at our McNeil Consumer Healthcare Las Piedras, Puerto Rico facility, we are at normal levels of production for key products, restocking commenced in the second quarter and continues to ramp up to normal trade inventory levels for key products. In an effort to simplify and streamline the operations at Las Piedras, we are in the process of temporarily transferring certain product to other sites or eliminating some other products and promotional items that would have been produced there.

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, solid OTC products manufactured at that facility.

We began shipping a small amount of product previously produced at this facility in the fourth quarter of 2010, and ultimate supply of the remaining key products will ramp up in the latter half of 2011, slightly later than previously anticipated. This is due to a decision to upgrade manufacturing and quality processes in the course of transferring products other sites as a result of learnings from reviews completed as part of our comprehensive action plan.

McNeil submitted its comprehensive action plan, or CAP, to the FDA on July 15. The plan applies to all manufacturing facilities at McNeil U.S. operating to supply the U.S. market and addresses government and management controls, training programs, process assessments and process improvement. We are on schedule with commitments made in the CAP. Anti-smoking aids and oral care both achieved double-digit growth driven by the excess of new formulations and increased adoption.

Now moving on to the other businesses. The Skin Care business declined on an operational basis by 6.1%, with the U.S. down 6.9% and sales outside the U.S. down 5.5% on an operational basis. As discussed in our last meeting, in the third quarter, we began implementing enhancements to equipment that continued into the fourth quarter. This has resulted in a temporary reduction of shipments for certain products. Partially offsetting the declines, AVEENO, Dabao, Le Petit Marseillais brand achieved double-digit growth due to the success of new products, including the AVEENO NOURISH+ hair care collection and the POSITIVELY NOURISHING body care collection.

Baby care products were flat on an operational basis, with growth outside the U.S. driven by strong sales of lotions, offset by lower sales of cleansers and powders in the U.S. Women's health declined operationally by 7%. Sales in the U.S. were down 12.6%, while sales outside the U.S. were down on an operational basis by 4.8% due to increased competitive pressure and timing of launches.

Baby care and women's health are the franchises most impacted by the Venezuelan currency devaluation. Sales in the oral care franchise were down 5%. In the U.S., sales were down 10.8%, while sales outside the U.S. were down 0.9% operationally. Sales were impacted by the divestiture in the U.S. of the EFFERDENT and Effergrip brand.

Sales of mouth rinses were down versus the same period a year ago, impacted by competitive pressures and consumer trade-downs to smaller, lower-priced offerings. On a worldwide basis, the year-to-date market share is stable.

That completes the review of the Consumer segment, and I'll now review highlights for the Pharmaceuticals segment. Worldwide net sales for the fourth quarter of $5.7 billion were down 4.7% versus the same period last year, with an operational decline of 3.9% and a negative impact of currency of 0.8%. Sales in the U.S. decreased 5.7%, while sales outside the U.S. decreased from an operational basis by 1.6%.

In addition to the impact of the 2009 53rd week mentioned earlier, the fourth quarter sales were negatively impacted by U.S. healthcare reform, as well as European austerity measures estimated to be approximately $130 million and $50 million, respectively. Excluding these items, operational sales grew approximately 1%.

Now reviewing the products. Contributing to the results were a number of the 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 launches of STELARA and SIMPONI, we achieved U.S. market leadership in immunology in 2010.

Sales of REMICADE, a biologic approved for the treatment of a number of immune-mediated inflammatory diseases, were down 6.4% when compared to the fourth quarter of 2009. Sales in the U.S. were down 10.4% due to lower market share in an increasingly competitive marketplace, healthcare reform and the impact of the 53rd week, partially offset by strong market growth.

Export sales grew 1.6%, impacted by a reduction in inventory levels in the quarter. Excluding this impact, sales were up double digits. As an update on the arbitration with Merck, the hearing is complete, and final arguments have been made. It is possible we could have a decision in the first half of 2011.

PROCRIT/EPREX declined operationally by 15.1% during the quarter as compared to the same period last year, with PROCRIT down 12.3% due to a decline in the market. EPREX sales were lower by 18.4% operationally due to increased competition and the market decline.

Sales of LEVAQUIN, our anti-infective, were down 11.6% on an operational basis when compared to the same period a year ago due to the decline in the market and increased penetration of generics. The U.S. anti-infective market is estimated to be down approximately 6% in the quarter due to a lower incident of seasonal illness.

Sales of RISPERDAL CONSTA, a long-acting injectable antipsychotic, were flat on an operational basis. Sales in the U.S. were down 21.1%. However, solid growth was achieved in the combined market share of our long-acting injectables, including INVEGA SUSTENNA. Sales of RISPERDAL CONSTA outside the U.S. were up 10.5% operationally, with very strong growth in Japan.

CONCERTA, a product for attention-deficit hyperactivity disorder, was down 3.3% operationally in the fourth quarter as compared to the same period last year. Sales in the U.S. were down 6.5% due to double-digit market growth, offset by the impact of healthcare reform and lower market share. Sales outside the U.S. were up 5.4% operationally, with strong growth seen in most major regions.

VELCADE is 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 4.1%. Slower sales in Europe due to price pressure were offset by strong growth in other regions.

ACIPHEX, as it's known in the U.S. market and PARIET

Outside the U.S., is a proton pump inhibitor, or PPI, that we co-market with Eisai. On an operational basis, sales were down 17.3%, with the U.S. sales down 24.7% and sales outside the U.S. down 9.8% operationally. Sales were impacted by increased competition from generics in the category.

PREZISTA, a protease inhibitor for the treatment of HIV, grew operationally 35.1%, with U.S. growing 26.1% and sales outside U.S. growing 43.9% due to very strong momentum in share. INVEGA, an atypical antipsychotic, grew operationally 10.2% due to strong growth outside the U.S. with the recent approval in Japan.

As an update to our Pharmaceutical pipeline, in December, we announced that the fulranumab clinical development program has been placed on full clinical hold. We continue to work towards resolution with the FDA but do not have any further updates at this time.

In addition to a number of the filings Bill will discuss later, we recently received additional country or indication approvals or recommendations for INVEGA, INVEGA SUSTENNA, STELARA and REMINYL. INVEGA was approved as the first antipsychotic schizoaffective treatment in Europe, indicated for treatment of psychotic or manic symptoms, and INVEGA has now been approved and launched in Japan. We also received approvals in Japan for STELARA and REMINYL this January.

Additionally, pediatric exclusivity has been granted for studies conducted on paliperidone, which will extend the marketing exclusivity for INVEGA and INVEGA SUSTENNA in the United States. Paliperidone palmitate has received a positive opinion in Europe from the CHMP, recommending the granting of marketing authorization for the treatment of schizophrenia.

Lastly, I'm pleased to announce that the enrollment is complete for the two Phase III North America trials for bapineuzumab. This includes the main studies and the biomarker sub-studies, which are 18 months trial.

I'll now review the Medical Devices & Diagnostics segment results. Worldwide Medical Devices & Diagnostics segment sales of $6.3 billion grew 0.1% operationally as compared to the same period in 2009. Currency had a positive impact of 0.1 point resulting in total sales increase of 0.2%. Sales in the U.S. were up 1.6%, while sales outside the U.S. decreased on an operational basis by 1%. In addition to the impact of the 2009 53rd week of approximately 2.5 points, growth was tempered by a softer market and pricing pressure in certain businesses.

Now turning to the franchises, starting with Cordis. Cordis sales were down 9.9% operationally, with the U.S. up 2.5% and sales outside the U.S. down 16.3% operationally. Cordis' results were impacted by lower sales of CYPHER, our Sirolimus-eluting Stent, partially offset by the strong growth in Biosense Webster business.

CYPHER sales were approximately $135 million, down 40% on an operational basis versus the prior year. Sales in the U.S. of approximately $45 million were down 18%. Estimated share in the U.S. of 12% was down one point from both a year ago and on a sequential basis.

Sales outside the U.S. of approximately $90 million declined 48% operationally. The estimated market share in the quarter of 15% was down one point on a sequential basis and down nine points from the fourth quarter of 2009. Increased competition has impacted the share outside the U.S. CYPHER estimated worldwide share for the quarter was 14%, down one point sequentially and down six points from the fourth 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 and the continued expansion of installed base of CARTO 3 made a strong contribution to the results.

As an update on NEVO, we announced last quarter that we voluntarily suspended enrollment in the NEVO II clinical trial in order to make modifications to the balloon catheter. We are currently making these modifications and plan to supplement our submission for CE Mark with some additional data later this year. We are currently evaluating the impact of these changes on the clinical development program timelines.

Moving on to our DePuy franchise. Sales for DePuy declined 1.4% operationally when compared to the same period in 2009, with the U.S. down 2.5% and the business outside the U.S. flat on an operational basis. In addition to the impact of the 2009 53rd week, 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. Additionally, we believe slower growth and procedure volumes continued in the fourth quarter. Partially offsetting these items were the incremental sales for the acquisition of Micrus. This decline is 6% operationally on a worldwide basis, with the U.S. sales decline of 12% due to lower volume in the metal-on-metal bearing business and intensified pressure on the price net of mix.

On an operational basis, sales outside the U.S. grew 1%. Sales growth, driven by the success of the acetabular and cementless system, was partially offset by ASR and softness in procedure volumes in Europe. On an operational basis, worldwide units declined 4% with the U.S. down 4% and outside the U.S. down 3% operationally. Slower growth in revision procedures and continued pricing pressure impacted sales.

Spine declined 3% on an operational basis, with the U.S. down approximately 8% and sales outside the U.S. up 4% operationally. Pricing pressure in the category and softness in procedural volume impacted the growth in the U.S.

The diabetes franchise was down 1.8% operationally in the fourth quarter of 2010. Macroeconomic pressures, such as increasing co-pays and out-of-pocket expense, continue to pressure volume growth in the category. The U.S. business was up 1.6% due to an estimated increase in strip market share, while the business outside the U.S. was down 5% operationally due to competitive pressures compounded by the macroeconomic issue.

Ethicon worldwide sales grew operationally by 4.3%, with the U.S. up 9.4% and sales outside the U.S. up 0.6% operationally. The acquisition of Acclarent this year contributed to growth in the quarter. Growth was also driven by uterine surgery products; and outside the U.S., increased penetration of VICRYL Plus antibacterial suture and SYNSYL synthetic absorbable suture.

Ethicon Endo-Surgery was flat on an operational basis, with the U.S. sales down 5.8% and sales outside the U.S. up on an operational basis by 4.6%. Growth was impacted by the divestiture of the Breast Care business. Excluding this impact, worldwide sales grew operationally by approximately 3%. Growth was driven by increased market share for advanced sterilization products, as well as strong growth for harmonic products; and outside the U.S., Endo and EnSeal products. The growth was partially offset by lower sales of mechanical products due to a decline in the market.

Ortho Clinical Diagnostics was up 6.9% in the fourth quarter, with similar results both in and outside the U.S. Growth was driven by the success of the VITROS 5600 and 3600.

Rounding out the review of the Medical Devices & Diagnostics segment, our Vision Care franchise achieved operational sales growth of 4.3% in the fourth quarter compared to the same period last year. Sales in the U.S. increased 12.8%, while sales outside the U.S. increased 0.7% on an operational basis. The strength of the underlying platforms and new product launches drove growth across the category.

That completes highlights for the Medical Devices & Diagnostics segment and concludes the segment highlights for Johnson & Johnson's fourth quarter of 2010. I'll now turn the podium over to Bill Weldon. Bill?

William Weldon

Thanks, Louise, and thank you, all, for being here today. Let me start by saying I'm pleased to report that Johnson & Johnson delivered innovation in healthcare and earnings growth in 2010, with many of our businesses performing well in light of the overall macroeconomic conditions.

We're emerging stronger as an organization, while we deal with issues in our Consumer business. The results in our Consumer business were clearly a disappointment, heightened by the impact of the OTC recalls in the McNeil Consumer Healthcare business. While we will continue to see near-term pressures on the business for 2011, we remain committed to investing in the people, products, pipelines and global markets that will sustain our growth over the long term. We continue to build on the strong foundation of our credo and proven operating model, and we are well positioned to capitalize on our market leadership in one of the most important and rewarding industries in the world.

I'd like to begin our presentation by looking back at 2010 and discussing our business results for the year. I'll also give you an update on our McNeil Consumer business and our priority of returning high-quality products back to our customers this year. After that, we'll discuss the state of the global healthcare market, our approach to growth at Johnson & Johnson, and the steps and investments we're making to extend market leadership across our enterprise.

While we achieve many notable successes in 2010, it was clearly a year marked by very visible challenges that tested Johnson & Johnson on numerous fronts. Since I've received many questions regarding the McNeil situation, let me provide some perspective beyond the updates Louise has already shared with you.

Our experience with the McNeil Consumer recalls has been difficult and disappointing for our business, for our employees and most importantly, for our customers. Consumer trust in our company and our products is fundamental to everything we do, and that trust has truly been tested.

I visited many of our manufacturing locations around the world, and I can tell you that our people are dedicated to giving our customers the most trusted brands and highest quality products in the industry. I and all our people know it is our responsibility to learn from what happened, address any problems at the root causes and ensure only the highest quality products reach our customers and thus earn back the trust and respect.

Last year, we've made a commitment to restore McNeil Consumer Healthcare to the highest levels of quality and compliance that people expect of all Johnson & Johnson companies and that we expect of ourselves. As part of this commitment, we accelerated the implementation of organizational changes to our supply chain, manufacturing, quality and compliance areas. We also undertook thorough review of how we operated these plans. We examined in detail the historical production records going back many years of McNeil Consumer Healthcare products that were sold in the United States and produced in McNeil's internal manufacturing network.

We've now completed this interim, and we will continue to conduct reviews at external sites that manufacture McNeil products. If these reviews reveal any further issues, we will not hesitate to take whatever steps are needed, including further market action, to ensure that our products meet world-class quality standards. Moreover, the steps we have taken under the comprehensive action plan submitted to the FDA constitute an uncompromising effort to review quality and manufacturing practices at McNeil.

To help us assure that moving forward any of our products in the marketplace live up to the trusted standards and expectations that consumers have for all of our products coming from Johnson & Johnson. At the appropriate time, we will be investing in market support for our over-the-counter brand such as TYLENOL, MOTRIN and many others. And we will be introducing product and packaging innovations for many products, especially for those for young children.

As I indicated earlier, there were many successes and achievements in 2010 that have positioned us well for the future, and it is thanks to the dedicated and talented people of Johnson & Johnson that we continue to deliver results and advance the pipelines that will serve an array of unmet medical needs and sustain our long-term growth.

For the year, we grew our adjusted earnings by 2.9% despite a sales decline and continued our long-term management focus. We maintained our financial discipline and strength in a tough global economy, we generated strong free cash flow and maintained our AAA-credit rating, and we executed a $1.1 billion debt offering at the lowest interest rate for long-term corporate debt in history.

We continued launching many new products and growing our market leadership in some of the fastest-growing segments in healthcare. We invested nearly $7 billion in R&D to advance our newest technologies and pipeline compounds, many of which are truly breakthroughs in how we treat disease, improve people's health and save lives.

We're also excited about the progress we saw in the emerging markets, with our sales growing 14% operationally in the BRIC markets: Brazil, Russia, India and China. We're focused on growing share across our businesses with new products and innovations. And as the global economy and market conditions improve, we will be well positioned for long-term growth.

As you can see here, our sales for 2010 declined 1.3% operationally, reflecting the loss of revenues from our consumer recalls and the impact of U.S. healthcare reform, as well as generic competition in our Pharmaceuticals business. The 2009 results were also included a 53rd week, which Louise commented about earlier. Excluding those impacts, our underlying operational growth would've been a little over 2%, reflecting the continued economic slowdown in the consumer and medical device markets. Despite our revenue decline, our adjusted earnings were $13.3 billion and adjusted EPS was $4.76, up 2.8%. We also generated a strong free cash flow of approximately $14 billion.

Last January, when we set expectations for our financial results, we anticipated a very different 2010. We informed investors that the impact of U.S. healthcare reform was not reflected in our January guidance, and it would be incorporated once legislation was enacted. U.S. healthcare reform was implemented in March, and as the year continued, we faced additional challenges with the consumer OTC products.

Meanwhile, our Medical Device businesses and certain consumer products have felt the effects of continued economic slowdown, which will likely carry into this year. While all of these factors were strong headwinds for our business to face, thanks to the people we were still able to increase earnings and meet our adjusted earnings guidance while maintaining our growth investments.

In terms of sales by segment, our Consumer generated $14.6 billion in revenue, and that's about 24% of the total, and saw a significant decline due to the McNeil recalls and continued softening in the general economy. Pharmaceuticals generated $22.4 billion or 36% of our total, while it showed an operational sales decline for the year. When you exclude the impact of U.S. healthcare reform, European austerity measures and generics, the business grew nearly 4% operationally, which is more indicative of the underlying strength of our Pharmaceutical business.

Meanwhile, Medical Devices & Diagnostics, our largest segment, generated $24.6 billion or 44% of our total. It had healthy growth of 3.4% considering the pricing and economic pressures that became more prevalent especially in the second half of the year. Operating profit for 2010 excluding special items was $17.6 billion and 28.5% of sales, and that's an increase from $17.4 billion and 28.1% in 2009. This increase can be attributed to the excellent job our leadership teams did in managing their business during the year, while continuing to invest in key product opportunities and pipelines that are recognized today as some of the best in the industry.

Now for our segment highlights. In addition to our McNeil recalls, which had significant impact in OTC sales, our overall consumer products business was affected by the general economic slowdown and greater consumer sensitivity to spending, which was reflected in the broader move toward store brands and smaller sizes in certain markets.

Total sales declined approximately 9% operationally to $14.6 billion. Despite the headwinds, we saw a positive momentum in emerging markets, where consumer grew double digits. While operational sales decreased in most of our consumer franchises, we did see growth in several product lines, like Dabao skin care products, NICORETTE, JOHNSON'S and AVEENO, where our science-based innovations and expansion into emerging markets continue to drive strong results.

While significant investments were necessary to address manufacturing issues, the business also continue to focus on new product innovations and line extensions to iconic brands such as JOHNSON'S NATURAL, LISTERINE ZERO, Tylenol PRECISE, ZYRTEC Liquid Gels and CYTOMIMIC Technology in several new skin care products.

Our Pharmaceuticals business with sales of $22.4 billion represents the world's eighth largest pharmaceutical business and fifth-largest biotech business. We saw an operational sales decline of 1% for the year. Our underlying operational growth in pharmaceuticals would've been nearly 4% excluding the items that were previously mentioned.

Pharmaceuticals continue to make significant advancements to expand our presence in emerging markets, which also grew double digits, and in new therapeutic areas for Johnson & Johnson like vaccines in Alzheimer's disease. We continue to have solid growth from some of our core products and recently launched products across our key therapeutic areas.

In immunology, we achieved U.S. market leadership. Our flagship product, REMICADE, grew 7%, while newer products, STELARA and SIMPONI continued increasing market share and generated more than a combined $600 million in sales for the year, contributing to 17% operational growth for the immunology franchise. In long-acting antipsychotics, which grew 14%, RISPERDAL CONSTA grew 6% worldwide, and INVEGA SUSTENNA continued to increase its U.S. market share, contributing to our expanding market leadership.

In the HIV area, PREZISTA and INTELENCE grew sales 46% and 41%, respectively, achieving more than $1 billion in sales for the first time, while providing access to markets with the most significant needs. In oncology, VELCADE grew 16%, also eclipsing $1 billion in sales outside the United States for the first time.

We also continue to make exciting advancements in our Pharmaceutical pipeline, considered to be one of the strongest in the industry, where we are addressing critical unmet needs in cancer, infectious diseases, cardiovascular disease and many others. Our pipeline features many true innovations that are designed to change the treatment paradigm for patients.

We recently filed several such compounds for regulatory approval. Abiraterone acetate is an investigational agent for the treatment of metastatic advanced prostate cancer, a devastating disease that is the second most common cancer in men. It was accepted for accelerated assessment in Europe and submitted in the United States.

Telaprevir, for Hepatitis C, another treated global infectious disease, has also been accepted for accelerated assessment in Europe, and we filed TMC278 for HIV in both the U.S. and Europe.

Rivaroxaban, our anticoagulant, has been filed in the United States for prevention of stroke in patients with atrial fibrillation, a condition that can lead to major physical and behavioral impairments and even death. We also submitted a complete response to the FDA for its review to our rivaroxaban filing for deep vein thrombosis prevention following total knee and hip replacement surgery.

In addition, we also continued to develop pipelines in our product by pursuing line extensions. In 2010, we submitted applications for several major line extensions, including both REMICADE and SIMPONI, which continue to build the strength of our immunology franchise. And over the next three years, we expect to file compounds to address critical medical needs, including Alzheimer's disease and diabetes, conditions growing in prevalence as populations age. With five compounds currently in registration and several more planned in the coming years, our portfolio potential ranks among the leaders in the industry.

Our Medical Devices & Diagnostics business is the largest medical technology business in the world, with sales of $24.6 billion. Sales grew 3.4% operationally for the year, and we saw a market share growth in the majority of our businesses. We achieved solid growth in six of our seven franchises, while facing the macroeconomic slowdown that has led to a decline in the growth of surgical procedures and an increase in pricing pressures across the medical device market in the second half of the year. We continue to advance our pipelines across those franchises and show strong double-digit growth in the emerging markets.

Our franchises in MD&D has been a wide range of treatment categories. Ethicon grew 8% operationally based on its strong suite of Surgical Care products, as well as recent acquisitions in new markets like aesthetics and ear, nose and throat surgery. Ethicon Endo-Surgery grew 5% operationally. Double-digit growth in the advanced sterilization products and energy products were major contributors.

Vision Care saw operational sales growth of 4% based on growth in its core ACUVUE brand and the continued launch of 1-Day ACUVUE TruEye into new markets. Ortho Clinical Diagnostics grew 4% operationally, with the continued growth of the VITROS 3600 and 5600 platforms. DePuy increased operational sales 3% based on the strength of its orthopedic reconstruction sports medicine and neurosurgical business with the recent acquisition of Micrus Endovascular.

Diabetes Care increased operational sales 2%, with the introduction of a number of new OneTouch products around the world. Meanwhile, sales in the Cordis franchise continue to decline due to competition in drug-eluting stents. But this was partially offset by strong growth in electrophysiology products in the Biosense Webster business, which grew nearly 20% for the year. Our Medical Device franchises also continue to develop new technologies and build on key acquisitions that truly advance the standard of care or expanded key products in the more global markets.

On the next two slides, you'll get a quick look at a number of innovative technologies being developed across our MD&D pipeline. This form the basis for a steady flow of new products we anticipate over the next few years. A few recent pipeline developments with exciting potential include the Fibrin Pad, a revolutionary hemostasis product that combines two biomaterials and two biologics to stop bleeding during surgical procedures. This conversion product’s BLA filing was made in November in the United States.

The new blood glucose monitoring system, called OneTouch Verio, which promises to develop a new standard for accuracy and precision in diabetes testing, meeting the number one need for patients. Verio is now available in Europe and Australia where it's off to a promising start, and we plan to file for approval in the U.S. this year.

INCRAFT, a new stent graft system to treat abdominal aortic aneurysms. It is the potential to make endovascular aneurysm repair a viable treatment alternative for a wider range of patients with this very serious condition. Early clinical trial results have been very encouraging, and we are on track for a CE Mark submission later this year.

And SEDASYS, a first of its kind computer-assisted personalized sedation system for colonoscopy and upper gastrointestinal procedures. As a result of our appeal being granted, we are now waiting for the FDA to select the date for a new independent advisory review panel hearing, and we expect that to take place later this year.

MD&D. MD&D also continues expanding its presence and capabilities in certain markets by building through acquisitions like Acclarent and Micrus Endovascular in 2010. Across MD&D, we have businesses leveraging internal and external resources in developed and emerging markets to bring some of the most innovative life-changing and life-saving technologies to the market.

Thanks to our financial strength and discipline, we extended our track record of adjusted earnings increases to 27 years, and we have 48 consecutive years of dividend increases. In 2010, as has been true throughout our 125-year history, we faced difficult choices, made prudent decisions and relied on our people to deliver solid results while positioning ourselves well for the future.

With this approach and by staying focused on scientific innovation, we have built enduring market leadership. In fact, approximately 70% of our sales are from products with number one or number two global market shares, and approximately a quarter of our sales last year came from new products that were introduced in the past five years.

During 2010, we saw our one year total shareholder return decline about 0.5%. Over long time frames, we continue to compare unfavorably the most stock indices, beating all our major benchmark's performance on a three-year and five-year basis. The one-year decline was a disappointing performance for us, but it reflects both the uncertainty around healthcare reform that hampered many in our sectors, as well as concerns around the impact of the consumer recalls. The steps we are taking to resolve the McNeil recall issues and invest in future market opportunities will enable us to lead our trusted OTC brands to the market and keep our businesses well positioned for long-term growth in healthcare.

With 125-year history as a company and 66 years of having been publicly traded, Johnson & Johnson has been through its share of short-term challenges, and we continue to focus on the long term. I continue to believe that long-term demographics in positive trends make healthcare a very

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hip and knee replacements, aesthetic surgery, anti-aging and obesity treatments are just a few examples of these.

Critical unmet medical needs like cancer, HIV, diabetes and cardiovascular disease spread in large populations. Advancing science and technology will offer the opportunity for more convergent products that can be used earlier in disease state or to address new areas of unmet need. From personalized medicine and comparative effectiveness to the increased use of companion diagnostics and biomarkers, these types of developments will help shape a more effective approach to healthcare.

So far, I've provided you an overview of our business progress, our 2010 results and many successes and some disappointments. I'll talk a bit about the advancements we are making with new products in our pipelines and our growing global presence, especially in emerging markets.

I've also discussed the high-level view of the healthcare market, the tremendous opportunities we see to improve people's health and well-being, and to grow our business. The questions you may be asking are what differentiates Johnson & Johnson in being able to capitalize on these opportunities. What will allow us to continue to sustain our leadership in the global healthcare market.

It all starts with our credo, which is the heart and soul of Johnson & Johnson. Our credo is established in 1943, and it provides a common set of values for our approximately 114,000 employees around the world. It's the very fabric that holds together our employees in 60 countries in more than 250 operating companies.

The four tenets of our credo provide a clear focus and mindset for how we approach each decision. Patients and customers come first, then our employees, our communities and our shareholders. We don't get every decision right, but in our response to recent issues, we have shown what credo leadership really means. The accountability we have taken, the commitments we have made to our customers, the actions and uncompromising reviews we have taken to ensure mistakes don't happen again. We've taken these issues seriously, and we are more resolved and more determined than ever to live up to the legacy every generation at Johnson & Johnson has built up with our credo. It is a rich, meaningful and living statement of our responsibilities.

In addition to our credo, we also work under an operating model that has served us well for decades. We are focused on four growth enablers: Products, pipelines, global presence and people that support our model and allow our businesses to achieve compliance growth. The success of this model relies on all of these elements working at concert across Johnson & Johnson.

Our operating model has four elements, being broadly based on human healthcare, managing our businesses for the long term, making a decentralized management approach and focusing on our people and values. This past year our operating model has been put to the test and challenged in light of our quality and manufacturing issues. Through this process, we've examined our core beliefs and management approach, and we believe our credo and our operating model have not only been proven over decades but remain truly valuable differentiators for our company today. The commitment to our credo and operating model is what has made Johnson & Johnson one of the most trusted and successful leaders in healthcare. It is what has seen us through difficult times in the past and is doing so once again.

I'd like to dig deeper now into our operating model and point out how its elements fostor growth and position us for the long term. For decades, we have recognized the value of being a broadly based company focused on human health. It helps us drive consistent performance in sometimes turbulent markets. When one area our business is challenged, another area is likely to be growing. This allows us to continue to deliver results, make investments in R&D or M&A that will strengthen the enterprise and help us whether the challenges that invariably arise. Once again, 2010 is a great example of that.

Our breadth also allows us to pursue growth opportunities wherever they exist. We have an expansive view of and access to the unmet needs' capabilities and market opportunities that exist in the $6 trillion global healthcare market. To develop our portfolio, our companies start first by identifying areas of healthcare with significant unmet needs, areas where we can make a meaningful difference. These market opportunities are often characterized by high demand for innovative solutions; and thus, high potential growth.

Our companies then look for ways to expand our market leadership through access to science-based innovations or by building on our existing brands. Infectious disease is one such area of unmet need. Diseases such as HIV, Hepatitis C and tuberculosis cause the suffering and death of millions of patients or people each year. We acquired Tibotec in 2010 to enter the HIV market. And since then, we have become a world leader in HIV medicines and infectious disease research.

While we have continued to work in HIV medicines, we've expanded our research to other infectious diseases. Today, together with our partners, we're developing two new drugs for Hepatitis C, telaprevir and TMC435. These incredible compounds have the potential to cure significantly more people than current therapies, and they have the average treatment time from 12 to six months. We've also done groundbreaking work in tuberculosis and have announced plans to acquire Crucell, which will bring with it a global vaccine business to prevent many viral and bacterial infections.

Our business in infectious disease illustrates how we target an unmet medical need, bring talented people together to solve these problems, create partnerships and then broaden our base of research and products to build on this foundation. It's a model you will see again and again across Johnson & Johnson, reflecting many of our growth enablers.

Another example is the company like Ethicon, which has been the world's leading suture business and is now a broader and larger player in complementary new surgical businesses. With acquisitions over the past three years of Acclarent in ear, nose and throat surgery; Mentor in aesthetics; and Omrix in biosurgicals, Ethicon has been able to broaden its product portfolio in fast-growing markets, strengthen its pipeline and continue to grow its core business.

As part of our broadly based approach, the family of Johnson & Johnson Companies also has the advantage of being part of a broad global network of market care leaders. Across the business, we share knowledge of consumers and patients, our leadership in scientific research and clinical trial development, and our understanding of local markets. This type of network has been crucial when we identify opportunities or issues in the business. We can quickly gain access to best practices, leadership talent, global resources and world-class experts within our very own family of companies to achieve a breakthrough or to solve a problem.

Our broad base and global reach also give us unique capabilities in developing, expanding and globalizing products, and our ability to bring together technology, medicines and consumer insights on a particular disease or unmet need can be compelling and beneficial for patients for consumers.

Our Advanced Energy business, which grew double digits in 2010, is an excellent example of our ability to acquire and integrate new businesses and complementary technologies, expand the reach through our global network, enhance our pipelines and strengthen our overall market leadership position. Ethicon Endo-Surgery acquired SurgRX in 2008 and added their EnSeal family of devices to an already successful energy portfolio, the harmonic line of ultrasonic medical devices, which is being used in more than 10 million procedures worldwide. By broadening our base, even in specific area like energy, we can better serve our customers, explore new growth opportunities in markets for products like EnSeal and develop an extraordinary pipeline for the future.

In terms of our operating model, our formula for success also means managing our businesses for the long term. When a decision short-term benefits are outweighed by the longer-term impact, we always seek to have the long-term view. This focus means that we make significant investments in the long-term health of our business even in the face of economic and market pressures that may impact our near-term growth.

Last year, despite pressures, we invested significantly in advancing our outstanding pipeline and newly launched products, as well as in the manufacturing changes that will aid the return of our OTC products to the market. These types of investments will continue in 2011.

We also built on the long-term equity of our brands to create customer loyalty and brand strength that few companies can match. You've seen us build household names and iconic consumer brands, such as JOHNSON'S, TYLENOL, LISTERINE, NEUTROGENA, ZYRTEC and ACUVUE.

Our financially disciplined approach to growth means we take strict views on the future that enable us to create shareholder value over the long term. We continuously seek to grow sales faster than the markets where we compete, manage our businesses to deliver earnings, produce strong cash flows and provide capital for other needs. Over our 125-year history, this approach has served us well.

We also utilize multiple approaches to grow the business over the long term. We believe in taking an organic and collective approach to innovation. We develop our own internal R&D programs. We collaborate and partner with other companies and academic institutions that are pursuing exciting discoveries, where we can add our global development capabilities. And in selective cases, we also make targeted acquisitions to either add a capability we don't have or to gain an asset from which we can drive more value.

Over the last 10 years, licensing and acquisitions contributed about 30% of our growth, with roughly 70% from organic operations, and that's a healthy balance that allows us to create shareholder value. In the case of our agreement with Elan, we were able to acquire its assets and rights to world-class neuroscience research in its Alzheimer's Immunotherapy Program, including the compound bapineuzumab.

Bapineuzumab, which is being developed in collaboration with Pfizer, has shown promising early data in Phase II indicating the potential to impact the presumed underlying pathology and progression of Alzheimer's disease. As Louise mentioned, we just completed enrollment in our Phase III U.S. trials.

Another key tenet of our success in operating model is our decentralized management approach. Our leaders who are closest to the customers and markets drive many of the decisions for their business. With our credo as the foundation of what unites us, we're comfortable in powering our business leaders to make the right decisions based on our first priority of serving patients and customers.

We seek to continuously balance the benefits of decentralization. In some cases, such as our supply chain, we have clearly identified opportunities to improve our quality and compliance controls, as well as efficiencies by managing those activities in a more centralized way.

When it comes to decisions about the customers and commercial markets, however, those decisions are made by the people closer to the customers and with the deepest understanding of the market. That's how we maintain our clear access to customer insights, remain nimble in our response to market trends and develop deep understandings in the needs in particular geographies and markets. Our decentralized approach has been critical to our recent growth in emerging markets and our overall global expansion, with 52% of our revenues coming from outside of the United States today.

We continued leveraging R&D centers in emerging markets to develop medical devices, pharmaceuticals and consumer products based on insights in those local markets. And we have a vast and growing network of medical and surgical institutes around world to train and educate the doctors and nurses who use our products.

With rapid economic growth in the emerging markets, we're expanding our product offerings to meet unique needs of the mass market, comprised of billions of people who are now gaining greater degrees of access to health care coverage. These offerings include good market-appropriate sutures, consumer products, staplers, blood glucose meters and knee replacements, all geared for the emerging markets. These products might be more affordable, designed more simply and differently, or focused on diseases that are more common in the emerging markets and in the developed markets. The end result is superior outcomes for patients who previously might not have had access to such technologies.

Finally, we focus on our people and values. This is the common theme that runs through our credo operating model and growth enablers. The strategic framework for Johnson & Johnson at every level relies on the people of Johnson & Johnson to make it work. It is their talent, resiliency and commitment to our credo that has built our reputation over time, and is a tribute to the people of Johnson & Johnson, that despite our recent challenges, we have maintained solid performance and our repetition have remain among the best in the industry.

The recent organizational changes we announced are a direct reflection of the strength and depth of our leadership team. We thoughtfully approach succession planning and leadership development. We are committed to giving our people opportunities to work across our various sectors and geographies. We value the diversity of our teams and how their backgrounds and experiences enrich our global view of the healthcare market. We continue to invest more than ever in our people.

Our objective is simple: To develop employees with the skills, judgment and integrity to carry on the Johnson & Johnson legacy. Our credo values, operating model and growth enablers are the formula for why Johnson & Johnson has enjoyed such an unparalleled level of success and performance for 125 years. Every year, we'll present us with challenges, but the commitment to our credo, our operating model and our people will see us through.

Whether we encounter periods of slow economic growth, a product issue or a market challenge, this commitment is the reason we can manage through turbulent times, continue investing and stay well positioned for sustainable growth. As I wrap up, let me recap some of the critical points I hope you will take away today.

Johnson & Johnson has built on a strong foundation driven by its credo and operating model, and we are merging stronger from recent challenges. Our overall business is performing well led by our Medical Devices & Diagnostics and Pharmaceuticals business. We have made changes to address our supply chain issues and continue to build the Consumer business with science-based innovations that will lead the market as the business and economy recovers. Our innovations are moving into the marketplace, launching successfully, addressing critical unmet needs in incredible ways and thus building market share.

Our presence is promising new growth areas, and across our global footprint, gives us outstanding market opportunities. And our people are some of the most respected and talented leaders in the healthcare industry. We are fortunate to compete in one of the most important and rewarding industries in the world. I am confident that we're putting the supply chain problems of 2010 behind us, and we have the products, pipelines, global presence and talented people to expand our market leadership and bring innovative solutions to healthcare.

We look forward to keeping you updated on our progress throughout the year. And now I'd like to turn it over to Dominic.

Dominic Caruso

Thank you, Bill, and good morning, everyone. Given the various challenges we faced in 2010, we are pleased that we were able to deliver earnings growth and strong free cash flow, while continuing to make investments that position us well for the future. I would like to highlight a few items in our fourth quarter results and then provide some guidance for you to consider in updating your models for 2011.

Our fourth quarter results reflect a lower level of sales than we and you had expected. We also incurred additional expenses related to the remediation efforts at our McNeil Consumer Healthcare manufacturing and quality operations, putting further pressure on our gross profit for the quarter. However, we were able to offset this slower level of gross profit by positive impacts in the other income and expense line when excluding the special items that I will describe, as well as a lower effective tax rate. The lower effective tax rate reflects the implementation of the R&D tax credit retroactive to the beginning of 2010, which is consistent with our guidance for the year and the favorable mix in the business along with some additional tax claim strategies in the fourth quarter.

Our fourth quarter 2010 results include charges in the other income and expense line that we have identified as special items. These are excluded from our adjusted earnings since they are not related to our current operations, a practice that we have consistently applied with these types of items. These special items amount to approximately $1.2 billion and consists of three types of charges to earnings.

First, we recorded costs associated with the litigation settlements of approximately $375 million, primarily related to the arbitration ruling concerning ceftobiprole with Basilea and a settlement with Novartis concerning various patents in the vision care business. Additionally, we increased our reserves for product liability costs by approximately $570 million, primarily related to the DePuy ASR Hip recall, LEVAQUIN and RISPERDAL matters.

And finally, we also recorded a reserve of approximately $280 million for costs associated with the DePuy ASR Hip recall program, where we have agreed to cover reasonable and customary costs of testing and treatment for ASR patients who need services related to the recall, including revision surgery, if necessary. Together, these special items negatively impacted our fourth quarter results by $0.33 per share. Excluding these special items, our earnings per share of $1.03 achieved the mean of the analysts' estimates for the quarter.

To wrap up our formal presentation this morning, I would like to provide some guidance for you to consider as you refine your models for 2011. First, let me set some context around certain items that are reflected in my guidance but may not yet be reflected in your models.

We expect to continue to incur significant costs in 2011, as we continue to address the manufacturing and quality issues related to our OTC recalls and our work to restore our McNeil Consumer Healthcare products in the marketplace. These costs will negatively impact earnings by approximately $0.06 per share.

Additionally, as many of you know, the U.S. healthcare reform legislation requires that beginning in 2011, a fee is to be paid by each of the U.S. Pharmaceutical companies based on branded product sales. This fee is not tax deductible, and we estimate that it will negatively impact earnings by approximately $0.06 per share. As you have seen, the overall markets that we compete in have experienced significant pricing pressure in 2010, and we expect that this pressure will continue in 2011.

When you consider U.S. healthcare reform, European austerity measures and general pricing pressure in the market, we estimate that, overall, such pricing pressure will have a negative impact to pretax operating margins of approximately 0.5% to nearly 1%. As we plan for 2011, we want to ensure that we make the proper investments to ensure that sustainability of the underlying strength we see in the business, while we continue to deal with some challenges.

Finally, it is important to understand that the following guidance does not yet reflect the potential impact of the acquisition of Crucell. Assuming all closing conditions are met, we expect to close this transaction in the first quarter, and we will provide an update at that time, as is our normal practice.

Let me begin now with a discussion of cash and interest income and expense. During 2010, we continue to generate strong cash flows. In fact, as Bill pointed out earlier, we generated free cash flow or operating cash flow after necessary capital expenditures of approximately $14 billion.

At the end of 2010, we had approximately $11 billion of net cash. This consists of approximately $28 billion of cash and marketable securities, and $17 billion of debt. This is an improvement of $6 billion in our overall net cash position from year-end 2009.

During 2010, we used approximately $1.1 billion to repurchase shares of our stock in connection with our $10 billion share repurchase program, which we have now completed. For purposes of your models, assuming no major acquisitions, I suggest you consider modeling net interest expense of between $300 million and $400 million.

Turning to other income expense, as a reminder, this is the account where we record royalty income as well as one-time gains and losses arising from such items as litigation, investments by our development corporation and asset sales or write-offs. This account is difficult to forecast. But we would be comfortable with your models assuming approximately the same level of other income and expense as we saw in 2010 when excluding special items. Therefore, I would recommend that you consider modeling other income and expense for 2011 as a net gain ranging from approximately $600 million to $700 million.

And now a word on taxes. For 2010, the company's effective tax rate excluding special items was 21.1%. During 2010, we recorded a number of tax adjustments in various jurisdictions that reduced our effective tax rate, which we do not expect to repeat in 2011. We suggest that you model our effective tax rate for 2011 in the range of 22% to 23%.

As a reminder, the incremental healthcare reform fee is not tax deductible. As always, we will continue to pursue opportunities in this area to improve upon this rate throughout the year.

Now turning to sales and earnings. As we have done for several years, our guidance will be based first on a constant-currency basis, reflecting our results from operations, assuming that average currency rates for 2011 will be the same as they were for 2010. This is the way we manage our business, and we believe this provides a good understanding of the underlying performance of our business, and we will also continue to provide an estimate of our sales and EPS results for 2011 that the impact to current exchange rates could have.

As we've done in the past, we will use the euro as an example of the overall impact that currency fluctuations could have. And as of the end of last week, the euro was at $1.35 and have strengthened along with other major currencies versus 2010 levels.

Turning to sales, we would be comfortable with your models reflecting an operational sales increase on a constant-currency basis of between 2% and 3% for the year. This reflects the impact of the previously announced transaction with Watson concerning CONCERTA, as well as the loss of market exclusivity for LEVAQUIN in June 2011. These two items have reduced our growth rate by approximately 1.5%. This would result in sales for 2011 on a constant-currency basis of approximately $63 billion.

While we are not predicting the impact of currency movements, to give you an idea of the potential impact on sales, if currency exchange rates for all of 2011 were to remain where they were as of the end of last week as an example, then our sales growth rate would increase by approximately 1.5%. Thus, under this scenario, we would expect reported sales growth a range between 3.5% and 4.5%, for a total expected level of reported sales of approximately $64 billion.

And now turning to earnings. As I indicated earlier, there will be an incremental U.S. healthcare reform fee as well as the cost to restore our McNeil Consumer Healthcare manufacturing and product quality to our high standards. That will negatively impact our earnings in 2011. Additionally, we expect to continue investing in our businesses to ensure the sustainability of the underlying growth we see in our businesses even in the face of slower market growth and pricing challenges that we expect to continue in 2011.

We suggest that you consider full year 2011 EPS estimates, excluding the impact of special items, of between $4.72 and $4.82 per share on an operational basis. That is, assuming the same average exchange rates for 2011 as we saw in 2010.

And while we are not predicting the impact of currency movements, to give you an idea of the potential impact on EPS, if currency exchange rates for all of 2011 were to remain where they are as of the end of last week, then our reported EPS, excluding special items, would be positively impacted by approximately $0.08 per share due to exchange rate fluctuation. We, therefore, suggest that you model our reported EPS in the range between $4.80 and $4.90 per share. 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 our overall net income margin will contract by more than 0.5% versus 2010, partly due to the increase in our effective tax rate and partly due to a contraction in our pretax operating margins.

For 2011, the continued and incremental pricing pressure across our business, the incremental cost associated with U.S. healthcare reform fee, as well as the cost of remediation activities in our McNeil Consumer healthcare business and the investments we are making across our businesses for sustainable growth will result in this pretax margin contraction. While we will have the incremental benefit associated with our restructuring efforts, these will not offset all such factors.

In closing, Johnson & Johnson remains a company that is financially strong, and we are committed to expanding our market leadership and investing for sustainable growth in healthcare. While we see some challenges in 2011, we also feel positive about the underlying strength in our business as evidenced by strong core products, exciting new product launches, robust pipelines and extraordinary global expansion opportunities.

I look forward to updating you on our progress throughout the year. Now,

Louise, back to you.

Question-and-Answer Session

Louise Mehrotra

[Operator Instructions] Over here, Catherine. [Catherine Arnold, Credit Suisse]

Catherine Arnold - Crédit Suisse AG

I think guidance is probably a good place to start, and I wanted to ask a strategic question, and then one for Dominic on some specifics. So, Bill, for the strategic question, if you step back and you think about what your guidance is aspiring, and then you think about the growth over the last two years, it would suggest that the last three years have sort of been low single-digit flattish growth. And I guess, I'm wondering if your aspirations are that going into 2012 and beyond, we should return to a more typical J&J growth trajectory in the high single digits based on transition, based on investments and some challenges that go away, or if what we've seen in the last three years is really more about the way the business is going to be delivering longer term?

William Weldon

No, I think as you get into 2012, actually, we ended 2011 into '12, you'll start to see things start to accelerate back to what we would expect normal terms to be. And I think if you look at the new products, putting the OTC issues completely behind us, that we feel very, very comfortable on a go-forward basis.

Catherine Arnold - Crédit Suisse AG

And, Dominic, if I think about the moving parts for 2011 and things that could impact guidance, like there is five or six variables that the Street might have gotten wrong and estimated 2011, which is why the disparity between your guidance or what consensus estimates were or maybe some things are tougher than what you spoke of last time. And if I could just share this with you and you can react. In terms of EU pricing, for instance, you have made a comment that overall pricing was going to impact 1.5% to 1%. I just want to clarify if that was on a sales level or earnings level. I thought it was on earnings level. In the past, you've talked about mid-single-digit effects in 2011, and I thought that was on the sales also. So I want to try to understand if there's any difference or it's just given in a different way in terms of EU pricing. And healthcare reform in the past, I think you had said 5% to 6% of U.S. sales, where you just mentioned a $0.06 EPS impact. So again, is there any change that we could have gotten wrong or maybe both of those factors just weren't incorporated well into consensus estimates and there's no change? Do you want to comment?

Dominic Caruso

Let me comment on those two items first. So with respect to pricing, what I provided was an overall estimation that pricing pressure in the industry, when you take into consideration healthcare reform, European austerity measures and just overall market pricing conditions, would negatively impact pretax operating margins by 0.5% to 1%. That's what I said in my script. But that's the overall pricing contraction in the broad markets around the world. Now in addition to that, the healthcare reform fee that I'm discussing is incremental to that, and healthcare reform fee, as many of you know, will not be reflected in sales by corporations. It's actually a cost. And that healthcare reform fee, that incremental fee that takes place in 2011, which is non-tax deductible, that's an incremental impact to earnings, which we estimate to be worth about $0.06 per share. Hopefully, that clarifies it.

Catherine Arnold - Crédit Suisse AG

You have given some directional guidance on both of those factors in the past. So I just want to be sure that -- is there any change in the impact of those items in 2011 guidance versus when you spoke in the past about directionally what you expected from 2011 from healthcare reform and EU just pricing pressures in general?

Dominic Caruso

Right. Well, with respect to healthcare reform, there's really no change. We've talked earlier about the fact that in 2010, healthcare reform impacted the industry by about 2% of sales. Our impact was about 3% in 2011. The healthcare reform impact is somewhere in the neighborhood of 4% to 4.5% of sales. That would be our impact on sales. In addition, in 2011, the healthcare reform fee is another 1% to 1.5% of sales, impacting all companies in the industry. And that's reasonably consistent with our earlier guidance back in the early part of 2010 when healthcare reform was established. With respect to overall pricing, we did see acceleration in price pressure throughout the back half of the year. So the overall pricing comments that I made are slightly more intense pricing pressure in 2011 than we have previously indicated.

Catherine Arnold - Crédit Suisse AG

And I appreciate your patience. Just to wrap it up. If you think about pricing, healthcare reform, consumer recall, investment and launches, you got four or five potentially this year I think. Gross margin challenges that you mentioned and procedure pricing pressures from the MD&D business, are any of those jump out of you as you observe the models in the street that are inadequately being forecast and that you would encourage us to be more conservative about?

Dominic Caruso

I think generally speaking, the model of the street have gross margin not as impacted as we would expect it to be. So the gross margin seems to be optimistic, I guess, in the model. And also, all the factors that we just discussed, price and healthcare reform and costs associated with McNeil remediation, all those things together, including an effective tax rate that's higher, as I said, impact of our margins, our net income margin by contracting it from 2010 levels to 2011 by at least half a point, whereas most of the street's estimates are a slight increase in margin from 2010 levels.

Louise Mehrotra


Matthew Dodds - Citigroup Inc

Matt Dodds from Citigroup. For R&D, Bill, I think three years ago, we talked about a lot of products to the pipeline, and your R&D in pharma as percentage of sales has actually not dropped that all. I'm wondering as kind of broadly as we look out, should it remain above levels? I think we look at versus your peers in pharma that 20% range and a minimum for 2011, should we expect it to remain at pretty high levels?

William Weldon

Yes, I think you probably should. I think you'll see a comeback a little bit, Matt. But I think it's really a function of the products that are in the pipeline. I think if you look at it last year, I think -- or the year before, we had three or four products approved last year. We had four submissions we had throughout to go out early this year. So I think we had such a strong pipeline, and we're going to continue to invest at appropriate levels to make sure we capitalize on the opportunities.

Matthew Dodds - Citigroup Inc

And then, Dominic, one for you. As the other income is getting bigger here, can you give us at least a couple of areas of where that shows up, if not broken out, like what are some areas, is it royalty we should be thinking about?

Dominic Caruso

Well, maybe this perspective will help. The other income and expense line, the main component of that line is other income related to royalties, so royalty income. And that's generally about $500 million on an annual basis. Now over the years, other items hit that line, like write-offs, asset sales, gains and losses, et cetera. So this year, there were some gains and some lower level of write-offs. Then next year, we expect around the same level. But start with about $500 million of royalty income, which is usually offset by other items, which are very difficult to forecast. We're trying to give you our best guess on where those things might come out.

Louise Mehrotra

Maybe just right over to Bob here.

Robert Hopkins

Bob Hopkins, Bank of America Merrill Lynch. Dominic, I was wondering if you could be a little more specific in some of the commentary about pricing decelerating in the fourth quarter, maybe start with DePuy if you don't mind. You guys have a lot of moving parts in DePuy this quarter. So first, how much we need to add back for the tougher extra week comparison? And then if you can comment on how much did pricing decline in Q4 versus Q3.

Dominic Caruso

So generally speaking, across all of our businesses, we estimated that this 53rd week impact last year was worth about two points on the quarter's growth. Maybe about half a point or thereabouts for the year. So of course, each of the businesses vary a little bit from that, but that's an overall estimate for the impact. And then with DePuy in particular, the way I would characterize it is, in knees, price net of mix from fourth quarter 2010 compared to fourth quarter 2009 did not change very much. It was still negative by about a point. Things did not accelerate. In hips, in both worldwide and U.S. hips, price net of mix did negatively accelerate into fourth quarter, with mix being a far a less of an add, if you will, do that mix. And that change, that delta between the two quarters is about three points.

Robert Hopkins

And then as you look forward, just especially for the Medical Device business as a whole, and you talked about the company as a whole, but can you just talk about what you're assuming for pricing in 2011 within Medical Devices broadly?

Dominic Caruso

Well, across all the businesses, I could just comment across all the businesses. As I said, about half a point to a point of pretax operating margin as a decrease in price year-over-year. We've experienced price in 2010 as well, as I said, accelerated in the back half of 2010. But nearly a point of pretax margin rose into the price compression is a tough hill to climb when we want to make investments when you saw the significant pipeline that we're building and the launch of these exciting products. So we want to make sure we get through those launches and move those pipelines forward, and then hopefully, get price through better sales growth, of course, in the future as these products hit the marketplace.

Louise Mehrotra


Michael Weinstein - JP Morgan Chase & Co

Mike Weinstein, JPMorgan. Dominic, let me ask you two sets of questions here, and the first is with regard to your, actually close to kind of like 2011 a bit. The first is on revenue growth. You're forecasting what appears to be business acceleration and organic growth where the model is. so I just wanted to explore that a bit. In 2010, I think your constant-currency growth was down 1.3%, but that included a bunch of moving parts, but there was I think 60 basis points from healthcare reform. And then you kind of added obviously the $900 million impact of Consumer business. So a lot of moving parts. If perhaps if we're forecasting some acceleration growth this year, just hoping you can just touch a little bit about on that. And then the second question is on a bit of capital allocation question. You bought back only $1 billion in stock last year, sitting on obviously just a ton of cash. And I'm curious. One, why did you buyback only $1 billion of stock? And two, what's in your assumption in your 2011 guidance for share repurchase?

Dominic Caruso

So with respect to the revenue, you're right, Mike. It's a good observation. We are forecasting an acceleration to the revenue growth in 2011 versus 2010. Just to give you a little bit of a perspective, you had mentioned the negative 1.3% operational decline in revenue in 2010. Just a few adjustments to that to give you a sense: Pharmaceutical generic impact almost a point; healthcare reform about half a point; OTC recall about a point and a half; and of course, the 53rd week, which we said was two points for the quarter, maybe half a point for the year. So about 2% or a little over 2% base business, we're forecasting constant-currency growth of 2% to 3%. But remember, that includes the impact of CONCERTA and LEVAQUIN. And I mentioned that those are about a point and a half. So the normalized rate, of course, is about 2% in 2010 and somewhere in the 3.5% range for 2011 when you adjust for all those components. You would ask for, why do we only buyback $1 billion? So we typically have an ongoing buyback program. In any event, we buyback share that are issued in connection with employee stock purchase plans. That's always in existence. But the $1 billion is basically completed the authorized $10 billion share repurchase program that we had authorized several years ago. And my guidance does not assume any additional share repurchases in the guidance I provided.

Louise Mehrotra

Jami? [Jami Rubin, Goldman Sachs]

Jami Rubin - Goldman Sachs Group Inc.

Dominic, if you can again clarify. The $0.06 related to the excise tax for the Pharmaceutical business, which is an after-tax expense, is that new from what the company guided a year ago or your second quarter when you provided guidance for healthcare reform? Because that was on a revenue basis, and this is now a earnings basis. Just wondering if this is new. Secondly, if I could just go back and explore the pricing issue related to procedures and procedure volumes in the Med Tech business. Is what you're seeing with accelerated pricing a consequence of the weak economy? How come we don't have spending power? And you expect that as the economy picks up, that you will regain that pricing pressure? Or is there something going on, structurally, where the payers are pushing back because they're not going to pay for incremental innovation? And how should we think about that equation going forward? And then just thirdly on utilization trends, we saw a significant slowdown in the second half of 2011. What are your expectations, and how are you thinking about utilization trends in that business going forward?

Dominic Caruso

Well, let me take it starting from the top. Let's talk about healthcare reform. When we talk about it in April of 2010 after legislation was passed, of course, we provided guidance for 2010 and not guidance for 2011. But the overall macro picture we provided then was that healthcare reform impact for the industry was about $4 billion in 2010 growing to about $11 billion in 2011. We still think that's exactly the case. The difference is that $8 billion of the $11 billion is reflected in sales, and $2.5 billion or thereabouts of the $11 billion is reflected in the expense line. So no change in terms of overall impact to the industry or impact to Johnson & Johnson. With respect to pricing, I think two components. Yes, hospitals are under pressure, and therefore, pushing back on pricing. And I think that in various segments of the market, there is significant pressure on paying for innovation. So spine is probably the best example of that, where we saw a significant payer pushback. I wouldn't say that's the case across all of the markets that we compete in. And then utilization, we did see MD&D -- I think you were talking about medical device. So in the MD&D market, we expect that the market -- we think the market grew at about 4% overall for 2010, and we think that it's about 6% in the first half and 3% in the back half of the year. And even in that 3% in the back half, third quarter was a little stronger than fourth quarter. So we're expecting that for 2011 this back half of 2010 will continue, at least through the early part of 2011. And it may pick up a little bit towards the back half of 2011.

Louise Mehrotra

We'll go over there. Larry?

Larry Biegelsen - Wells Fargo Securities, LLC

Larry Biegelsen, Wells Fargo. On NEVO, could you give us a sense of when in 2010 you might refile in Europe? And how confident you are you can fix the problem, and how committed you are to the product given the slippage? And then I had a question on the Consumer business. The Puerto Rico facility, maybe this is a difficult -- this is, I'm sure, a difficult question to answer, but how confident are you we won't see similar issue with the Puerto Rico plant that we saw with Fort Washington?

William Weldon

Yes, I think maybe I'll talk about Puerto Rico first. I think we're working closely with the FDA to address the issues down there. But I don't think that we can really comment on what's the outcome going to be on that right now. As far as the NEVO question, we're assessing NEVO right now to look at where we're going. We're committed to the cardiovascular market. Right now, if you look at the results NEVO is showing, it's showing very good results. So we're assessing that right now to look to see what we do exactly with that product, but the strong commitment to both the product at this point in time as well as the market.

Louise Mehrotra


Frederick Wise - Leerink Swann LLC

Rick Wise, Leerink Swann. Bill, maybe just on the Consumer topic. You described the CAP plans that are on track. Maybe there you can talk a little bit more about what's left to do to fully complete that? And on Consumer, generally, you said you completed the internal review. What's left to do, and do you think we've seen the last of the recalls at this point?

William Weldon

Yes, I think when you look at what's left to do, we have looked at every product that's internally manufactured, which is around 80% of the total volume of McNeil. So we're now looking at external manufacturers, which shows about 20%. Some of those we've already addressed as you saw with the recall in the past. So most of it is behind us, but we're going through the exact same process with external manufacturers as we did with the internal process. So 80% plus is behind us. We still have to look at those and see if there's anything. As I said, if there's any issues there, we'll address those appropriately. So I would say most of it is behind us, Rick, but there could be a little bit ahead of us.

Frederick Wise - Leerink Swann LLC

Does this make you rethink your strategy in some kind of way for managing the business? Maybe you want to bring everything in house? I mean, is this reflect too much cost cutting? How are you changing managing?

William Weldon

I don't think if we always talk about lots of different issues out there, and we can't go into a lot of them. But no, I think we've identified and understand what the issues are. We're addressing the issues, and we're going to put them behind us. I think what the CAP has allowed us to work closely with the FDA. I think we have a very good working relationship and resolving the issues as we go forward. But I think it was a myriad of issues that we really can't go into all of them at this point. But I think we've got them a, under control; b, understand them; and c, we're addressing them. And as I said before, the vast majority are behind us. So now we can look forward to getting the products back into the marketplace and being able move forward.

Frederick Wise - Leerink Swann LLC

And last, I hate to bring up the idea of thinking about your successor at this point. But clearly, there's a transition process underway. Maybe it would be interesting to hear, how you're thinking about the timing and maybe what you're looking for as you look out over the next couple of years in terms of the next kind of CEO for the company?

William Weldon

Well, I think we go through, as I said before, very thoughtful assessment of the succession planning. I think we've created the Office of the Chairman, which is something that we've done in the past and allows people to work closely for a protracted period of time. So I think that's the best I can say right now. I think the positive thing about J&J is that you have -- we're committed to continuing to give people exposure, experiences and to develop people so that we can have smooth transitions. And I think when the appropriate time comes, we'll have a smooth transition.

Louise Mehrotra


Derrick Sung - Bernstein Research

Derrick Sung, Sanford Bernstein. First, Bill, maybe a strategic question here. You talked a lot about emerging markets and opportunity there. But it seems like you're focused on emerging markets as most of have been in the consumer and med tech sectors. Many of your pharma peers have been making some big moves and land-grabs in emerging markets. And I was wondering how you thought about positioning your Pharmaceutical businesses for the opportunities in emerging markets? And then maybe kind of as a follow on to that also, if you can comment on some of your pharmaceutical peers are also getting to biosimilars as a growth area in pharma, how might you think about that?

William Weldon

Yes, as far as the emerging markets, I think we're looking at it in all of our businesses. I think in pharma, we've made -- we've looked at some opportunities that we've been able to expand our businesses. And you have to look at both kind of the not really the OTC, but let's call it the OTC market, as well as the RX market. But we have been doing a lot of research in those areas. We have set up a center over there to do clinical trials. We've got a relationship with Nanjing university in China, for example. So we have a lot of work going on. We're also working closely with the governments to get approvals in those areas and to launch new products in those areas. So I think in the pharma area, we're as active as we are in both MD&D and Consumer. Consumer, obviously, we bought a company called Dabao a couple of years ago, which has been very successful for us in China. We set up innovation centers, as well as a lot of training centers throughout both in the eye area as well as the surgical area and diabetes area. And we've set up a lot of manufacturing facilities. So I think where we've moved and make quite a few investments, and you'll see a lot more investment in that area.

Derrick Sung - Bernstein Research

In biosimilars?

William Weldon

Yes, the biosimilars area, it's not an area that we have felt was the right area to be going into it at this point in time. We think that we need to innovate, bring new products to market, and we have such a strong pipeline that we really haven't been worried about the biosimilars area. And we feel that we have to innovate and bring new products out. So that's not an area we've been looking at.

Derrick Sung - Bernstein Research

And just a follow-up on the pricing pressures that you're seeing in Europe, Dominic. On European austerity, I think last quarter you mentioned that you saw maybe $50 million in impact from European austerity, and we're expecting that to accelerate through the back half of this year and certainly into 2011. It seems like you reported that same number of about $50 million again this quarter. So I'm wondering is perhaps austerity not as bad as you thought it would be, or is it maybe unfolding a little slower? Can you kind of give some commentary that.

Dominic Caruso

You're exactly right. We had, early on, estimated it to maybe be in the $200 million range. It's probably a little over $100 million for 2010. But we do see it still accelerating through 2011 and more than doubling from what we saw in 2010.

Derrick Sung - Bernstein Research

Any specific moves by the countries that would make you think that it would accelerate?

Dominic Caruso

Well, we've been tracking all the countries and their specific legislative moves and their specific targets. And that's our estimation now based on what they have published.

Louise Mehrotra


Kristen Stewart - Deutsche Bank AG

Kristen Stewart from Deutsche Bank. You've mentioned earlier that there was obviously a negative pricing or pricing pressures emerging across several business units within MD&D. We talked a lot about DePuy, but what are you seeing in some of the other franchises?

Dominic Caruso

We did see pricing across many of the franchises throughout the MD&D business, pricing pressure again in the back half of the year. I think it's consistent with the comments that someone made earlier us procedure volumes have slowed down. That's come with it from additional pricing pressure by hospitals.

Kristen Stewart - Deutsche Bank AG

And how about U.S. versus Europe? I know historically you haven't been seeing a lot of pricing pressure in Europe in the devices, the device review data that was something that you had did kind of flagged as the potential to watch for 2011?

Dominic Caruso

Right. We still think that the pricing pressure, as a result of European austerity measures, will be more pronounced in the Pharmaceutical business that in the MD&D business. As you know, the MD&D market structure, which is essentially a DRG-based structure provides that there's less direct impact to price from the government. But as tenders come up in these markets throughout Europe, we are starting to see some additional pressure. But I would say, it's much more pronounced than pharma than it is in medical devices in Europe.

Louise Mehrotra


Bruce Nudell - UBS Investment Bank

Bruce Nudell, UBS. Bill, I had a question about Consumer. Skipping the OTC issue and just looking at the other divisions within Consumer, could you just characterize how they're performing relative to their respective peers? And if, in fact, they are underperforming, when you take out specials and stuff, what are the plans to address them? If you could give any color on the specific business units, where you have action items that you think really could exert a major effect?

William Weldon

Yes, in a simple word, they underperformed in 2010, especially as you got to the latter part of the year. Part of it I think was a distraction on the whole consumer area with the OTC recalls and looking at resources and resourcing and trying to address some of those areas. I think we're looking at people are refocused now back on their core businesses, making sure they're making the right investments in innovation. I talked about some of the areas of innovation that they're looking at. We also have some disruption in some of the other areas and some manufacturing in 2010 in some of the skin care areas. But I think we should be back on track and look at a positive movement in 2011.

Bruce Nudell - UBS Investment Bank

And just a follow-up broadly speaking on capital allocation, and I don't expect you to comment on specific things that have been speculated, but when you think about major investments and things such as major joints, where mature market hard-to-demonstrate clinical superiority and contrast that with things like Acclarent, which clearly unmet medical need or even Tibotec, which they prove to be a fantastic acquisition. Broadly speaking, any comments in that regard?

William Weldon

Well, I guess, what I would say is, when you look at -- you look at emerging markets. So we're looking at investments in those areas. Like you have to look at demographics and you mentioned joints. But demographics lead to a lot of areas, joints, cardiovascular diseases, those types of things. But I think as I mentioned up there, we try and work from the bottom up looking at where's the opportunity, where's the unmet medical need. As you look to the future, what are the future is going to be able to lead us, lend us towards, and it's demographics, it's emerging markets, cardiovascular disease, orthopedics, diabetes, these areas. And so I think we continue to look at areas where we can move into those in either expand areas that we have, such as you mentioned, Acclarent, with our surgical business or Tibotec with our Pharmaceutical business or possibly new areas to move into and Tibotec could be putting in that area also, really moving into the infectious disease. So we look at it more from where the opportunities that are going to be out there for the future and what is the opportunity that an acquisition or license would bring to us to afford us to capitalize on those opportunities.

Matthew Miksic - Piper Jaffray Companies

Matt Miksic, Piper Jaffray. Ethicon, if you want to get a sense the impact of acquisitions on that number from Acclarent to Micrus? And so, Bill, on the pharma side, the Medical Devices side, the business strategically become a tougher environment obviously over the last couple of years, regulatory pricing, the economy, patient behavior and so on, peer behavior, in some cases. And I'm wondering, number one, how do you compare that both regionally in the U.S. and o U.S. to trends that you're seeing in consumer? And how does that factor into your sort of strategic calculation where you look for growth? And then secondly is, do you see these changes as a permanent, or do you see these changes as something we can get through with an industry and come out of 12 to 18 to 24 months from now?

William Weldon

You'd love to say that the economic environment is going to change, but I think it's going to be a challenge for some time. I don't think we're going to come out of it in a year, 18 months. And the other piece of that is I think when you start to see some of the, let's call it compression on pricing or downward pressures, I think, once you get down there, it's very hard to bring it back. So I think we're going to see this come down to kind of a new level set. But I also think that innovation will allow us to be able to bring to get better prices in the marketplace. So if you look at some of the products I talked about earlier, they're real innovative products. Abiraterone, for example, will demand a much higher level. And I think to an earlier question that was asked, I think you're going to see much more need for differentiation of your products in the marketplace to be able to demand those higher prices, and whether that's devices or drugs. But I think as we see the pressure on pricing get to a new level, that's not going to be coming back. That's not going to come back. If it does, it's going to be a long time till it comes back. What will bring back is innovation in new products. So I think the compression is going to be there. And I think a lot of -- Dom talked about. I think if you look at pharmaceuticals in Europe, second half of last year, we really saw a lot of compression on pricing that will continue through into this year and I think into the future. But I think it's going to be the true advances and breakthroughs. If you come out with a non-differentiated product, that's gonna be very hard to get any real price.

Louise Mehrotra

So as far as Ethicon, on an operational basis, it grew 4.3%. And if you exclude the acquisitions, it would be about 1.6%. And as far as DePuy, it declined to 1.4%. And if you excluded Micrus, it will be about a decline of about 3%. Net-net, acquisition net of the divestitures for Johnson & Johnson in total had no impact on the quarter. And back to you, Bill.

William Weldon

Yes, I'd like to thank everybody, first of all, for coming today. But again to reinforce, I think that we have made a commitment to resolve in the OTC products and the manufacturing issues. We're going to put that behind us. I think that's going to be a big positive. And then I think when you look at the investment in the future and the product opportunities we have, I think we feel very, very good about the future. So again, I'd like to thank everybody and wish you a safe trip home. Thanks very much.

Louise Mehrotra

Thank you.

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