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Johnson & Johnson (NYSE:JNJ)

Q1 2011 Earnings Call

April 19, 2011 8:30 am ET

Executives

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

Louise Mehrotra - Vice President of Investor Relations

Analysts

Matthew Dodds - Citigroup Inc

Matthew Miksic - Piper Jaffray Companies

Robert Hopkins

Jami Rubin - Goldman Sachs Group Inc.

Michael Weinstein - JP Morgan Chase & Co

Benjamin Yeoh - Atlantic Equities LLP

Kristen Stewart - Deutsche Bank AG

Derrick Sung - Sanford C. Bernstein & Co., Inc.

Larry Biegelsen - Wells Fargo Securities, LLC

David Lewis - Morgan Stanley

Frederick Wise - Leerink Swann LLC

Rajeev Jashnani - UBS Investment Bank

Operator

Good morning, and welcome to Johnson & Johnson's First Quarter 2011 Earnings Conference Call. [Operator Instructions] This call is being recorded. If anyone has any objections, you may disconnect at this time. [Operator Instructions] I would now like to turn the conference call over to Johnson & Johnson. You may begin.

Louise Mehrotra

Good morning, and welcome. I'm Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson, and it is my pleasure, this morning, to review our business results for the first quarter of 2011. Joining me on the call today is Dominic Caruso, Vice President, Finance and Chief Financial Officer.

A few logistics before we get into the details. This review is being made available to a broader audience via webcast, accessible through the Investor Relations section of the Johnson & Johnson website. I'll begin by briefly reviewing highlights of the first quarter for the corporation and highlights for the 3 business segments. Following my remarks, Dominic will provide some additional commentary on the first quarter results and guidance for the full year of 2011. We will then open the call to your questions. We expect the call to last approximately one hour.

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

Before I get into the results, let me remind you that some of the statements made during this call may be considered forward-looking statements. The 10-K for the fiscal year 2010 identifies certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning. The company does not undertake to update any forward-looking statements as a result of new information or future events or developments. The 10-K is available through the company or online.

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

Now I would like to review our results for the first quarter of 2011. If you would refer to your copy of the press release, let's begin with the schedule titled Supplementary Sales Data by geographic area. Worldwide sales to customers were $16.2 billion for the first quarter of 2011, up 3.5% as compared to the first quarter of 2010. On an operational basis, sales were up 1.8%, and currency had a positive impact of 1.7%.

In the U.S., sales declined 0.6%. In regions outside the U.S., our operational growth was 4.1%, while the effective currency exchange rates positively impacted our reported results by 3.2 points. The Western Hemisphere excluding U.S. grew by 7.3% operationally, while the Asia-Pacific, Africa region grew by 6.3% on an operational basis. Europe grew 1.9% operationally.

If you'll now turn to the Consolidated Statement of Earnings. Net earnings were $3.5 billion compared to $4.5 billion in the same period in 2010. Earnings per share were $1.25 versus $1.62 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, first quarter results this year were adjusted to exclude the after-tax impact of litigation expense and additional DePuy ASR Hip recall costs. The first quarter results in 2010 were adjusted to exclude the after-tax impact of the net gain from litigation matters. Net earnings on an adjusted basis were $3.7 billion and earnings per share were $1.35, up 3.6% and 4.7%, respectively, versus the first quarter of 2010.

I would now like to make some additional comments relative to the components leading to earnings before we move on to the segment highlights. Cost of goods sold at 29.5% of sales was 50 basis points higher than the same period in 2010, primarily due to the ongoing remediation work in our OTC business.

Selling, marketing and administrative expenses at 31.3% of sales were up 80 basis points due to investment spending in our MD&D [Medical Devices and Diagnostics] business as well as the fee on our branded pharmaceutical products included as part of the U.S. Health Care Reform legislation. Our investment in research and development as a percent of sales was 10.8%, up 80 basis points versus the first quarter of 2010, due primarily to the timing of milestone payments.

Interest expense net of interest income of $104 million was up $23 million versus the first quarter of 2010, due to a higher average debt balance. Other income net of other expense was $13 million in the first quarter of 2011 compared to $1.6 billion in the same period last year. Excluding special items, net other income was $359 million versus $97 million a year ago. Dominic will discuss this item during his remarks. Excluding special items, taxes were 22.8% in the first quarter of 2011, in line with our guidance.

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

Worldwide Consumer segment sales for the first quarter of 2011 of $3.7 billion decreased 2.2%, as compared to the same period last year. On an operational basis, sales declined 4.1%, while the impact of currency was positive 1.9 points. U.S. sales were down 13.8%, while international sales grew 2.6% on an operational basis. Excluding the impact of lower over-the-counter or OTC revenues, operational sales declined approximately 1%.

For the first quarter of 2011, sales for the OTC Pharmaceuticals and Nutritionals decreased 8.2% on an operational basis compared to the same period in 2010, with U.S. sales down 26.8%.

During the quarter, McNEIL-PPC announced the signing of a Consent Decree covering the manufacturing facilities in Las Piedras, Puerto Rico and Fort Washington and Lancaster, Pennsylvania. The Consent Decree allows McNeil to continue work already initiated under the Comprehensive Action Plan or CAP and identifies procedures that will help provide additional assurance of product quality to the FDA.

McNeil will continue to operate the manufacturing facilities in Las Piedras and Lancaster and will work with an independent expert who will inspect these sites, issue recommendations and review production and quality processes. Production volumes shipped from these facilities are expected to be impacted during the initial implementation of these reviews and approval processes. Shipments of key products are expected to ramp up during the latter part of 2011.

McNeil will not reopen the Fort Washington facility until it has first completed the remediation efforts at the facility, received certification of compliance from the independent expert and then receives approval from the FDA.

Regarding the products previously produced at this facility, we are in the process of transferring the production to other sites. We began shipping a small amount of product in the fourth quarter of 2010 and ultimate supply of certain key products will begin late in 2011. The broader portfolio of products is expected to be available in 2012, later than previously anticipated. This is due to a decision to upgrade and reformulate manufacturing and quality methods in the course of transferring the production to other sites.

Sales of OTC and Nutritional products outside the U.S. were up 6.9% on an operational basis. Fluctuations in retail inventory levels favorably impacted the quarterly comparisons. Additionally, strong market growth in certain regions positively impacted growth in the quarter.

Our Skin Care business declined on an operational basis by 3.7% in the first quarter of 2011, with sales in the U.S. down 5.8% and sales outside the U.S. down 1.7% on an operational basis.

As previously discussed, sales have been impacted by lower production volumes due to the enhancements to equipment and manufacturing processes which began in the latter half of 2010. Shipments and retail inventory levels are expected to normalize toward the end of the second quarter.

Baby Care products achieved operational growth of 3.1% when compared to the first quarter of 2010, due primarily to growth in cleansers, wipes and powders outside the U.S.

Women's Health declined 4% on an operational basis. Sales in the U.S. were down 14.4%, while sales outside the U.S. were up on an operational basis by 0.7%. Lower sales of K-Y products and the divestiture of the e.p.t. brand impacted growth in the quarter.

Sales in the Oral Care franchise were flat on an operational basis. In the U.S., sales were down 6.3%, reflecting the impact of competition, including private label, for certain products. Sales outside the U.S. increased by 0.6% operationally, driven by strong growth for LISTERINE.

Wound Care/Other was down 8.4% on an operational basis compared to the same period last year due to increased competition, compounded by the divestiture of PURELL announced in the fourth quarter of 2010.

That completes the review of the Consumer segment, and I'll now review the highlights for the Pharmaceuticals segment.

Worldwide net sales for the first quarter of $6.1 billion were up 7.5% versus the same period last year. On an operational basis, sales were up 6.4%, with a positive currency impact of 1.1 points. Sales in the U.S. increased 5.8%, while sales outside the U.S. increased, on an operational basis, by 7.3%.

The first quarter sales comparisons were negatively impacted by approximately $60 million in incremental rebates due to the U.S. Health Care Reform legislation implemented late in the first quarter of 2010. Additionally, European austerity measures, primarily implemented in the second half of 2010, impacted the first quarter comparisons by a similar amount. Excluding these items, the underlying operational growth was approximately 8.5%.

Now reviewing the major products. Sales of our key immunology products, which include REMICADE, STELARA and SIMPONI were up nearly 18% versus 2010. Sales in the U.S. were up approximately 8% when compared to the first quarter of 2010, with REMICADE up 1%; STELARA up 88% and SIMPONI up 36%. With the strong growth achieved by STELARA and SIMPONI, we continue to be the market leader in immunology in the U.S.

Export sales of REMICADE were up 22.5%, reflecting both double-digit market growth, as well as the expected increase in 2011 to 42% from 40% for the division-of-contribution income split per the previous distribution agreement. The amended distribution-agreement division-of-contribution income split of 50% will go into effect July 1, 2011. The success of the international launches resulted in the significant growth of export sales for SIMPONI and international sales for STELARA.

Sales of LEVAQUIN, our anti-infective, were up 16.9% on an operational basis when compared to the same period a year ago. The U.S. anti-infective market was estimated to be up over 8% in the quarter due to higher incidence of respiratory illness and flu. Of note, the U.S. marketing exclusivity for LEVAQUIN will expire on June 20 this year.

RISPERDAL CONSTA, a long-acting injectable antipsychotic, achieved first quarter sales growth of 5.5% on an operational basis. Sales in the U.S. were down 2.6%. However, the total U.S. sales of our long-acting injectables, including INVEGA SUSTENNA, increased strong double digits versus a year ago, due to an increase in combined market share. Sales of RISPERDAL CONSTA outside the U.S. were up 9.1% operationally, with strong growth in most major regions.

PROCRIT/EPREX declined operationally by 24.6% during the quarter as compared to the same period last year, with PROCRIT down 34.5% and EPREX down 12.3%, operationally. A softening of the market and increased competition has contributed to the lower sales results. PROCRIT results were also impacted by a reduction to retail inventory levels.

CONCERTA, a product for Attention Deficit Hyperactivity Disorder, increased 8.8% operationally in the first quarter as compared to the same period last year, with sales in the U.S. up 10% due to strong market growth, partially offset by lower market share. Sales outside the U.S. were up 6.3% operationally, with solid growth seen in most major regions.

As a reminder, last quarter, we announced a supply and distribution agreement with Watson Laboratories, Inc. to distribute an authorized generic version of CONCERTA in the U.S., effective May 1, 2011.

VELCADE, a treatment for multiple myeloma, is being co-developed with Millennium Pharmaceuticals. We have commercialization rights in Europe and the rest of the world outside the U.S. Operational sales growth was 5.6%. Slower sales in Europe due to price pressure and increased competition were offset by strong growth in other regions.

PREZISTA, a protease inhibitor for the treatment of HIV, grew operationally 41.9%, with similar results both in and outside the U.S. due to very strong momentum in share.

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 8.6% due to increased penetration of generics in the category.

DOXIL/CAELYX grew 71.6% in the quarter. With the expiration at year end 2010 of the distribution agreement with Merck, we are now marketing DOXIL/CAELYX globally.

INTELENCE, an NNRTI for the treatment of HIV, grew operationally 25.1% due to an increase in market share.

INVEGA, an atypical antipsychotic, grew operationally 10.1% due to very strong growth outside the U.S. with the recent approval in Japan.

As an update on the Pharmaceutical pipeline, we have completed a number of submissions and received a number of approvals. At the end of February, we submitted to the FDA the response to the Complete Response letter for NUCYNTA extended release tablets. We have been assigned a 6-month review.

The VELCADE subcutaneous dossier was submitted to the European Medicines Agency. XEPLION, paliperidone palmitate, received approval from the European Commission for the treatment of schizophrenia. The European Commission approved once-daily dosing over PREZISTA for the treatment of HIV in treatment-experienced adult patients. The revised dosing extends the same dosing already available for treatment-naïve patients.

The FDA approved INVEGA for the treatment of schizophrenia in adolescents 12 to 17 years of age. And SIMPONI received approval from the European Commission for structural damage in RA [rheumatoid arthritis] and a positive opinion from the CHMP for structural damage in psoriatic arthritis. Also during the quarter, we announced the pending sale of the Janssen animal health business.

I'll now review the Medical Devices & Diagnostics segment results. Worldwide Medical Devices & Diagnostics segment sales of $6.4 billion grew 1.3% operationally, as compared to the same period in 2010. Currency had a positive impact of 2 points, resulting in total sales increase of 3.3%. Sales in the U.S. were down 0.5%, while sales outside the U.S. increased on an operational basis by 3%.

Now turning to the franchises, starting with Cordis. Cordis sales were down 7.5% operationally, with the U.S. down 3.6% and sales outside the U.S. down 9.9% operationally. Cordis results were impacted by lower sales of CYPHER, our sirolimus-eluting stent, partially offset by the strong growth in our Biosense Webster business.

CYPHER sales were down 41% on an operational basis versus the prior year, and estimated worldwide share for the quarter was 12%, down 2 points sequentially and down 6 points from the first quarter of 2010.

Biosense Webster, our electrophysiology business, achieved strong operational growth of 18% in the quarter due to increased market share. The continued success of CARTO 3 and expansion of the installed base made strong contributions to the results.

The DePuy franchise had operational growth of 1.7%, when compared to the same period in 2010, with the U.S. down 0.4% and the business outside the U.S. growing by 4.2%, operationally. Low single-digit pressure on pricing continued as a result of the economic trends with positive mix mitigating some of the impact.

Incremental sales from the acquisition of Micrus contributed to the growth in the quarter. The rate of growth was negatively impacted by very strong results in the first quarter last year, particularly in the U.S. The U.S. markets softened through the balance of 2010. On a sequential basis, sales were up both on a worldwide basis and in the U.S.

Operationally, hips were down 2% on a worldwide basis with the U.S. down 6% and sales outside the U.S. up 3%. Growth was impacted by lower volume of metal-on-metal bearings and continued pricing pressure.

On a sequential basis, hips grew approximately 4% in the U.S. and 8% operationally outside the U.S. Mix positively impacted the sequential trends, as well as the success of the cementless systems.

Knees declined 4% on an operational basis, with the U.S. down 6% and sales outside the U.S. down 1%. On a sequential basis, knees were up 1% in the U.S. Continued softness in the market continues to temper the rate of growth. Outside the U.S., on an operational basis, knees were up 5% sequentially due to the success of the Sigma Fixed Bearing Knee.

The Diabetes franchise was up 6% operationally in the first quarter of 2011, with the U.S. business up 7.2% and the business outside the U.S. up 4.9% operationally. Increased market share was the major driver of growth.

Ethicon worldwide sales grew operationally by 2.3%, with the U.S. up 1.2% and sales outside the U.S. up 3.3% operationally. Sutures, Women's Health and Acclarent were the major growth drivers this quarter.

Ethicon Endo-Surgery achieved operational growth of 2.4% in the first quarter of 2011, with U.S. sales down 2.5% and sales outside the U.S. up 6% operationally. Growth was negatively impacted by the divestiture of the Breast Care business. Excluding this impact, worldwide sales grew approximately 5%. Growth was driven by increased market share for advanced sterilization products as well as HARMONIC products, and outside the U.S., Endo and EnSeal products.

Ortho Clinical Diagnostics declined 2.5% on an operational basis in the first quarter. Sales in the U.S. declined 8%, while sales outside the U.S. were up 4.1% on an operational basis. Sales were impacted by timing of shipments, as well as lower sales and donor screening due to the moot selective testing in the U.S. for Chagas' disease. This was partially offset by the continued strong growth in clinical labs due to the strength of the VITROS 5600 and 3600 platforms.

Rounding out the review of the Medical Devices & Diagnostics segment, our Vision Care franchise achieved operational sales growth of 4.7% in the first quarter compared to the same period last year. Sales in the U.S. increased 2.8%, while sales outside the U.S. increased 5.9% on an operational basis. ACUVUE TruEye and the astigmatism lenses were strong contributors to the quarter.

That completes highlights for the Medical Devices & Diagnostics segment and concludes the segment highlights for Johnson & Johnson's first quarter of 2011.

I'll now turn the call over to Dominic Caruso. Dominic?

Dominic Caruso

Thank you, Louise, and good morning, everyone. I would like to provide some comments this morning about our first quarter results, highlight some recent business and pipeline developments, and provide guidance for you to consider in refining your models for 2011.

I'm pleased to report that we are off to a good start in 2011, with solid sales growth for the enterprise. Although the utilization in the healthcare markets continues to be below prerecession levels, we are seeing some sequential improvements in the comparisons to prior year. We are also seeing continued progress with our new product launches and our sales in emerging markets.

Our Pharmaceuticals business demonstrated strong operational sales growth this quarter of over 6%, due to the success of our recently launched products such as STELARA and SIMPONI and core medicines such REMICADE and PREZISTA.

Our Medical Device businesses saw modest sales growth in the first quarter, which was in line with market expectations for this sector. This reflects tough comparisons to the first quarter of 2010, which was prior to the slowdown in the overall markets for this sector.

And our Consumer Healthcare business saw sequential improvements in its operational sales growth versus the fourth quarter of 2010 in various markets, excluding the impact of the plant shutdown and the lower production levels in our McNeil U.S. over-the-counter business, where we are making good progress in addressing the manufacturing and quality issues in that business.

As to earnings, we are very pleased to have reported solid earnings per share in the first quarter of $1.35, excluding special items, which is higher than the latest estimates published by First Call. This quarter, we recorded reserves related to litigation matters and the ASR Hip recall. We reflected these charges as special items, and we will continue to exclude them from our guidance.

We continued to make investments this past quarter to advance our robust pipelines, launch new products and make necessary enhancements to our manufacturing and quality systems, particularly in our McNeil OTC business. These investments are expected to increase through the remainder of the year, and I will comment on that further when providing guidance for you to consider in refining your models.

We continue to see many positive developments and growth opportunities across our businesses. For example, in the first quarter, we filed a new drug application with the FDA for rivaroxaban for the prevention of stroke and systemic embolism in patients with non-valvular atrial fibrillation. We also received approval for XEPLION, or paliperidone palmitate, in Europe for the treatment of schizophrenia. This compound is currently market as INVEGA SUSTENA in the U.S.

And in the Infectious Disease space, we continue to expand our pipeline. We recently announced positive results from a study of telaprevir and also initiated Phase III clinical trials of TMC435.

We also added to our Infectious Disease portfolio in the first quarter by completing the acquisition of Crucell. Crucell now operates as the center for vaccines within our Pharmaceuticals group, focused on R&D, production and marketing of vaccines and antibodies against infectious disease worldwide. We are very pleased to welcome the talented people of Crucell to the Johnson & Johnson family of companies.

In connection with the acquisition and under current accounting standards, we recorded a gain in the other income and expense line in the first quarter related to our earlier investment in Crucell. However, as we indicated when we announced this acquisition agreement, we expect the operations of Crucell to have a dilutive impact of $0.03 to $0.05 per share, which we will see in the remaining quarters of this year, essentially offsetting this gain.

In recent weeks, we also announced several developments that I would like to comment on. In March, our McNeil Consumer Healthcare business finalized the terms of a Consent Decree with the U.S. Food and Drug Administration for 3 manufacturing facilities. We had previously included in our guidance for 2011 an impact of approximately $0.06 per share from of the ongoing remediation efforts at McNeil. Now that we have finalized the terms of the Consent Decree, we estimate that, that impact will be twice that amount. This results from both the slowdown in sales reflecting the impact on production volumes as we implement the additional quality steps outlined in the Decree, as well as additional investments required in the remediation process.

In April, we announced a settlement with the U.S. Department of Justice, the U.S. Securities and Exchange Commission and the U.K. Securities Fraud Office (sic) [Serious Fraud Office] for matters related to Foreign Corrupt Practices Act investigations and the United Nations Oil-for-Food program. We will pay nearly $80 million in connection with these matters, an amount that was previously reserved for.

Details on these matters have been widely reported, and we've accepted full responsibility for the shortcomings in our McNeil consumer manufacturing operations and for the actions related to these other investigations. We are confident that these matters are not representative of the vast majority of the Johnson & Johnson employees around the world.

While there are clear implications and commitments from these matters that carry forward under the Consent Decree and the Deferred Prosecution Agreement, we have already been addressing these issues and have a clear path forward. As always, we are focused on what is most important to us: serving the millions of people around the world who rely on our products everyday to meet their healthcare needs.

And finally, just last week, we reached an amended agreement with Merck concerning the distribution rights for REMICADE and SIMPONI, concluding the arbitration proceedings that began back in 2009. We are very pleased to have reached this agreement and are working very closely with Merck to make certain that this is a seamless transition for the patients and healthcare providers who rely on these treatments.

Beginning July 1, 2011, Merck will relinquish the distribution rights to REMICADE and SIMPONI in 150 territories, including Canada, Brazil, Australia and Mexico. And Merck will pay Johnson & Johnson $500 million. The distribution of contribution income will move to a 50-50 split effective July 1, 2011. This was previously scheduled to reach that level in 2014. This compares to the current split of 42% to Johnson & Johnson and 58% to Merck prior to the amendment.

This is obviously a very positive development for our business. However, the financial impact to 2011 earnings is not expected to be significant due to transitional matters and the fact that we expect to take this opportunity to invest for future growth.

Before I begin commenting on guidance, I would also like to take a moment and express our deep concern for the citizens of Japan, who are recovering from the recent disasters there. Our thoughts and prayers are with them. I'm happy to report that all of our Johnson & Johnson employees in Japan remain safe, and our focus is now firmly on providing support to the relief efforts in terms of financial contributions and considerable product donations of medical supplies and consumer hygiene products that we traditionally provide in such times of needs. The efforts and resilience of our employees in Japan have been truly remarkable.

We are returning operations in Japan to business as usual wherever possible, but there is still more work to do. It will be premature to estimate any potential financial impact at this stage. We will continue to gather more information and provide updates in the future.

Now let me provide some guidance for you to consider as you refine your models for 2011. My comments will reflect the net impact of the items I mentioned earlier, namely, the acquisition of Crucell, the McNeil Consumer Healthcare Consent Decree and the amended agreement with Merck.

Let me begin with a discussion of cash and interest income and expense. At the end of the first quarter, we had over $9 billion of net cash. This consists of approximately $27 billion of cash and investments and approximately $18 billion of debt. We used approximately $2.5 billion to fund the Crucell acquisition during the quarter, and we continue to generate strong cash flows.

For purposes of your models, assuming no additional major acquisitions during 2011, I suggest you consider modeling net interest expense of between $300 million and $400 million, consistent with our previous guidance.

Turning to other income and expense. As a reminder, this is the account where we record royalty income as well as onetime gains and losses arising from such items as litigation, investments by our development corporation and asset sales or write-offs. This account is difficult to forecast, but assuming no major onetime gains or losses and excluding the impact of the special items I referred to earlier, I would recommend that you consider modeling other income and expense for 2011 as a net gain ranging from approximately $700 million to $800 million. This is higher than our previous guidance due to the fact that we have now included the impact of the Crucell acquisition.

As I noted earlier, in the first quarter, we recorded a gain related to our previous investment in Crucell in this line item on the P&L. However, the dilutive impacts of the operations of Crucell of approximately $0.03 to $0.05 per share will be seen in other line items on the P&L during the remainder of the year, thus offsetting this gain.

And now a word on taxes. For the first 3 months of 2011, the company's effective tax rate, excluding special items, was 22.8%. We suggest that your models reflect an effective tax rate for 2011 in the range of 22% to 23%, consistent with our previous guidance. As always, we will continue to pursue opportunities in this area to improve upon this rate throughout the year.

Now let's turn to sales and earnings guidance. As a reminder, my comments will reflect the net impact of the items I mentioned earlier, namely, the acquisition of Crucell, the McNeil Consumer Healthcare Consent Decree impact and the amended agreement with Merck.

Our guidance continues to 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 operational view provides a good understanding of the underlying performance of our business. We will also continue to provide an estimate of our sales and EPS results for 2011 with the impact that current exchange rates could have, using the euro as an example.

Turning to sales. We would be comfortable with your models reflecting an operational sales increase, on a constant-currency basis, of between 2.5% and 3.5% for the year. This is higher than our previous guidance, reflecting the net impact of the developments I previously mentioned. This would result in estimated sales for 2011, on a constant-currency basis, of approximately $63.5 billion.

While we are not predicting the impact of currency movements, to give you an idea of the potential impact, if currency exchange rates for the remainder of 2011 were to stay where they were as of last week, as an example, with the euro at approximately $1.44, then our sales growth rate will be positively impacted by approximately 3% for the year. Thus, under this scenario, we would expect reported sales growth to be between approximately 5.5% and 6.5% for the year for a total expected level of reported sales of $65.5 billion, higher than our previous guidance.

Now turning to earnings. I suggest that you consider full year 2011 operational EPS estimates of between $4.74 and $4.84 per share, excluding the impact of special items and assuming the same average exchange rates for 2011 as we saw in 2010. This increase reflects the net impact of the recent developments that I discussed earlier, as well as the fact that we are off to a good start in 2011.

While we are not predicting the impact of currency movements, to give you an idea of the potential impact on EPS, if currency exchange rates for the balance of 2011 were to remain where they were as of last week, then the impact of currency movements, primarily the euro, would be favorable by approximately $0.16 per share, an increase of $0.08 per share from our previous guidance. Therefore, our reported EPS, excluding special items, would be between $4.90 and $5 per share for a reported EPS growth rate of approximately 3% to 5%. This is higher than our previous guidance.

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

Louise Mehrotra

Thanks, Dominic. And Brooke, could you please give the instructions for the questions?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from a Matthew Dodds with Citigroup.

Matthew Dodds - Citigroup Inc

Dominic, a couple questions. First, on the Merck settlement, can you give any idea why the split was Europe versus sort of all the other countries? Did that relate to kind of ease of transition? Or is there a particular reason you may have wanted some of those other markets?

Dominic Caruso

Well, I think both companies believe these markets are attractive outside the U.S., and we saw some positive trends in certain markets that we thought we would like to have total control of. Of course, Merck, obviously, is doing well in other markets around the world. And I think, it was just really a settlement or an agreement between the 2 parties as to ratably divide the business and see where we can, together, make both REMICADE and SIMPONI grow optimally.

Matthew Dodds - Citigroup Inc

And your sense is in the countries that you've taken over, there won't be any disruption switching over, or minimal disruption.

Dominic Caruso

Well, I would say that anytime you do such a transition that there may be some disruption, but our plan is to make this as seamless as possible. And we've gotten the assurances of our partners at Merck that they will, obviously, cooperate with us and ensure that this is seamless and minimize any disruption.

Matthew Dodds - Citigroup Inc

Okay, then. One more question on Consumer. You doubled the impact this year from $0.06 to, I think, $0.12. Is that all related to the Consent Decree? Or is that thing -- is an addition that they're doing that you maybe weren't planning on doing, when you gave guidance in January?

Dominic Caruso

Well, the increase of $0.06, just to be clear, from $0.06 to $0.12, that additional $0.06 is, in fact, related to the Consent Decree in 2 main buckets: One is the shipments from the facilities will be slowed, if you will, or slow down as we implement the quality procedures and the reviews that the Consent Decree now requires. And in addition, we have also -- we will also embark on additional remediation efforts. So that doubles the initial estimate that we has made for that impact.

Matthew Dodds - Citigroup Inc

And then one more quick one on that. Do you still expect, in the back half of the year, to increase the marketing spend on those products? Is that still in the plan?

Dominic Caruso

Well, as Louise mentioned, we expect to begin launching the products towards the back half of the year, but the majority of the products will be launched in 2012. And obviously, we'll spend in accordance with those launches.

Matthew Dodds - Citigroup Inc

Perfect. All right. Thank you, Dominic.

Dominic Caruso

Sure, Matt.

Operator

Your next person comes from Rick Wise with Leerink Swann.

Frederick Wise - Leerink Swann LLC

Dominic, Louise, let me start off with a big picture question. First, Dominic, I don't expect you to comment on acquisition rumors, but maybe just help us think through again, or just remind us your latest thinking about cash use and the order of acquisitions or share buybacks or dividend. Just update us there, and any color you'd like to provide would be great.

Dominic Caruso

Well, as I've said many times, and I think everyone on the phone has probably -- or in the call has probably heard me say this. We're very pleased to be able to generate very strong cash flows as a business. And we have a 48-year track record of increasing our dividend to shareholders, so we do consider that as a priority in the use of our free cash flows. Then our priority is to grow the business to enhance the ability for us to continue to generate strong cash flows and returns to shareholders over long periods of time, so we would like to invest our excess cash as much as possible in building the business. And then lastly, of course, if that doesn't seem to be a reasonable way to use the cash, then we would always consider additional returns to shareholders as we have done in the past.

Frederick Wise - Leerink Swann LLC

2 other quick ones. First, maybe bring us up to date in your thoughts about the potential operating leverage. Gross margins were better than expected in the first quarter. Is that sustainable here? Do you need some more restructuring, again, especially as Consumer rebounds? And last, quick, it seems like your comments on hip and knee pricing was a little more negative than in the first quarter. Louise, I think you'd been talking 0.5% to 1%, and now you're talking low-single-digit price pressures. Perhaps you can give us some more color there. Thanks a lot.

Dominic Caruso

Sure. Well, with operating leverage, as you know, when we provided guidance earlier in the year for 2011, we did describe that we thought our overall margin would decrease year-over-year -- net operating margin would decrease year-over-year. We still expect that to be the case, although we're off to a very good start, of course, in the first quarter. But the gross profit line will be impacted further throughout the year for a couple of reasons: One, we'll incorporate the Crucell business, and we'll go ahead and incur those additional remediation costs that I talked about earlier. And of course, we want to continue to invest in our business, especially the new territories that we're getting back from Merck, do I'd expect to see increased investment throughout the remainder of the year. And our pipeline remains strong, so we have every reason to invest in the pipeline. So our guidance reflects an increased level of investment throughout the year despite the strong start for the year. We think that's a great way to manage the business for the long term. With respect to your comments on pricing pressure, I think Louise was referring to the fact that pricing net of mix in orthopedics is still negative year-over-year, but sequentially from the fourth quarter to the first, that negative price net of mix got a little better. So Louise, I don't know if you want to clarify it any further.

Louise Mehrotra

Sure. So in the U.S., the just pure price in the orthopedics group, total DePuy is about flat, fourth quarter versus the first quarter. And then when you go in and look at hips and knees in the U.S., we actually have seen a slight less negative combination.

Frederick Wise - Leerink Swann LLC

Thanks so much.

Dominic Caruso

You're welcome, Rick.

Operator

Your next question comes from Mike Weinstein with JPMorgan.

Michael Weinstein - JP Morgan Chase & Co

Thank you. I'll actually pick up where Rick left off and just talk for just a minute about DePuy. Louise, if I heard you right -- and so, first, correct me if I didn't. I think you said that U.S. hips and knees were both down 6% year-over-year. Is that right?

Louise Mehrotra

In the U.S., yes. On an operational basis, yes.

Michael Weinstein - JP Morgan Chase & Co

Right. And I think we recognize the comparison is still tough in the first quarter, but that's probably -- I think, at least, certainly on the knees side, below the Street's expectations. So any commentary you have about the environment for DePuy would be appreciated. And if you could also maybe just compare that to the performance that you saw in your other surgical businesses for Ethicon, Ethicon Endo.

Louise Mehrotra

Mike, on a sequential basis, in the U.S., the hips are actually up 4%, and the knees are up 1%. So the knee market is still soft in the U.S., but on a sequential basis, you are seeing it in a positive trend rate.

Dominic Caruso

Right. And with respect to the other surgical business, I think, our Ethicon Endo business is a good barometer, for example. Right? They're widely used in many surgeries. And as Louise pointed out, when we exclude the impact of the Breast Care divestiture, the operational growth in the business is 5%. So that's returning -- it's not exactly at the levels we saw prerecession, but we are seeing some sequential improvement in volumes. When we looked at, for example, hospital admissions and other elective surgery trends, they still are below prerecession levels. But when you compare them year-over-year to prior quarters, as we compare year-over-year, the negative trend is becoming less, if you know what I mean. So the trend is getting better quarter-over-quarter, but it's still negative year-over-year, Mike.

Michael Weinstein - JP Morgan Chase & Co

So your view, Dominic -- I don't want to put words in your mouth -- is that looking at the aggregate of your numbers here then, we didn't see a step down this quarter, that this relatively comparable in your view to what we saw in the fourth quarter.

Dominic Caruso

That's right. Comparable, with some trends starting to show some year-over-year less negative trending. And as I pointed out in my comments, the quarter, for example, for the Medical Device business is in fact a very tough comparison, because this market decline that we saw, actually happened, as you remember, in the back half of 2010. The first quarter of 2010 was still very strong. So we have not seen a decline as you pointed out.

Michael Weinstein - JP Morgan Chase & Co

Okay, certainly. And let me just ask on Cordis. You made the decision this quarter to consolidate your U.S. coronary and peripheral vascular sales forces. It looks like it might have had some impact this quarter on the business. Can you share with us your thoughts on that? And then any update you can provide on these, that would be great. Thanks.

Dominic Caruso

Yes. Well, like I said earlier, with respect to any transition, there's always some impact to the business whenever you make a transition that seems to be the right thing to do for the long-term health of the business. We believe it is the right decision to make, but I wouldn't be surprised if there was some potential impact. It's very difficult to quantify that, as you could imagine. With respect to NEVO, we have no further comments to share with you with NEVO. We're disappointed about the delay in the NEVO development program. We're still evaluating the situation, but we have no further comments to share at this point.

Michael Weinstein - JP Morgan Chase & Co

Thanks for taking the questions.

Dominic Caruso

Okay, Mike.

Operator

Your next question comes from Larry Biegelsen with Wells Fargo.

Larry Biegelsen - Wells Fargo Securities, LLC

Thanks for taking my questions. Let me start with the 2011 guidance. What does this assume for new product approvals and launches? I mean, you're waiting before 4 major approvals, so telaprevir, Xarelto, abiraterone and 278 [TMC278].

Dominic Caruso

Right, Larry. We're very conservative with respect to new product launches in our forecasting. We can't predict the timing of these things. I think they're all moving along through the FDA process, but as we normally do, we don't include much of anything in our forecast related to FDA approvals that are required before launching products.

Larry Biegelsen - Wells Fargo Securities, LLC

Thanks. And then back on Cordis, what does your guidance assume for the new CYPHER delivery system for the U.S. and Japan? Do you assume you'll get that approved in 2011?

Dominic Caruso

We've -- as you know, we've submitted for approval of our own catheter system in the U.S., and we are waiting to get that approval. We're working through the comments that we received from the FDA in the awarding letter, and once those are resolved, then we'll be able to use our on catheter. So it does assume that we'll be able to have that available for us at the back end of the year.

Larry Biegelsen - Wells Fargo Securities, LLC

And lastly, Dominic, are you expecting a panel for Xarelto for the stroke prevention indication? Thanks.

Dominic Caruso

Go ahead, Louise.

Louise Mehrotra

It's possible, Larry. We haven't heard at this point.

Operator

Your next question comes from Jami Rubin with Goldman Sachs.

Jami Rubin - Goldman Sachs Group Inc.

Thank you. Dominic, just a clarification on the 2011 guidance. Based on my numbers, Crucell will cost you roughly $0.04; the McNeil remediation, an additional $0.06. So that's a $0.10 operational hit. On the other end of the spectrum is the Merck REMICADE settlement, which should net you somewhere between sort of $0.05 to $0.09 or so this year, depending on your spending levels. So can you confirm that -- what proportion of the $0.10 increase in guidance is related to currency? And what proportion is related to operational improvement? And my second question relates to the Pharma business. Can you tell me there if you saw any stocking changes related to some of the key, more older products? Specifically, LEVAQUIN came in well above our expectations. Just wondering how much of that is just market dynamics with flu season, or how much of that could be inventory ahead of the patent expiration.

Dominic Caruso

Okay, sure. Well, just to summarize the guidance with respect to currency and operational, the $0.10 change in guidance, $0.08 is due to currency and $0.02 is due to operational matters. You are correct in some of the items you mentioned. For example, Crucell will be $0.03 to $0.05 dilutive for the remainder of the year, although we did have this gain in the first quarter. So the dilutive impact will be less than what we previously had expected, so it'll basically wash out the gain that we had in the first quarter. You did pick up on the $0.06 for additional remediation cost. When you commented about the Merck agreement, I think all of you have written extensively on the agreement, and I think you have it pretty, pretty right that on a long-term basis, it's in the sort of $0.10, $0.11 range. But remember, this year it's half a year, and this year we have transitional items. And of course, as I mentioned, we're going to want to spend against this benefit to make sure we can grow the business. So I think the impact to Merck will be minimal -- Merck agreement will be minimal this year. But in summary, $0.08 due to currency and $0.02, netting out all the things that we just talked about, including our good start to the year. And then with LEVAQUIN, we did see some stocking. Louise, I don't know if you have any other comments on that.

Louise Mehrotra

Sure. So the LEVAQUIN was up 16.9%, and if you excluded the stocking, it would be up about 10%. And that was the only product that we saw a major shift in stocking.

Jami Rubin - Goldman Sachs Group Inc.

Thank you.

Dominic Caruso

You're welcome.

Operator

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

Robert Hopkins

So on the fourth quarter call, I think you mentioned that your 2011 guidance did not assume incremental buybacks. Is that still the case in this updated guidance?

Dominic Caruso

That's right, Bob. We did not assume incremental buybacks.

Robert Hopkins

Okay. And so, in light of the comment out of Synthese yesterday. Their comment, not yours, that you guys are in talks. I was just wondering if you'd be willing to say anything about that. And if you can confirm, are you still in talks right now? Just wanted to ask that question in light of their release yesterday.

Dominic Caruso

Bob, we're not going to comment.

Robert Hopkins

Okay. Lastly, I just wanted to follow up on the commentary on DePuy, because you've suggested that there was a sequential uptick. But if I recall it correctly in the fourth quarter, you had 1 less selling week. So to a degree, was the uptick sequentially real in terms of the business? Or was it simply due to the fact that you had 1 less selling week in Q4 and more of an even distribution this quarter?

Dominic Caruso

Louise has a good -- go ahead, Louise.

Louise Mehrotra

Okay. So the anomaly on the selling week actually relates to 2009, where we had a 53rd week. The 2010 did not have that phenomenon.

Robert Hopkins

Okay. And then, could you just give us the spine numbers? I don't think you gave us those in the initial commentary?

Louise Mehrotra

Sure. So on an operational basis, spine in the U.S. is down 1%; o U.S. is up 6% for a worldwide number of 1%. And again, if you looked at it on a sequential basis, o U.S. would be up about 3%. And the U.S. is flat.

Robert Hopkins

Thanks very much.

Louise Mehrotra

Okay.

Operator

Your next question comes from David Lewis with Morgan Stanley.

David Lewis - Morgan Stanley

Dominic, I want to come back to the Merck settlement. I know you've been very, very clear on 2011, but as you think about your prior comments relating to Pharmaceutical R&D investment, if you think about sort of the '12 time frame and beyond, is there any reason to believe that we shouldn't think that there is a reasonable amount of drop-through based on this settlement, as you think about 2012, '13 and '14?

Dominic Caruso

Yes. David, as you know, we're not in the practice of giving any guidance beyond the current year, because we want to evaluate the plans that each of our 250 operating companies have throughout the world to grow their business the best way they can. So I think all of you have kind of estimated the impact of just the Merck settlement and, I think, appropriately. But whether or not that impacts our 2012 and beyond guidance is still something we'll have to determine once we see all of the plans. And, look, we have a strong pipeline, and we'd love to continue to invest in the pipeline. I think you've seen the fruits of these investments from the past, bearing fruit now. So were very pleased what our R&D folks have been able to do. So I'm sure we'll take that into consideration when we review our plans for '12 and beyond.

David Lewis - Morgan Stanley

Okay. Just 2 more quick questions. First, this is on Consumer. If you look at the gives and takes of Consumer, Dominic, across the balance of the year, do you think it's likely that this quarter reflects the trough quarter for Consumer as you think about the balance of the year?

Dominic Caruso

Well, I guess, in terms of growth, this is a tough comparison, because many of the issues manifested themselves throughout the balance of 2010, after the first quarter. So obviously, on a growth basis, this is a very tough quarter, tougher than the other quarter that we'll see throughout 2011. We did see some sequential improvement in from Consumer from fourth quarter to first quarter excluding the McNeil issues, again, and the plant shutdowns, et cetera. So we are seeing some stronger market uptake in some of the products. And Louise mentioned that the Skin Care business was particularly down due to some manufacturing upgrades, at NEUTROGENA in particular, and those will be completed in the second quarter. So obviously, we won't see that drag for the remainder of the year. So we're hopeful that Consumer business will improve throughout the balance of the year.

David Lewis - Morgan Stanley

Okay. Just last quick question. Louise, I think you mentioned select investments in MD&D. I just wondered if you could clarify what the biggest chunks of investment spending were in that segment this quarter. Thank you.

Dominic Caruso

Well, let me take that, David. Louise is referring to select markets throughout the world. So for example, in our MD&D business, we've invested pretty heavily in certain emerging markets, and her reference was related to select markets throughout the world.

David Lewis - Morgan Stanley

Okay. Thank you very much.

Operator

[Operator Instructions] Your next question comes from Matt Miksic with Piper Jaffray.

Matthew Miksic - Piper Jaffray Companies

So I wanted to follow up just one -- couple of quick bookkeeping kind of questions here on the product lines within DePuy. I think Bob asked about spine. I was wondering about trauma. And if you could comment on what you're seeing in spine pricing similar to what you've given us on hip and knee pricing? And then I have just a couple of quick questions.

Louise Mehrotra

So trauma is up 6% on an operational basis worldwide, as well U.S. and o U.S. So similar results in all the markets. As well for spine pricing, on a price basis, U.S., it's mid-single digits negative, and it's slightly better because there's slightly positive mix in the first quarter.

Matthew Miksic - Piper Jaffray Companies

And just to be clear, I think you had said mid-single last quarter, and when we pushed you for the actual number -- I don't know if you're comfortable giving a number on the call, but it was slightly less than say, 5%.

Louise Mehrotra

Yes. So the negative price only in the U.S. is less than 5%. It's in the 3% range. And then mix was positive about 1%.

Matthew Miksic - Piper Jaffray Companies

Perfect. And I wanted to ask, this Consent Decree with McNeil and the FDA, you had already been engaged pretty, obviously, heavily in your action plan to restore McNeil to production. Incrementally, how should we think about the difference between the level of resources and focus and spend before the Consent Decree and after? Maybe if you could give us some perspective, and then I have one follow-up.

Dominic Caruso

Right. Well, you're right. We had developed a comprehensive action plan, along with the FDA, for restoring the McNeil manufacturing and quality systems, remediating them, including by the way, the transfer of the products from the McNeil Fort Washington facility over to other manufacturing facilities throughout the Johnson & Johnson network. So the products will come back to the market before the Fort Washington facility is reopened, right, because they will be shipped from other manufacturing facilities. I tried to quantify the incremental impact of this additional $0.06, and so the way to think about this, the initial $0.06 drag on earnings has to do with what I mentioned earlier. The difference between the CAP, or the Comprehensive Action Plan, and the Consent Decree has mostly to do with the presence of a third party in the manufacturing plants sampling the product qualities, checking the processes, et cetera. And therefore, that causes a bit of a delay in the level of shipments. And then working along with the third party to implement the Comprehensive Action Plan and report back to the FDA along the way. So that slows down sales, requires some additional investment. We had previously estimated $0.06 per share drag to implement the Comprehensive Action Plan, and now we expect that it's about $0.12 per share hit to implement both the Comprehensive Action Plan and the additional requirements in the Consent Decree.

Matthew Miksic - Piper Jaffray Companies

Okay. And then one follow-up on Europe. By our estimates anyway, o U.S. seemed to be a little stronger, U.S. maybe just slightly weaker than expected. Color on strength overseas, was this -- was it in Europe? Was it in emerging markets? Was it just that U.S. was more comp-related and Europe wasn't? Any color you could give would be great.

Dominic Caruso

Yes, I'd say, generally speaking, the business is stronger outside the U.S. Just by way of reference, the BRIC markets, they grew in the first quarter for us. Our sales in the BRIC markets were up about 14% in the first quarter of 2011. They were up about 12% in the first quarter of 2010. So stronger growth in Brazil, Russia, India and China. And then selected markets, our selected businesses, for example, the Baby business is stronger outside the U.S., et cetera. So I say, generally speaking, the mix of the business is shifting more towards x U.S., so we're now about 53% x U.S. and 47% U.S.

Matthew Miksic - Piper Jaffray Companies

And the sequential U.S. improvement, you've given a lot of information on it this quarter. I mean, is the signal -- it sounds like the point you're trying make is prior-year comps -- the difference in weeks in selling made it difficult, but sequentially it feels like things were, kind of, maybe stabilizing and improving from a utilization standpoint.

Dominic Caruso

Yes. I don't want to exaggerate on this, because they're still below prerecession levels, but we do see the decline year-over-year, when we look at a first quarter comparison to a first quarter comparison. That decline is just less of a decline than we saw in the fourth quarter or the third quarter when we did the same comparison. So things are starting to improve but it's not over yet, of course.

Operator

Your next question comes from Rajeev Jashnani with UBS.

Rajeev Jashnani - UBS Investment Bank

I had a couple of questions on the Consumer business. I know you talked about some of the issues impacting the OTC, Skincare and some of the other line items, but I was wondering if you could offer some perspective -- and maybe from a qualitative perspective, just on the margins in that business and how you would think of some of the pushes and pulls there, and how you might think about the margin trajectory for that business, going forward.

Dominic Caruso

Yes. Well, we don't -- Rajeev, we don't provide any guidance with respect to margin on any sector of the business. But, obviously, the margins overall in that business are impacted by the -- less sales of some higher margin products in the OTC business. The overall margins for the Consumer business, pretax operating margins in 2010, were 16% as we disclosed at year end. That was down from 18% in 2009. And the main reason for that is the OTC impacts that we've been discussing. Other than the OTC impacts, I think that margins still remain healthy and at comparable levels to other years in that business.

Rajeev Jashnani - UBS Investment Bank

Thank you.

Dominic Caruso

You're welcome.

Operator

Your next question comes from Derrick Sung with Sanford Bernstein.

Derrick Sung - Sanford C. Bernstein & Co., Inc.

Thanks for taking my question. So, Dominic, I won't ask you to comment on the Synthese rumors, but in thinking about -- if that were true, it would suggest that perhaps there's a belief on your part that size or that scale and diversification within the med tech space is of value. And I wanted to see if you could comment on that thought. Do you believe that a significant success factor moving forward in this new med tech environment is the ability to have size or scale in diversification across various businesses? And if so, I understand -- I can see that you have that on the orthopedic side, but if you could also kind of transfer that thinking over to your cardiovascular side where it seems that you don't have the scale in diversification that you might hope to. How does that -- what are the implications of that for the sustainability of that portion of your med tech business?

Dominic Caruso

Yes, well, Derrick, I'm not going to comment on anything related to the Synthese discussions that they've made in the market. I would say though -- look, we're the largest med tech business in the world, so obviously we believe that having a broad base of med tech businesses of scale is important. We are usually the preferred choice amongst various hospitals or -- and even more importantly, with governments around the world, in terms of discussing the impact we could have on healthcare. So having a broader base of businesses across all of our businesses, whether it be Pharma, Consumer or MD&D, is a strategy we've employed for many years. I don't think that, that's changed any. I think that, that's -- it's important to be a major player. We think we already are a major player. And obviously, where we don't have sufficient scale, we'd love to increase the scale over time in the appropriate manner.

Derrick Sung - Sanford C. Bernstein & Co., Inc.

Okay, great. Thanks. And just a follow-up on Consumer. Louise, I thought I heard you mention that sort of the -- when you talked about the ramp up of the OCT (sic) [OTC] products and, sort of, the majority happening in the first part of 2012 that, that was a delay from previous -- your previous expectation. And I recall that in your Q4 call, you pushed back the timing on that to the back half of 2011. So is that a further delay versus what you had expected in Q4? And is that then incorporated in the your guidance somehow?

Louise Mehrotra

So this relates to the Fort Washington products, and yes, it is later than what we had said in fourth quarter.

Dominic Caruso

And yes, Derrick, I did include that when we provided guidance for the year.

Derrick Sung - Sanford C. Bernstein & Co., Inc.

So is that part of the $0.06 that you're adding to the additional remediation costs, Dominic? Or is that just some that are buried and not explicitly called out when you've been sort of breaking out the guidance?

Dominic Caruso

Right. Well, just to summarize, the $0.06 isn't only additional remediation cost, it's an impact of lower sales, lower shipments due to, primarily, the impact of the Consent Decree. But also, it will have some delay in getting some products back to the market.

Derrick Sung - Sanford C. Bernstein & Co., Inc.

Okay, great. Thank you.

Operator

Your next question comes from Kristen Stewart with Deutsche Bank.

Kristen Stewart - Deutsche Bank AG

Thanks for taking the question. On the last call, Dominic, I think you had talked a little bit about just the broader price environment and have embedded the negative 50 to 100 basis points additional headwind in 2011. Given what you've seen, and I recognize it's early in the year, but do you still anticipate that you will see that price environment, going forward?

Dominic Caruso

Yes, we still see that overall for the business, year-over-year across the world, our business would see a negative impact to margins of 50 to 100 basis points due solely to price.

Kristen Stewart - Deutsche Bank AG

Okay, perfect. And then the Micrus acquisition, how much did that add, exactly, to DePuy in the quarter?

Louise Mehrotra

DePuy was essentially flat if you took out the Micrus.

Kristen Stewart - Deutsche Bank AG

And the comments just on the slightly less negative combination of price and mix, is that just simply because price in the U.S. for hips and knees got a little bit better? Or are you just seeing a little bit better mix?

Louise Mehrotra

This is actually coming from a little bit better mix.

Kristen Stewart - Deutsche Bank AG

Okay. So price remains about the same?

Louise Mehrotra

About the same.

Kristen Stewart - Deutsche Bank AG

Is that about the same?

Louise Mehrotra

About the same. About the same negative, yes.

Kristen Stewart - Deutsche Bank AG

Okay. That's all I have. Thank you.

Operator

Your last question comes from a Ben Yeoh with Atlantic Equities.

Benjamin Yeoh - Atlantic Equities LLP

Thanks for squeezing me in. I was just wondering how we should think about your R&D spend this year and maybe beyond. I have you on track to spend maybe just over $7 billion. You have Crucell coming in, but also a number of Phase III trials that ended. I was just wondering, maybe from a sort of bottom-up level view, is this level of spending enough, or in light of acquisitions, maybe a little bit too much to sustain you and sustain growth, going forward?

Dominic Caruso

Yes. Ben, again, we don't provide comments on each individual line item. But look, we're very pleased with the productivity of our R&D folks around the world. And in fact, this quarter, look at our Pharmaceutical sales. I mean, we have very strong growth of over 6% operational, and this is the result of launching these new products that the R&D team has either developed internally or, obviously, licensed from others. And so we are -- when we improve our operating margins, we generally don't focus on reducing R&D to improve our operating margins. We like to spend in R&D. Our folks are very productive. We have one of the most robust pipelines in the pharmaceutical industry, and we're very pleased with that, and we want to keep that up. I can't give you any specifics on how much R&D spend we're going to have as a percent of sales, but just suffice it to say that we're pleased in the level of productivity we have in our R&D organization.

Benjamin Yeoh - Atlantic Equities LLP

Okay. Thank you.

Dominic Caruso

You're welcome, Ben.

Louise Mehrotra

Well, Dominic?

Dominic Caruso

Sure. Thanks, Louise. And thanks, everyone, for tuning in today.

And in closing, let me just say we're very pleased to see top line sales growth again for the enterprise. And we see further opportunity for growth as the global economy stabilizes and our new products, robust pipelines and our core businesses continue to addressing the critical, unmet healthcare needs of patients and consumers.

I remain confident in our prospects for the year thanks to the dedication, focus and integrity of the people at Johnson & Johnson, and I look forward to seeing you at our Pharmaceutical business review day on May 26. And we also look forward to updating you on our progress throughout the year. Thanks for your time this morning, and have a wonderful day.

Operator

Thank you. This concludes today's Johnson & Johnson First Quarter 2011 Earnings Conference Call. You may now disconnect.

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