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Johnson & Johnson (NYSE:JNJ)

Q2 2011 Earnings Call

July 19, 2011 8:30 am ET

Executives

Alex Gorsky - Worldwide Chairman of Medical Devices & Diagnostics Group and Vice Chairman of Executive Committee

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

Sara Michelmore - Brean Murray, Carret & Co., LLC

Robert Hopkins

Jami Rubin - Goldman Sachs Group Inc.

Michael Weinstein - JP Morgan Chase & Co

Glenn Novarro - RBC Capital Markets, LLC

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

Kristen Stewart - Deutsche Bank AG

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 the Johnson & Johnson Second 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 second quarter of 2011. Joining me on the call today are Dominic Caruso, Vice President, Finance and Chief Financial Officer; and Alex Gorsky, Vice Chairman, Executive Committee, Office of the Chairman. A few logistics before we get into the details. This review is being made available to a broader audience via webcast accessible through the Investor Relations section of the Johnson & Johnson website. I'll begin by briefly reviewing highlights of the second quarter for the corporation and highlights for our 3 business segments. Following my remarks, Dominic will provide some additional commentary on the second quarter results and guidance for the full year of 2011. Following Dominic, Alex will discuss our medical devices and diagnostics business. We will then open the call to your questions. We expect the call to last approximately 90 minutes. Included with the press release that we sent to the investment community earlier this morning, is the schedule showing sales for major products and/or businesses 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 identify 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. Tables reconciling these measures to the most comparable GAAP measures are available in the press release or on the Investor Relations section of the Johnson & Johnson website at jnj.investor.com.

Now I would like to review our results for the second 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 $16.6 billion for the second quarter of 2011, up 8.3% as compared to the second quarter of 2010. On an operational basis, sales were up 2.6%, and currency had a positive impact of 5.7%. In the U.S., sales increased 0.1%. In the regions outside U.S., our operational growth was 4.9%, while the effective currency exchange rates positively impacted our reported results by 11 points. Europe grew 5.4% operationally. The Western Hemisphere, excluding the U.S., grew by 5.3% operationally, while the Asia-Pacific Africa region grew 4.2% on an operational basis.

If you'll now turn to the consolidated statement of earnings, net earnings were $2.8 billion, compared to $3.4 billion in the same period in 2010. Earnings per share were $1 versus $1.23 a year ago. Please direct your attention to the box section of the schedule where we have provided earnings adjusted to exclude special items. As referenced in the footnotes, second quarter net earnings this year were adjusted to exclude the after-tax impact related to the previously announced restructuring of Cordis, the net after-tax impact of expenses related to the litigation matters, additional DePuy ASR Hip recall costs and an after-tax mark-to-market gain associated with the currency option related to the planned acquisition of Synthes Inc. Similarly, the second quarter net earnings in 2010 were adjusted to exclude the after-tax net impact of litigation matters. Net earnings on an adjusted basis were $3.5 billion, and earnings per share were $1.28, up 4.9% and 5.8%, respectively, versus the second 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 31.2% of sales was 100 basis points higher than the same period in 2010, primarily due to charges related to the restructuring of the cardiovascular care business, the ongoing remediation work in our OTC business and the impact of integrating the Crucell business. Selling, marketing and administrative expenses up 31.4% of sales were up 40 basis points due to investment spending in our 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 11.3%, up 50 basis points versus the second quarter of 2010 due to a higher level of investment spending to advance our pharmaceutical pipeline. Interest expense net of interest income of $111 million was up $53 million, versus the second quarter of 2010 due to a higher average debt balance. Other expense net of other income was $206 million in the second quarter of 2011, compared to $18 million in the same period last year. Excluding special items, net other income was $109 million versus $139 million a year ago. Excluding special items, taxes were 19.6% in the second quarter of 2011, lower than our previous guidance. Dominic will discuss taxes in his remarks.

Now turning to the consolidated statement of earnings for the first half of 2011. Consolidated sales to customers for the first 6 months of 2011 were $32.8 billion, an increase of 5.8% as compared to the same period a year ago. On a year-to-date basis, sales were up 2.2 points operationally, and currency had a positive impact of 3.6 points. On the consolidated statement of year-to-date earnings, I'd first like to draw your attention to the box section, adjusted net earnings of $7.3 billion in 2011 compared to adjusted earnings of $7 billion in 2010. Adjusted earnings per share at $2.63 were up 5.2% versus the 2010 results.

Turning now to business segment highlights. Please refer to the supplementary sales schedule highlighting major products or businesses. I'll begin with the consumer segment. Worldwide consumer segment sales for the second quarter of 2011, up $3.8 billion increased 4% as compared to the same period last year. On an operational basis, sales declined 1.8%, while the impact of currency was positive 5.8 points. U.S. sales were down 8.5%, while international sales grew 2.8% on an operational basis. Excluding the impact of lower U.S. over-the-counter or OTC revenues, as well as the impact of divestitures, operational sales grew approximately 2.5%.

For the second quarter of 2011, sales for the over-the-counter pharmaceuticals and nutritionals decreased 11.5% on an operational basis, compared to the same period in 2010 with U.S. sales down 32.9%, primarily due to supply constraints.

On March 10 this year, McNeil-PPC announced the signing of a Consent Decree covering the manufacturing facilities in Las Piedras, Puerto Rico and Fort Washington and Lancaster, Pennsylvania. McNeil has made progress against its commitments under the terms of the Consent Decree and has managed requirements to date with the FDA. McNeil continues to operate the manufacturing facilities in Las Piedras and Lancaster. McNeil is proceeding with its site specific work plan. As we previously discussed, production volumes from these facilities have been impacted due to the additional review and approval processes. However, shipments of key selective products remain on track to ramp up during the latter part of 2011.

Regarding the products previously produced at the Fort Washington facility, McNeil continues to re-site the production to other facilities. McNeil is making progress on the validation and expects a modest amount of certain products to ship in late 2011. We anticipate the balance of the portfolio of key products will continue to be reintroduced throughout 2012.

Sales of OTC and nutritional products outside the U.S. were up 4.8% on an operational basis, primarily due to a higher instance of respiratory illness and flu in Europe. Our skin care business grew 5.3% on an operational basis in the second quarter of 2011, with sales in the U.S., up 6.4% and sales outside the U.S., up 4.3% on an operational basis. Neutrogena, Le Petit Marseillais and AVEENO achieved strong sales growth due to the success of new product launches.

Baby care products achieved operational growth of 5.2% when compared to the second quarter of 2010, due primarily to double-digit growth in cleansers, wipes and oils. Women's health declined 4% on an operational basis. Sales in the U.S. were down 11.7%, while sales outside the U.S. were down 0.9% on an operational basis. Lower sales of K-Y products and the divestiture of the e.p.t. pregnancy test brand earlier this year impacted growth in the quarter. Sales in the oral care business increased 1.5% on an operational basis. In the U.S., sales increased 6.8% due to LISTERINE new product launches and strong sales of toothbrushes.

Sales outside the U.S. decreased 2.1% operationally, primarily in Europe and Venezuela, which was partially offset by strong growth in Asia. Wound care/other was up 2.8% on an operational basis compared to the same period last year. Solid growth was achieved across most of the product lines, partially offset by the divestiture of PURELL in the fourth quarter of 2010.

That completes our review of the consumer segment, and I'll now review highlights for the pharmaceuticals segment. Worldwide net sales for the second quarter of $6.2 billion increased 12.2% versus the same period last year. On an operational basis, sales increased 7% with a positive currency impact of 5.2 points. Sales in the U.S. increased 4.1%, while sales outside the U.S. increased on an operational basis by 10.7%. The marketing exclusivity for LEVAQUIN expired in June, negatively impacting worldwide sales growth by approximately 3 points and U.S. growth by approximately 5 points.

Additionally, the second quarter sales comparisons were negatively impacted by approximately $75 million in incremental rebates related to both European austerity measures, primarily implemented in the second half of 2010 and the U.S. Health Care Reform legislation implemented late in the first quarter of 2010.

Positively impacting the sales growth in the quarter were sales related to the recent acquisition of Crucell and an increase in REMICADE export sales related to customer inventory planning, which I will discuss in a moment. Excluding all of these items, the underlying operational growth was approximately 7.5%.

Now reviewing the major products. Sales in the U.S. of our key immunology products, which include REMICADE, STELARA and SIMPONI were up approximately 13% versus 2010, with growth for REMICADE at 6.8%, STELARA at over 100% and SIMPONI, up 30%. 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 55% in the quarter. Sales related to customer inventory planning contributed approximately half of the growth, while the impact of the agreement with Merck contributed approximately 10 points to the growth in the quarter. Excluding these items, export sales were up approximately 15% in the quarter, reflecting double-digit market growth. As a reminder, we will begin recording sales of product from the territories relinquished by Merck in the third quarter and the amended distribution agreement division of contribution income split of 50% went into effect July 1, 2011.

PROCRIT/EPREX declined operationally by 14% during the quarter as compared to the same quarter last year, with PROCRIT down 16% and EPREX down 11.2% operationally. A softening of the market and increased competition has contributed to the lower sales results. RISPERDAL CONSTA, a long-acting injectable antipsychotic achieved second quarter sales growth of 4.5% on an operational basis. Sales in the U.S. were down 4.3%. However, the total U.S. sales of our long-acting injectables, including INVEGA SUSTENNA, increased strong double-digit growth versus a year ago due to an increase in combined market share. Sales of RISPERDAL CONSTA outside the U.S. were up 8.7% 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 10% due to strong double-digit growth in Asia and Latin America.

CONCERTA, a product for attention deficit hyperactivity disorder, increased 4.5% operationally in the second quarter as compared to the same period last year, with sales in the U.S. up 4.9%. Sales outside the U.S. were up 3.6% operationally. The supply and distribution agreement with Watson Laboratories, Inc. to distribute an authorized generic version of CONCERTA in the U.S. became effective May 1, 2011. Sales reflect the shipments to Watson, including the initial stocking of the authorized generic, partially offset by lower sales of the branded products. According to IMS, the authorized generic has captured approximately 3 quarters of the combined CONCERTA script share.

PREZISTA, a protease inhibitor for the treatment of HIV, grew operationally 47.3% with U.S. increasing 29.3% and sold outside the U.S. increasing 65.9% due to very strong momentum in share. ACIPHEX/PARIET is a proton pump inhibitor that we co-market with Eisai. On an operational basis, sales were down 9.4% due to increased penetration of generics in the category. DOXIL/CAELYX grew 50.3% in the quarter. With the expiration at year-end 2010 of the distribution agreement with Merck, we are now marketing DOXIL/CAELYX globally.

INVEGA, an atypical antipsychotic, grew 25.5% on a reported basis with the U.S. up 11.8% due in part to market growth. Sales outside U.S. were up 52.9% with the recent approval in Japan. INTELENCE, an NNRTI for the treatment of HIV, grew 41.1% on a reported basis with the U.S. up 18.8% and the sales outside the U.S. up 70.8%. Increased market share drove the sales increase.

As an update on the pharmaceutical pipeline, regarding telaprevir, which we'll market as INCIVEK, and ZYTIGA, our review for these EU approvals are right on track, and we expect to hear back from the regulatory authorities in the very near future.

Additionally, we are pleased that TMC435 has received fast track designation from the FDA for the treatment of chronic hepatitis C. As you know, pending regulatory approvals, we intend to commercialize both TMC435 and INCIVEK, and we are developing strategies that would enable us to successfully commercialize both compounds.

I'll now review the medical devices and diagnostics segment results. Worldwide medical devices and diagnostics segment sales of $6.6 billion grew 1.3% operationally as compared to the same period in 2010. Currency had a positive impact of 5.9 points, resulting in a total sales increase of 7.2%. Sales in the U.S. were up 0.1%, while sales outside the U.S. increased from an operational basis by 2.2%. Excluding drug-eluting stent, worldwide sales increased 3% on an operational basis.

Now turning to the MD&D businesses, starting with cardiovascular care, previously referred to as Cordis. Cardiovascular care sales were down 16.1% operationally with the U.S. down 20.8% and sales outside the U.S. down 12.9% operationally. Excluding drug-eluting stent, Cardiovascular care sales were flat. Biosense Webster, our Electrophysiology business, achieved strong operational growth of 14% in the quarter due to increased market share. The continued success of Carto 3 and the expansion of the installed base made strong contributions to the results. This increase was partially offset by lower sales of endovascular products due to increased competition. The DePuy business had operational growth of 1.3% when compared to the same period in 2010, with the U.S. down 0.8% and the business outside the U.S. growing by 4% operationally. Pressure on pricing and procedure volumes persisted as a result of the economic trends. Mitigating some of the price impact, mix with favorable most notably in knees driven by the growing revision segment.

Incremental sales from the acquisition of Micrus contributed to growth in the quarter as well as sports medicine and trauma. Operationally, hips were down 3% on a worldwide basis, with U.S. down 7% and sales outside the U.S. up 1%. Sales were impacted by the lower volume of metal on metal bearings and continued pricing pressure.

Knees declined 4% on an operational basis, with the U.S. down 5% and sales outside the U.S. down 4%. The market was estimated to have declined modestly in the first quarter with the U.S. down 2% and the worldwide market down 1%. It is estimated that the softness in the market continued into the second quarter. The diabetes care business achieved operational sales growth of 5.3% in the second quarter of 2011, with the U.S. business growing 6.4%, and the business outside the U.S. growing 4.1% operationally due to the combination of increased market share and market growth.

Ethicon worldwide sales grew operationally by 5% with the U.S. up 6.1% and sales outside the U.S. up 4.2% operationally. Drivers of the increase include the emerging markets growth in sutures, the strong uptick of the recently launched products, PHYSIOMESH and SECURESTRAP as well as the clearance sales, which grew over 20% in the quarter. Ethicon Endo-Surgery achieved operational growth of 1.8% in the second quarter of 2011 with the U.S. sales down 3.4%, and sales outside the U.S. up 5.5% operationally. Growth was negatively impacted by the divestiture of the breast care business. Excluding this impact, worldwide sales grew approximately 4%. Growth was driven by increased market share for advanced sterilization products. And outside the U.S., new product launches drove double-digit growth for HARMONIC products and strong sales results for Endo products.

Ortho clinical diagnostics grew 6.4% on an operational basis in the second quarter in both the U.S. and outside the U.S. Clinical lab results drove growth in the quarter due to the strength of the VITROS 5600 and 3600 platform. Rounding out the review of the medical devices and diagnostics segment, our vision care business achieved operational sales growth of 3.3% in the second quarter compared to the same period last year. Sales in the U.S. increased 5.6%, while sales outside the U.S. increased 2.1% on an operational basis. ACUVUE MOIST and the astigmatism lenses made strong contributions to the quarter.

That completes highlights for the medical devices and diagnostics segment and concludes the segment highlights for Johnson & Johnson second 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 additional comments about our second quarter results, highlights on recent business and pipeline developments and then provide guidance for you to consider in refining your models for 2011. I will be brief to allow ample time for Alex Gorski to speak about the exciting developments in our medical devices and diagnostics segment.

This quarter's results are very encouraging as we continue to see good momentum through the first half of the year. This quarter, sales growth and solid earnings exceeded the analyst estimates published by First Call, and we are very pleased that in addition to these solid financial results, we are making significant progress in our product launches, pipelines and investments for future growth. Consistent with our operating model, our broad base of healthcare businesses is enabling us to invest and grow, even as the markets we compete in have not yet rebounded to pre-recession levels. I am pleased with our operational growth for the quarter, and I expect to see additional improvement in our sales growth, as our businesses gain momentum and as the healthcare market improves.

We are expanding our market leadership in many growth segments of the business, successfully launching new products and advancing our pipelines in areas of critical unmet need. We continue to invest in emerging markets and in the fastest growing segments of healthcare to sustain our growth over the long-term. We are making portfolio decisions to focus on our core strengths where we can have the greatest impact on unmet patient and customer needs. We are making progress with enhancements to our quality and manufacturing systems, and we are taking a disciplined approach to profitable growth.

Our pharmaceuticals business demonstrated strong operational sales growth this quarter of 7% due to the success of our recently launched products, such as STELARA and ZYTIGA, and core medicines, such as REMICADE and PREZISTA. Our medical devices and diagnostic business saw modest sales growth again this quarter. But excluding the drug-eluting stent sales, MD&D saw operational growth of about 3%. We're in line with the market expectations for the sector and a good performance considering market factors that Alex will discuss later in this call.

And our consumer healthcare business continued to see good results in emerging markets, more stabilization in businesses like skin care and baby care and steady progress addressing the manufacturing quality issues in the OTC business. Excluding the impact of the OTC recall related issues, the business saw operational sales growth of approximately 2.5%, which has improved over the first quarter of this year. As to earnings, we are very pleased to have reported solid earnings per share in the second quarter of $1.28, excluding special items. These special items, which together amounted to $0.28 per share this quarter, are the type of items we consistently exclude from our guidance. I'll just briefly summarize these items. As previously announced, we recorded restructuring charges related to the Cordis business. We recorded expenses related to litigation matters and additional to DePuy ASR Hip recall cost. We also recorded a mark-to-market gain associated with the currency option that we purchased and that I previously described during our conference call regarding the planned acquisition of Synthese.

Now turning to a few notable business highlights for the quarter, we hosted a review of our pharmaceutical business at the end of May, which outlined the strength of our pipeline and highlighted the market strategies we are pursuing in our 5 therapeutic areas. In fact, our pipeline strength has been evident in 3 FDA approvals we received during the quarter, including EDURANT for the treatment of HIV and treatment-naïve adults, ZYTIGA for the treatment of metastatic prostate cancer and XARELTO for the treatment of deep vein thrombosis in patients undergoing knee or hip replacement surgery.

We recently announced a licensing agreement with Gilead Sciences for the development and commercialization of a new combination therapy, including PREZISTA, for patients with HIV. We advanced our immunology leadership with the expansion of REMICADE and SIMPONI in certain global markets for which rights were transferred as of July 1 as a result of our agreement with Merck and with the recent approvals of SIMPONI in Japan.

Our businesses continue to make strategic decisions about where to focus resources. As you know, we announced that we are restructuring the Cordis business to no longer participate in the drug-eluting stent market and to focus on other cardiovascular therapies where significant patient need exists. We recently completed the sale of Janssen Animal Health business to Elanco, a division of division Eli Lilly, which will be reflected in our third quarter results. And also just last week, we announced the planned divestiture of our ortho dermatologics business.

In consumer, we are progressing with remediation actions in our McNeil consumer business while making investments to grow the overall consumer business. For example, we completed an acquisition of the over-the-counter brands from J.B. Chemicals & Pharmaceuticals Ltd. just last week. This transaction includes leading Russian OTC brands and strengthens our consumer products business in emerging markets. Alex will provide an update about the MD&D business in just a few minutes.

Let me now provide some guidance for you to consider as you refine your models for 2011. Let me begin with a discussion of cash and interest income and expense. At the end of the second quarter, we had approximately $11 billion of net cash. This consists of approximately $30 billion of cash and investments and approximately $19 billion of debt, and we continue to generate strong cash flows. We also announced the dividend increase of 5.6% in April, our 49th consecutive year of dividend increases. For purposes of your models, assuming no additional major acquisition is due in 2011, I suggest you consider modeling net interest expense of between $400 million and $500 million, slightly higher than our previous guidance.

Now turning to other income and expense. As a reminder, this is the account where we record royalty income as well as one-time gains and losses arising from such items as litigation, investments by our development corporation, divestitures, asset sales or write-offs. This account is difficult to forecast. But assuming no major one-time 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 $800 million to $900 million. This is slightly higher than our previous guidance.

And now, a word on taxes. On a year-to-date basis, through the second quarter of 2011, the company's effective tax rate, excluding special items, was 21.3%. This is lower than our previous guidance, as I am happy to report that we were able to implement some tax planning strategies. Also our earnings growth has accelerated outside the U.S., and we are seeing lower corporate tax rates in certain countries. We suggest that you model our effective tax rate for 2011 in the range of 21% to 22%, which is lower than our previous guidance. As always, we will continue to pursue opportunities in this area to improve upon this rate throughout the year.

And now just a word on our operating expense trends. In this quarter's earnings, you can see a higher trend in cost of goods sold, as well as R&D and SG&A expenses that you saw in our first quarter earnings. This is somewhat impacted by the inclusion of the diluted impact of Crucell in our results, but also a reflection of our commitment to invest in our business for future growth. Our lower effective tax rate allows us to continue to invest in our business while delivering solid earnings. And as you saw this quarter, we did have higher spending levels in R&D and SG&A, reflecting our investments to continue to build our pipeline and invest behind the launches of our exciting recently approved products. We expect that this impact of Crucell and this higher level of investment will continue for the remainder of the year and will be higher than we contemplated in our previous guidance. And looking at many of the published models, I noticed that many of you have not reflected this higher level of spending yet. And I suggest that you now consider this guidance in updating your models.

Now let's turn to sales and earnings guidance. Our guidance continues to be based first on a constant-currency basis, reflecting our results from operations, assuming that average currency rates for 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 overlying performance of our business. We will also continue to provide an estimate of sales and EPS results for 2011, with the impact the current exchange rates could have, and we'll use the euro as an example.

So turning to sales. We would be comfortable with your models reflecting an operational sales increase on a constant-currency basis of between approximately 2.5% and 3.5% for the year. This is consistent with our previous guidance. This would result in estimated sales for 2011 on a constant-currency basis of approximately $63.5 billion. While we're not predicting the impact of currency movements to give you an idea of the potential impact of currency exchange rates for the remainder of 2011 or to stay where they were as of last week, as an example, with the euro at approximately $1.42, then our sales growth rate would 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 approximately $65.5 billion. This is consistent with 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 is consistent with our previous guidance, as our lower effective tax rate will be offset by higher investment spending as I discussed earlier. While we're 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. Therefore, our reported EPS, excluding special items, would be between $4.90 and $5 per share or a reported EPS growth rate of approximately 3% to 5%. This is also consistent with our previous guidance. While we are pleased with the momentum in our business in the first half of this year, given the continued uncertainties in the overall economic climate, we believe that this level of guidance is prudent at this time.

That concludes my comments on our operating performance this quarter and our guidance with respect to your models.

As you know, we regularly communicate with the investment community about our long-term strategy and prospects for growth. This year, we held a business review in May, focusing on the pharmaceutical business and today, we're providing you an update on our progress in the MD&D business. At the end of the MD&D presentation, we look forward to taking your questions.

It is my pleasure now to introduce my friend and colleague on the Executive Committee, Alex Gorski, Vice Chairman of Johnson & Johnson's Executive Committee, who will take you through an overview of the exciting opportunities and life-changing technologies that our MD&D businesses are focused on. Alex?

Alex Gorsky

Thank you, Dominic, and good morning, everyone. I last spoke with you in detail about our medical devices and diagnostic segment a little more than a year ago when we gathered in New Brunswick for an all-day session. At that meeting, we discussed the overall MD&D market as well as our strategies to succeed in this market. Since that time, there have been some significant changes in the macroeconomic environment and therefore in the marketplace. Namely, we are seeing slower market growth, particularly in developed countries around the world, but we do remain confident in the market's long-term growth potential. I'll talk more about that in a moment. Also since last year, we've been executing well against our strategic priorities. First, we've launched a number of innovative products across a wide range of our businesses, allowing us to strengthen our largest core franchises, gain share in our high-growth businesses, and expand into some new market segments. We believe that many of these products are real game changers, and I'll highlight a few of them today.

We've continued to advance our robust pipeline across our businesses. As with our recently launched products, we feel that a number of our pipeline products also have real breakthrough potential, and I'll highlight a few of them today as well. And we strengthened our global presence, especially in emerging markets like China and India, and I'll provide you with some examples of that today too. We've also made some significant decisions to shape our portfolio of businesses for growth, and I'll describe some of these decisions to you as well.

So let's start by taking a look at the overall MD&D market and what we're seeing. We continue to believe this market has solid long-term growth potential due to a number of tailwinds that you see on the left-hand side of this slide. I'll highlight each briefly. First, populations in the developed world are aging rapidly. In large countries like Japan, Germany and Italy, more than 20% of the total population is already over 65 years of age. That percentage is rising rapidly in other developed nations, including the U.S., with a first of approximately 77 million baby boomers began turning 65 this year at the astonishing rate of 1 person every 8 seconds. As most of us know from personal experience, we consume more healthcare as we grow older. In fact, those over the age of 65 consume an average of 7 times more healthcare per year than those under the age of 65.

A second tailwind is the growing demand for healthcare that we're seeing in emerging markets. China, for example, has lifted more than 400 million people out of poverty in the last 20 years. As standards of living rise, people increasingly expect and are able to afford better healthcare.

A third tailwind is the fact that significant unmet medical needs remain in both the developed and the developing world. The diseases that our products help treat, osteoarthritis, cardiovascular disease, diabetes, presbyopia, obesity, affect hundreds of millions of people today with prevalence rates that are on the rise globally.

Finally, we live in a time of tremendous scientific and technological progress. I was in Asia just a few weeks ago and had the pleasure of visiting with the number of high-tech companies outside of the healthcare industry. When you think about the advances that are being made in terms of our understanding of disease, and you couple that with some of the incredible new technologies that are being developed, it's a very exciting time to be in our space.

But there are very significant headwinds facing us too, and you see them here; continued high unemployment and deficit concerns in the United States; austerity measures in Western Europe; a tougher regulatory environment worldwide; a tougher pricing and reimbursement environment worldwide. None of these will come as any surprise to you, but I think it's fair to say that these headwinds are proving to be stronger and more persistent than we would have hoped, and we are feeling their effects. I'll give you just a few examples. First, we've seen declining in-hospital surgical procedures in the U.S. for 6 straight quarters through the first quarter of this year, a good proxy for the overall strength of the MD&D market. Visits to physicians' offices in the United States, another key indicator, declined throughout 2010, and we've seen little if any recovery thus far in 2011. Some of you have written about what you're seeing recently, noting procedure volumes still appear to be soft.

Looking at price, we saw a slight price decline in our markets collectively last year on a global basis, and price continues to be a challenge for us this year, particularly in certain market segments. A few years ago, price was a neutral to positive factor in our overall performance. Having said all that, we believe that J&J's market leadership positions, our depth and breadth, and our capabilities and expertise position us to move forward despite these headwinds, but they are challenging.

So what does all this mean in terms of our market outlook? As we've said in the past, the global MD&D market is worth roughly $350 billion a year. From the pie chart on the left, you see the market is split about evenly between the U.S. and the rest of the world. And we estimate that the total market will grow at a 5-year compound annual growth rate of about 5%. Shifting to the pie chart on the right, J&J competes in almost 2/3 of the overall market, and we expect the segments in which we compete to grow at roughly the same rate as the total market. In 2011, we expect a slower full year market growth than we saw in 2010. We anticipate faster market growth as we move into the 2012 to 2015 timeframe as the global economy gradually improves, as more people come into the U.S. healthcare system through healthcare reform, and as demand in emerging markets continue to rise.

We can see the impact of slower market growth in our second quarter results, which Louise reviewed earlier, as well as on our performance through the first 6 months of the year, which I'll discuss briefly now. MD&D's total sales for the first 6 months of the year were $13 billion, up 1.3% operationally from the prior year and 5.2% on a reported basis. Sales in the U.S. were roughly flat operationally, while sales outside the United States increased on an operational basis by 2.5%. Excluding drug-eluting stent, total MD&D sales increased about 3% operationally. Despite a challenging market environment, 6 of our 7 franchises generated positive growth, led by our diabetes care franchise, which grew at 6% operationally. Our Ethicon and Vision Care franchises each grew at 4% operationally, while our ortho clinical diagnostics Ethicon endo-surgery and DePuy franchises each grew at 2% operationally. Sales of our cardiovascular care franchise declined 12% operationally but were up 3% excluding drug-eluting stents. Spending just a moment on DePuy since it's our largest franchise, Louise mentioned some of the pressures that we've been seeing in hips and knees, with both segments of the market growing at rates well below historical levels. In the U.S., patients are reluctant to step away from their jobs at a time of persistently high unemployment, and they often can't afford the higher co-pays they're being asked to cover. Austerity measures in Europe are leading to longer queues for both hip and knee replacements.

From a share perspective, we're holding our own in knees globally, but we have lost some share in hips, especially in the U.S. due to the recall of our ASR product. Moving forward, we have several new product launches planned that we believe will strengthen our competitiveness in both these businesses. In hips, for example, our new RECLAIM system approved in the U.S. earlier this year and approved just a few weeks ago in Europe, along with our new GRIPTON TF product, should strengthen our position in the fast-growing revision segment of the market. Additionally, we recently launched a comprehensive patient education campaign in the U.S. that encourages people living with chronic knee or hip pain to talk to an orthopedic surgeon about treatment options, a campaign that we hope will contribute to stronger procedure growth.

Elsewhere in DePuy, we are continuing the rollout of the COUGAR LS Lateral Cage, which should strengthen our spine business in the fast-growing lateral approach segment. While our neurovascular business has been doing well, thanks in part to our new line of GALAXY coils and products added to the 2010 acquisition of Micrus Endovascular.

At a time of slower market growth, we remain committed to our long-standing goal of sustaining or gaining share in the market segments where we compete. Within our 7 franchises, we track 20 major product platforms that account for about 90% of our total sales. To give you an example of what I mean, our Ethicon franchise includes 4 major platforms: sutures, biosurgicals, aesthetics and ears, nose and throat. Based on all available data, we sustained or gained share in 3 quarters of these 20 platforms through the first 3 months of the year, and we estimate this will be the case for the first 6 months of the year as well. Obviously, we'd like to go for 20 for '20, but we're pleased with our performance especially when you consider that we're already number 1 or number 2 in most of these platforms.

At a time of slower market growth, we are also more focused than ever on executing against our strategic priorities. Launching innovative products, advancing a robust pipeline, broadening our geographic presence and achieving these first 3 by focusing on our talented people around the world. So let me spend a few minutes taking you now through these strategic priorities, starting with innovative products.

You know when you look at our 20 platforms, there's a real mix in terms of size, maturity and growth rates. We have some very large platforms where we've been a significant player for a long time, platforms like contact lenses, sutures and SMBG. These platforms typically don't grow at double-digit rates for us, but they form a terrific and consistent core foundation upon which we can build the rest of our business.

We have another set of platforms where we often do see high single-digit or double-digit growth and where there's still a lot of runway left. Electrophysiology, energy, biosurgicals and infection prevention are some of the platforms in this category, and they are the real growth engines for us today. And then we have some new platforms, businesses that we've entered fairly recently typically through an acquisition but are relatively small today, but they have the potential to be the real growth engines of tomorrow. The common denominator of success across all of these platforms is that you need to introduce a steady stream of innovative new products with great execution. In contact lenses, for example, which is our single largest platform, we continue to drive growth in daily disposables, one of the fastest growing segments of the market worldwide. In the U.S., sales of 1-day ACUVUE MOIST and 1-day ACUVUE TruEye has made us number in the daily disposables segment. TruEye is the world's first daily disposable silicone hydrogel contact lens, offering patients a level of all-day comfort that is not just superior to competing lenses but actually comparable to wearing no lenses at all, a remarkable achievement. In Asia-Pacific and Europe, we've been rolling out 1-day ACUVUE MOIST for astigmatism, powered by BLINK STABILIZED technology that positions the lens quickly and keeps it in the right place no matter how active your lifestyle might be.

In SMBG, another large core platform, we recently launched the highly accurate and easy-to-use OneTouch Verio blood glucose monitoring system in Australia and Western Europe where it's been performing well. We look forward to upcoming launches of additional new products based on the Verio platform in the U.S. and Canada.

In electrophysiology, which has been a consistent double-digit growth platform for us, we've taken share over the past year to the global launch of Carto 3, the most advanced navigational mapping system on the market today for treating cardiac arrhythmia such as atrial fibrillation. More recently, we've just begun the European launch of the ThermoCool SmartTouch Contact Force Sensing Catheter, a breakthrough technology that provides EPs with real-time information about the precise amount and direction of the force being applied during ablation procedures. Just last week, we enrolled the first patient in our pivotal U.S. trial for this product.

We've been driving well above market growth in our biosurgicals platform through new products like the SURGIFLO Hemostatic Matrix Kit, one of the first product launches resulting from our 2008 acquisition of Omrix Biopharmaceuticals. We've also driven growth to the rapid globalization of the EVICEL Fibrin Sealant also acquired from Omrix. When we acquired Omrix, EVICEL is available in 1 country, Omrix's home country, Israel. But by the end of 2009, the product was available in 10 countries. And at present, we're at the 21 countries.

In our ear, nose and throat platform, a great new platform, which we entered through our 2010 acquisition of Acclarent, we recently received U.S. clearance for the CYCLOPS Multi-Angle Endoscope. CYCLOPS is a revolutionary new endoscope that enables ENTs to visualize the anatomy of the nasal cavity like never before, so they can provide the best possible therapy. We believe that CYCLOPS will encourage and enable greater adoption of Acclarent's innovative Balloon Sinuplasty technology to treat chronic sinusitis, especially as these procedures begin to move into in office settings.

Let's move to our second strategic priority, which is advancing our robust pipeline. Our financial strength enables us to invest approximately $1.8 billion a year in research and development. This is more than any of our competitors, and we're seeing our investment pay off. Last June, I showed you 2 charts highlighting significant products in the pipeline across our 7 franchises. Since then, I'm pleased to say that roughly 3 quarters of the products on these slides from last year have progressed from one column to the next. Products in the pending approval column have been approved. Products in the planned submission column had been submitted and so forth. I'll highlight just a few of these again by platform. Within our energy platform, Ethicon Endo-Surgery received 510(k) and CE Mark approval in just the past few weeks for its new advanced energy generator. This is the first of its kind combination generator that powers both ultrasonic and advanced bipolar technologies, helping to simplify the operating room and enabling surgical teams to dedicate more of their time to patients. We believe this a real game changer for our customers and for our business. Approval of this new generator paves the way for the launch of another important energy product that recently emerged from our pipeline. The new ENSEAL G2 Super Jaw device designed for open surgical procedures such as colorectal, gynecological and general surgery. This is the first bipolar advanced energy technology that offers surgeons strong seals while remaining gentle on tissue and it rounds out our product portfolio in this area.

In our infection prevention platform, we just received U.S. clearance for the very innovative GLOSAIR Healthcare Environmental Decontamination System acquired as part of our 2009 purchase of Gloster Europe. The GLOSAIR System creates and uniformly disperses a fog of 5% hydrogen peroxide in hospital rooms and operating suites, hoping to reduce the risk of patient contact with infection-causing pathogens. Did you know, for example, that some light switches in hospital rooms, are cleaned only 20% of the time? Healthcare associated infections are a growing public health concern impacting an estimated 2 million patients a year in the U.S. alone. We believe the GLOSAIR System has a potential to become a real must-have technology for hospitals. In fact, in a survey that will be released next week, 75% of Americans say that it is more important to choose a hospital based on lower infection rates than on convenience when in a non-emergency situation.

Insulin delivery is a relatively new platform for us. One of our most important pipeline products here is the Animas Vibe, an insulin pump that's integrated with a continuous glucose monitoring system, providing greater insight for pump wearers about their blood glucose levels. Unlike other CGM-enabled pumps, the Animas Vibe displays glucose trends in color, and it's waterproof, a fact that will be vividly demonstrated later this week when 6 Animas Vibe users swim across the English Channel to raise money for diabetes research. Additionally, the Vibe's Dexcom sensor technology is approved for up to 7 days of wear, delivering more days of CGM data than competing systems. I'm pleased to report that we and our partner, Dexcom, received CE Mark approval a few weeks ago for the Animas Vibe, and we continue to work together towards submitting the product for approval in the U.S. and Canada. Beyond the Vibe, I'm pleased to report that Animas received IDE approval a few weeks ago from the FDA to proceed with the clinical trial investigating the world's first artificial pancreas, an automated closed loop system that dispenses insulin based on real-time changes in blood sugar levels. We look forward to working closely with our partner, the Juvenile Diabetes Research Foundation, to begin feasibility studies on this groundbreaking project later this summer.

Another new platform for us is sedation. As you know, we asked for and were granted an appeal from the FDA relating to the agency's denial of our PMA application for the SEDASYS system, the world's first computer-assisted personalized sedation system. We're hopeful that a new independent advisory panel will be convened before the end of the year to reconsider SEDASYS, a very exciting technology that has the potential to benefit millions of patients while removing cost out of the healthcare system. In the meantime, I'm pleased to report the system has been performing very well in Canada, where it is approved and now has been used in approximately 250 cases.

Before wrapping up this portion of discussion, I should note that I've highlighted just a select few of the many products in our pipeline. We are advancing dozens of exciting new pipeline products, including several breakthroughs that I've highlighted to you in the past, such as the Fibrin Pad to address intraoperative bleeding and a contact lens embedded with an active anti-allergy ingredient.

Moving to our next strategic priority, broadening our geographic presence, we really have a tale of 2 cities in this case between developed and emerging markets. Developed markets, the U.S., Japan, Europe are traditionally accounted for approximately 90% of the total MD&D market. So it's essential that we succeed in these markets, and we remain focused on growing our share there. As I mentioned earlier, growth in developed markets has slowed considerably over the course of the past 12 months. So we are increasingly shifting resources into emerging markets, which collectively are growing at a very strong double-digit rate and will make up a growing percentage of the total MD&D market moving forward.

Now J&J is no newcomer to emerging markets. We opened our first offices in Russia nearly 20 years ago, in China nearly 30 years ago, in India more than 50 years ago and in Brazil more than 70 years ago. We understand what it takes to succeed in these markets, and we are succeeding. MD&D sales in China, for example, have grown twentyfold since 2000. We have achieved this kind of impressive growth even though we traditionally focused almost exclusively on the premium or as one segment in emerging markets. Those patients who live in urban centers and who can afford to pay out of pocket for top-quality health care. Moving forward, we plan to expand our coverage of the S-1 market in BRIC, as well as other promising emerging markets like Indonesia, Mexico, Turkey, to ensure that we are fully maximizing our growth potential.

At the same time, we are expanding our product offerings to meet the unique needs of the S2 segment of the market, comprised of hundreds of millions of people who are now gaining some degree of healthcare coverage. I had the pleasure just a few weeks ago to attend the opening of a new MD&D Asia-Pacific innovation Center in Suzhou, China focused on developing product specifically for the S2 market in China and India. These products might be targeted at specific disease states that are more prevalent in the region. They might be simplified or smaller devices that are better suited for use outside the major cities and top-tier hospitals, or they might be multi-use or disposable products that are more economical. We already have a number of these products on the market, staplers, sutures, the blood glucose meter and an artificial knee, but there's much, much more to be done as we seek to bring the promise of good health to as many people as possible. And since so many of our products don't truly come to life until they get in the hands of skilled surgeons, we continue to provide training to thousands of physicians in both the S1 and S2 segment of emerging markets.

Next week, for example, we will be opening a new DePuy Institute in southern India, modeled after the highly successful DePuy Institute we opened in the U.S. a few years ago. Osteoarthritis is on the rise in India, but today, joint replacement surgery there is performed at a very low rate, about 1/10 the number of cases per year compared with the U.S. even though India's population is roughly 4 times larger. Our institute in India will train approximately 1,000 physicians a year in the latest orthopedics techniques and technologies helping to ensure that patients can get the quality care they need.

So I've taken you through our strategic priorities. Now I'd like to spend a few minutes talking about strategic portfolio management, ensuring that we are investing a disproportionate share of our resources, and those opportunities that we believe have the greatest potential to benefit patients and to drive our growth. I have often said that the business is like a garden. In order to thrive, it needs to be regularly pruned and planted. This type of work is important to do, even when the market conditions are favorable. But it's absolutely essential to do it in a tough market environment like the one we're experiencing today. We have a number of unique competitive advantages that really help us in this regard. The breadth of our businesses, not only in MD&D but across our pharma and consumer segments too, gives us a view of the entire healthcare landscape that enables us to make better choices than if we were in just a handful of market segments. We see the whole field, and we make our choices accordingly. Our breadth also enables us to leverage certain of our slower growth businesses and geographies in order to more aggressively fund higher growth opportunities. Our financial strength gives us the ability to invest in multiple growth opportunities at the same time rather than just having to pick 1 or 2. And our leadership position and reputation make us a highly attractive partner for companies across the spectrum of the MD&D industry, again, enabling us to pick and choose the best opportunities.

We've made a number of important portfolio decisions in recent years. We've divested a few slow growth, non-strategic businesses such as our professional wound care and breast care businesses. And we've acquired a number of new businesses that have strengthened us in existing platforms or taken us into new areas, including Omrix in biosurgicals, SurgRX in energy, Mentor in aesthetics, Acclarent in ENT, Micrus in neurovascular, Finsbury in orthopedics and Gloster in infection prevention. Two significant portfolio moves we made this year are the decision to exit the drug-eluting stent business and the decision to acquire Synthese, a world-class orthopedics company. I'd like to spend a moment in both these decisions.

First, we recently announced plans to stop manufacturing the CYPHER drug-eluting stent by the end of this year and to cease further development of the NEVO drug-eluting stent in order to better focus on those areas of the cardiovascular market with the most significant medical needs and the greatest opportunities for growth. Moving forward, our new cardiovascular care franchise will be comprised of Biosense Webster, the world's leading electrophysiology business, and Cordis, which will focus on access and diagnostic products for cardiology procedures and endovascular products to access and treat lower extremity disease. These businesses collectively generate $1.9 billion in 2010 sales and grew operationally at approximately 8%.

I spoke with you earlier about our fast-growing electrophysiology business and some of the exciting new products that are driving growth in that space. On the Cordis side of the franchise, we received U.S. approval recently for the EXOSEAL Vascular Closure Device, which closes the puncture site made during catheterization procedures. This is an area where complications can occur and which can significantly affect length of hospital stay as well as patient comfort. EXOSEAL has done well in Europe where it's been available for about the past year, and we're excited about its prospects in the U.S.

We also continue to advance a promising new device to treat abdominal aortic aneurysms, INCRAFT, which we expect to file for CE Mark approval later this year. An estimated 27 million people worldwide have abdominal aortic aneurysms. Left untreated, all aneurysms will eventually rupture resulting in death 80% of the time. The ultralow profile delivery system of INCRAFT has the potential to make endovascular aneurysm repair a possible treatment alternative for a wider range of patients.

At the same time that we're bringing greater focus to our existing cardiovascular businesses, we'll also look for opportunities to enter in new areas of the market where we can significantly improve patient care and drive growth.

Turning to another major portfolio decision. We announced in April a definitive agreement to acquire Synthese, a premier global developer and manufacturer of orthopedics devices. This agreement exemplifies our continued willingness and ability to take advantage of significant opportunities when they arise that will enable us to better serve more patients and to enhance our long-term growth prospects. The acquisition of Synthese would be the largest purchase in J&J history, and it is consistent with our enterprise global strategy that strengthen our leadership position across important healthcare markets, in this case, the $37 billion global orthopedics market. A combination of DePuy and Synthes we'll be well positioned to succeed in a time of dramatic change in the orthopedic market, offering patients, surgeons and hospitals a broad range of innovative technologies to meet their orthopedic needs.

DePuy and Synthese are highly complementary. DePuy, as you know, is a leader in hips and knees, by far the largest segment of the orthopedics market, as well as in the sports medicine. Synthese is a leader in several important and growing market segments where DePuy has less of a presence or no presence at all, including trauma, cranio-maxillofacial and power tools. Both companies offer complementary portfolios for spinal surgery.

Updating the status of the transaction, our integration planning activity is well under way. We've initiated several major regulatory filings, and we continue to expect the transaction to close in the first half of 2012. Let me also say that we continue to evaluate several alternatives to finance the transaction in the most efficient manner.

Okay. Before we open up the lines for your questions, let me leave you with a few key takeaways. First, Johnson & Johnson is the largest, strongest player in the large, attractive MD&D market. Current headwinds are leading the slower market growth in the near term, but we remain confident in the market's solid long-term growth potential.

Second, we are executing well against our strategic priorities. We are launching innovative products in our core franchises and in our high-growth businesses. We are investing in and advancing a robust pipeline, and we are strengthening our geographic presence. By doing so, we are gaining or maintaining share in most of the market segments in which we compete. Finally, we are committed to making the strategic decisions that will enable us to shape our portfolio, to best serve patients and to best drive our growth.

I want to thank the thousands of MD&D employees around the world for their commitment to our credo, to the patients and customers we serve and to our business. And I thank all of you for your time and attention this morning. Now I'll turn things back over to Louise, who will get us ready for our Q&A session.

Louise Mehrotra

Thank you, Alex. David, could you please give the instructions for the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Mike Weinstein.

Michael Weinstein - JP Morgan Chase & Co

Dominic, maybe as a starting point, could you just touch on the guidance for the contents for the quarter? You did have some outperformance this quarter, but you left guidance unchanged. Could you just add some more to that?

Dominic Caruso

Sure, Mike. Well, as you saw, we did have some outperformance on the top line. We're pleased with that. We also had the outperformance in the bottom line, principally driven by the benefit from a lower tax rate. If I compare the tax rate that we experienced so far this year to the tax rate guidance I previously gave, the quarter was probably impacted by about $0.04 just from a lower tax rate from the previous guidance. We're pleased with that because I'd rather have lower taxes and be able to invest in the business, and that's what you saw us start doing. You saw that the second quarter cost of goods sold, SG&A and R&D, are all up from the first quarter. And as I said during my prepared remarks, that we would expect that trend to continue through the balance of the year. So in summary, we're going to take advantage of a lower tax rate to continue to invest behind the pipeline, make sure the product launches are off to a great start and integrate, obviously, the Crucell business as best we can. So we're going to take advantage of that, and I think in the slower markets, we want to make sure that we can gain as much share as we can. We want to continue to invest behind our business. So our view at this point is our guidance for the year stays about the same in the bottom line, despite a stronger quarter than perhaps Wall Street had estimated. But as I said, we're going to continue to invest and probably build some momentum in the expense line throughout the balance of the year to offset the tax benefit.

Michael Weinstein - JP Morgan Chase & Co

Alex, while we got you, the Orthopedic business, particularly the hip and knee segments, look very similar to what we saw in the first quarter if I look at year-over-year growth, but the comparisons did ease a fair amount in the first quarter and second quarter. So it's a bit disappointing. Can you give us your view on the underlying health of the hip and knee end markets and maybe as well as spine, and how we should think about those for the balance of the year?

Alex Gorsky

Sure. As we pointed out earlier, we have seen the hip and knee markets, their overall growth slowed down significantly. So, for example, we're seeing hip growth probably at about 1%, and we're seeing knees down about 1%. We're seeing the spine market at about 1%. Based on a lot of the macro economic factors that we talked about earlier, if you look at hospital admissions, if you look at surgical procedure rates, as well as just some other fundamentals that we've been tracking, even looking at primary care physician visits, we would expect those trends to continue into the back end of the year. Now there might be some recovery just based upon our lapping of last year's results, but we think that economic pressures are going to continue to play a role in any type of elective procedure. And so we would expect those markets to pretty much play out in that manner for the remainder of the year.

Michael Weinstein - JP Morgan Chase & Co

And then last, just to be clear, Alex, there's no update on the Synthese financing at this point?

Dominic Caruso

Let me take it, Mike. There isn't, and we're consistent with what we said before. However, Mike, that as we proceed with the integration activities with which we're doing, now, we'll look for ways to finance this transaction more efficiently than the way we modeled it. I think we gave you a conservative way of modeling it when we announced the transaction and, obviously, we're working towards improving that, but we don't have any more update on that -- in that regard just yet.

Alex Gorsky

And, Mike -- I would just add on that, Mike, that all the regulatory filings are on schedule. Things are on track, and, obviously, we'll keep you updated as we move through the process.

Operator

Your next question comes from the line of Matthew Dodds with Citigroup.

Matthew Dodds - Citigroup Inc

Dominic, first for you. On the gross margin, it was a little bit below from expectations were. Was there anything onetime in there? I'm not sure, Louise, if you said there might have been something onetime in there. Or should we just assume that the pharma mix is going to be a little bit lower as we move through this year?

Dominic Caruso

The gross margin that you see on the P&L, and Louise talked about it 100 basis point increase from the second quarter, 2 main factors: One is that the restructuring charge related to Cordis, a portion of that restructuring charge goes into cost of goods sold line. So that's about 50 basis points of the different, and that's just obviously just this quarter. The balance of the 50 basis point increase year-over-year has to do with integrating the Crucell business, which is a vaccine business, as you know, which has lower margins than the balance of our Pharma business. And also, the continuing remediation cost and activities related to our McNeil Consumer Healthcare business. So they are the main reasons why the GP looks lower this quarter.

Matthew Dodds - Citigroup Inc

All right. Perfect. And then, Alex, for you. Can you just say broadly whether you think the U.S. and Europe markets are growing right now, and to get to this 5% growth rate that you have on your slide, from 10 to 15, and you said next year will be better. When do we get the 5%? Is it 2012? Or is this going to be, in your view, longer than that?

Alex Gorsky

I would say, as we look at the markets right now, and you know better than I do, the granularity of some of the data points that we're dealing with, and so I think it's really important that we look at it from a trend perspective and not necessarily a spot or point in time. But we're seeing the market probably somewhere between 2% and 3% right now. And we think that's likely to continue. Again, there may be some effect from the lapping of last year. I think you noted in your report last year we started seeing in June, but it really was in quarter 3 and quarter 4 when we started to see what we feel is the more significant impact from the macroeconomic issue certainly in the United States and also in Europe due to some of the austerity measures. We think that's going to continue. Now going forward, I think one of the things we'd be looking for, one obviously is the lapping of the current period; two, when we should see an influx of patients once healthcare reform in enacted in the United States, and that's probably more 2014, '13, '14, '15 phenomena, as well as some recovery in the overall economic environment in both the U.S. and Europe. And so we would expect that over time, that's how you get to the period that we referenced earlier, the 2010 to 2015 of approximately 5%.

Operator

Your next question comes from the line of Jami Rubin with Goldman Sachs.

Jami Rubin - Goldman Sachs Group Inc.

Just a couple of questions. Dominic, for you first on -- can you update is on where we are with hip litigation? I saw that you added to your reserve for that litigation. Where are we with that? How do you see that being resolved? And then I just wanted to follow up with some pharma questions.

Dominic Caruso

Well, just a point of clarity, there's 2 components to the cost associated with the ASR hip recall: One is litigation and the other is what we refer to as the hip recall program cost. Those are the costs that we've agreed to incur on behalf of patients as they move forward with the process of getting revisions, et cetera. So we've updated the separate item that we're referring to here, is -- but refers to both. So there is no litigation that's actually been tried. These are estimates of the amount of claims that have come in and our cost to handle those claims, and the uptick in the recall cost primarily relate to the actual cost that we'll incur on behalf of patients to help them through the process. I can't give you any more specifics on how it all will end up, but as we learn more we'll continue to refine the estimates just as we get more information.

Jami Rubin - Goldman Sachs Group Inc.

What is your total reserves for litigation at this point?

Dominic Caruso

Right. We haven't disclosed that, Jami, and we're not going to do so today.

Jami Rubin - Goldman Sachs Group Inc.

Okay. If I could just ask a couple of pharma-related questions. Can you provide sales for ZYTIGA? And just my other question related to Xarelto, just in light of the very positive Crixivan data. How do you see Xarelto being positioned in the AF market?

Dominic Caruso

On ZYTIGA, Louise, do you have that handy?

Louise Mehrotra

It's just under 1% of the pharma sales.

Dominic Caruso

And on Xarelto, I -- you're right, we did see some apparently positive results for Crixivan. I think it's too early to comment because we haven't really seen the full data set. So what was disclosed was top line results, and I guess the full data set will be in August, I believe, and I think we'll wait until we see the full data setting, including all types of bleeding and, obviously, primary and secondary endpoints. So at this point, we're going to watch and see what the full data set looks like, but we do believe Xarelto is already well positioned as a product that has -- will meet unmet medical need today with good results and, obviously, a once-a-day pill should be something that the market will appreciate.

Operator

Your next question comes from the line of Larry Biegelsen with Wells Fargo.

Larry Biegelsen - Wells Fargo Securities, LLC

Louise, could just give us the spine numbers for the quarter, please?

Louise Mehrotra

Sure. On an operational basis, spine in the U.S. is down 4%, and o U.S. is up 8%. So on a total basis, it's flat.

Larry Biegelsen - Wells Fargo Securities, LLC

You said 8 -- down 8% for the U.S.?

Louise Mehrotra

No. Down 4% for the U.S., up 8% o U.S., so flat on a total basis.

Larry Biegelsen - Wells Fargo Securities, LLC

And, Alex, any update on the integration with Synthese, and if that's having any impact on your spine business?

Alex Gorsky

No. It's really too early to get into any details of the integration at this time.

Larry Biegelsen - Wells Fargo Securities, LLC

Okay. On Cordis, of that $1.9 billion, how much is non-drug-eluting stent interventional cardiology sales? And do you expect exiting the drug-eluting stent business to negatively impact that? And just lastly, Alex, maybe you can tell us a little bit about the process or the thought process of exiting the drug-eluting stent business, and why you didn't think about selling the interventional cardiology business.

Louise Mehrotra

So, Larry, in the second quarter, the drug-eluting stent business in a quarter was about $65 million, and on a year-to-date basis, it's about $180 million. Last year, it was about $630 million.

Larry Biegelsen - Wells Fargo Securities, LLC

I'm sorry, Louise, the non-drug-eluting stent interventional cardiology business.

Louise Mehrotra

We don't break it out that specifically, but you can back out the drug-eluting stents out of that. Biosense Webster is just under $1 billion business. That's the degree of detail we've given on it.

Larry Biegelsen - Wells Fargo Securities, LLC

That's helpful.

Alex Gorsky

Larry, as you can imagine, we put a lot of thought and careful consideration into our decision in the drug-eluting stent portion of the business. We're really proud of the contribution that we've made in that part of the market, given our history and our overall track record of performance. But frankly, when you -- when we look at it going forward, we saw that a lot of the dynamics have changed considerably in recent years, and they're going to continue to evolve, when you look at really unmet medical need in light of existing products and the profiles they represent and some of the other products that would have proceeded our NEVO technology. If you look at pricing, let alone some of the recent quarters, is we would project going forward, as well as reimbursement, and then when we also compare that with some of the regulatory requirements that we would need for the clinical development program, to get the kind of claims necessary to be able to actively differentiate products in the future, we just felt that, frankly, there are other areas in our portfolio where we can make investments that will not only lead to better meeting unmet medical need for patients, but also have better return for overall business. And so that's why we made the decision. Regarding its impact on the other areas, we do think that there's an impact. We're looking hard at the strategy overall now for our cardiovascular portfolio. As I mentioned in my talk earlier, we are very fortunate that we've got a thriving Biosense Webster EP business right now. If you look at our growth rates, our market position, and very importantly, if you look at the new technology that we're introducing, things like CARTO 3 and our new ThermoCool Sensors and other items that we have coming out, we think we're going to be very well positioned there. We think endovascular also represents a very important space for us. We're working hard on the INCRAFT triplaise approach, and the early results have been very promising. Of course, we're going to continue to look hard there. But I want to also say that we remain very interested in the overall cardiovascular space. We still think that if you look at the overall impact that it has on patients, there's still a lot of unmet need in many areas in addition to EP and endovascular, if you look at areas like severe hypertension, if you look at the valve space where we have some very early investments in other areas, again, there's a lot of unmet need. And we think that those markets are going to evolve in the coming months and years, and we'll be looking hard around our strategy and exact tactics going forward.

Operator

Your next question comes from Sara Michelmore with Brean Murray, Carret.

Sara Michelmore - Brean Murray, Carret & Co., LLC

When you talk about the TYLENOL remediation program, Louise, it did sound like you maybe we’re seeing some additional challenges or delays there. I just was hoping you can clarify the commentary versus what you've said previously.

Louise Mehrotra

Yes. So what we said was from the Fort Washington facility, which was primarily the liquids, we're only going to see a modest amount back on the market this year.

Sara Michelmore - Brean Murray, Carret & Co., LLC

Okay. And then in 2012, I think initially, you'd said that you should be back in sort of full-scale production in the first half of the year. It sounded like maybe you're talking 2012 broadly now.

Louise Mehrotra

It is more broadly in 2012. It is ramping up in the beginning, the first half of 2012, but it is a little bit slower than previous.

Sara Michelmore - Brean Murray, Carret & Co., LLC

Okay. And in terms of the cost associated with a remediation, is there any change there? Or is that still on the same type of spending level?

Dominic Caruso

This is Dominic, Sara. The costs are about the same as we previously gave, so no impact in the guidance related to the cost. One thing about the ramp-up of the products, Louise is exactly right, modest amount at the end of this year end and production ramps up in 2012. But I would say by the middle of 2012, the majority of the products are expected to be back on the market.

Sara Michelmore - Brean Murray, Carret & Co., LLC

Okay. That's helpful. And in terms of going over to Alex, when we think about the cardiovascular franchise and what it will look like, it does sound like you're going to maybe extend your footprint in new end markets. I'm just curious in terms of what you have in the internal portfolio today versus what you need to access externally, what your thoughts are in terms of buy versus build.

Alex Gorsky

Sure. I think as we look over at cardiovascular, we do have a number of new products new development, new approaches, especially in the EP and the Biosense Webster space. So I just recently went out and visited with our Biosense team in Israel, and we're very optimistic and confident about our ability to pretty consistently innovate in that space, building again on things like CARTO 3, our new ThermoCool Catheter, as well as some of the other things we have coming in that area to ensure that we maintain and build upon our very strong leadership position. If we look at other areas, obviously, we've -- I mentioned the INCRAFT AAA stent. Again, early results, and we have few patients so far, we're getting ready to open up the clinical program on that later this year. The results have been encouraging. It's got a very low profile, and so far, we've been pleased with what we've seen, but obviously, we've got a lot more work that needs to be done in that area. And beyond that, we're continuing to look at some of the other spaces that I mentioned to you. And, again, those could range from things like severe hypertension. Again, there's a lot of unmet need there. Other areas that I -- that we've talked about in the past, even the LVAD space is one that we watch. So I think we want to take a balanced approach. We want to have good internal development programs, and obviously, they were going to need to rebuild some of our cardiovascular capabilities, given recent decisions and discussions, as well as make a very selective and appropriate external investments as well, which we've done historically through JJDC, as well as directly with Cordis.

Sara Michelmore - Brean Murray, Carret & Co., LLC

Okay. And is there a time frame in which you're contemplating kind of having the portfolio kind of totally rebuilt at this point?

Alex Gorsky

No.

Operator

Your next question comes from Glenn Novarro with RBC Capital Markets.

Glenn Novarro - RBC Capital Markets, LLC

Alex, on the DePuy business, can you give us what pure pricing was in U.S. spine, U.S. hips and U.S. knees? And then do the same for worldwide total. And then also, was there any mix benefit in U.S. spine, hips and knees in the U.S. and worldwide?

Louise Mehrotra

So, Glenn, I'll take that one. For the U.S. on hips, pure price, minus 5%, so mid-single digits. In the knees, low-single digits negative, in the U.S. only. And then in spine, it's in the mid-single-digit range as well, and that's pure price.

Glenn Novarro - RBC Capital Markets, LLC

Okay. And then you have it on a worldwide basis as well?

Alex Gorsky

Yes, we do. For hips we saw it down about 3%; knees, about 1%; and spine, about 3%. We don't have the mix based upon the data challenge on a worldwide basis.

Glenn Novarro - RBC Capital Markets, LLC

And I just don't have it in front of me. Were these numbers consistent with what you saw in the first quarter? Was there a little bit of improvement, a little deceleration, any type of color? I just don't remember what I had for the first quarter.

Alex Gorsky

Overall, fairly consistent. And, again, I tend to look at this on a multi-quarter basis versus just a direct quarter-to-quarter because of the data, but fairly consistent.

Glenn Novarro - RBC Capital Markets, LLC

Okay. And just one last question, sticking on DePuy, particularly on spine. The market has slowed from a unit point of view and a utilization point of view, just because of payer pushback requiring additional care before going to surgery, particularly on the lumbar side. Have you seen any softening of the pushback? Has it gotten worse? Any additional color would be great.

Alex Gorsky

It's actually been pretty consistent now for about the last 6 to 12 months, and while we continue to see good performance on more minimally invasive approach and things that we're doing with both Cougar and our Viper systems, overall, if I look at the market, I think the trends have been fairly consistent.

Operator

Your next question comes from Matt Miksic with Piper Jaffray.

Matthew Miksic - Piper Jaffray Companies

One, on Ethicon growth, maybe for Alex, just to get a sense of the trends. You talked we saw some sequential improvements in the U.S. and o U.S. in the second quarter. You mentioned emerging markets future growth this quarter. But last quarter, there was a sense of stabilization in the U.S., utilization trends stabilizing with another quarter under your belt. If you could talk a little bit about how you would characterize the trends here. Is it stabilizing? Or is it improving? Is it just sideways? Alex, any color would be helpful, and then I have a follow-up.

Alex Gorsky

Sure, Matt. I would paint it pretty much sideways based upon what we've seen so far. That market usually grows at a pretty consistent 1% to 2% range. We've seen it actually go negative. It's been relatively flat. So if I take that and also contrast it and compare it with some of the other data sources that we have around hospital admissions and actual surgical procedures to include ambulatory surgical procedures, I think flat to sideways is probably the best description that I have at this time.

Matthew Miksic - Piper Jaffray Companies

Okay. And a follow-up for you also on your comments on emerging markets. You've been in the S-1 segment and many of these markets for a while, as you talked about -- Could you talk a little bit about your strategy to penetrate the mid-tier device markets, particularly ortho and spine, trauma in China? Do you expect this to be 2-tier branding strategy that's organic? Or is there some sort of local vehicle? It would be great if I can get your thoughts on that.

Alex Gorsky

Sure. We are excited about the growth opportunities in China, particularly in the ortho space as we look at not only the S-1, the S-2 segment. We've had a strong presence in the S-1 for a while, but I was just in China about 3 weeks ago, opening up a new R&D center we have.

And we really got what I would say is a several-pronged approach to help us, first of all, access new patients and frankly provide them and their surgeons a lot better options and to really grow our business. And it starts with R&D. We recently opened an R&D center there and our focus there is to, number 1, make sure that we've got the right insights into the local market needs; and then 2, to have scientists, engineers, physicians locally that work and work together as part of a team to bring those concepts to life within those markets.

Historically, we tended to take our products from the U.S. to the developed markets and taking them to China sometimes at a different price point. But what we prefer to do is look at things, such as in the orthopedic space, is there a need for a different size of knee for a one that is facilitated through easier and more straightforward surgical procedures that can meet the unique needs of that particular market. That's an example of the kind of things we're looking at, but the same would apply to hips, as well as the spine space.

Next, we also have a manufacturing facility in China, and it's really state-of-the-art. And it's something that we want to be able to continue to build on. And then third, we've also invested significantly in our commercial model. We've got a different organization that focuses on the S-2. We think that, that's really important. And we've seen some positive signs about their accomplishments in the market. But that's also something that we're spending a lot of time and effort on to make sure that we execute that in the right way.

Regarding other partnering opportunities, that's certainly something that we're always looking for. We've got some smaller partnerships already in the region, but we want to continue to build on those as well going forward. So that's really our overall approach. I mean, ultimately, what we'd like to see is that for us to be able to develop, design, manufacture products in those markets that may be applicable to emerging markets in other parts of the world outside of China. And we're not there today, but that would be our goal in the future.

Matthew Miksic - Piper Jaffray Companies

Just a clarification on your spine comments a couple of questions ago, you said that most of the ortho, knee, spine pricing was relatively consistent with Q1. Was spine down 5% U.S. not a touch worse than it was in Q1 in the U.S?

Alex Gorsky

If you look only at the U.S. data, it was a touch worse. But again, if you look back 3 quarters or so, the data does bounce around. That's why I would just be very cautious about a single point. And also on a worldwide basis, it's actually been pretty consistent.

Operator

Your next question comes from the Kristen Stewart with Deutsche Bank.

Kristen Stewart - Deutsche Bank AG

Question. So I just wanted to make sure I understood you correctly when you were talking about the market growth. I think you had mentioned that you expected the MD&D markets in 2011 to grow slower than 2010, is that correct?

Alex Gorsky

Yes.

Kristen Stewart - Deutsche Bank AG

Okay. And is that just simply the full year effect of the flow of utilizations so your assumptions assumed no back half pickup by virtue of easier comps?

Alex Gorsky

Remember, last year in 2010, we saw very strong first half of the year across most of the MD&D. And so some of that is lapping effect and some of it is -- as I said earlier, we see that the current dynamics that are taking place, particularly in developed markets, we see those fundamentally continuing to the rest of the year. So there's likely to be some potential upside from just the lapping. But the core underlying dynamics, we think will be the same.

Kristen Stewart - Deutsche Bank AG

Okay. And then just on DePuy, what's the ex-Micrus growth number or decline?

Alex Gorsky

It's basically flat, ex-Micrus.

Kristen Stewart - Deutsche Bank AG

Okay. And then would you be willing to comment just kind of on the decision to exit out of Cordis just from a longer-term impact? Obviously, you guys have talked a little bit about 2012 with what the impact of Synthese will be to earnings. Is there any financial impact from Cordis outside of the special charges that we should expect of the decision to exit, accretive to numbers, a little bit dilutive?

Dominic Caruso

Kristen, this is Dominic. Just my way of clarity. So we didn't exit Cordis. So we just exited drug-eluting stents. And as you saw, the drug-eluting stents, as Louise mentioned earlier, the total sales in the second quarter were $64 million compared to about $164 million the prior year. So obviously, we're going to see as we've exited that, yes, business, we're going to see less of a quarter-to-quarter, year-over-year drag on the business. And as you know, drug-eluting stent business, when we exclude that from our MD&D overall results this quarter, the 1% results that MD&D delivered are about 3% excluding the, yes, change. But other than that -- and the charges that we've just described earlier in the restructuring charge, there's no other financial impact that you should expect to see.

Alex Gorsky

And Kristen, I guess what I would just add longer term is we just think it's critically important that we always challenge ourselves around our strategic investments for our overall portfolio. And again, while we obviously thought very carefully about this, we've been going forward. It's the right thing to do, not only for our cardiovascular business, but for all of the MD&D given some of the other, we feel, are very exciting opportunities that we have and things such as biosurgicals, energy, EP and other emerging areas.

Kristen Stewart - Deutsche Bank AG

And you've been very active with divestitures. Is there anything else we should be kind of just size-wise expecting the room for other ideas as the portfolio is pretty good as is?

Alex Gorsky

No, I won't comment on that right now, but you're right. I mean, we've done a number of small -- what I'd call smaller divestitures such as our wound care, our breast care business in the past. We've done some other small- to medium-sized acquisitions, the Acclarent, Mentor and others. And we would expect to continue taking that kind of approach going forward.

Operator

Your next question comes from Rick Wise with Leerink Swann.

Frederick Wise - Leerink Swann LLC

First question, maybe for -- equally for Dominic and Alex. If you can talk a little bit about, help us think about the second half outlook. European operational growth was 1.9% in the first quarter, 4.5% the second quarter, stronger than I would have thought. Do you all each, given your different roles, see the second half outlook as stable, worsening given the economic issues? How are you thinking about it?

Dominic Caruso

Yes, it's a quick question, Rick. We have some momentum that we're building in the business, as you saw. And as I mentioned in the overall comments on guidance, there is still this sort of economic climate uncertainty that overhangs the market growth and whether that be European austerity measures and significant economic price controls across the market. So I guess we’re cautiously optimistic that the second half of the year will be just as good as the first year or slightly better. But we are watching it closely because, in fact, there are some still uncertain economic times ahead of us. And the actions that countries will take, specifically in the Southern European markets, are still unknown as to how they're going to implement their various austerity measures and what impact it could have on the markets that we compete in. Alex, anything else?

Alex Gorsky

Rick, I completely agree with Dominic's comments

Frederick Wise - Leerink Swann LLC

Okay. Turning last to some more questions on U.S. consumers, Dominic, down 13% in the first quarter, down 8.5% in the second. When do you get back to neutral to positive growth again? When do we move past this period of decline? Are you hoping it could happen by the fourth quarter? Or no, it's going to take longer than that?

Dominic Caruso

No, I think certainly going into next year as these products in the McNeil Consumer business, as I mentioned earlier, start coming online on the shelves, and so I said by the first half of the year, the majority of them will be on the shelves. But I think that obviously, that will be a good comparison to a year just proceeding it where we had no such products on the shelves. So that's obviously the major driver. I think I mentioned earlier or Louise may have mentioned, the business itself, excluding the impact of not having the products on the market, grew at about 2.5% in the second quarter. And I think on the same comparison, it was about flat in the first quarter. So obviously, we're seeing some momentum, and you see it particularly in Skin Care and in Babies. So we're hopeful that the underlying business is continuing to grow and do well in emerging markets. We're really just seeing the impact of not having the products on the shelf, which I think in 2011, as we pointed out, will be behind us -- I mean, sorry, in 2012, that will be behind us.

Alex Gorsky

Okay. And just lastly, a quick follow-up on that. When I look at the big pieces, if I'm reading it correctly this quarter, each region, each geographic region, U.S., OUS -- in each business showed an accelerated rate of year-over-year growth in the second quarter as compared to the first quarter except OUS consumer. What's going on there?

Dominic Caruso

Let's see. OUS consumer. Let me just get my...

Alex Gorsky

If I can get -- I think I -- U.S. consumer, the first quarter was up 2.6% ex-currency...

Dominic Caruso

It's actually up in the second quarter. It's up 2.8%.

Alex Gorsky

I'm sorry. I take it back. I'm apologize. I misread my own handwriting.

Operator

Your next question comes from David Lewis with Morgan Stanley.

David Lewis - Morgan Stanley

Dominic, just a quick question. If we go back about a year or 2 ago. The thought was coming into significant pharmaceutical pipeline years, I think you thought that spending levels remain relatively flat and we're going to start to see some nice accretion from the significant pipeline that J&J has versus peers. Just speaking about your comments this morning, maybe you can sort of compare and contrast what I think I heard before versus today. Is it the nature of the competitive environment of pharmaceuticals? Is it just specific spending tied to specific launches? And another way of saying it is if you still believe that you can begin to see significant accretion from the pharmaceutical division as you get into the meat of this pipeline?

Dominic Caruso

Yes, it's a great question, David. I think this is a matter of timing. Obviously, as we launch these products and they ramp up in the marketplace, the effect of having taking the significant cost positions that we took earlier will have an incremental impact, positive impact to the overall profitability of that business. But of course, as we're launching the products and products are coming off patent at the same time, you do have a bit of a dilemma because you're looking at the second quarter, leave it off patent and conserving an authorized generic started, these are significant impacts on the top line. We're not going to reduce the cost to offset those. And at the very same time, we're launching all these products and getting ready to launch new products. So I think what you see is just the timing difference. We're going to invest behind the launch of these products, get them out there as best we can, try to deal with the loss of patent exclusivity of some of the other products like LEVAQUIN and CONCERTA. But then as these products ramp up, I think we should be in great shape in terms of improved profitability.

David Lewis - Morgan Stanley

Just a quick question because we're running long. On DePuy there are a series of external factors facing the entire industry and there have been some internal factors facing DePuy in the last 3 or 4 quarters, maybe 4 to 6 quarters. At this point, are you comfortable that the internal pressures facing DePuy are beginning to ebb and now you're just more focused on what's going to happen to the external environment? So basically, have the internal pressures began to trough in that segment for you?

Alex Gorsky

David, that's a good question. And I guess the way I would answer that is to step back and put by perhaps a little bit more context on things even like around our Hip performance over the last 12 months. Last year in August, when we announced the recall of ASR, and the first thing that we felt we needed to do is really focus our attention and resources to ensure the patients impacted by the recall got the right information and the right care that they needed in a timely and responsible manner. And while we're obviously concerned about the issues related to ASR, it was important that over the past decade, we got over a million patients that have been held by DePuy hip implant. And so we remain very committed to this space. We're confident that we're going to be able to recover. So the way that we're looking at it is, first of all, we had to make sure that we've looked out after the patient. Also, we're getting ready to launch several important new products. We've had 3 510(k)s and 2 PMA approvals for new hip products in the last 10 months. These include things like RECLAIM, GRIPTION TF, complete Ceramax with Ojax [ph] liners and the Pinnacle system. And these products were clearer to approve and we're in the process of launching them literally as I speak. And we think it's really important that you give surgeons a lot of options as they consider the right fit for their particular patient. So that was first of all. Second, we're spending a lot of time around surgery education and awareness. Over the last few years, we have seen the positions are a little bit more hesitant to travel and learn about new products and techniques. We actually deployed a mobile training institute that's out, and it's about 1,100 square foot surgeon learning center. And this enables DePuy to educate physicians locally without needing to travel. So we think that's a unique approach. And last but certainly not least, just in June, DePuy launched a consumer education and awareness campaign called Real Life Tested. And it's designed to really better educate and empower patients around hip and knee replacement surgery and, frankly, some of the unique options that DePuy offers. That's our overall approach. We're confident that over time, we will return to the position that we think we should have in that market. But we realize in the short term, we have to get our priorities right.

Operator

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

Robert Hopkins

First question is on Synthese. I was wondering if you guys can just provide an update on when you think you'd be able to announce the financing details.

Dominic Caruso

Yes, Dominic here. I can't give you a timing. The level of financing alternatives that we're considering, have a lot to do with the integration plan that we talked about earlier. So as the integration progresses, we'll combine the businesses in the most efficient manner possible. So we don't really have responses yet from the regulatory authorities, so we can't give you an estimate of when we'll be able to announce that. But rest assured that when we -- obviously, when we close the deal, we'll be able to tell you about it. But as we know more in these updates, we'll provide any information we have when we give you updates periodically throughout the next couple of quarters.

Robert Hopkins

Okay. And Dominic, if you can just elaborate on your comments about financing options as it relates to Synthese, especially when you talk about financing options for the equity portion, obviously, that equity portion is fixed. So I assume what you're referring to is really just ways to potentially offset the equity dilution via buybacks, post-close, or other methods over time. Any thoughts there would be helpful.

Dominic Caruso

Well, you're exactly right. This form of the transaction, the form of the consideration that Synthes shareholders received will be exactly as we described it. Right, they will receive shares of J&J stock and cash exactly as we describe it, exactly as we negotiated with Synthese. But how we finance that depends on a number of factors. And you're exactly right. We may be able to use less overall stock or issue less stock in the aggregate as a result of our ability to finance the repurchase of our stock as one example. So we're looking at a number of alternatives to make it efficient. And obviously, we have tax considerations here that we're going to make sure that we do efficiently.

Robert Hopkins

And you still like -- the AAA rating is important to you as it relates to this transaction?

Dominic Caruso

Yes, it is. I think maintaining the flexibility that we have as a result of the AAA rating is still important to us, and I think we can still maintain that flexibility and actually get the transaction to be less dilutive than the conservative estimates we gave earlier.

Robert Hopkins

Great. And then just really quickly on DePuy. Last quarter, you gave some very specific numbers on DePuy's results sequentially from Q4 to Q1, that basically you suggested that pricing was flat sequentially, that units improved sequentially and mix improved sequentially. In other words, you provided some solid evidence of the market itself a little better in the first quarter. So when we think about sequentially on hips and knees here in the second quarter compared to the first quarter, I was wondering if you'd be willing to comment on do you think that the market got a little bit worse sequentially as a result of the year-over-year numbers that you showed here. Or again, were things were stabled up when you look at sequential units and pricing trends?

Louise Mehrotra

Okay. So Bob, as you know, we're the first one out. So we're just kind of using a crystal ball on the second quarter right now. But for the U.S. hips, we think on a sequential basis, mix price just got a little bit more negative, and there's some noise in the market. But until the other manufacturers report, we're not going to have a whole lot of clarity on that. In terms of knees, we think price mix sequentially in the U.S. was positive, primarily mix.

Robert Hopkins

And units?

Louise Mehrotra

We've gotten slight negative on the market and a whole lot of other factors. But again, until the other manufacturers report, we can't get a real clarity on what specifically that is.

Operator

Your next question comes from Rajeev Jashnani with UBS.

Rajeev Jashnani - UBS Investment Bank

My question pertains primarily to the easing comps in the back half of the year as it relates to major joints. I guess it implies if underlying utilization gets no better than the observed growth rates improved. And I'm just wondering if you could roughly quantitate -- or quantify what that change may be, for example, if rate of minus 1 goes to plus 1 or 1% or 2% improvement or 2% or 3% improvement just based on the baseline, getting a little bit more favorable. And I understand it may not be the same for hips and knees, but any general color would be helpful.

Louise Mehrotra

Okay. So in general on DePuy, I'm going from memory, the first quarter grew about 8% operationally last year. The second quarter grew about 4% and the third quarter grew about 2%. So you do see the declining, and then I believe the fourth quarter was about 1%. It kind of halves itself throughout the year. So you are going to see easier comps in the DePuy area. Alex has got some more information he can give you.

Alex Gorsky

Right. That would be information for hips. If you look at the knee information, early in 2010, you were looking at growth rates of over 10% in Q1. And then on a constant currency basis, let me back up, as reported basis, so Q1 is about 10% reported, Q2, around 5%. And then it went down to about 1% in Q3 and Q4. So that should give you an idea about those markets.

Operator

Your final question comes from Derrick Sung with Sanford Bernstein.

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

Dominic, just going back to your guidance comments, I understand kind of the rationale that you're speaking with regard to investing the bottom lines of bits that we've seen here as a result of the tax rate. But if we just focus on the top line here, you've also -- this quarter, you came in above The Street expectations. There's a couple of new products on the Pharma side that you've launched that presumably were not in your original guidance when you contemplated that. Can you talk about why the top line guidance wouldn't increase and would stay the same?

Dominic Caruso

Right. That's a great question, Derrick. So let me just reiterate. The top line guidance on an operational basis remained the same at between 2.5% and 3.5% growth over the prior year. And as you know, this second quarter, our growth was 2.6%. In the first quarter, it was 1.8%. We obviously are expecting in the guidance overall of 2.5% to 3.5% for the year that we will accelerate our growth in the back half of the year. But that was already contemplated in the guidance that we gave.

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

Okay. So you're saying, basically, The Street was lower than what you were thinking?

Dominic Caruso

I think The Street may have been lower than what we actually delivered in the second quarter. But it was pretty much consistent with our overall guidance. Again, we're only at 2.6% for Q2 and 1.8% for Q1. We expect 2.5% to 3.5% for the year. So we will see the ramp-up. We expect to see the ramp-up, as you mentioned, of new products that we're launching. But that's already contemplated in the guidance we have previously given.

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

Okay. That's helpful. And then on the consumer side of your business in the U.S., excluding your OTC franchise, there was a nice sort of pickup in kind of all of the -- in almost all of the separate franchises. I'm wondering if any of that -- how much of that is perhaps pickup in the overall market and sort of consumer spending habits, et cetera? or do you feel like all of that is more J&J-specific related to your specific products?

Dominic Caruso

We haven't seen much of the pickup in the overall consumer trends although in our Skin Care business, which generally does pretty well despite economic conditions, we've launched lots of new products in the NEUTROGENA line, the NEUTROGENA Naturals, for example, that's getting good uptake in the consumer -- by consumers, the AVEENO extensions of product lines with AVEENO haircare and the like. So we think we haven't seen much of a change in overall consumer spending habits, but we have seen some very good uptake in the new product launches. Particularly, NEUTROGENA has started to come around here, and we're glad to see the consumers appreciate the innovation that we're showing in the NEUTROGENA product line.

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

Okay. And just one last one for Alex. Specifically on spine, Alex, can you comment on what impact, if any, you're seeing on the whole BMP controversy as that might relate to overall spinal procedure volumes, perhaps specific lateral access-type procedure volumes? And then also, when you look at your own biologics and bone graft substitute franchise, what impact are you seeing on that with respect to the BMP controversy?

Alex Gorsky

We don't think it's having that significant impact at this point.

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

On procedure volumes or your own specific biologics?

Alex Gorsky

On us. We think it's certainly having an impact in other areas. If we're talking about its impact on us, we don't think it's significant.

Louise Mehrotra

Okay. So some final remarks from Dominic.

Dominic Caruso

Okay. Thanks, Louise. On closing, let me just say we're pleased to see the continuing momentum in the second quarter results, and we expect to continue to build on our core strength with the recent launches. And we expect ongoing investments for the second half of the year. We see further opportunity for growth as the global economy stabilizes and our businesses continue addressing the critical unmet healthcare needs of patients and customers. I do remain confident in our products' prospects for the year, thanks for the dedication, focus and integrity of the people of Johnson & Johnson. And I look forward to speaking with you again in October and 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 second quarter 2011 earnings conference call.

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