Johnson & Johnson (JNJ) Alex Gorsky on Q4 2015 Results - Earnings Call Transcript

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Johnson & Johnson (NYSE:JNJ)

Q4 2015 Earnings Call

January 26, 2016 8:30 am ET


Louise Mehrotra - Vice President-Investor Relations

Alex Gorsky - Chairman & Chief Executive Officer

Dominic J. Caruso - Vice President, Finance and Chief Financial Officer


Michael Weinstein - JPMorgan Securities LLC

Glenn John Novarro - RBC Capital Markets LLC

Matt Miksic - UBS Securities LLC

Larry Biegelsen - Wells Fargo Securities LLC

Jami Rubin - Goldman Sachs & Co.

Vamil K. Divan - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Kristen M. Stewart - Deutsche Bank Securities, Inc.

Robert Adam Hopkins - Bank of America Merrill Lynch

Joshua Jennings - Cowen & Co. LLC

David R. Lewis - Morgan Stanley & Co. LLC


Good morning. And welcome to Johnson & Johnson's fourth quarter 2015 earnings conference call. All participants will be in listen-only mode until the question-and-answer session of the conference. This call is being recorded. If anyone has any objections, you may disconnect at this time. If you experience technical difficulties during the conference, you may press star zero to reach the operator. I would now like to turn conference call over to Johnson & Johnson. You may begin.

Louise Mehrotra - Vice President-Investor Relations

Good morning and welcome. I'm Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson. And it is my pleasure this morning to review our business results for the fourth quarter of 2015. Joining me on the call today are Alex Gorsky, Chairman of the Board of Directors and Chief Executive Officer, and Dominic Caruso, Vice President Finance and Chief Financial Officer.

A few logistics before we get into the details. This review is being made available via webcast accessible through the Investor Relations section of the Johnson & Johnson website at I'll begin by briefly reviewing results for the corporation and for our three business segments. Following my remarks Alex will comment on 2015 results and provide a strategic outlook for the company. Then Dominic will provide some additional commentary on the business, review the income statement and provide guidance for 2016. We will then open the call to your questions. We expect the call to last approximately 90 minutes.

Included with the press release that was issued earlier this morning is the schedule of sales for key products and/or businesses to facilitate updating your models. These schedules are available on the Johnson & Johnson website as is the press release. Please note we will be using a presentation to complement today's commentary. The presentation is also available on our website.

Before we begin let me remind you that some of the statements made during this review are or may be considered forward-looking statements. The 10-K for the fiscal year 2014 and the company's subsequent filings identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made today. The company does not undertake to update any forward-looking statements as a result of new information or future events or developments. Our SEC filings, including the 10-K, are available through the company and on our website.

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

A number of the products and compounds discussed today are being developed in collaboration with strategic partners or license from other companies. This slide lists the acknowledgment of those relationships not otherwise referenced in today's presentations.

Now I would like to review our results for the fourth quarter of 2015. Worldwide sales to customers were $17.8 billion for the fourth quarter of 2015, down 2.4% versus fourth quarter of 2014. On an operational basis sales were up 4.4% and currency had a negative impact of 6.8%.

In the U.S. sales were up 8%. In regions outside the U.S. our operational growth was 1.2%, while the effective currency exchange rates negatively impacted our reported results by 12.9%. On an operational basis the western hemisphere, excluding the U.S., grew 2.8%, while the Asia-Pacific Africa region grew 0.9% and Europe grew 0.8%. Growth in all regions was negatively impacted by the divestiture of the Cordis business with Europe, Latin America and Canada also negatively impacted by hepatitis C competition. Excluding the net impact of acquisitions and divestitures and hepatitis C sales, underlying operational growth was 7.8% worldwide, 13.4% in the U.S., and 2.9% outside the U.S.

I'd like to point out that our 2015 fiscal year included an additional week. Since this week occurred during a holiday period, we did not achieve a full week of sales. However, we did have a few more shipping days. These additional shipping days added approximately 4 points to the quarterly sales growth rate and 1 point to the annual growth rate. The additional sales were more heavily skewed to the U.S. While these few shipping days added to sales, we also had a full week's worth of operating costs. Therefore, the bottom line impact was negligible.

Turning now to earnings. Net earnings were $3.2 billion and diluted earnings per share were $1.15, versus $0.89 a year ago. As referenced in the tables reconciling non-GAAP measures, 2015 fourth quarter net earnings were adjusted to exclude after tax amortization expense of $220 million and a net charge of $608 million for after tax special items. 2014 fourth quarter net earnings were adjusted to exclude after tax amortization expense of $275 million and a charge of approximately $1.1 billion for after tax special items. Dominic will discuss special items in his remarks.

Excluding amortization expense and special items for both periods, adjusted net earnings for the current quarter were $4 billion and adjusted earnings per share were $1.44, representing increases of 4% and 5.1% respectively as compared to the same period in 2014. Currency translation significantly impacted net earnings. On an operational basis adjusted diluted earnings per share grew 12.4%.

Now turning to the financial highlights for the full year of 2015. Consolidated sales to customers for the year of 2015 were $70.1 billion, a decrease of 5.7% as compared to the same period a year ago. On an annual basis sales grew 1.8% operationally and currency had a negative impact of 7.5%. Excluding the net impact of acquisitions and divestitures and hepatitis C sales, underlying operational growth was approximately 6.5% worldwide, 10.6% in the U.S., and 3% outside the U.S.

Turning now to earnings. 2015 annual net earnings were $15.4 billion and diluted earnings per share were $5.48. For the year 2015 adjusted net earnings were $17.4 billion and adjusted earnings per share were $6.20, down 4.8% and 3% respectively versus the 2014 results. On an operational basis adjusted diluted earnings per share grew 5.8%. Estimated free cash flow for the year was strong at $15.9 billion, up $1.1 billion versus 2014.

Turning now to quarterly business segment highlights. Please note percentages quoted represent operational sales changes in comparison to the fourth quarter of 2014 unless otherwise stated, and therefore, exclude the impact of currency translation.

I'll begin with the Consumer segment. Worldwide Consumer segment sales of $3.3 billion increased 1.8% with U.S. sales down 4.9%, while outside the U.S. sales grew 5.5%. Excluding the net impact of acquisitions and divestitures, underlying growth was approximately 4.7% worldwide, 1.7% in the U.S., and 6.3% outside the U.S. Growth was driven by worldwide OTC and oral care as well as women's health outside the U.S.

OTC sales results in the U.S. were driven by Zyrtec and product relaunches for digestive health products. Strong growth for analgesics was partially offset by timing of inventory builds, as noted in the third quarter, and a slower start to the flu season. In the U.S. adult analgesic market share was approximately 13.5%, up from approximately 11.5% a year ago. While U.S. pediatric share was approximately 45.5%, up from approximately 42% a year ago.

Results outside the U.S. were driven by strong sales of upper respiratory products and the relaunch of anti-smoking products. Strong sales momentum, driven by successful marketing campaigns and geographic expansion for new products, drove results for LISTERINE in oral care and in women's health products outside the U.S.

Moving now to our Pharmaceutical segment. Worldwide sales of $8.1 billion increased 6.5% with U.S. sales up 12.7% and sales outside the U.S. down 0.9%. Competitors in hepatitis C significantly impacted sales results. Excluding sales of our hepatitis C products, OLYSIO and INCIVO, as well as the impact of acquisitions and divestitures, underlying growth was approximately 11.1% worldwide and 21% in the U.S.

Sales outside the U.S. declined approximately 0.2% with strong growth of new and core products, offset primarily by lower sales of REMICADE and SIMPONI to our distribution partner. Important contributors to growth were STELARA, INVOKANA and VOCAMET, IMBRUVICA, INVEGA, SUSTENNA and XEPLION, XARELTO and U.S. sales of REMICADE. STELARA achieved strong growth across all the major regions, driven by robust market growth and increased penetration with the psoriatic arthritis indication.

Strong momentum in market share drove results for INVOKANA and VOCAMET. In the U.S. INVOKANA and VOCAMET achieved 6.5% total prescription share, or TRx, within the defined market of type II diabetes, excluding insulin and Metformin, up from 4.2% last year. TRx with endocrinologists was 12.8% for the quarter and 5.8% in primary care.

Strong patient uptake with demonstrated efficacy drove results for IMBRUVICA in the U.S. IMBRUVICA is the leader in both new and total patient regiment share in second line CLL and MCL. Outside the U.S. results were driven primarily by Europe with strong patient uptake and shared momentum. IMBRUVICA is now approved in over 60 countries.

As an update on our oncology pipeline, we received FDA approval for DARZALEX in November. DARZALEX is off to a robust start, with strong underlying market demand. INVEGA SUSTENNA or XEPLION achieved strong results in all major regions, primarily due to increased market share and the launch earlier this year of INVEGA TRINZA.

Continued share growth drove XARELTO sales results with TRx for the quarter in the U.S. anticoagulant market of 16.1%, up nearly 1.5 points from a year ago. XARELTO is broadly reimbursed with approximately 95% of commercial and Medicare part D patients covered at the lowest branded product co-pay.

REMICADE in the U.S. benefited from strong market growth, partially offset by lower market share. REMICADE U.S. export sales and international sales were negatively impacted by lower distribution partner sales, due to the weakening of the Euro and the loss of exclusivity in Europe, partially offset by a higher inventory reduction last year. Strong results were achieved in the western hemisphere excluding the U.S.

I'll now review the Medical Devices segment results. As a reminder we announced last week that we will use a new format for the reporting of sales in the Medical Devices segment. And we provided historical sales results in the new format at that time. The historical sales are available on our website.

Worldwide Medical Devices segment sales of $6.4 billion increased 3.4%. U.S. sales increased 6.7%, while sales outside the U.S. increased 0.6%. Excluding the net impact of acquisitions and divestitures, underlying growth was approximately 5.8% worldwide with the U.S. up 8% and growth of 3.9% outside the U.S. Growth was driven by surgery, orthopedics, electrophysiology, and vision care, partially offset by the divestiture of the Cordis business.

Growth in our surgery business was driven by strong results for the advanced products, with endocutters growth of 15%, biosurgicals growth of 9%, and energy growth of 5%. In addition, ASP and Mentor products in our specialty products made significant contributions to sales in the quarter.

Market growth, additional selling days, and new products drove strong results for the U.S. orthopedics business. Pricing pressure continued across the major categories, partially offset by positive mix for trauma and spine products.

The successful introduction in early 2015 of the TFNA nailing system in trauma, the success of the ATTUNE platform in knees, our primary stem platform in hips, and ORTHOVISC/MONOVISC in spine or other made important contributions to the results. Orthopedic sales outside the U.S. were negatively impacted by results in China, due to softer demand and a reduction in inventory. Spine, other and trauma were the categories most impacted.

Our electrophysiology business grew 19% worldwide, due to strong market growth complemented by the success of the THERMOCOOL SMARTTOUCH catheter.

Vision care results were driven by very strong growth in the U.S. due to the introduction of new products as well as the trade inventory build.

That concludes the segment highlights for Johnson & Johnson's fourth quarter of 2015. For your reference there were some notable developments in the fourth quarter, which we have summarized on this slide to assist as you develop your models. Lastly, to assist you in updating your models for the full year 2015, on our website you will find annual sales highlights by segment.

It is now my pleasure to turn the call over to Alex Gorsky. Alex?

Alex Gorsky - Chairman & Chief Executive Officer

Thank you, Louise. Let me start by saying how optimistic and confident I am as we enter 2016. We had a strong finish to 2015. And with our healthy balance sheet we are well positioned to continue to invest for future growth. Our core business is very strong. And we expect a number of additional new products and line extensions in the coming year.

Now as we enter 2016, we look forward to, first, continued growth of core products across our segments. Next, a rich near-term pipeline in our Pharmaceutical segment. Positive momentum in our Consumer segment with a full portfolio of OTCs back on the market. Setting a strong foundation for sustainable growth with the bold actions we are taking in our Medical Devices segment. And continued financial strength and strong free cash flows to return capital to shareholders and take disciplined and decisive actions regarding M&A that contribute to sustainable growth and long-term value creation.

Now I'll share more specifics in my discussion with you today about the healthcare environment, our 2015 results, and why we're so optimistic and confident about the future for the enterprise in each of our business segments. But with that as a backdrop I'd like to begin where I always do by talking about our credo.

Our credo is the beginning of everything at Johnson & Johnson. It guides all of our decisions. And I believe it sets us apart. This year is Johnson & Johnson's 130th year. Think of that for a moment. 130 years of working to balance our mission of helping people everywhere live longer, healthier, and happier lives.

And I'm proud to see the employees of Johnson & Johnson around the world continuing to uphold the imperatives of our credo every day, through both our philanthropy initiatives, as recent commitment to supporting the immediate and ongoing needs of Syrian refugees in partnership with Save the Children, as well as through our commitments to the healthcare community with investments that will accelerate how we address global health crises like Ebola, AIDS, and mental health.

You've undoubtedly heard me say that I believe healthcare is one of society's greatest challenges. And this global challenge grows with aging populations, rising costs in developed world, and growing middle classes in emerging economies who have increasing expectations for access to quality care.

Now as the world's largest and most broadly based healthcare company, it's not just an opportunity for us to help manage this transformation, it is our responsibility to help lead the way to a better future.

Now in this environment, ensuring access to important medicines and medical procedures remains a key objective for us. As government officials, politicians, and other stakeholders debate significant issues around the world, we're pleased to see that healthcare is such a focus in the dialogue. And we believe that our goals and those of public policy makers are aligned to find the best ways to ensure the delivery of quality healthcare and the best patient outcomes in a high-quality and sustainable manner.

Now in this discussion it's the responsibility of all stakeholders to consider the economic and financial implications of healthcare. We got to look at the whole picture, drugs, devices, insurers, hospitals, and governments, put the patient in the center and reward innovations that drive better outcomes.

Here in the United States, prescription drugs represent approximately 12% of total healthcare costs and medical devices represent around 6%. These cures and treatments not only improve quality of life for many patients, extend life for others, and contribute to the productivity of our society, but they can also help to reduce caregiver burden, disability, and healthcare spending overall. The promise of innovation in healthcare is great and will remain great if we can take a holistic approach to reforming the healthcare system.

At Johnson & Johnson we believe in this holistic approach to healthcare solutions. It's vital to developing the best innovations, to meeting the needs of our stakeholders, and to sustaining our legacy of strong and consistent business performance. Our Consumer, Medical Devices, and Pharmaceutical segments are increasingly interconnected businesses. And we believe that being broadly based in healthcare has been and will continue to be a significant factor in Johnson & Johnson's success, as it positions us well to lead and grow our business with the evolving healthcare landscape.

Our broad global footprint enables us to reach more patients and consumers in fast-developing and changing markets. In fact, Johnson & Johnson is operating in 60 countries today. And we are continuing to invest in implementing new operating models, forging strong relationships with local governments and health systems, and further accelerating growth through strategic acquisitions and partnerships with local companies.

Because of our broad base across healthcare, we are uniquely positioned to be a partner of choice. Now let me just go over a few examples. With large health systems, we are taking more of a business-to-business model to help them with innovative contracting strategies, integrated services and solutions, and with dedicated customer-focused teams. We're working with technology companies like Google, IBM, and Apple, who are advancing medical innovation through an infusion of technology that can benefit from deep healthcare expertise Johnson & Johnson can uniquely provide. We're continuing to support biotech and med tech start-ups who appreciate the value we placed on innovation and the reach and breadth of our footprint in the healthcare market.

And with public health organizations we have a tremendous opportunity to address the gaps that remain in innovation, access, and delivery of effective prevention and treatment. We're collaborating more than ever before to meet the world's most pressing public health challenges. Our scale, financial flexibility, and business and healthcare expertise make Johnson & Johnson a key partner for a number of our stakeholders. And our relationships with these partners will help Johnson & Johnson continue to be a leader in the future.

Applying our expertise in design thinking, strategic innovation models, and a commitment to collaborating with all stakeholders, we've developed a number of cross-segment innovations. For example, we've created the China Lung Cancer Center, which is developing a holistic approach to treat lung cancer in China, where the disease is particularly prevalent.

We're pioneering cell therapy for age-related macular degeneration, combining technologies from Pharma and from our vision business to find a way to address this condition. And we're leveraging capabilities from our Medical Devices, Pharma, and Consumer businesses to treat obesity and diabetes in new ways. In fact, almost every one of our programs can benefit from the advantages of our broad base.

Over the past several years, we've also been leveraging our scale by developing enterprise efficiencies and capabilities across all of our sectors, targeting as much as $1 billion in operational savings by 2018 to support our growth. And we believe innovation that is taking place within our supply chain and quality systems is actually creating a competitive advantage for Johnson & Johnson.

But the bottom line – well, it's the bottom line. And this broad-based structure has helped us deliver strong, consistent, and sustainable financial performance. Let's consider some of the numbers.

First, 53 consecutive years of dividend increases at Johnson & Johnson. That means we have provided steady dividend increases since we first put a man in space. And 32 years of consecutive adjusted operational earnings growth, more than three decades. Over the past 10 years we have returned approximately 70% of our free cash flow to our shareholders. And today, 70% of our revenues come from brands that are number one or number two in their markets. We have 24 brands that represent $1 billion platforms. If you think about that, in 1999 the entire corporation had revenues of $24 billion. And about 25% of our sales come from brands launched in the last 5 years. That's a result of constant learning, collaboration, and innovation.

Our corporate structure, our broad base, is a strategic choice and one that is grounded on performance, not just our heritage. We know it has been a significant driver in the past and expect it will be more important in the future.

As we've said, we see global healthcare growing at 3% to 5% over the next 5 years. And we have a clear objective: that Johnson & Johnson should grow sales organically at a faster rate than the market. We also intend to grow our earnings faster than sales. In addition, we will continue to create value through strategic acquisitions and partnerships that generate additional growth. All of this, coupled with our strong dividend yield, and you are looking at a very compelling long-term total shareholder return.

As part of our performance-driven strategy, we regularly review the structure and portfolio of our businesses to evaluate how they're delivering on our responsibilities to the stakeholders outlined in our credo, meeting evolving healthcare needs, and achieving performance expectations. Johnson & Johnson has a rigorous and disciplined portfolio review program focused on creating long-term shareholder value. And this applies to all our businesses.

We have a track record of evolving our business and taking decisive actions when necessary to meet changing industry and consumer dynamics. And we'll continue to do so in the future. We're actively looking for the right opportunities to create greater value for our shareholders. We are seeking companies with a mutual desire to partner. But we're also patient. We will only act when we see the right value-creating deal at the right price and with the right partners.

Now historically, about half of our growth has come from M&A and half from internal development, which we fully expect to continue. And with our strong balance sheet, we've got the resources to do just that.

Now let me take a few minutes to review the priorities we laid out for you last year. One, we will continue to be focused on delivering on our financial and quality commitments. Two, in Pharmaceuticals, our objective as always is constant innovation. We're building on our launch excellence and continuing to develop a robust pipeline of transformational medicines. In our Consumer business, we positioned our entire portfolio to focus on key geographies, need states, and mega brands. We are prioritizing and investing to expand our market leadership in key Consumer segments in OTC, oral care, baby, and beauty.

And as you heard through our announcement last week, our priority in Medical Devices is accelerating growth through the strategic investments in innovation and by transforming our go-to-market models. We're confident that these priorities will deliver the results that you expect from us and, just as importantly the results that we expect from ourselves.

As we said we are pleased with our 2015 performance. In 2015 we generated sales of $70.1 billion, reflecting strong underlying operational growth across our enterprise. Our in-market portfolio in Pharmaceuticals delivered strong growth. We built positive momentum in our Consumer segment. And we just announced bold actions to accelerate growth in our Medical Devices segment. Throughout the year you've heard from each of our business segment leaders about the strategies we put in place to meet our commitments. So I'll touch on just a few of the recent actions we've taken to advance those strategies.

As Joaquin Duato laid out for you at our Pharmaceuticals business review in May, our Pharmaceuticals business has a clear strategy focused on five therapeutic areas of high unmet medical need, a robust innovation engine, and proven commercial capabilities. Joaquin talked to you about how we're investing in our future with 10 new products we plan to file by 2019, each with the potential to exceed $1 billion in annual sales. And in fact, we are already delivering one of those promising medicines to the market, 4 months ahead of schedule, with the U.S. approval for DARZALEX, the first human monoclonal antibody to be approved anywhere in the world for patients with multiple myeloma, which is off to a very good start.

In the near term I know many of you are keeping an eye on potential biosimilar competition in the United States. As you've heard us say, biosimilars are not generics.

With more than 2.4 million people having been treated with REMICADE and about 70% of the current patients receiving sustained and effective treatment, we believe doctors will be reluctant to switch them off with that level of success. And we've seen this play out in many markets where biosimilars have already been introduced. And we also have a patent for REMICADE that expires in September 2018 that we'll obviously continue to vigorously defend.

We consider our immunology products part of an important and robust portfolio for patients, physicians, and payers. So when you consider our continued expectations for REMICADE, as well as the future potential of products like STELARA and SIMPONI and the pending submissions of Guselkumab and Sirukumab, we are confident in our ability to continue driving strong growth from our immunology portfolio.

When you combine these advances with additional line extension approvals expected in 2016, like those for IMBRUVICA, STELARA, and INVOKANA and DARZALEX, approval in the EU, our near-term pipeline is incredibly robust and may not be fully appreciated in the market. With the combined strength of our in-market portfolio and deep, late-stage pipeline we expect to deliver above industry compound average growth through 2019.

Our consumer expertise, insight, and access are becoming increasingly valuable to payers and providers, as demographic and technology trends in healthcare are moving the system toward more consumer-driven decision-making and in some cases, self-care alternatives. We see this as a key differentiator for our company. And we are investing in technologies that help us exploit this expertise across our broad base. Jorge Mesquita and our other Consumer business leaders will share more details at our Consumer business review this May.

For 2015 our U.S. OTC business continued to grow faster than the market. And we're happy to report that nearly all of our OTC products have returned to shelves. And we are proud the quality system improvements we have put into place.

Our Consumer Medical Device businesses, the Johnson & Johnson diabetes solutions companies and Johnson & Johnson vision care, made progress in 2015 to improve our competitiveness. Both businesses, which command global leadership positions in their respective categories, focused their 2015 turnarounds on launching new products, solidifying their base businesses, and accelerating growth. And both businesses have regained or stabilized market share and market leadership and introduced important new products, such as Animas Vibe and ACUVUE OASYS 1-DAY with HydraLuxe in the U.S.

In our broader Medical Device businesses, last week we announced a strategic restructuring initiative designed to directly support and accelerate the strategy Gary Pruden laid out for you on our third quarter earnings call. We are reallocating resources to priority platforms like endocutters, knees, trauma, and EP. And recent history shows that when we double down in an area, we are able to accelerate meaningful innovation and outcomes, as we saw with our endocutters portfolio, which is now the fastest growing platform in our Medical Devices segment.

Additionally, we are making progress on transforming our go-to-market models, like our cross-selling efforts between Ethicon and DePuy Synthes Joint Reconstruction and Spine, which resulted in over 600 leads through 2015. We are now co-selling in over 1,200 accounts. And all sales teams will be trained covering all markets by the end of the first quarter.

And finally, our recent acquisition of Coherex Medical in the area of atrial fibrillation and the surgical robotics collaboration with Verily, formerly Google Life Sciences, are examples of the type of focused and strategic investments that you will see us make more of in the future. Our goal is to reach more patients, outperform the markets in which we compete, and consistently identify, build, and acquire new platforms for growth.

Moving forward into 2016 we will continue to take bold but appropriate steps to put our Medical Device business in the best position to deliver more value for customers and for our company and for our shareholders.

In summary we believe that improved universal access to quality healthcare, rewarding innovation, and a more vital culture of health, wellness, and prevention are the keys to a future where people are healthier and businesses and economies are stronger. Our broad-based experience and scale uniquely positions Johnson & Johnson as a leader and partner of choice in the movement towards outcomes and episodes of care-based approaches and ultimately a healthier society. We're optimistic about the future opportunities in healthcare and confident in the strength of our business.

In 2016 we will remain focused on our near term priorities and continue to advance our longer term growth drivers, enabling us to continue delivering shareholder value year after year. With the guidance of our credo we'll continue to meet our responsibilities to all stakeholders. That's been true for 129 years of breakthrough, life-saving innovation. And we are confident Johnson & Johnson is well positioned to continue meeting those responsibilities for the next 130 years.

Thank you. I look forward to further dialogue during the Q&A session. But first, I'll turn it over to Dominic Caruso, who will talk more about our results and expectations for 2016. Dominic?

Dominic J. Caruso - Vice President, Finance and Chief Financial Officer

Thanks, Alex, and good morning, everyone. As you've heard from Alex, we're very pleased with our 2015 performance. We believe we managed our business well and have provided you insights during the year in a transparent manner that allowed all of you to understand our plans and expectations. We finished the year strong, and we're carrying that momentum into 2016. We ended the year at the top end of our operational guidance range for both sales and earnings and exceeded estimates for earnings as published by [Thomson] First Call.

Turning to the next slide, you can see our condensed, consolidated statement of earnings for the full year 2015. I'd first like to remind you about some of the key assumptions in our guidance for 2015. At the beginning of the year we discussed that while we reinvested some of the profitability from OLYSIO sales, our earnings in 2014 did benefit by approximately $0.20 per share even after those investments, making 2015 comparisons to 2014 results more challenging. Additionally, currency headwinds increased quite substantially in 2015, negatively impacting both sales and earnings for 2015 by approximately 8%. Given those expected headwinds, last January we guided that we would deliver operational sales growth in the range of 1% to 2%.

As you can see, while reported sales results show a decrease of 5.7%, on an operational basis we ended up at the high end of our guidance with operational sales growth at 1.8%.

We also provided you with an estimate of our underlying operational sales growth for 2015, which excluded the impact of all acquisitions and divestitures as well as the impact of hepatitis C sales. We expected that underlying operational growth would be approximately 6%. And we exceeded that estimate, delivering 6.5%.

On earnings our adjusted operational EPS growth in our original 2015 guidance was expected to range between 2.3% and 4.7%. As reported this morning our EPS of $6.20 reflects operational growth of 5.8% and is at the top of the updated EPS guidance range we gave in October. And finally, our adjusted net income margin improved to 24.9%.

Now let's take a few moments to talk about certain items on the statement of earnings for the quarter. Turning to the next slide you can see our condensed, consolidated statement of earnings for the fourth quarter of 2015. As we expected, direct comparisons to our fourth quarter of 2014 would be challenging, due to stronger OLYSIO sales that we benefited from last year, as well as divestitures and currency headwinds in 2015. Our results on an operational basis, excluding the impact of acquisitions and divestitures and excluding the impact of hep-C sales, were up 7.8% for the quarter. As Louise noted, sales did benefit from additional shipping days in the fourth quarter of 2015.

Please now direct your attention to the box section of the schedule, where we have provided earnings adjusted to exclude special items and intangible asset amortization expense. Adjusted net earnings were $4 billion in the quarter, up 4% compared to the fourth quarter of 2014. And adjusted earnings per share of $1.44, versus $1.37 a year ago, are up 5.1%. And the adjusted EPS result exceeded the mean of the analyst estimates as published by First Call.

Excluding the impact of translational currency, our operational adjusted EPS was $1.54, or up 12.4% for the fourth quarter. In the quarter we incurred intangible amortization expense of $200 million on an after tax basis, as well as after tax special charges of $600 million, which included an expense of $400 million related to the restructuring of our Medical Device business, which we announced last week, and in-process research and development charge of $200 million.

Now let's take a few moments to talk about the other items on the statement of earnings. Cost of goods sold was 30 basis points lower than the same period last year, impacted by changes in our business and product mix. Selling, marketing, and administrative expenses were 33.1% of sales. This is 120 basis points higher than last year, as we continued to invest to drive growth in our key brands.

Our investment in research and development as a percent of sales was 16.1% in the quarter and 170 basis points higher than the prior year, as we continue to make important investments in our pipeline for future growth. In fact, in the fourth quarter we entered into important new licensing agreements, made milestone payments, and increased spending to advance our R&D portfolio, which are all positive developments, as we continue to strengthen our pipeline.

Interest expense net of interest income was slightly lower, reflecting higher earnings on our investments. Other income and expense was a net gain of $1.2 billion in the quarter, compared to a net charge of approximately $1 billion in the same period last year. Of course this line item includes several special items in both years. Excluding those special items, other income and expense was a net gain of approximately $1.3 billion, compared to a net gain of approximately $130 million in the prior year period.

This year's fourth quarter reflects the gain on the previously announced divestiture of Cordis. As a reminder we indicated that any gains from divestitures, which are reflected in the other income and expense line, would largely be reinvested in the business, as well as used to mitigate the negative impact of currency and a lower level of income in 2015 from reduced OLYSIO sales. And therefore, our pre-tax operating margin would be expected to be lower in 2015 versus 2014. And our 2015 results reflect just that. We funded important investments with a higher level of other income that will benefit us going forward.

The adjusted fourth quarter effective tax rate for 2015 was 17.7%. This was lower than the rate in the previous 9 months due to the passing of legislation, which renewed the R&D tax credit and look-through provisions. The R&D tax credit and look-through provisions were always included in our annual guidance. The adjusted full year effective tax rate for 2015 was 20.7%, slightly below guidance due to the mix of income from higher to lower tax jurisdictions.

Turning to the next slide. I will now review adjusted income before tax by segment. Adjusted income before tax for the entire enterprise improved from 30.7% of sales in 2014 to 31.4% of sales in 2015.

Looking at the adjusted pre-tax income by segment. Medical Devices expanded 360 basis points, due primarily to the gain associated with the Cordis divestiture. While Pharmaceutical margins contracted 50 basis points, due to the lower OLYSIO sales and increased investments in research and development, partially offset by the gain earlier in the year of divestiture of NUCYNTA. Consumer margins contracted 110 basis points, due to lower divestiture gains in 2015 versus 2014, as well as important investments for future growth, as we returned our iconic Consumer brands to the market.

Now I will provide some guidance for you to consider, as you refine your models for 2016. Before I discuss sales and earnings I'll first give you some guidance on items we know may be difficult to forecast.

I would first like to address our cash position and remind you about our capital allocation approach. At the end of the quarter we had approximately $18.5 billion of net cash, which consists of approximately $38.5 billion of cash and marketable securities and approximately $20 billion of debt. This is a higher level of cash than we typically hold. And as Alex said earlier, we are actively looking for the right opportunities to deploy that capital to create greater value for our shareholders. But we are patient. We are seeking companies with a mutual desire to partner. And we'll only act when we see the right value creating deal at the right price with the right partners.

We have a transparent and disciplined capital allocation strategy that starts with dividends to our shareholders, followed by value-creating M&A. And then we consider other prudent ways to return value to shareholders, such as share repurchase programs.

And due to our strong balance sheet, we have the financial strength and flexibility to execute on all three of these capital allocation priorities simultaneously. During Q4 2015 we used approximately $1 billion to repurchase shares of our stock in connection with our $10 billion share repurchase program that we announced in October. Although we are continuing to evaluate external value-creating opportunities in line with this strategy, for purposes of your models, assuming no major acquisitions or other major uses of cash, we suggest you consider modeling 2016 net interest expense of between $450 million and $550 million.

Regarding other income and expense. As a reminder this is the account where we record royalty income, as well as gains and losses arising from such items as litigation, investments by our development corporation, as well as divestitures, asset sales, and write-offs. We would be comfortable with your models for 2016 reflecting other income and expense, excluding special items, as a net gain ranging from approximately $1.1 billion to $1.2 billion.

Although we expect to have a significantly lower level of other income in 2016 versus 2015, our pre-tax operating margin in 2016 is expected to expand by more than 200 basis points. As we've discussed several times during the year, we continue to evaluate our portfolio. And we expected that any gains from divestitures would be lower than the level we saw in 2015. However, we also discussed that we would nonetheless improve on earnings, as we see the benefits of good expense management and meaningful investments we made in 2015.

And now a word on taxes. We're very pleased that the R&D tax credit was made permanent and approved by Congress this last year. We would be comfortable with your models reflecting an effective tax rate for 2016, excluding special items, of approximately 19.5% to 20.5%.

Turning to sales and earnings guidance. Our sales guidance for 2016 assumes no biosimilar entrants for PROCRIT or REMICADE in the U.S. We also do not anticipate generic competition this year for ZYTIGA, RISPERDAL CONSTA, and INVEGA SUSTENNA. But as expected there are generic entrants for INVEGA and ORTHO TRI-CYCLEN LO.

As we've done for several years, our guidance will be based first on a constant currency basis, reflecting our results from operations. This is the way we manage our business. And we believe this provides a good understanding of the underlying performance of our business. And we'll also provide an estimate of our sales and earnings and EPS results for 2016 with the impact that exchange rates could have on the translation of those results.

For the full year 2016 we would be comfortable with your models reflecting an operational sales increase of between 2.5% and 3.5% for the year. This would result in sales for 2016 on a constant currency basis of approximately $71.9 billion to $72.6 billion.

Additionally, by way of comparison to how we described our sales results in 2015, our 2015 operator sales growth excluding the impact of all acquisitions and divestitures and hep-C sales, was approximately 6.5%. After adjusting for extra shipping days in 2015, that underlying growth rate was approximately 5.5% in 2015. Our sales guidance for 2016 on the same basis is expected to continue at a similar growth rate of around 5.5%.

While the euro has been fairly stable over the last few months, many of the other currencies have been volatile. Although we're not predicting the impact of currency movements, using the euro at $1.09, our guidance for sales growth would decrease by approximately 1.5%. We are watching the other currencies closely, as it is uncertain as to how they will settle out for the year. Of course we will update the assessment as we progress throughout the year.

Thus under this scenario, we would expect reported sales to reflect the change in the range of 1% to 2% for a total expected level of reported sales of approximately $70.8 billion to $71.5 billion.

Now turning to earnings. A continuing factor impacting earnings guidance for 2016 is the impact of currency movements on transactions, which although hedged, is still somewhat negative. We expect transaction currency impacts to negatively impact our gross margin by approximately 60 basis points to 80 basis points in 2016 as compared to 2015.

We would be comfortable with adjusted EPS guidance in the range of $6.53 to $6.68 per share on a constant currency basis, reflecting operational or constant currency growth rates of 5% to 8%.

Again we're not predicting the impact of currency movements, but to give you an idea of the potential impact on EPS with the euro at $1.09, our reported adjusted EPS would be negatively impacted by approximately $0.10 per share. Therefore, our reported adjusted EPS would range from $6.43 to $6.58 per share. At this early stage in the year we would be comfortable with your models reflecting the midpoint of this range, which at approximately 5% is higher than current consensus estimates.

So in summary as you update your models for the guidance I just provided, I'd like to make a few points. Although operational sales growth is expected to range between 2.5% and 3.5%, we're pleased to note when excluding the impact of acquisitions and divestitures and hep C sales, our operational sales growth is expected to be around 5.5% for the full year 2016. With regards to expected EPS growth on an operational basis, our adjusted EPS growth guidance is strong in the range of 5% to 8%.

Also for 2016 pre-tax operating margins are expected to expand by more than 200 basis points, based on the guidance I just provided. Margin expansion is driven by a combination of investments we made in 2015, coupled with the benefit of disciplined expense management across the enterprise.

Moving into 2016 we are confident in the strength of our business. As we execute on our growth plans and near term priorities that Alex laid out for you this morning, we're well positioned with a strong balance sheet to deliver solid results while continuing to invest in innovation, which will ensure our future growth and success.

Our goal remains to grow our sales organically at a rate faster than the markets in which we compete, grow our earnings faster than sales, and create value through strategic acquisitions and partnerships that generate additional growth. All this coupled with our strong dividend yield provides a very compelling long-term shareholder return.

Finally, before I turn it over to Louise for Q&A, just a reminder to please save the date for our Consumer and Medical Devices business review on Wednesday, May 18. Thank you. Now back to Louise.

Louise Mehrotra - Vice President-Investor Relations

Thank you, Dominic. Manny, could you please give the instructions for the Q&A session?

Question-and-Answer Session


Thank you. Okay. And your first question comes from Mike Weinstein of JPMorgan. Please go ahead.

Louise Mehrotra - Vice President-Investor Relations

Morning, Mike.

Michael Weinstein - JPMorgan Securities LLC

Good morning, everybody, and thanks for taking the question. So let me start with the margin expansion piece of the guidance. And this kind of fits in with the announcement last week on the MD&D business. And there's really like – there's two parts to the question.

So if I look at MD&D and where you ended up with pre-tax margins in 2015, they were at 35.6%. And which to every observer would say, those are very high margins. And for the overall company, you're guiding to 200 basis points plus of pre-tax margin improvement, which would make 2016 the biggest year of margin expansion in the last 15 years.

So talk about the decision to be as aggressive as you're being in 2016 on operating costs. And for the MD&D business in particular, why is the consolidation that you're pursuing and let's call it the cost transformation imperative at this point in time? And why are you being as aggressive as you're being? Thanks.

Dominic J. Caruso - Vice President, Finance and Chief Financial Officer

Sure, Mike, thanks for your question. Well, couple things. One is the – 2015 as you saw was a heavy investment year, because we benefited from the divestitures. And I think we were very transparent that we would make important investments going into 2015. And we did just that.

So in 2016 we have a lower level of those investments, consistent with a lower level of the other income that we just guided to. Also it's important to point out that those investments we made in 2015, we're seeing the benefits of those already in 2016. So we think they were wise investments.

And finally, we've talked a lot about our various programs of reducing our cost structure. And Alex today mentioned the program that we embarked on several years ago that will reduce cost by $1 billion by 2018. Well we're well on our way in implementing that program after several years of investment. In 2016 we'll see a year where the actual benefits associated with that program outweigh any incremental investments. And maybe – Alex, maybe a comment on the MD&D restructuring, and why that's appropriate for us to do today.

Alex Gorsky - Chairman & Chief Executive Officer

Yeah, Mike. We do think that this is the right time to be making the moves. But really I think it's important to kind of step back and put it into larger perspective.

If you think about what we've been doing in Medical Devices over the last several years, we've had a range of activities, ranging from some of the divestitures with OCD as well as Cordis underway. At the same time, we've been making changes internally with the way that our organizations are innovating as well as in the way that they're going to market.

And so we see this as the next logical step in that overall process. Our Medical Devices business is one that we remain very committed to. We believe that it's got an exciting future, a lot of new innovation coming, new ways of dealing with our customers. And so we think this is the right time to make sure that we're set up for growth, not only in 2016 but actually for the next 5 years and 10 years.

Michael Weinstein - JPMorgan Securities LLC

Dominic, can you share any commentary about how you're thinking about the respective businesses in 2016 versus your 2015 performance?

And then maybe just on the MD&D topic, it's hard to piece out what the kind of underlying growth is with the extra selling days. But MD&D did grow 5.8% this quarter. That's obviously inflated by that. Do you have any thoughts just in terms of where you are in the turn of the performance in the MD&D business? Thanks.

Dominic J. Caruso - Vice President, Finance and Chief Financial Officer

Yeah. Well sure, Michael. Let me comment overall. As you know, our growth in 2015, primarily driven by Pharmaceuticals. And we expect healthy growth in 2016 from Pharma, but probably at a slightly lower rate of growth than what we saw in 2015 as those products that we launched are beginning to mature in their growth trajectory, but still a lot of growth ahead of them.

So we're not going to give guidance by sector. But overall a little bit lower growth in 2016 versus 2015 for Pharma. Better growth in Consumer, good momentum in 2015 carrying on into 2016. And we expect higher growth rates in 2016 versus 2015 for the Medical Devices business as well. And as you saw, we ended the year with good, strong momentum in that business as well.

Michael Weinstein - JPMorgan Securities LLC

Perfect. I'll let some others jump in.

Louise Mehrotra - Vice President-Investor Relations

Okay. Next question, please.


Thank you. The next question is from Glenn Novarro of RBC Capital Markets. Please go ahead.

Louise Mehrotra - Vice President-Investor Relations

Good morning, Glenn.

Glenn John Novarro - RBC Capital Markets LLC

Hi, good morning, guys. Question for Alex. Alex, given the strong balance sheet, I'm somewhat surprised you were not more aggressive with the balance sheet in 2015, especially on the M&A front. And you made some comments about the balance sheet going forward. But I'm just curious. As you evaluate your options, particularly on the M&A front, is the fact that we haven't seen deals year to date or so far, is it because the targets still have very high valuation expectations? Or is it that most of your cash is trapped outside the U.S., limiting your ability to do acquisitions? Or is it a little bit of both? Thanks.

Alex Gorsky - Chairman & Chief Executive Officer

Hey, Glenn, thank you very much for your question. Look, we are and we have been and will continue to be very active in the M&A category. As we mentioned during the earlier comments, if you look at us historically, really over about any timeframe, 20 years, 10 years, what you see is about half of our growth being generated from organic innovation platforms and about 50% being generated vis-a-vis M&A.

As we reflect back on 2015 we realize that the market was premium priced. We remained very active in a number of different areas. And while we didn't necessarily close on a larger deal, I would not assume that we were not engaged and involved.

But at the same time, we think it's really important for you, our shareholders, as you think about long-term returns, that we stay at the appropriate level of discipline and decisiveness as we go through that process. As we look at the environment today, we see a number of opportunities across the Consumer, the Medical Devices, and the Pharmaceutical groups. We're going to remain very active.

I think that our financial team has done a great job of using our offshore assets in a very compliant but also tax-effective way. And we'll continue to look for opportunities that ultimately we believe are going to help us continue to get into growing markets, to improve our share position, to provide complementary products and services to platforms that we already have, that ultimately are going to lead to long-term sustainable growth for J&J.

Glenn John Novarro - RBC Capital Markets LLC

So if I hear you correctly, you're saying valuations were elevated for the targets in 2015. But I sense from you that the valuations of your targets, valuations are coming down. And it sounds like the cash sitting outside the U.S. will not inhibit deal flow. So is that a fair assumption? And then is there any one business versus the other that you would be more likely inclined to do an acquisition to help accelerate growth? Thanks.

Alex Gorsky - Chairman & Chief Executive Officer

Yeah, Glenn, look, we're fortunate in that because of our strong performance, our strong cash flows, that our balance sheet is actually quite strong. I also believe that if you look at our track record of how we've utilized that cash to make the right capital investments in companies, that we've been successful with that. And look, we think that there's opportunities across all three of our different sectors. And it's not an algorithm per se as we decide which and where to invest, but rather it really depends on the opportunity. And many of the factors that Dominic described earlier, as far as what are the specific platforms that we're looking at? Where is the partner in terms of their decision making, what they want to do with the business? And frankly what the competitive environment is like?

So we think that there are opportunities. We intend to be quite active as we look at 2016 and beyond in a manner that's been consistent with our track record in that area.

Glenn John Novarro - RBC Capital Markets LLC

Okay. Thanks, Alex.

Louise Mehrotra - Vice President-Investor Relations

Thank you. Next question please? Next question please?


Yes. The next question is from Matt Miksic of UBS. Please go ahead.

Louise Mehrotra - Vice President-Investor Relations

Morning, Matt.

Matt Miksic - UBS Securities LLC

Good morning. Thanks for taking our question. So one kind of broader question on the sort of changes in the health economy in the U.S. And then I have one follow-up on some of the extra day commentary that you made.

So looking forward to the MD&D day and the update on sort of the restructuring there. But stepping back, you've been one of the leaders here in sort of broader contracting strategies and developments, some of these value added services like CareSense and Outpatient Solutions. Alex, it would be just helpful to get your thoughts on what you're seeing in the marketplace in terms of uptake of those kinds of strategies. And maybe talk about whether we're in the early innings here? And how you think about some of the benefits you're seeing or hope to see with those approaches to the business? And then I have one follow-up.

Alex Gorsky - Chairman & Chief Executive Officer

Sure, Matt. Thank you very much. Look, overall we feel that we're still in the very early innings of what I'd call is the market evolution that we clearly expect to see over the next 3 years, 5 years, and even 10 years. And for all the reasons that we've discussed around increasing demands based on demographics certainly here in the U.S., and a rising middle class in demographics outside the United States, and the pressure that that's likely going to put on payers and governments and others in between. We realize that there is an opportunity for us to participate, not only in bringing great innovation that's going to help patients, but also doing it in a value-added way.

And clearly the consumer, the patient is weighing in much heavier in these decisions, as they take on higher co-pays, as they can get more information that's available online. And frankly they just have higher expectations about their ability to participate in that healthcare decision-making process.

So what we see is a range of customers. Look, we see some customers who are still very innovation focused. And to be clear we remain very innovation focused. We think at the end of the day what we do best is bring new products, new solutions to our customers that are going to ultimately have better outcomes for patients. And so that's an area where we are very focused on and will continue to be focused on.

We are though starting to also see hospital systems. And I think one important point here is it's certainly taking place in the United States. But it's also definitely taking place in places like Europe and even some of the developing and emerging markets that frankly don't have the history and the legacy of some of the infrastructure that you see in the more developed markets. And there it – what we see is an evolution more towards a business-to-business relationship, where, yes, customers want to see innovation.

But they also want to see how are you going to interact? How can you assist in working with our supply chain to make it more efficient? How can we work together as part of a broader partnership that ultimately is focusing not just on a product sell, but actually on an outcome, on an episode of care for the patient. And it creates a much broader partnership. We are seeing those organizations becoming more and more interested. And that's why we're adapting to make sure that we're part of that.

So I think overall it's a – it's important that we continue to innovate, we continue to operate with a lot of excellence in the current environment. At the same time it's important that we set the stage for this evolution that's taking place out there to make sure that we can not only be successful, but we'll actually be a leader as that market evolves as well.

Matt Miksic - UBS Securities LLC

Very, very helpful. And then the clarification on the extra shipping days as you talked about. It was a holiday week. And maybe OR surgery days were not as much of a factor as shipping days from what I could tell in your commentary.

But you were strong in vision care, obviously a shipping type of business. Strong in Pharma. Just wondering, Dominic, if – or if you have any color on some of your consignment businesses, where we think about orthopedics, spine, and trauma, where the inventory is in the field, it's not on your balance sheet. Is it – was there any difference in the way those businesses were impacted, versus businesses where you're actually shipping and billing for things in the last couple days of the quarter?

Dominic J. Caruso - Vice President, Finance and Chief Financial Officer

Sure, Matt. Well, just overarching comment on this. Of course these extra shipping days were already included in our guidance for the year. And I think you've all modeled for them. And as you know our sales came in pretty much in line with expectations.

About 1% for the year we think is the impact overall for the enterprise and about 4% in the quarter. You're right. It does vary slightly by different businesses within the U.S. in particular. So this is largely a U.S. phenomenon, as opposed to a global phenomenon.

And with respect to the orthopedics business line, which I think you're referring to specifically, I think, Louise, you might have the details on the impact there.

Louise Mehrotra - Vice President-Investor Relations

Yeah. So the additional days in the U.S. in orthopedics was about 2.5 days, and outside the U.S. about 1.5-day average.

Dominic J. Caruso - Vice President, Finance and Chief Financial Officer

So not really much different from the overall total, because that 2.5 days gets you to this 4% and 1% that I talked about earlier.

Matt Miksic - UBS Securities LLC

Got you.

Louise Mehrotra - Vice President-Investor Relations

It was interesting also, when you look at the underlying growth in the orthopedics third quarter, fourth quarter, taking out the additional shipping days, we saw sequential improvement across hips, knees, spine, and trauma.

Dominic J. Caruso - Vice President, Finance and Chief Financial Officer

That's right.

Alex Gorsky - Chairman & Chief Executive Officer


Louise Mehrotra - Vice President-Investor Relations

On a worldwide basis. Okay?

Matt Miksic - UBS Securities LLC

Terrific. Thanks.

Louise Mehrotra - Vice President-Investor Relations

Next question please?


Thank you. The next question is from Larry Biegelsen of Wells Fargo. Please go ahead.

Louise Mehrotra - Vice President-Investor Relations

Morning, Larry.

Larry Biegelsen - Wells Fargo Securities LLC

Hi. Good morning, thanks for taking the questions. Let me just start with med tech, and then I had a follow-up on Pharma.

So, Alex, can you talk about the health of the med tech end markets in the U.S. and emerging markets? And what drives the acceleration for your business specifically in 2016? When I look at the general surgery business, it looked like, adjusting for the extra days in the U.S., that was – or worldwide that was slightly weaker in Q4. So just the health of the end markets in the U.S. and emerging markets. And I had a follow-up. Thanks.

Alex Gorsky - Chairman & Chief Executive Officer

Sure. Thanks a lot for the question, Larry. Look, I think what we would say overall is we continue to see let's say a slightly increasing positive trend. So we saw hospital admissions I believe up around 2%. We saw surgical procedures up a little over 1% in the U.S. That's the most recent data that we have.

If we go outside the U.S. we think rates in Europe have been pretty steady. And even in the markets in which we compete most significantly in the developing markets, we haven't seen a major impact from secular shifts. Perhaps in China some but not dramatic. And then putting that into the context and what that represents overall on our business, we don't see it as a major indicator.

As I look toward 2016, look, there's a few things that cause us to be optimistic about our Medical Device business. And it really starts with innovation. And we've got about 30 products that we'll be launching by the end of 2016. Over half of those have either been launched or are well on their way as we speak.

And what we're seeing is when we're bringing new technology to the market like our new contact lenses, like our new insulin pump, like our new energy instrumentation, like the ATTUNE knee, we're seeing very good uptake. And in fact in those categories, we're seeing share gains. And certainly in areas like electrophysiology endocutters, the same thing. And so we believe that the market does still reward significant innovation when we're introducing it. So that's one aspect.

The second aspect frankly is, one, just improved execution. And I think if you look across all of our device businesses, you think about diabetes care, the major price reset that we had there a couple of years ago. And as all of you know when you take that kind of a reduction, resizing your business, going back into each and every line, and setting it for the new marketplace causes a tremendous amount of change.

If you look at our vision care business last year, we went in and we really increased the cadence out of our innovation pipeline, launching five new products. We did a price reset there to make us more competitive with the ECPs. We made a lot of other internal adjustments to improve our selling and marketing. We are definitely seeing the impact of that now, not only on the sales results of up 8%, but as, and maybe even more importantly, if you look at the leading indicators as far as new share that's being generated and new patient starts in the offices, those things are positive.

Louise mentioned earlier the improvement that we're seeing across our orthopedics business. And look, this is one where we know that when you bring large organizations together, when you standardize quality systems, manufacturing systems, we think that we've made a lot of progress there. And frankly when you compound that with the innovation rollout that we've seen in orthopedics of the ATTUNE knee, the CORAIL hip, the TFNA nail, we're starting to see that come back. As well as some of the – frankly the new approaches that we're taking that Gary will be talking about more in May, where our Ethicon and our DePuy Synthes teams are actually co-selling, co-contracting in a number of very innovative ways.

Compounded with the fact that, look, we think some of the performance issues related to China in our orthopedics are more of a one-time event. That's getting normalized. So as we burn our way through those and head into 2016 overall, we think that innovation, we think changes in our commercial model, we think improved execution, all those things are – make us more optimistic about the growth prospects as we head into 2016.

Larry Biegelsen - Wells Fargo Securities LLC

That's very helpful, Alex. And I just had one follow-up on a biosimilar REMICADE. So obviously there's a panel scheduled – rescheduled next month. So wondering if you can talk about what issues you think we should be listening for? What your expectations are? And what you're seeing in Europe, where biosimilar REMICADE is on the market? And why or why not that might be a proxy for the U.S.? Thanks a lot.

Alex Gorsky - Chairman & Chief Executive Officer

Certainly. Well obviously we'll also be watching the advisory committee and participating in it as well coming up. And we think there's a few things to keep in consideration about this.

And first and foremost is that as Dominic stated earlier, biosimilars are very different from generics. And particularly in this category, keeping the patient in the center of all these. We've got a tremendous amount of experience in the biologics category, going back to PROCRIT, REMICADE, (1:09:51).

And we think that the differences between molecules can have – manifest themselves in significant ways with patients. So making sure. And I think things that we'll be watching for at the AC are, what kind of data do the biosimilars actually have? What kinds of indications? What will be the guidance around substitutability?

All those frankly, sitting here today, are unknowns. We're going to need more clarification. But we think each of those means that the expected uptake, even when a biosimilar does launch, will lead to a significantly different curve than what you see with generics.

We think secondly, it's very important to actually think about it from our patient perspective. And we know for example there's about 2.5 million patients with REMICADE. And about 70% of those are either continuing therapy and have a pretty high satisfaction rate. So if you look at the available population who's likely to be switched, we think it's in the 30% range.

And last but certainly not least, there's the whole issue of the business model and the way that we actually work with customers in this setting. And this is an area where we've got a lot of experience in contracting. We've got some great relationships with providers in this area right now.

We also have a very broad portfolio. If you think about what REMICADE does, but you look more broadly at the performance recently of a product like STELARA, a multi-billion-dollar compound growing at 20%-plus rate. If you look at SIMPONI, same thing. SIMPONI ARIA in particular, the great dosing convenience that it provides. That's another multi-billion-dollar addition that we have to that portfolio.

Then you augment that with the submissions that we have in 2016 planned for Guselkumab, Sirukumab, an IL-23, and an IL-6, we think that that positions us very well with our portfolio and from a contracting point of view with large providers and payers in – certainly in the U.S. but also abroad.

What we're seeing outside the United States is in most of the markets where they're introduced is a relatively minor impact. We're seeing that we're holding onto about 90%, plus or minus. It varies by market. You have to look at each one individually. And it's difficult to project exactly what that impact will be going forward.

But I think when we think of it broadly across all those different areas, what's the clinical data show, what ultimately is the labeling, the regulatory aspects, what about our contracting, the business aspects, and we think all those are very important, will result in a different impact from biosimilars. And ultimately we'll continue to defend our intellectual property as well through what we believe is the right patent in September of 2018.

Larry Biegelsen - Wells Fargo Securities LLC

Thanks for taking the question, guys.

Louise Mehrotra - Vice President-Investor Relations

And just to add to that we have REMICADE in Canada as a Johnson & Johnson product. And we've seen fairly – it's actually still growing in Canada, even with the biosimilar there. Now the biosimilar has a limited indication there, but it's still growing. And we'll be listening to Merck's call as well to see of the latest in Europe.

Larry Biegelsen - Wells Fargo Securities LLC

Thank you very much, guys.

Louise Mehrotra - Vice President-Investor Relations

Next question please?


Thank you. The next question is from Jami Rubin of Goldman Sachs. Please go ahead.

Louise Mehrotra - Vice President-Investor Relations

Morning, Jami.

Jami Rubin - Goldman Sachs & Co.

Thank you. Good morning. Just a – it's noisy. Anyway just a question for you, Dominic, and then I have a question for Alex. Just trying to understand the difference between consensus estimates for 2016 and your guidance. Do you have a sense for what the Street was assuming for non-operating income? When I go back historically, that's been in the $500 million to $600 million range. Clearly it was $2 billion last year. But just curious to know what consensus models had assumed for that?

Secondly, did your guidance assume that the medical device tax would be suspended, as I think we've seen with other device companies? Just curious to know if that savings is reinvested in the business? Or if that is part of the guidance?

And then for you, Alex, just curious to know your thoughts on pricing? I mean we heard Bernie [Sanders] and Hillary [Clinton] last night go after drug pricing again. And I don't think – I think that's also something we're going to hear from the Republican candidates. What are your expectations in terms of pricing in 2016 and 2017? Do you expect that there will be a change in terms of list prices going forward? Thanks very much.

Dominic J. Caruso - Vice President, Finance and Chief Financial Officer

Okay. Jami, let me try to take the first two, and then have Alex – maybe you'll comment on the drug pricing.

You're referring to our non-operating, let's call it the other income and expense line for 2016, what was assumed in analysts' models versus what we have provided in guidance. When we looked at the analysts' consensus models, overall it looked like that number averaged in the high $900s million, so nearly $1 billion. And our guidance of course is somewhere $1.1 billion to $1.2 billion.

So our guidance is slightly higher than the analysts' models. But just as a reminder we always take the opportunity to – since these are portfolio choices to use any of those gains to offset some other expenses we'd like to invest in.

And then with respect to the medical device tax the – we have assumed that it would be a benefit in 2016. But I must say the benefit for us is very, very minor. Remember when the medical device tax is incurred, it's incurred upon the first manufacture of a product. And therefore it can be for, for example, orthopedic companies hung up in inventory for quite some time. So the overall impact of not having a medical device tax in 2016 is not significant for Johnson & Johnson. It may be significant for certain other companies that maybe are pure orthopedic players, but not overall significant for us.

And secondly, I would say that whatever benefit we see there we've already assumed would be reinvested in innovation, because of course during the time that the medical device tax was a drag on earnings, obviously decisions had to be made on where to invest. Now we're happy that with that easement of the device tax for a couple years, we'll be able to actually invest more in innovation in the medical device space.

Alex Gorsky - Chairman & Chief Executive Officer

Yeah. Jami, thanks for the question on pricing. Look, we realize and understand the pricing in pharmaceuticals, let alone in all of healthcare, is certainly a very important issue. And we believe that it's important to consider it just in that way.

As we think about pharmaceuticals for example, they currently make up about 12% of healthcare spending in the United States, slightly higher in Europe. If you think about medical devices, they represent about 6%. And if you go beyond those areas of course, there's a lot of other costs built into that system, ranging from hospital, patient care, insurance companies, many other people.

And particularly in an environment today, where frankly we're seeing such transformational outcomes and moving more and more towards cures, disease prevention, interception than we ever have, because of some of the great science that's being produced.

So we understand and would certainly expect there to be a continued spotlight in this area. Obviously we're working with a lot of stakeholders to try and make sure that we look at it in a very holistic way. And it's very I think difficult at this point in time to try to project what's going to happen in 2016 or 2017. All of us know that the healthcare system not only here in the United States, but frankly around the world, is complex. There's a lot of other – a lot of issues that are intertwined. And – but it's obviously a conversation that we'll be participating in. And ultimately where we want to be part of the solution.

Louise Mehrotra - Vice President-Investor Relations

Thank you. Next question please?


Thank you. The next question is from Vamil Divan of Credit Suisse. Please go ahead.

Louise Mehrotra - Vice President-Investor Relations


Vamil K. Divan - Credit Suisse Securities (USA) LLC (Broker)

Hi, good morning, everyone. Thanks so much for taking the question. So just a couple on the Pharma side. I guess one on the Pharma side and then one other one for Dominic.

You mentioned STELARA, and you mentioned the strong quarter and 20% growth it's showing. I'm just wondering if you can share a little bit, as you thought about 2016 and maybe beyond, your expectation of that product going forward, just given the competition it's going to face from the IL-17s, both in psoriasis and psoriatic arthritis. So is this sort of 20% range still sustainable? Or do you think you'll see more of a decline?

And then second for Dominic, just on the guidance. And I apologize if I missed this. But in terms of your EPS guidance can you comment on what share count you're using to get to that guidance? Or just give some sense of the buybacks against the year that you've sort of incorporated into the way you think about the year?

Dominic J. Caruso - Vice President, Finance and Chief Financial Officer

Sure. Why don't I take that part first? So, Vamil, we obviously – we announced the share buyback in October. And I said we already through the fourth quarter spent about $1 billion dollars of that $10 billion.

In our plans for 2016 we have not assumed that it's totally complete. But certainly more than a majority of the share buyback will be completed by the end of 2016, maybe three-quarters of it, sort of around that range. And that's what we've assumed in our models for 2016, the guidance I just gave.

Alex Gorsky - Chairman & Chief Executive Officer

Yeah. Vamil, thanks for the question. Look, if we look at STELARA, one, it just starts with a great compound. It's had very nice uptake, very good growth. And we've certainly seen that in psoriatic arthritis. But we're also excited about the planned indications in areas like UC and axial spondylitis.

So when you take the profile, the momentum that we're seeing in the current marketplace, and the share that continues to grow, you combine it with some additional indications as we go forward, particularly as part of our broader immunology portfolio, we think that there's – and the other important issue, I believe this category is only about 22% or 23% penetrated. So in terms of new patients that are coming in, all of that represents a nice growth opportunity for this important product.

Louise Mehrotra - Vice President-Investor Relations

Thank you. Next question, please?


Thank you. The next question is from Kristen Stewart of Deutsche Bank. Please go ahead.

Louise Mehrotra - Vice President-Investor Relations

Morning, Kristen.

Kristen M. Stewart - Deutsche Bank Securities, Inc.

Hi. Thanks for taking my question. Two questions, the first for Dominic. I believe a couple years ago you talked about the opportunities for margin expansion within Consumer. We really haven't seen that just yet. With most of the products (1:20:59) in the OTC business, do we expect to see Consumer really starting to reach an inflection point?

And would the goal – I believe, Sandi [Peterson] had talked about 2 years ago at the last kind of Consumer update really getting back into that kind of 20% range – still really achievable in the next couple years?

Dominic J. Caruso - Vice President, Finance and Chief Financial Officer

Yeah. Kristen, we do expect that the Consumer business, now that the products have been launched and the cost remediations associated with the consent decree are largely behind us – although we still comply with the consent decree for another 5 years. We did want to launch those products with the right support. But it is true that we do expect, and we'll see it in 2016 and we'll report on it later in the year throughout the quarters, an improvement in the operating margins of the Consumer business going forward.

Kristen M. Stewart - Deutsche Bank Securities, Inc.

Okay, great. Then for Alex, I guess just following that, will M&A be a key driver to improving the margins or any sort of portfolio management?

And then more broadly – I know I've always asked Dominic this question every now and again. I guess you guys have always talked about the fourth leg. And we've seen some of your competitors go to more solutions-based approach and wraparound programs. I know you have some of those as well, particularly within the orthopedics business. Is that something that you think of when you're thinking about M&A moving more towards a holistic healthcare model and maybe perhaps rolling in some more lifestyle disease management programs or something more on the service side? Thanks.

Alex Gorsky - Chairman & Chief Executive Officer

Sure. Look, I'd just pick up with what Dominic had just said about our Consumer business is that I'm really proud of the work they've done on the consent decree and the great strides that they have taken around quality. In fact, I think in working closely and partnering with the FDA, we likely have a benchmark organization now. And we're really proud of having done that.

At the same time I think it is – as they begin to ship from only remediation to remediation and relaunch across a number of these areas, while certainly keeping a very high eye on quality, as we increase our volumes, as we are able to deepen our relationships with a lot of the major trade partners, that's where we see a great growth opportunity as well. And obviously, that's going to have an impact on our margins as we go forward.

I also think that the other thing that that team is doing is, as we're transitioning more and more to online marketing versus just traditional marketing, the way we're partnering with some of the large customers, I think that there's a lot of opportunities not only to drive share and volume but actually to improve efficiencies on our back end as well.

As I step back and look more broadly, we think the three areas that we're in, Consumer, Medical Devices, and Pharmaceuticals, are all great platforms and great businesses. Of course we would look first for areas that – what is the next ZYTIGA? What's the next vision care platform? What's the next NEUTROGENA? That would certainly be our focus.

Another would be, are there chances to grow in perhaps some of the faster-growing developing markets? With the right kind of opportunity, those are things that we would be interested in.

And then what are ways to complement our existing businesses? I think the way that you pointed out, as the markets evolve we are looking not only at M&A, but also broader partnerships that we've done for example with companies like Google and Verily, where we see a big opportunity to really help transform the robotic surgery space in a pretty significant way longer term.

And then I guess the final option there would be for us to actually acquire something outside the current three. And again, if it's something where we thought there was a lot of unmet patient or consumer need, if we feel that it's consistent with the capabilities that we can bring to bear to actually have it be a successful business, if the financials work, then we would take that step.

Louise Mehrotra - Vice President-Investor Relations

Thank you. Next question, please?


Thank you. The next question is from Bob Hopkins of Bank of America. Please go ahead.

Robert Adam Hopkins - Bank of America Merrill Lynch

Hi, thanks for taking the question. So two things, and I'll just rattle them off. First, I was wondering if you guys could comment a little bit on emerging market growth in Q4 relative to trends earlier in the year? And then, more importantly, just talk about the current operating environment in China. And when do you think we could see a reacceleration of emerging market growth for J&J? That's question number one.

And then question number two is just back to the original question on the 200 basis points of pre-tax operating margin improvement in 2016. I was wondering if you could give us just a little more detail on exactly where that comes from? Maybe mention how much extra spend was there in 2015 that won't materialize in 2016? Just looking for a little bit more color there. Thank you very much.

Louise Mehrotra - Vice President-Investor Relations

Okay. So on the emerging markets growth, excluding the impact of course of Cordis and OCD, it was about 6.5% in the fourth quarter and a year-to-date basis it was about 5.5%. Those are both operational numbers.

Dominic J. Caruso - Vice President, Finance and Chief Financial Officer

And on China, just a couple comments. That China, we did see a slowdown in China primarily in the Consumer business, because both Medical Devices and Pharma businesses still had high single digit growth in China. And we're optimistic about China going into 2016. Our plans are for improved growth in China in 2016.

But I just want to put China in perspective. It's less than 5% of our sales. It's an important market for us longer term with 1.3 billion people and lots of healthcare needs, et cetera. But any short-term changes in their economy is unlikely to have any significant impact on our results.

And then on the 200 basis point improvement, Bob, it's actually across all three lines of the P&L, COGS, selling, marketing, as well as R&D. So in the case of COGS where we have a long-term program that we've been executing on to reduce footprint, we're accelerating some of those programs. That'll benefit us on the COGS line.

On the selling, marketing, and administrative line, I talked earlier about the fact that we had a program in place for a couple years, shooting for $1 billion of cost savings by 2018. We're well on our way. We'll see cost reductions in that line.

And R&D, that depends on the individual licensing deals that we have and the timing of when we would spend those milestone payments or enter into new licensing agreements. But as it looks today the advancement in the portfolio in 2015 from the milestone payments, et cetera, are not expected to be at the same level in 2016 that they were in 2015. So it's across all three lines in the P&L.

And I can't give you an exact number on the amount of extra investment we made in 2015 but just to say that we had $2.8 billion of other income in 2015, well above the years past. And we still improved overall income before tax by not quite that amount. Right? So most of it was reinvested in the business.

Robert Adam Hopkins - Bank of America Merrill Lynch

Great. Very helpful. Thank you, Dominic.

Louise Mehrotra - Vice President-Investor Relations

Thank you. We'll take two more questions. Next question, please?


Thank you. The next question is from Josh Jennings of Cowen & Company. Please go ahead.

Joshua Jennings - Cowen & Co. LLC

Hi. Good morning and thanks for taking the questions. Just have one for Alex. And you have a formal plan in place to accelerate growth in the Medical Device unit that's reasonable. And I believe your target of returning in it to 4% to 5% or 4% to 6% growth. I just wanted to ask how patient you'll be before you look externally in a transformational way? And is this a 12- to 24-month initiative or longer time period that you'll put in place? Thanks a lot.

Alex Gorsky - Chairman & Chief Executive Officer

Yeah. Josh, thanks a lot for the question. What I would say is this is something that has been underway for the last several months. But clearly we're accelerating it.

And whenever you make this kind of a decision, we certainly think about the impact that it has on employees. But we also see it as our responsibility to make sure that this business is positioned for the next 5 years, the next 10 years.

And with that note we have a high sense of urgency about increasing our rate of innovation, about making the business model changes, and ultimately about making sure that we're more competitive and delivering in the markets.

We try to be very clear where our goal is to grow faster than the markets. Even given our size and given our scale, we think we've got over 10 platforms that are $1 billion. The majority of those are number one or number two. But we realize there's still a lot of opportunity.

So while we're pleased with what we've seen, we're far from satisfied. And I know Gary and the rest of his team as well as all of us are completely committed to accelerating the performance of this group to be frankly benchmark in the industry.

Louise Mehrotra - Vice President-Investor Relations

Thank you. And we'll take the last question. And Alex will provide some brief closing remarks. Next question please?


Thank you. Our final...

Louise Mehrotra - Vice President-Investor Relations



Yes. Our final question comes from David Lewis of Morgan Stanley. Please go ahead.

David R. Lewis - Morgan Stanley & Co. LLC

Good morning. Just two quick ones. I'll start with a strategic one for Alex and then a quick Pharma question for Dominic or others. Alex, just thinking about M&A for a second. I know it's been a theme for this call. But how does segment performance influence your willingness to deploy capital in those segments? So are you more inclined to deploy capital in outperforming segments or not?

And I guess related, does it make sense to deploy material capital in devices through M&A until the restructuring has been digested and growth is back to market rates in those franchises? And then I have a quick question for Dominic.

Alex Gorsky - Chairman & Chief Executive Officer

Yeah. David, thanks for the question. Look, it depends on a number of different factors. And obviously as we think about it for example in our Pharmaceutical group, we think that the model that we pull together, where we try to find the next INVOKANA, the next DARZALEX, very early compounds, where frankly we've got solid scientific insight. We bring it inside. And because of our clinical development and our regulatory capabilities, we can launch.

And then very strong sales, marketing, and reimbursement practices around that. Frankly that's what's helped us create the number of $1 billion blockbusters that we've been able to launch since 2009. And I think 16 new products and seven of which are like right at $1 billion or shortly will be. And so we think that's a good model.

In Medical Devices we've done tuck-ins as well as large. And look, I think in both cases, whether it's Pharma or Medical Devices, the smaller tuck-ins are frankly more straightforward to get done. We haven't shied – we won't shy away from large where we think it makes for a significant opportunity. And it's something that we'll continue to look at in Consumer.

As far as the question if it's underperforming or not, I think it depends on why it's underperforming. If it's an exogenous market shift or something else, then obviously that would not necessarily have us shy away from that particular area. On the other hand if it's an internal, more executional issue, absolutely we'd want to make sure that we've got the knitting where we need it before we add onto that particular opportunity.

So that's the way we tend to look at it. But again it's part of a broader strategic question, really on how we're managing the portfolio across the enterprise.

David R. Lewis - Morgan Stanley & Co. LLC

Okay. Very helpful. And then to Dominic, just a quick one for you or the team. Just on INVOKANA, it hasn't come up yet on the call. I wonder if you can just give us a sense of what's happening in the market (1:33:24), as it relates to class expansion or your market share? And can you give us any update on the CANVAS trial? I'm looking at data in 2017. Thank you very much.

Louise Mehrotra - Vice President-Investor Relations

Okay. So I'll give you the market share third quarter versus fourth quarter, which will give you some nice trend information. So and this is U.S. For the total we went from 6.3% in the third quarter to 6.5% in the fourth quarter. Primary care, we went from 5.6% to 5.8%. And endo is at flat at about 13% quarter-to-quarter.

Dominic J. Caruso - Vice President, Finance and Chief Financial Officer

And the reading that we're getting from the field is that most physicians – and in fact some guidelines were recently published that the cardiovascular benefit that we saw with the other SGLT2 is most likely a class effect. And that's the way physicians treat it. And in fact the guidelines were just recently issued that called it a class effect. Our data won't be until sometime mid-2017 I believe...

Louise Mehrotra - Vice President-Investor Relations


Dominic J. Caruso - Vice President, Finance and Chief Financial Officer

...on those results, where we'll actually then be able to put those results in our label. But until then I think the market recognizes it as a beneficial effect on cardiovascular.

David R. Lewis - Morgan Stanley & Co. LLC

Thank you very much.

Louise Mehrotra - Vice President-Investor Relations

Thank you. And so final remarks?

Alex Gorsky - Chairman & Chief Executive Officer

Yeah. So thank you very much, everybody. Look, and in closing I'd like to thank you again for joining today's call. We're pleased with the results we delivered in 2015. And we think our strong underlying operational growth across the enterprise, combined with a very high sense of urgency, gives us a lot of confidence as we head in 2016. And we're optimistic about the opportunities in healthcare and frankly about the underlying strength of our core business. So thank you very much. And I hope everyone has a great day.


Thank you. This concludes today's Johnson & Johnson's fourth quarter 2015 earnings conference call. You may now disconnect. And have a wonderful day.

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