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Johnson & Johnson (NYSE:JNJ)

Q2 2007 Earnings Call

July 17, 2007 8:30 am ET

Executives

Louise Mehrotra - Vice President of Investor Relations

Dominic Caruso - Vice President of Finance and Chief Financial Officer

Analysts

Mike Weinstein – JP Morgan

Glenn Reicin - Morgan Stanley

Larry Biegelsen - Wachovia

Rick Wise - Bear Stearns

Glenn Novarro - Banc of America

Matthew Dodds – Citigroup

Tao Levy - Deutsche Bank

Sara Michelmore - Cowen & Co.

Larry Keusch - Goldman Sachs

Catherine Arnold - Credit Suisse

Bob Hopkins - Lehman Brothers

Lloyd Zeitman – Sanford Bernstein

Presentation

Operator

Good morning and welcome to the Johnson & Johnson second quarter 2007 earnings conference call. (Operator Instructions) I would now like to turn the conference call over to Johnson & Johnson. You may begin.

Louise Mehrotra

Good morning and welcome. I am Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson, and it is my pleasure this morning to review our business results for the second quarter of 2007. With me on the call today is Dominic Caruso, Vice President of Finance and Chief Financial Officer of Johnson & Johnson.

A few logistics before we get into the details. This review is being made available to a broader audience via a webcast accessible through the investor relations section of the Johnson & Johnson website. Included with a copy of the press release that was sent to the investment community earlier this morning is a schedule showing sales for major products and/or business franchises to facilitate updating your models. These are also available on the Johnson & Johnson website, as is the press release.

Following my remarks, Dominic will provide additional commentary on the results for the quarter and the guidance for the year. During the Q&A session following the formal remarks, we will also be happy to address any questions on the share repurchase program announced last week. We expect the call to last approximately one hour, but we will be mindful of allowing time to address your questions.

Before I get into the results, let me remind you that some of the statements made during this call may be considered forward-looking statements. The 10-K for the fiscal year 2006 identifies certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning. The company does not undertake to update any forward-looking statements as a result of new information or future events or developments. The 10-K is available through the company or online.

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

Now I would like to review our results for the second quarter of 2007. If you would refer to your copy of the press release, let's begin with the schedule titled Supplementary Sales Data.

Worldwide sales to customers were $15.1 billion for the second quarter of 2007, up 13.2% as compared to the second quarter of 2006. Our operational growth was 10.8% and currency had a positive impact of 2.4 points. The sales results include the net impact of the acquisition of Pfizer Consumer Healthcare, or PCH, which was completed in December 2006. On a pro forma basis, including the net impact of the PCH acquisition in both periods, worldwide sales increased 3.6% operationally.

If you turn to the schedule showing sales by geographic area, you will see that we achieved growth of 9% in the U.S. In regions outside the U.S., our operational growth was 13%, while the effect of currency exchange rates positively impacted our reported results by 5.4 points.

The Western Hemisphere, excluding the U.S., grew 24.1% on an operational basis; Asia Pacific-Africa region grew by 11.3%; while Europe grew 11%. The results in all the regions have been positively impacted by the acquisition of Pfizer Consumer Health.

If you will now turn to the consolidated statement of earnings, net earnings on a reported basis were $3.1 billion, while earnings per share were $1.05. This compares to $2.8 billion and $0.95 in the same period in 2006.

Please direct your attention to the box section of the schedule where we have provided adjusted earnings information. As referenced in the footnote, the second quarter 2006 results were adjusted to exclude the after-tax impact of in-process research and development of $87 million associated with the acquisition of Vascular Control Systems. There were no adjustments to the results for the second quarter of 2007. On an adjusted basis, second quarter 2007 net earnings and earnings per share were up 6% and 7.1% respectively.

I would now like to make some additional comments relative to the components leading to the adjusted earnings before we move on to the segment highlights. For the second quarter of 2007, cost of goods sold at 28.8% was up 50 basis points as compared to the same period in 2006. The second quarter included the addition of the PCH business to our mix of businesses, increasing cost of goods sold as a percent of sales by an estimated 80 basis points. Partially offsetting this impact was cost improvements, primarily in our Medical Devices and Diagnostics segment.

Selling, marketing and administrative expenses at 33.3% of sales was up 70 basis points as compared to 2006. The addition of the PCH business to our mix of businesses increased these expenses by an estimated 100 basis points, partially offset by continued cost containment efforts in our pharmaceutical business.

Our investment in research and development as a percent of sales was 12.3%, 140 basis points less than the second quarter of 2006. The 2006 investment included the $165 million payment to Vertex Pharmaceuticals for the rights to develop and commercialize VX-950 for hepatitis C in selected regions, including Europe. Adjusted for this one-time payment in 2006, our R&D as a percentage of sales was 12.4%, similar to the 2007 level.

The addition of PCH to our mix of businesses reduced R&D as a percentage of sales by approximately 60 basis points, offset by incremental investments due to a significant number of pharmaceutical projects in late-stage development.

Interest income, net of interest expense, of $36 million was down $160 million compared to the second quarter of 2006, due to a lower cash balance and a higher debt position. Other income, net of other expense, was $117 million in the second quarter of 2007 compared to $98 million in the same period last year.

With regard to taxes, please direct your attention to the effective tax rate excluding special charges shown in the boxed section of the schedule. In the second quarter of 2007, taxes were 23.6% as compared to the prior year rate of 21.2%. Dominic will provide further comments on taxes during his remarks.

Looking at year-to-date data, consolidated sales to customers for the first half of 2007 were $30.2 billion, an increase of 14.5% as compared to the same period a year ago. On a year-to-date basis, operational growth was 12.1% and currency had a positive impact of 2.4 points.

On the consolidated statement of year-to-date earnings, I would first like to draw your attention to the boxed section. In 2007, charges for in-process research and development have been excluded. In 2006, after-tax charges for both in-process research and development and the payment received from the termination of the planned acquisition of Guidant have been excluded. With these adjustments, net earnings for the first half of 2007 were $6.5 billion, or $2.21 per share, up 10% and 12.2%, respectively as compared to the same period in 2006.

Turning now to business segment highlights, I will begin with the consumer segment. Worldwide consumer segment sales of $3.6 billion increased 48.6% as compared to the second quarter of 2006. Operational growth was 45.1% while currency contributed 3.5%. U.S. sales were up 41.6%, while international sales grew 48.1% on an operational basis. On a pro forma basis, including the net impact of the acquisition of Pfizer Consumer Health in both periods, sales were up 4.6% on an operational basis.

For the second quarter of 2007, sales for the over the counter pharmaceuticals and nutritionals increased 89% on an operational basis compared to the same period in 2006. Sales in the U.S. were up 41% while sales outside the U.S. were up 179% operationally. On a pro forma basis, including the net impact of the PCH acquisition in both periods, operational sales growth was 3%.

Double-digit growth of Nicorette and Rogaine and healthy growth for adult analgesics and Splenda were partially offset by slower growth in some of the smaller brands.

Our skincare business achieved operational sales growth of 12% in the second quarter of 2007, driven by strong U.S. sales growth of 20%. Sales outside the U.S. grew 6% on an operational basis. The addition of the PCH products, the Group Vendome product line, and the double-digit growth achieved by Aveeno and Neutrogena were strong contributors to the results. These gains were partially offset by softer sales of Johnson's adult products. On a pro forma basis, including the net impact of the PCH acquisition in both periods, operational sales growth was 7%, ahead of projected category growth rates for the year.

Baby and kids care products achieved operational growth of 11% when compared to the second quarter of 2006. Sales growth in the U.S. was 10%, while sales outside the U.S. grew 11% on an operational basis, driven by the strong performance of cleansers, lotions and creams, and hair care. On a pro forma basis, including the net impact of the PCH acquisition in both periods, operational sales growth was 9% ahead of projected category growth rates for the year.

Women's health achieved operational growth of 7%, with the U.S. growing 10% and sales outside the U.S. up on an operational basis by 5%. On a pro forma basis, including the net impact of the PCH acquisition in both periods, operational sales growth was 2%.

On a pro forma basis, including the net impact of the PCH acquisition in both periods, the oral care business had an operational sales decline of 2%. Across the categories of whitening products, toothbrushes, floss and mouth fresheners, increased competition and new product launch inventories included in the second quarter 2006 results have impacted the quarter-on-quarter comparison for sales. This decline was partially offset by the strong results for Listerine mouthwash.

That completes our review of the consumer segment and I will now review the highlights for the pharmaceuticals segment.

Worldwide net sales for the second quarter of $6.1 billion were up 5.8% on a reported basis and 3.8% on an operational basis as compared to the same period in 2006. Sales in the U.S. increased 4.8%, while sales outside the US increased on an operational basis by 2%.

Our results continue to be impacted by generic competition on some of our products, namely Duragesic oral contraceptive, Sporanox, and Risperdal Oral in certain countries outside the U.S. The combined effect of this generic competition has reduced the second quarter worldwide pharmaceutical growth rate by approximately 4 percentage points, with an approximate 6 point impact on sales growth outside the U.S. and 3 point impact on the U.S. sales.

Additionally, we saw a retraction in the U.S. market for erythropoietin-stimulating agents, or ESAs, as a result of the ODAC discussions, the label changes and the potential changes to reimbursement. This retraction has impacted the overall pharmaceutical growth rate by approximately 2.5 points.

Procrit/Eprex had a combined operational decline of 8%, with Procrit down 14% and Eprex up 2% on an operational basis. Strong results in oncology was the major driver of the Eprex growth. Procrit results have been impacted by a combination of a decline in the market versus the second quarter of 2006 and our competitors’ anti-competitive contracting strategies. Procrit aggregate share across all markets was approximately 43% in the second quarter of 2007, down 1 point sequentially and stable versus the second quarter of 2006. Increased share in the hospital and retail markets was offset by lower share in the oncology clinic.

Let me now move on to discuss some of our growth drivers. Our antipsychotic franchise, which includes Risperdal Oral, Risperdal Consta and Invega had operational growth of 7% when compared to the same period a year ago, with U.S. growth of 15% and an operational sales decline outside the U.S. of 2%. Sales results outside the U.S. were impacted by generic competition for Risperdal Oral in certain markets.

Growth was fueled by the global success both of Risperdal Consta, our long-acting injectable formulation, and the U.S. launch earlier this year of Invega. Although Invega sales have been softer than we had anticipated, we continue to see progress on both the reimbursement front and the script uptake. Risperdal Consta achieved second quarter sales of approximately $280 million, up 30% of an operational basis.

In the quarter Invega received marketing authorization in the European Union. It has been launched in the UK and Germany. We are currently working with the reimbursement authorities in the remaining countries in Europe and will launch Invega as reimbursement is obtained.

We remain on track to file paliperidone palmitate in the U.S. at the end this year and anticipate filing in the EU in 2009. Remicade, a biologic approved for the treatment of a number of immune mediated inflammatory diseases, grew by 12% when compared to the second quarter of 2006. Growth in the U.S. was 5%, while sales to our partners for markets outside the U.S. grew by 34%. Market growth in the anti-TNF category continues to be strong and the competitive dynamics have intensified with the new entrance and the expansion of labels for existing competitors.

Sales of Topamax, which is approved for the treatment of epilepsy and migraine prophylaxis, increased operationally by 16%, with very strong growth of 20% in the U.S. due to continued growth in share in the migraine category. Sales outside the U.S. declined by 2% on an operational basis due to generic entries in certain markets.

Sales of Levaquin were up 5% operationally when compared to the same period a year ago due to strong market growth. Aciphex, as it is known in the U.S., and Pariet outside the U.S., is a proton pump inhibitor that we co-market with Eisai. Overall operational growth was 6%. Sales growth in the U.S. of 10% was due to strong market growth partially offset by lower script share. Sales outside the U.S. grew at a modest rate of 2% on an operational basis due to increased competitive challenges, particularly in Europe.

Concerta for attention deficit hyperactivity disorder grew 16% in the second quarter as compared to the same period last year. Sales in the U.S. were up 14%, while sales outside the U.S. grew 25% on an operational basis with very strong growth in all regions.

As a brief update on the pipeline, we are pleased to announce that the U.S. filing for TMC125 began in June and is expected to be completed during this week. TMC125 was previously granted fast-track approval status by the FDA. This month, the results of the TITAN trial, PREZISTA versus Kaletra, and the DUET trial, TMC125 plus optimized background regiments, and optimized background regiment plus PREZISTA were published in The Lancet.

In the TITAN trial, PREZISTA met both its primary and secondary objectives: non-inferiority to Kaletra and superiority in virological response versus Kaletra.

In the DUET trials, TMC125 demonstrated significant efficacy in patients with NNRTI resistance, the first NNRTI to do so. We are very pleased with the results of these trials. Top line results for Zarnestra were reviewed last week. While 8% of the patients showed complete remission, the product failed to show a statistically significant difference in efficacy versus best supportive care for survival, the primary endpoint. While we continue to assess whether or not Zarnestra demonstrated activity sufficient to continue to explore the drug for other indications, we will not file it for the AML indication.

Additionally, on July 9 the Phase III results for Rivaroxaban were presented at the ISTH Congress in Geneva. Rivaroxaban demonstrated superior efficacy versus Enoxaparin in prevention of BTE in patients undergoing knee replacement surgery and similarly, low rates of major bleeding compared to Enoxaparin, the gold standard. We were very pleased with both the efficacy and safety results demonstrated by the record 3 study.

We continued to make significant progress during the quarter in advancing our pharmaceutical pipeline. Let me now turn to the medical devices and diagnostics segment.

Worldwide medical devices and diagnostics segment sales of $5.4 billion grew 2.8% operationally as compared to the same period in 2006, while currency contributed 2.3 points to bring total growth to a total of 5.1%. Sales in the U.S. grew 1.1%, while sales outside the U.S. increased on an operational basis by 4.4%. Sales excluding the impact of lower sales of drug-eluting stents grew 9% operationally, with healthy growth seen across the other franchises.

Now turning to the franchises, starting with Cordis. Cordis sales declined operationally by 21% in the second quarter due to lower sales of Cypher, our sirolimus-eluting stent, partially offset by strong growth in both our Biosense Webster business and our endovascular science business. U.S. sales were down 26% and sales outside the U.S. declined 17% on an operational basis.

Cypher sales in the U.S. declined 41% to approximately $210 million. A reduction in PCI procedures and a lower penetration rate of drug-eluting stents resulted in an estimated market decline in the U.S. of over 40% versus the second quarter of 2006. Estimated share in the U.S. of 46% increased 1 point from both second quarter 2006 and first quarter 2007.

Sales outside the U.S. of approximately $240 million declined 30% operationally. The international market decline versus the second quarter of 2006 is estimated at nearly 15%, while the estimated market share in the quarter of 43% is down from 52% in the second quarter of 2006 and 48% last quarter. Increased competition has impacted the share outside the U.S.CYPHER remains the worldwide market leader in drug-eluting stents, with an estimated 44% global market share.

The Biosense Webster franchise, our electrophysiology franchise, achieved operational growth of 15%, with similar results both in and outside the U.S. Endovascular stents also achieved healthy growth in the quarter due to the newly-launched rapid exchange carotid system and the continued growth of our chronic total occlusion product.

Our DePuy franchise had operational growth of 7% when compared to the same period in 2006, with the U.S. growing 3% and the business outside the U.S. growing by 14% operationally. Both our hip and sports medicine business continue to experience strong operational growth. In the U.S., sales were impacted by the continuing competitive challenges in our spine business and the lower sales of trauma products to an international distributor.

Ethicon worldwide sales grew operationally by 6%, with the U.S. sales up 9% and sales outside the U.S. up 5% on an operational basis. Double-digit growth across many categories, namely hemostasis, women's health, biosurgicals, and meshes, complemented growth in suture sales, were the major contributors to the strong results this quarter.

Ethicon endo surgery achieved operational growth of 9% in the second quarter of 2007, with the U.S. and international markets growing at the same rate. The endo cutter, a key product in performing bariatric procedures, grew nearly 15% operationally and was a major contributor to the growth. Strong double-digit results were achieved in the business due to the continued success with Harmonic Scalpel.

The advanced sterilization products continue to show healthy, double-digit growth due to a combination of increased equipment installations and an increased demand for consumables due to the expanding installation base.

The LifeScan franchise achieved operational growth of 11% in the second quarter of 2007. The U.S. sales increased 7%, reflecting the continued success of the UltraMini and Ultra Strip, complemented by strong double-digit growth of the Animas business. Sales outside the U.S. increased to 16% on an operational basis due to the strong results of the Ultra products.

ORTHO clinical diagnostics sales grew on an operational basis 8% in the second quarter, with the U.S. sales up 16%. Sales outside the U.S. were flat on an operational basis, impacted by the timing of instrument shipments and the lower sales of donor screening products. Results in the U.S. were driven by the rapid uptake of the Chagas screening assay and the strong results achieved with the immuno-diagnostic process.

Lastly in the medical devices and diagnostics segment, our vision care franchise achieved operational sales growth of 17% with sales in and outside the U.S. growing at similar rates. Operational growth for the franchise was driven by the global success of Acuvue Oasys, Acuvue Advance for astigmatism, and Acuvue Moist. Additionally, outside the U.S. one-day Acuvue Define continued to make strong contributions to the growth in the quarter.

That completes highlights for the medical devices and diagnostics segment and concludes the segment highlights for Johnson & Johnson's second quarter of 2007. I will now turn the discussion over to Dominic Caruso for some additional comments.

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Dominic Caruso

Thank you, Louise and good morning, everyone. We are pleased with our solid financial results for the second quarter, as Louise highlighted for you. During the second quarter, our pro forma sales results, reflecting the net impact of the Pfizer Consumer Healthcare business in both periods, was 3.6%. This reflects the impact of the decline in the market for our erythropoietin-stimulating agents and drug-eluting stents, two important markets.

Our solid earnings performance for the quarter demonstrates our ability to continue managing our costs and improving our margins even in the face of these sales challenges. In fact, if you were to look at the impact of adding the PCH business to our base business for 2006, as we filed in an 8-K earlier this year, you would see that our pro forma operating margin for 2006 was negatively impacted by 1.2 points. However, when you look at our operating margin for the first six months of this year, now including the PCH business, you will see an operating margin of 26.8%, or only four-tenths of a percent negative impact versus the 2006 period, thus indicating leverage in the base business of approximately eight-tenths of 1%.

When we provided updated guidance for the year on our call with you in April, we indicated that growth in earnings for the remainder of the year would be balanced across quarters. That would have implied EPS of approximately $1.02 for the second quarter. Our performance of $1.05 exceeded both our own estimates and consensus estimates of $1.00 for several reasons: sales were stronger than we expected despite the sales challenges noted earlier; we accelerated our margin improvement through continued cost management; and we lowered our tax rate slate.

A word on share repurchases. As you know, last week we announced a $10 billion share repurchase program, the largest in our history. We intend to finance this repurchase program through available cash, but we will also increase the debt we have outstanding. The program is open ended and the level of debt we will assume is dependent on how quickly we repurchase the shares.

A number of you have asked us how long do we think it will take for us to complete the repurchase? I cannot be specific, as the program is open ended and there are some guidelines that impact the timing. In any event, we expect the EPS impact in 2007 to be modest and we will update you on the impact for 2008 when we provide guidance for 2008.

This share repurchase program, along with our dividends, demonstrates our strategy of returning value to our shareholders while allowing us the flexibility to continue to invest in business-building activities when they materialize.

Now, just a few words on the integration of the Conor and PCH acquisitions. Integration of the Conor acquisition is proceeding nicely. Despite the setback we had with the COSTAR II trial results, we continue to see the promise of this new drug delivery technology, as we are now applying it in various doses and profiles for sirolimus solution from the Conor stent, obviously including among them a pattern similar to our CYPHER stent. We expect to be in human trials in early 2008.

The PCH acquisition integration work proceeded as scheduled during the second quarter and we remain on track to meet or exceed the synergy targets we have established and previously communicated to you.

That said, I would like to provide some comments for you to consider as you refine your models for 2007. Let's start with a discussion of cash and interest income and expense. During the second quarter of 2007, the company continued to generate strong cash flows. At the end of the second quarter, we had $0.5 billion of net debt. This is approximately $6 billion of cash and investments and $6.5 billion of debt; this as an improvement of $2 billion in our overall net debt position from year end 2006, which was $2.5 billion. We achieved this improvement while completing the $1.4 billion acquisition of Conor Medsystems during the first half of this year.

Turning to interest income, we had net interest income of $36 million for the quarter. For purposes of your models, and excluding any impact from the share repurchase program and assuming no additional major acquisitions, I suggest you consider net interest income in the range of $150 million to $200 million for the year, consistent with our prior guidance.

Turning to other income and expense, as a reminder of the nature of this account, this is the account where we record royalty income as well as one-time gains and losses arising from such items as litigation, gains or losses from investments by our development corporation, or asset sales. This is also the account where we recorded a gain on the divestitures of certain brands in connection with the PCH acquisition in the first quarter as well as integration costs associated with PCH acquisition. This account is difficult to forecast, but assuming no other major one-time gains or losses, I would recommend you consider modeling other income and expense for 2007 as a net gain ranging from approximately $150 million to $200 million, slightly higher than our prior guidance.

Now a word on taxes. For the second quarter of 2007, the company's effective tax rate, excluding special charges, was 23.6%, as compared to 21.2% in the prior year period. Just by way of reminder, in the 2006 period we reversed tax reserves related to our Tibotec subsidiary once that subsidiary received approval of its first product, Prezista. We now suggest that you model our effective tax rate for 2007 in the range of 23.5% to 24%. As always, we will continue to pursue opportunities in this area to further improve upon this rate as the year unfolds.

Turning to sales and starting with operational sales growth, we are pleased with our second quarter performance of 10.8% operational growth. Considering some of the challenges we may face for the remainder of the year, given the still uncertain outcome of issues discussed by the FDA at the ODAC panel in May, as well as the proposed reimbursement changes in the market for erythropoietin stimulating agents, as well as the erosion we are seeing in the market for drug eluting stents, we would be comfortable with your models reflecting operational sales growth for the full year between 11.5% and 12%, slightly lower than our previous guidance.

Regarding currency, we cannot predict the impact that movements in currency will have on our sales growth and we are not providing a forecast on currency, but to give you a sense of possible currency impacts, if currency were to remain where it is today, currency would have a positive impact to our full year sales growth of approximately 2.5%.

Now turning to earnings. When I last checked, the First Call mean estimate for our EPS for full year 2007 was $4.04 per share, and this included both the dilutive effect of the PCH as well as the Conor acquisitions, but not including any in-process R&D charges or other special items.

Although we are pleased with our earnings performance in the second quarter, when considering the uncertainties in the market for ESAs and drug-eluting stents that I referred to earlier, we suggest you consider full year EPS estimates, excluding the impact of IP R&D charges or other special items, of between $4.02 and $4.07 per share, consistent with our previous guidance.

That concludes my comments. I look forward to updating you throughout the year at our future quarterly earnings calls. Thank you and now Louise, back to you.

Louise Mehrotra

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mike Weinstein – JP Morgan.

Mike Weinstein – JP Morgan

Thank you, good morning. Dominic, can we just spend a minute on those last comments relative to the guidance? The reduction in the organic sales growth expectations for the year is really a function of what you are seeing in the ESA market? Is that fair, or is there something additional to that?

Dominic Caruso

Well, it is what we are seeing currently in the ESA market and also what we are seeing in the drug-eluting stent market.

Mike Weinstein – JP Morgan

If you want to add any commentary into what you saw during the quarter in the ESA market that maybe has reduced your expectations there?

Dominic Caruso

Sure. The market for ESAs in the quarter we believe was down about 14%, and obviously we think that there's still some uncertainty as to how that market will develop pending the outcome of the FDA's final decision coming out of the ODAC panel and also the CMS final decision on reimbursement.

Mike Weinstein – JP Morgan

And then on the bottom line, you are sticking with the previous guidance, even though you showed some upside this quarter and your gross margin particularly was strong. Is that conservatism? Is that just because you are being a little more cautious on the top line? Just maybe a little bit more commentary there.

Dominic Caruso

Sure, Mike. I think given those uncertainties that I mentioned earlier, I just think it is prudent at this point to wait and see what happens with the FDA final decision and the CMS final reimbursement decision before we adjust guidance for the year. So we are probably being slightly conservative there pending those uncertainties. Obviously, those will be fully known to us in the next several months and we will continue to update you as we normally do when we learn more.

Mike Weinstein – JP Morgan

Could you add a little bit more on the strength of the gross margin in the second quarter? Because we've got 90 basis points above what we had been modeling, that obviously as you're showing those gains sequentially despite the erosion in the drug-eluting stent business and the Procrit/Eprex business, so give us a little bit better inside into how you are doing that?

Dominic Caruso

Right. Louise mentioned it in her comments earlier. We saw some cost improvements throughout our businesses, particularly in the medical devices and diagnostic businesses, and we saw some benefit to better pricing in the second quarter in some of our pharma business.

Operator

Your next question comes from Glenn Reicin - Morgan Stanley.

Glenn Reicin - Morgan Stanley

Good morning, folks. Thanks for taking my call. A couple of real quick questions. Dominic, what was in the other income line, if you can try to quantify?

Two drug questions. Can you talk a little bit about the timing for the Rivaroxaban trial for AF and also talk a little bit about the impact of generic competition for both Risperdal and Topomax? Any way of quantifying that for the year and next year?

Dominic Caruso

Well with respect to other income, that line typically has royalty income, which is generally around $100 million a quarter. So you saw $117 million, I think it is, for this quarter and $90 million or something in the prior year quarter. So other than that, there is just small items going in and out of that line, nothing of any significance, as contrasted with the first quarter, Glenn, where we had the gain on the sale of some of the brands we had to divest in connection with the PCH acquisition. So this quarter really nothing unusual in the other income line.

Glenn Reicin - Morgan Stanley

But the integration costs usually offset that royalty rate?

Dominic Caruso

They do. The integration costs are in that line, but they don't necessarily offset that royalty rate. They do offset some other one-time gains and losses on small asset sales and things of that nature. With respect to the Riva trial for AF, Louise, can you help me with the timing there?

Louise Mehrotra

It is actually in Phase III at this point and we actually haven't given any timing beyond the fact that it is in Phase III at this point, Glenn.

Glenn Reicin - Morgan Stanley

Feel free to, right now.

Louise Mehrotra

We will save that for a later time.

Glenn Reicin - Morgan Stanley

And then just the impact of generics for both Risperdal and Topomax. I had not anticipated that. What should we factor in for the year?

Dominic Caruso

We can't give you specific estimates for generic erosion for the year. Talking about Risperdal, we have seen generic erosion already in Canada, Japan and certain EU markets. The significance of that is, I don't know, Louise, about 2 points of growth in our OUS market, basically.

Louise Mehrotra

We wouldn't actually break that out specifically, but you did see the OUS in Risperdal declining about 2% and it was growth in the other markets.

Glenn Reicin - Morgan Stanley

Is that steady or should it accelerate going forward? What do you think?

Louise Mehrotra

Wouldn't want to give that type of prediction, but Dominic has given you the countries that have gone generic at this point.

Operator

Your next question comes from Larry Biegelsen - Wachovia.

Larry Biegelsen - Wachovia

Could you please give us a little bit more specific update on DES, drug-eluting stent market trends, pricing, procedure volume, DES penetration if possible, in the U.S. and Europe? And, a little bit of your expectation going forward? I mean has PCI volume and drug-eluting stent penetrations stabilized in your view?

Dominic Caruso

Let's talk about the U.S. market. We saw procedure, total PCI volume, decline by about 13% from the second quarter of 2006. In terms of penetration rates, we saw penetration in the mid-60s in the most recent quarter, lets call it 65% or thereabouts. That is down from 84% penetration in the second quarter of '06 and that 65% or thereabouts penetration rate we saw stabilize in this quarter as compared to the previous quarter.

Pricing, we saw some deterioration in pricing, about 3 points of price deterioration in the U.S. market.

Larry Biegelsen - Wachovia

And Europe?

Louise Mehrotra

Europe is about similar in the penetration rate and we actually saw the market decline about 14% versus the second quarter of 2006. Now, it is different depending on which market you are in -- EU versus Japan -- but about 14% down in the quarter.

Larry Biegelsen - Wachovia

Louise, the decline was due to what? Procedure volume or pricing or penetration or all of the above?

Louise Mehrotra

Pricing is down about 3% as well OUS and penetration is about the same as it was 2006.

Larry Biegelsen - Wachovia

So the difference is PCI volume declined?

Louise Mehrotra

I don't have the specifics on that, Larry, for OUS. I only have it for the U.S. market, but the penetration is very similar in the EU and Japan versus the second quarter of 2006.

Larry Biegelsen - Wachovia

And one other question on Eprex. The number was strong in the quarter relative to our model. Can you talk about your expectations for Eprex in Europe with new branded and generic competition there? Thank you.

Dominic Caruso

Sure. Well, we won't give you specifics, obviously, on what we expect Eprex to do, we do know that there are at least three biosimilars, let's call them, not approved yet, they are recommended for approval in the EU countries. We don't expect to see those hit the market until later this year in the fourth quarter, so we don't expect much of an impact this year. When we talk to you about our '08 expectations, we will obviously take that into consideration once we see their impact at the market.

Operator

Your next question comes from Rick Wise - Bear Stearns.

Rick Wise - Bear Stearns

Good morning, Louise and Dominic. A couple of questions. First, perhaps you could go back to Invega. This is the first time I have heard you comment that the launch progression is happening in a softer way, I think, were your words, softer than expected way. So you are off to a slow start. What do you think the factors are there and what are you doing and what effect might it have as we look out over the next few quarters or year?

Dominic Caruso

Well, let me provide a few comments and Louise, certainly chime in. The major factor in the slower than we anticipated uptake of Invega has to do with reimbursement trends, as we mentioned in previous calls. There continues to be a challenge in getting Invega into a higher-tier reimbursement. It does get included on formularies, but sometimes at a third tier or with prior authorization, et cetera. So access is a major factor in the adoption of Invega at this time.

We are continuing to work through that. As you know, we have spoken to you before about there are certain waiting periods that are now expiring before the product can be put on certain formularies. We are working through that. We continue to see progress as we work through it and in certain accounts where we don't see as much restricted access, we obviously see better share outcome in those accounts than others.

So, Rick, we are going to have to just continue going through it and obtaining more and more favorable reimbursement as we proceed, and our teams are dedicated to doing that formulary by formulary, state by state, et cetera.

Rick Wise - Bear Stearns

It sounds like it is not going to be much of a contributing factor in '07. Do you think that process has a more positive impact in '08? Is that what you are assuming? Or should we assume?

Dominic Caruso

Well, we think our efforts will have some impact. It is going slower than we expected and we will have to see how much of an uptake we get towards the latter part of this year before we can accurately predict what it will do in '08.

Rick Wise - Bear Stearns

Dapoxetine seems to be back on the radar screen. Are you still on track to file before the end of '07 in Europe? Are you feeling more optimistic and hopeful about the timing of a U.S. filing?

Louise Mehrotra

We are still on track to file in Europe in selected countries and the strategy in the U.S. is still being worked through and we are in discussions with the regulatory agencies on that. So there is no update on Dapoxetine versus what we had said on the June 7 call.

Rick Wise - Bear Stearns

Two more quick ones. California Blue Shield announced, I think it was yesterday, that they are restricting reimbursement generally, but were requiring new patients get started on Procrit. Is this a trend that we're likely to see continue in your view and is it some sort of net positive for J&J Procrit that we should understand?

Dominic Caruso

It is hard to predict. We found it actually surprising that they came out with their conclusion prior to CMS concluding on the national coverage decision. Obviously we are happy that they selected Procrit as the product to reimburse, but we were a little disappointed that they actually adopted some of the more stringent reimbursement guidelines that CMS had suggested.

It is too early to tell, Rick. I can't really tell you whether that is a net positive. It's positive in the sense that it is Procrit. It is negative in the sense that it is harsher reimbursement than we would have liked to have seen.

Rick Wise - Bear Stearns

One last quick one on the share repurchase. Dominic, are there any implications here for how we should think about the opportunities for acquisitions? Is this any kind of signal that maybe there are fewer attractively-valued acquisitions there and therefore you have decided to be a little bit more aggressive on the share repurchase front? Thanks so much.

Dominic Caruso

Sure, Rick. I wouldn't read too, too much into our share repurchase program other than our continuing our strategy of returning value to shareholders. As you know, we are very disciplined in our acquisition approach and as you know there has been some recent acquisitions in the market where we thought, and you may have thought also, the price was pretty high given the asset and its potential. But that does not mean that should the right asset come along at the right price and where we believe we can generate significant value for shareholders that we wouldn't move forward. We would, despite the fact that we increased our share repurchase program.

Operator

Your next question comes from Glenn Novarro - Banc of America.

Glenn Novarro - Banc of America

Two questions on pharma. One, you mentioned price increases in pharma in the quarter. Any drugs particularly get increases that were above the level from last year?

Secondly, when I plug into my model the drugs that you have reported, I have an other line that seems to do a little bit better as a result. So is Prezista doing better? Is Natrecor doing better? Are there any of the drugs that you don't report running ahead of expectations at this point?

Dominic Caruso

On price, just to remind you on one thing. We are looking at comparisons quarter to quarter. You may remember last year when we had the first year of the impact of MMA. Through the first half of the year we had a hard time estimating what the net impact would be and in the third quarter, we recorded a positive adjustment in the third quarter to make up for the differences that we saw in the first and second quarter of our estimates versus the actual pricing, primarily as a result of dual eligibles.

So in the first half of this year, both first quarter and second quarter, you have an unusual comparison because those adjustments for last year were not made until the third quarter. So you see some benefit to price just because adjustments were made in the latter period in '06 versus '07.

Having said that, we do see continued price in the dual eligible population and the products that benefit the most in that regard are Risperdal and Topomax.

Glenn Novarro - Banc of America

Then any of the other non-disclosed drugs doing better than expected? Again, when I worked through my model this morning, it seemed like that other bucket wound up doing better than I thought. So is it Prezista, is it Natrecor? Any color would be helpful.

Louise Mehrotra

We saw a strong growth in Prezista and we also saw strong growth in Velcade. Those are two of the bigger ones that are in that other bucket of growth.

Operator

Your next question comes from Matthew Dodds - Citigroup.

Matthew Dodds - Citigroup

For Cypher, even though the sales are declining, are you still planning on improving manufacturing so you can get better margins out of the products going forward in the U.S.?

Dominic Caruso

Yes, absolutely, Matt. We are still moving forward with plans to actually change the manufacturing process to a newer process, which makes it more efficient to produce the product.

Matthew Dodds - Citigroup

How long will that take, timing-wise?

Dominic Caruso

I am not certain on the timing. We have already begun some of the manufacturing construction work in Ireland so we are well on our way there, but I can't give you specific timing.

Matthew Dodds - Citigroup

One other question is on Remicade OUS, that has continued to grow at a pretty strong clip. Can you at least say if that growth is coming more from Europe or Asia Pacific, rough split?

Louise Mehrotra

We actually don't have that information at the corporate level. We get only one number from our company. But you are right, it was growing strongly.

Operator

Your next question comes from Tao Levy - Deutsche Bank.

Tao Levy - Deutsche Bank

As we start to think about the back half of this year and on a pro forma basis you're reporting sort of this mid single-digit top line growth. Are there opportunities towards the back half of this year heading into 2008 where you might take a more aggressive stance on a restructuring, assuming the top line doesn't accelerate from here on? It seems like there are some challenges, obviously, on the drug-eluting stent, on the EPO front, that is going to limit any potential upside over the next two quarters.

Dominic Caruso

Well, one thing I will say is that we constantly review our cost structure and we are constantly finetuning resource allocations and the like. We do that as a normal course in all the businesses of J&J throughout the year and obviously during the business planning process, which is going on now, we look to do more of that as we proceed into 2008.

Having said that, with regards to any major restructuring program or the like, should we embark on anything of that nature, we will obviously we will let you know as we normally do. We will be totally transparent about it, but it is too early to comment on that today.

Tao Levy - Deutsche Bank

If you could touch on the orthopedic business. There were some areas of strength, some areas of weakness, maybe you could flush out a growth rate in hip, knees, and spine? Also you have mentioned pressures in spine. Is there a new head of spine that has come on board yet? I don't remember hearing about that.

Dominic Caruso

Well, let me just comment on the management team. There is a new head of the entire orthopedic franchise. We are very pleased to have Mike Mahoney joined us. He has been on the job now for somewhere between 30 and 90 days, so we will give Mike a chance to get his arms around it. But we are very confident that he is a very seasoned executive and he will do very well in that franchise. As far as the specific growth rates, Louise has them at her fingertips here, so I will let her comment.

Louise Mehrotra

So this is all operational growth. In the U.S. hips were up 13%, OUS they were up 12% for a total of 13%. Knees in the U.S. were up 5%, OUS up 9%, and for a total of 7%. Spine in the U.S. was actually down 3%, OUS it was up 32% for a total of 5%. Hopefully that helps you with your models.

Operator

Your next question comes from Sara Michelmore - Cowen & Co.

Sara Michelmore - Cowen & Co.

Dominic, just to go back to this Procrit issue. So if I am interpreting what you're saying correctly, it sounds like, in terms of the guidance range reiteration today, that you are assuming a -- I hate to use the words worst case -- but a continued deterioration of Procrit within the current guidance scenario. Is that correct?

Dominic Caruso

While I wouldn't call it worst case. Let's just recap a little bit what has happened with Procrit. So in March of this year, we had a label change and then there was a number of news articles written, lots of publicity leading up to the ODAC panel. Then we had CMS come out with pretty harsh reimbursement proposed guidelines immediately after the ODAC panel.

So if you take the first two phenomena, you had the label change and publicity leading up to the ODAC panel, we have seen a market decline that we believe is a direct result of those two events.

What we don't know, Sarah, is what the ultimate outcome of the FDA's conclusion as a result of the ODAC panel and the CMS reimbursement conclusion is. That we haven't totally factored in and I think it is premature for us to speculate on that. So therefore, as someone asked earlier, I would say that we are being prudent with our guidance for the year pending the outcome of those uncertainties.

Sara Michelmore - Cowen & Co.

Was the rate of decline during the quarter more marked towards the end of the quarter as opposed to the beginning of the quarter? Was there a real difference in terms of the rate of sales decline?

Dominic Caruso

I don't have it available, Sara. I don't have it on a monthly basis, so I really can't answer the question.

Sara Michelmore - Cowen & Co.

Just a couple of clarifications on the consumer business. You had mentioned that you were on track to either meet or beat some of the targets that you had communicated to us earlier. Were you talking in terms of timelines or are there additional synergies or cost savings from the integration that you might be able to realize?

Dominic Caruso

I was referring to the synergy estimates, the cost saving estimates. Things are on track, they're moving ahead. We will obviously strive to even achieve more. Folks are working very hard. This is a very complex integration as you can imagine, but I can tell you we're really proud of the folks working on this and they are delivering according to plan. They are not skipping a beat and they are looking for additional opportunities wherever they can.

Sara Michelmore - Cowen & Co.

In terms of the oral care franchise, I was surprised that on a pro forma basis it declined. I know it sounds like there were some tough comparison issues there. Can you just talk to us in terms of what kind of normalized growth rate for that business should be just in terms of our modeling?

Louise Mehrotra

Well, we actually don't give growth rates specifically for any one of the franchises. I believe the growth rate for the market is in about the 3% range and I will just verify that as we get into the next question. But I think it is about 3% of the annual growth rate for that market for oral care and of course we want to exceed that.

Sara Michelmore - Cowen & Co.

Right. It sounds like Listerine is a higher growth rate than the market.

Louise Mehrotra

Listerine is doing very well, very well.

Dominic Caruso

The issues in the oral market are really not Listerine-related. They are related to toothbrushes, flosses, other elements, and launches in prior periods.

Sara Michelmore - Cowen & Co.

Lastly, is there any update in terms of the timing for over-the-counter Zyrtec?

Dominic Caruso

The only thing I can tell you about, Sara, is it goes off patent at the end of this year. As you know, we have the U.S. switch rights and we are finalizing our plans to launch the product once it goes off patent.

Louise Mehrotra

I just confirmed the oral care market is about 2%, predicted to go up in 2007 in constant currency. At the June 7 day, we were clear that we wanted to beat the markets, we are aiming to beat the markets in all the categories.

Operator

Your next question comes from Larry Keusch - Goldman Sachs.

Larry Keusch - Goldman Sachs

Dominic you have obviously, with the $10 billion share repurchase, have certainly suggested to people that you guys will continue to use your balance sheet. I just want to get some sense of view, philosophically forgetting about '07, but looking forward to the '08/'09 how do you think about your balance sheet? How much cash do you want to use there? Are you committed to continuing to look for further cost reductions?

I know you have hired a procurement officer, you are outsourcing some of your HR function. You are going to face a couple of tough years here and I am just really trying to get a feel for how you guys are thinking about your objectives as it relates to the bottom line?

Dominic Caruso

Larry, as I have said on many occasions, we have been able to run this business for a long time growing earnings at a rate faster than sales. We continue to manage our business that way. We always look for efficiencies and obviously when sales growth is slower than it has been in historical periods, then the ability to do that is harder. So we have to look at more programs, more activities, and accelerate certain activities that are already underway.

What I can tell you is that we are committed to continuing to look at our cost structure, reducing our cost structure. We have a number of initiatives already that we are undertaking. I talked to you about the chief procurement officer we put in place last year. We are already seeing benefits of that and we will hope to see more benefits of that in '08.

We just recently outsourced our global HR function to an outsourcing group where we obviously can achieve efficiencies with some back office operations there. That is a program that has to be implemented, but obviously as it gets implemented, it will reap some benefits.

And then both in the IT area and in the finance area, these four areas together HR, IT, finance, and procurement, there is a group of activities in the corporation where we believe standardization is a significant opportunity for us to lower our cost structure and leverage our size, quite frankly, in a way that we haven't been able to capitalize on in the past. There are programs going on in all four of those areas.

As far as cash, I would say that our philosophy remains as I have described it before, where we generate strong cash flows. We look to obviously first, utilize those cash flows for dividends and although we don't have a policy, as you know we have increased the dividend for 45 consecutive years.

Then we look for enhancements to our business through business building activities. That is obviously always our first priority because it provides a sustainable growth platform. And then obviously we will look, as we have now demonstrated and we just did one last year, look to return more cash to shareholders through share repurchases.

So we are constantly looking at the right mix of cash and debt and where we should be using the cash. We are constantly looking at improving our margins, as you saw just even in this most recent quarter, and will continue to do so.

Larry Keusch - Goldman Sachs

Is it fair to say that there is an increased focus on doing all of those sorts of things in the '08/’09 time period as, again, that top line does slow with the generic competition? The other part of that is, what is your ideal cash level when you think about it, Dominic? Where do you want that cash on the balance sheet?

Louise, I don't know if you have this information, but the vision care business obviously did very well. Any sense of the U.S. market growth for contact lenses?

Dominic Caruso

While Louise is looking that up, let me just take the two questions you have remaining for me. In terms of ideal cash level, Larry, what I look at is maintaining sufficient flexibility to continue to grow the business the way we would like to grow it. So that is not necessarily a specific dollar amount of cash or a specific dollar amount of debt. We survey the landscape. We look at our future strategic plans. We look at our current operating plans and we make a determination as to what the right level of debt and cash is for the business while maintaining the flexibility to continue to grow the business in the future.

That went into our decision to do this current share repurchase program because we think at this level it not only returns value to shareholders, but again, allows us to retain that flexibility for future business building activities.

In terms of accelerated activities in cost reduction, as I said, we are always looking at this, but it is true that it is harder to implement these activities as sales growth begins to slow. So across all our businesses our folks are focused on obtaining leverage, rationalizing the business, as you would expect them to do, as any good managers would do, running the business for the future.

So yes, I would say that with the challenges we face, we will be proactive there and we will position ourselves appropriately going into '08.

Louise Mehrotra

Regarding the vision care market for contact lenses in the U.S. in the first quarter, it was up about 5%. That is the latest information I have.

Operator

Your next question comes from Catherine Arnold - Credit Suisse.

Catherine Arnold - Credit Suisse

Good morning. Dominic, I wanted to go back to your comments about for the quarter you had internally expected $1.02 and you ended up with $1.05. Could you give a little bit more color around where your upside came from? Presumably you had baked in some FX effects and I don't know how different your non-operating income was or was it an expense management issue across the company that turned out better?

The last item to address on that would be inventory and whether there were any material moves up or down across the drug business that may have benefited or been a detriment to the numbers?

Dominic Caruso

Well, let me address the last one because we were just looking at that this morning and there were no major swings in inventory stocking in the drug business at all in this quarter versus last quarter.

In terms of exceeding both our own internal expectations as well as yours, really three factors. Sales came in a little better than we thought given the fact that we knew we were going to see some deterioration in the market for ESAs as well as drug-eluting stents. The broad-based business we have allows us to offset that when we have other parts of the business that perform stronger than we had anticipated. That has been a hallmark of J&J for quite some time and it was nice to see it come to life again in this quarter.

When certain parts of our business don't do as well other parts come to the rescue, so that is great. So we saw that a little bit better even than we had expected so it is a testament to our folks out there in the field.

We saw continued expense management. As I was just commenting to Larry in his question, we are cognizant of the challenges we face and so folks are being cautious as to the level of expense growth, et cetera and I am proud to say that they have been very prudent in their choices and we saw some better expense management as early as this most recent quarter than we had expected.

I mentioned earlier we had a slight, slight change to the tax rate from what I had given you before as guidance but that was probably less than a penny's worth of benefit, so hopefully that helps.

Catherine Arnold - Credit Suisse

You also had made a comment that when you look pro forma at your business margins, you would have deteriorated your margins by about 120 basis points, whereas you actually came in with a deterioration of about 40 basis points. When you step back and you think about the consolidated income statement for the company, is that translated into a gross margin effect or a G&A or other expense margin effect?

Dominic Caruso

Louise covered that across a number of factors. It was both gross margin and I made comments about that earlier, but there was also some SG&A benefit there as well and that acceleration of margin improvement coming out of SG&A was primarily in our pharmaceutical business.

Operator

Your next question comes from Bob Hopkins - Lehman Brothers.

Bob Hopkins - Lehman Brothers

Just one question, a follow-on question on stents. At PCR, which was I believe late May, we sat down and there were some surveys out that showed a slowing U.S. market and I think the commentary from your Cordis leadership was that at that point in the quarter you guys weren't really seen much of a deterioration, you were seeing stabilization. It seems like in the back half of the quarter things slipped more than expected. I was wondering if you would be willing to comment to what degree a competitive launch in Japan had any major impact on, or greater than expected impact, on your overall business and just any further thoughts on stents would be helpful. Thank you.

Louise Mehrotra

Sequentially, I can give you the market decline, which is probably where Rick would have been answering the question. So from the first quarter to the second quarter, the market in the U.S. is down about 10% and OUS the market is down about 5% sequentially. So that would have been the reference point that he would have been referring to. Of course we did see Boston Scientific launch in Japan and of course we did see some impact of that on our sales margins. But we don't actually provide the breakout on Japan.

Dominic Caruso

I would say the launch in Japan was not unexpected, so when we were talking about what we expected to see, we knew obviously that Paxis was going to be launched in Japan. So I wouldn't characterize that as unexpected or any further erosion than we already expected.

Bob Hopkins - Lehman Brothers

Right. I was just sensing that what actually ended up happening in the quarter versus the tone off the comments halfway through the quarter, this seemed like a little bit of a further decline than the tone in late May would have suggested, so I was wondering. I know the launch wasn't unexpected in Japan, but I was just wondering if maybe the impact was greater than what you had expected, given that at least it seemed to me that, again, relative to the tone mid-quarter, it seems like things were a little bit sloppier in the second half of the year than maybe your tone suggested.

Dominic Caruso

I would boil it down to PCI volume has continued to decline and we didn't expect that the decline maybe as rapidly as it did and the fact it did. That is a result of a number of factors, including the COURAGE trial and all the news around this area that I am sure you're very familiar with.

So I would say PCI volume declined more rapidly is probably a good way to summarize the difference from what happened versus what we thought was going to happen.

Bob Hopkins - Lehman Brothers

The just last part of that, in Japan previously it has been reported that penetration was holding very stable at 70%. Did we see a slip in Japan this quarter from previous levels?

Dominic Caruso

No. It is still at the high penetration levels.

Operator

Your final question comes from Lloyd Zeitman – Sanford Bernstein.

Lloyd Zeitman – Sanford Bernstein

Since the FDA warning letter has been resolved as of June, could you give us an update on what is going on in the stent area?

Dominic Caruso

Sure. Well, we have a number of new product iterations that we have been working on in both CYPHER, obviously, and with the Connor platform that I talked about earlier. Probably the most significant impact of the warning letter is allowing us to move forward with different size drug-eluting stents that we were a bit of a hold on while were under the warning letter. I would say that it's probably the most significant change, most immediate change as a result of lifting of the warning letter.

Lloyd Zeitman – Sanford Bernstein

Is there anything that we should look for in the next few months out of the stent business?

Dominic Caruso

No, I don't think so. I don't think there is anything specific that I could point out for you.

Louise Mehrotra

Thank you. We will have some closing remarks from Dominic.

Dominic Caruso

Thanks, Louise. Well, as I said earlier, we are very pleased with our earnings performance for the second quarter and this performance once again demonstrates the value of our broad-based business in human healthcare, where we can offset certain challenges in parts of our business with solid performances in others.

The performance is also a reflection of the fine work of the people of Johnson & Johnson, who continue to do a number of things. They continue to integrate acquisitions. They continue to improve operating performance, while all the while continuing to move our promising new growth opportunities forward and make important advances in human healthcare.

As I'm sure you saw yesterday afternoon, we announced that the FDA approved GeneSearch, an important new diagnostic for detecting spread of breast cancer, and as Louise mentioned, although we did not meet the primary endpoint in our trial for Zarnestra, we did see benefits to some patients who achieved complete remission. Although we are likely not going to file that product for AML this year, we do look forward to discussing these results with the FDA.

We look forward to continuing to keep you updated on our progress on all fronts. Thanks again for your continued support of Johnson & Johnson and have a great day.

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Source: Johnson & Johnson Q2 2007 Earnings Call Transcript
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