Johnson & Johnson Q3 2007 Earnings Call Transcript

Oct.16.07 | About: Johnson & (JNJ)

Johnson & Johnson (NYSE:JNJ)

Q3 2007 Earnings Call

October 16, 2007 8:30 am ET


Louise Mehrotra - Vice President of Investor Relations

Dominic Caruso - Vice President of Finance and ChiefFinancial Officer

Nick Valeriani - Worldwide Chairman, Medical Devices andDiagnostics


Larry Biegelsen – Wachovia

Rob Hopkins – Lehman Brothers

Catherine Arnold- Credit Suisse

Celine Brown – AllianceBernstein

Glenn Novarro - Banc of America

Louise Mehrotra

Good morning and welcome. I am Louise Mehrotra, VicePresident of Investor Relations for Johnson & Johnson. It is my pleasurethis morning to review our business results for the third quarter of 2007.

Joining me on the podium today are Nick Valeriani -Worldwide Chairman, Medical Devices and Diagnostics; and Dominic Caruso - VicePresident, Finance and CFO.

A few logistics before we get into the details. The audioand visuals from this presentation are being made available to a broaderaudience via a webcast, accessible through the investor relations section ofthe Johnson & Johnson website.

I will begin by briefly reviewing highlights of the thirdquarter for the corporation and highlights for our three business segments.Following my remarks, Dominic will provide additional commentary on the resultsfor the quarter and guidance for the year. Nick will then provide an update onour Medical Devices and Diagnostics business. We will then open the floor toyour questions.

We will conclude our formal presentation at approximately 9:30 am. Following Q&A and some finalremarks by Dominic, we will conclude the meeting around 10:00 am. Distributed with the copy of the press releasethat you just received is a schedule with actual revenues for the majorproducts and/or business franchises. For the listening audience, these areavailable on the Johnson & Johnson website, as is a copy of the pressrelease.

Before I get into the results, let me remind you that someof the statements made during this meeting may be considered forward-lookingstatements. The 10-K for the fiscal year 2006 identifies certain factors thatcould cause the company's actual results to differ materially from thoseprojected in any forward-looking statements made this morning. The company doesnot undertake to update any forward-looking statements as a result of newinformation, future events or developments. The 10-K is available through the companyonline.

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

Now I would like to review our results for the third quarterof 2007. If you would refer to your copy of the press release, let's begin withthe schedule titled supplementary sales data. Worldwide sales to customers were$15 billion for the third quarter of 2007, up 12.7% as compared to the thirdquarter of 2006. Our operational growth was 9.7% and currency had a positiveimpact of 3 points. The sales results include the net impact of the acquisitionof Pfizer Consumer Healthcare, or PCH, which was completed in December 2006.

On a pro forma basis, including the net impact of the PCHacquisition in both periods, worldwide sales increased approximately 2.4%operationally. Further, operational growth in the quarter was negativelyimpacted by approximately 5 points due to a number of factors: generics andsales rebate adjustments in our pharmaceutical business, and pressures causingdecreases in the overall market for both drug-eluting stents and erythropoietinstimulating agents or ESAs. I will cover each of these items in more detail inthe segment commentary.

If you turn to the schedule showing sales by geographicarea, you will see that we achieved growth of 5.8% in the U.S.In regions outside the U.S.,our operational growth was 14.7% while the effect of currency exchange ratespositively impacted our reported results by 6.8 points.

The western hemisphere, excluding the U.S.,grew 24.9% on an operational basis. Europe grew 13.3%,while the Asia Pacific/Africa region grew by 11.8%. The results in all regionshave been positively impacted by the acquisition of Pfizer Consumer Healthcare.

If you now turn to the consolidated statement of earnings,net earnings on a reported basis were $2.5 billion, while earnings per sharewere $0.88. This compares to $2.8 billion and $0.94 in the same period in 2006.Please direct your attention to the box section of the schedule where we haveprovided adjusted earnings information.

As a reference in the footnote, third quarter 2007 resultswere adjusted to exclude the after-tax impact of the costs associated with thepreviously announced restructuring program of $528 million. The third quarter2006 results were adjusted to exclude the after-tax impact of an in-processresearch and development charge of $115 million associated with theacquisitions of ColBar LifeSciences and Ensure Medical. On an adjusted basis,third quarter 2007 net earnings and earnings per share were up 7% and 8.2%respectively.

I would now like to make some additional comments relativeto the components leading to the adjusted earnings before we move on to thesegment highlights. For the third quarter of 2007, cost of goods sold at 28.5%was up 100 basis points compared to the same period in 2006. The third quarterresults included the addition of the PCH business to our mix of businesses,increasing cost of goods sold as a percentage of sales by an estimated 80 basispoints.

Selling, marketing and administrative expenses at 32.7% ofsales were up 40 basis points as compared to 2006. The addition of the PCHbusiness to our mix of businesses increased these expenses by an estimated 100basis points, substantially offset by continued cost containment efforts acrossour business.

Our investment in research and development as a percent ofsales was 12.3%, 60 basis points less than the third quarter of 2006. Theaddition of PCH to our mix of businesses reduced R&D as a percent of salesby approximately 60 basis points.

Interest income, net of interest expense of $52 million wasdown $142 million compared to the first quarter of 2006, due to a lower cashbalance and higher debt position. Otherexpense, net of other income, was $2 million in the third quarter of 2007,compared to $45 million of net other expense in the same period last year. Aspreviously reported, the 2006 results included an increase to our productliability reserve.

With regard to taxes, please direct your attention to theeffective tax rate, excluding special charges, shown in the boxed section ofthe schedule. In the third quarter of 2007, taxes were 23.3% as compared to theprior year rate of 23.9%. Dominic will provide further comments on taxes duringhis remarks.

Looking at year-to-date results, consolidated sales tocustomers for the first nine months of 2007 were $45.1 billion, an increase of13.9% as compared to the same period a year ago. On a year-to-date basis,operational growth was 11.3% and currency had a positive impact of 2.6 points.

On the consolidated statement of year-to-date earnings, Iwould first like to draw your attention to the boxed section. In 2007, theafter-tax impact of charges for in-process research and development and thecosts associated with the restructuring program have been excluded. In 2006,after-tax amounts for both in-process research and development and the Guidantacquisition termination fees have been excluded. With these adjustments, netearnings for the first nine months of 2007 were $9.5 billion, or $3.27 pershare, up 9% and 10.8% respectively as compared to the same period in 2006.

Now turning to the business segment highlights, I will beginwith the consumer segment. Worldwide consumer segment sales of $3.6 billionincreased 47.5% as compared to the third quarter of 2006. Operational growthwas 43.4% while currency contributed 4.1%. U.S.sales were up 39.8%, while international sales grew 46.5% on an operationalbasis. On a pro forma basis, including the net impact of the acquisition ofPfizer Consumer Healthcare in both periods, sales were up an estimated 3.5% onan operational basis.

For the third quarter of 2007, sales for the OTC pharmaceuticalsand nutritionals increased 79% on an operational basis, compared to the sameperiod in 2006. Sales in the U.S.were up 36% while sales outside the U.S.were up 173% operationally. On a pro forma basis, including the net impact ofthe PCH acquisition in both periods, estimated operational sales growth wasflat. Healthy growth for adult analgesics and SPLENDA was offset by lower salesof upper respiratory products. The 2006 upper respiratory sales included theimpact of the launch of the products reformulated with phenylephrine.

Our skincare business achieved operational sales growth of12% in the third quarter of 2007 driven by strong U.S.sales growth of 17%. Sales outside the U.S.grew 8% on an operational basis. The addition of the PCH products and the newproduct launches and successful promotional campaigns for Aveeno Clean &Clear and Neutrogena product lines resulted in strong growth for the quarter.

On a pro forma basis, including the net impact of the PCHacquisition in both periods, operational sales growth was approximately 6%ahead of projected category growth rates for the year. Baby and kids careproducts achieved operational growth of 7% when compared to the third quarterof 2006, driven by the strong performance of cleansers and powders. Salesgrowth in the U.S.was 10%, while sales outside the U.S.grew 6% on an operational basis.

On a pro forma basis, including the net impact of the PCHacquisition in both periods, operational sales growth was approximately 5%,ahead of projected category growth rates for the year. Women's health achievedoperational growth of 2% with the U.S.declining 1% and sales outside the U.S.up on an operational basis by 3%. On a pro forma basis, including the netimpact of the PCH acquisition in both periods, sales declined on an operationalbasis by approximately 3%, due to increased competition combined with retailinventory reductions in certain categories.

On a pro forma basis, including the net impact of the PCHacquisition in both periods, operational sales growth for the oral carebusiness was approximately 10%, ahead of projected category growth rates forthe year. Double-digit growth for Listerine mouthwash, driven by the strongresults in the international markets and the U.S.launch of the Listerine dissolvable whitening strips were the major contributorsto the growth in the quarter.

That completes our review of the consumer segment and I willnow review highlights for the pharmaceutical segment.

Worldwide net sales for the third quarter up $6.1 billionwere up 3.7% compared to the same period a year ago. Operational growth was1.2% with currency contributing 2.5%. Reported sales in the U.S.decreased 2%, while sales outside the U.S.increased on an operational basis by 7.2%.

As we discussed last year, U.S.sales results in the third quarter of 2006 included a reduction to reserves forsales rebates of approximately $130 million; while the third quarter 2007included a reduction to sales rebate reserves of approximately $60 million.Both sales reserve adjustments were related to sales recognized in previousperiods. The most significant impacts were to antipsychotics, Topamax and Levaquinand I will provide additional commentary as it relates to those products in amoment.

Our results continue to be impacted by generic competitionon some of our products, namely Duragesic, oral contraceptives, Ditropan, Sporanoxand Risperdal Oral in certain countries outside the U.S.The combined effect of this generic competition has reduced the third-quarterworldwide pharmaceutical growth rate by approximately 3 percentage points witha similar impact both in and outside the U.S.

Additionally, e saw a retraction in the for ESAs as a result of the ODAC discussions, the label changes andchanges to reimbursement. The combined effect of the estimated impact of allitems noted: generics, the declining ESA markets and the change in the reservereductions, impacted the worldwide pharmaceutical operational sales growth byapproximately 7.5 times.

Procrit/Eprex had a combined operational decline of 17% withProcrit down 27% and Eprex up on an operational basis by 1%. New competitionand label changes have contributed to the slowing growth for Eprex. Procritresults have been impacted by a decline in the market versus the third quarterof 2006 estimated at over 25%, partially offset by an increase in overallmarket hare. Procrit aggregate share across all markets was approximately 45%in the third quarter of 2007, up 2 points sequentially and 3 points versus thethird quarter of 2006.

Increased share in the hospital and retail markets waspartially offset by lower share in the oncology clinics, due to ourcompetitive/anti-competitive contracting strategy.

Let me now move on to discuss some of our growth drivers.Our antipsychotic franchise, which includes Risperdal Oral, Risperdal Constaand Invega had operational growth of 6% when compared to the same period a yearago, with similar results both in and outside the U.S.Both the worldwide and U.S.sales growth, excluding the reductions for the rebate reserves mentionedearlier, would have been double-digit.

Sales results outside the U.S.were impacted by generic competition for Risperdal Oral in certain markets. Theglobal success of Risperdal Consta continued to contribute strongly to thethird quarter with sales of approximately $295 million, up 20% on anoperational basis. Remicade, a biologic approved for the treatment of a numberof immune-mediated inflammatory diseases, grew by 6% when compared to the thirdquarter of 2006. Sales in the U.S.increased 8%.

Market growth in the anti-TNF category continues to bestrong and the competitive dynamics have intensified with the new entrants andthe expansion of labels for existing competitors. Sales to our partners formarkets outside the U.S.declined 1% due to the timing of supply shipment.

Sales of Topamax, which is approved for the treatment ofepilepsy and migraine prophylaxis, increased operationally by 14%. Sales growthin the U.S. wasreported as 14% and excluding the rebate reserve adjustments mentioned earlier,growth was approximately 20%.

Continued success in the migraine category has been themajor driver of growth. Sales outside the U.S.grew by 10% on an operational basis, with strong growth seen in many marketspartially offset by generic entries in certain other markets.

Sales of Levaquin were up 5% operationally when compared tothe same period a year ago, and double digit excluding the rebate reserveadjustments mentioned earlier. Solid market growth contributed to the increase.Aciphex, as it is known in the and Pariet outside the U.S.,is a proton pump inhibitor that we co-market with Eisai. Overall operationalgrowth was 6%. Sales in the U.S.grew 8% with market growth partially offset by lower script share. Operationalsales growth outside the U.S.was 4%.

Concerta, for attention deficit hyperactivity disorder, grewoperationally by 4% in the third quarter as compared to the same period lastyear. Sales in the U.S.were down 1% due to lower market share, partially offset by market growth.Sales outside the U.S.grew 25% on an operational basis with very strong growth in all regions.

Let me now turn to the medical devices and diagnosticssegment. Worldwide medical devices and diagnostics segment sales of $5.2 billiongrew 3% operationally as compared to the same period in 2006, while currencycontributed 3 points to bring reported growth to a total of 6%. Sales in the U.S.grew 2.4% while sales outside the U.S.increased on an operational basis by 3.7%. Sales, excluding the impact of lowersales of Cypher, grew nearly 10% operationally with healthy growth seen acrossthe other franchises.

Now turning to the franchises, starting with Cordis. Cordissales declined approximately 23% in the third quarter due to lower sales of Cypher,our sirolimus-eluting stent, partially offset by strong growth in both ourBiosense Webster business and our neurovascular business. U.S.sales were down 26% and sales outside the U.S.declined 21% on an operational basis. Cypher sales in the U.S.declined 44% to approximately $185 million.

The reduction in PCI procedures and a lower penetration rateof drug-eluting stents resulted in an estimated market decline in the U.S.of over 40% versus the third quarter of 2006. Estimated share in the U.S.of 46% were stable on both a sequential basis and versus the third quarter of2006. Sales outside the U.S.of approximately $190 million declined nearly 40% operationally. Theinternational market decline versus the third quarter of 2006 was estimated atover 10%, while the estimated market share in the quarter of 37% was down from51% in the third quarter of 2006 and 43% last quarter. Increased competitionhas impacted the share outside the U.S. Cypher estimated worldwide share forthe quarter was 41%.

The Biosense Webster franchise, our electrophysiologybusiness, achieved operational growth of 18% with the U.S.growing over 20% and sales outside the U.S.growing 15%. Neurovascular sales also achieved strong growth in the quarter,due to the relaunch of the Trufill DCS Orbit coil system.

Our DePuy franchise had operational growth of 9% whencompared to the same period in 2006, with the U.S.growing 5% and the business outside the U.S.growing by 15% operationally. Both our worldwide hip and sports medicinebusinesses and our knee business outside the U.S.achieved double-digit operational growth.

In the U.S.,sales were impacted by the continuing competitive challenges in our spinebusiness and lower sales of trauma products to an international distributor.Ethicon worldwide sales grew operationally by 6%, with the U.S.up 7% and sales outside the U.S.up 5% on an operational basis. Strong growth was achieved across manycategories, namely hemostasis, women's health, biosurgical, meshes and drains.

Ethicon Endo-Surgery achieved operational growth of 8% inthe third quarter of 2007, with the U.S.up 6% and sales outside the U.S.growing 11%. The Endocutter, the key product in performing bariatricprocedures, grew 13% operationally in the quarter and was a major contributorto the growth. Strong double-digit results were achieved in the energy businessdue to the continued success with the Harmonic Scalpel, up 18% operationally inthe quarter.

The LifeScan franchise achieved operational growth of 13% inthe third quarter of 2007. The U.S.sales increased 15%, reflecting the continued success of the Ultra Mini and theUltra Strip, complemented by growth of the Animas business. The Animas businessachieved sales growth of nearly 30% in the quarter, due to the launch of the2020 pump earlier this year. Sales outside the U.S.increased 9% on an operational basis, due to the strong results of the Ultraproducts.

Ortho-clinical diagnostics sales grew on an operationalbasis 10% in the third quarter, with the U.S.sales up 19%. Sales outside the U.S.were flat on an operational basis, impacted by softness in the immunodiagnostics market and lower sales of donor screening products. The results inthe U.S. weredriven by the rapid uptake of the Chagas screening assay and strong resultsachieved in immuno diagnostic products.

Lastly, in the medical devices and diagnostics segment, our visioncare franchise achieved operational sales growth of 16%, with sales in andoutside the U.S.growing at similar rates. Operational growth for the franchise was driven bythe global success of Acuvue Oasys, Acuvue Advance for astigmatism and Acuvue Moist.Additionally, outside the U.S.,one-day Acuvue Define continues to make strong contributions to growth in thequarter.

That completes highlights for the medical devices and diagnosticssegment and concludes the segment highlights for Johnson & Johnson thirdquarter of 2007.

I will now turn the discussion over to Dominic Caruso forsome additional comments.

Dominic Caruso

Thank you, Louise and good morning, everyone. While we arepleased with our solid financial results for the third quarter as Louisehighlighted for you, during the third quarter, our sales results were slightlyabove the mean of the analyst models published by First Call. Our solidearnings performance for the quarter demonstrates our ability to continuemanaging our costs and improving our margin, even in the face of salespressures in certain markets while continuing to invest in the future.

In fact, if you were to look at the impact of adding thePfizer Consumer Healthcare business to our base business for 2006, as we filedin an 8-K earlier this year, you would see that our pro forma operating marginfor 2006 was negatively impacted by 1.2 points. However, when you look at ouroperating margin for the first nine months of this year, now including the PCHbusiness, you will see an operating margin of 26.7%, or only 0.5% negativeimpact versus the 2006 period, thus indicating leverage in the base business ofapproximately 0.7%.

As you know, we recently announced a $10 billion sharerepurchase program, the largest in our history. We began purchasing shares inAugust and through the end of the third quarter we purchased $2 billion of ourstock. This share repurchase program, along with our dividends, demonstratesour strategy of returning value to our shareholders while allowing us theflexibility to continue to invest in business-building activities.

In July, we announced cost restructure improvements thatwill help us manage through some near-term challenges in our pharmaceuticalbusiness and Cordis franchise. As yousaw, our third quarter results reflect the restructuring charge ofapproximately $745 million on a pre-tax basis, consistent with the guidancethat I provided during our conference call when we announced the restructuringactivities and our estimates at that time of restructuring charges of between$550 million and $750 million.

Our plans are being executed by our operating companies andthe majority of the announcements have been made and actions have been taken,or are in the process of being implemented. I can tell you that these actionsare consistent with the guidance I have provided, namely reductions ofapproximately 3% to 4% of our global workforce in accordance with local workcouncils and labor laws, and we are on track to achieve annual cost savings for2008 of approximately $1.3 billion to $1.6 billion.

Leaders in our operating companies have been spending thelast few months talking with employees about adjustments in their respectivebusiness models and I am proud to say that our leaders are executing againstthese plans to reduce our cost infrastructure while maintaining the properbalance of investing in the future. Ourgoal remains to build on the strengths of our business, reduce our overall costbase and become better positioned for continued profitable growth in the yearsahead.

That said, I would like to provide some comments for you toconsider as you refine your models for 2007. Let's start with a discussion ofcash and related interest income and expense. During the third quarter of 2007,the company continued to generate strong cash flows.

At the end of the third quarter, we had approximately $400 millionof net cash. This is approximately $8.3 billion of cash and investments and$7.9 billion of debt. This is animprovement of $2.9 billion in our overall net cash position from year end2006. We achieved this improvement while completing the $1.4 billionacquisition of Conor Medsystems during the first half of this year and alsoutilizing $2 billion to repurchase shares as we began our share repurchaseprogram this past quarter.

Turning to interest income, we had net interest income of$52 million during the quarter. For purposes of your models and considering theimpact from the share repurchase program but assuming not major additionalacquisitions, I suggest you consider net interest income in the range of $125million to $175 million for the full year 2007, slightly lower than our priorguidance, to reflect the impact of the share repurchase program which is nowunderway.

Turning to other income and expense, as a reminder of thenature of this account, this is the account where we record royalty income, aswell as one-time gains and losses arising from such items as litigation, gainsor losses from investments by our development corporation, or asset sales. Thisis also the account where we recorded the gain on the divestitures of certainbrands in connection with the PCH acquisition in the first quarter, as well asthe integration costs associated with the PCH acquisition.

This account is difficult to forecast, but assuming no othermajor one-time gains or losses, I would recommend that you consider modelingother income and expense for 2007 as a net gain ranging from approximately $250million to $300 million. This is higherthan our prior guidance, reflecting additional royalty income and gains in ourdevelopment portfolio.

Now a word on taxes. For the first nine months year-to-date in 2007the company's effective tax rate, excluding special charges, was 23.7% ascompared to 23.9% in the prior year period. We suggest you model our effectivetax rate for 2007 inthe range of 23.5% to 24%, consistent with our prior guidance. As always, wewill continue to pursue opportunities in this area to further improve upon thisrate as we approach the end of the year and we finalize implementation of someof our plans.

Turning to sales and starting with operational sales growth,we would be comfortable with your models reflecting operational sales growthfor the full year of between 11.5% and 12%, consistent with the guidance I haveprovided during our conference call with you at the end of the second quarter.

Regarding currency, we cannot predict the impact thatmovements in currency will have on our sales growth and we are not providing aforecast on currency. But to give you asense of possible currency impacts, if currency were to remain where it istoday, currency would have a positive impact to our full-year sales growth ofapproximately 3 points.

When I last checked the First Call mean estimate for our EPSfor full year 2007, it was $4.06 per share and this included the dilutiveeffect of PCH as well as the Conor acquisition, but not including anyin-process research and development charges or other special items such asrestructuring charges.

Given the strength of our earnings performance for the thirdquarter and considering the fact that restructuring actions will result inapproximately $0.02 to $0.03 per share of additional costs that will bereflected in our ongoing operations this year, we suggest that you considerfull year 2007 EPS estimates, excluding the impact of in-process R&D charges,restructuring charges or other special items, of between $4.10 and $4.13 pershare. This enhanced earnings performance is a reflection of the fine work ofthe people of Johnson & Johnson who continue to integrate acquisitions andmake appropriate changes to our cost structure, all the while continuing tomove our promising new growth opportunities forward and make important advancesin human healthcare.

In fact, at this level of earnings per share, we are able toabsorb the dilutive effect of the PCH and the Conor acquisition, as well asenhance our earnings performance, despite some of the pressures we face in themarkets for drug-eluting stents and erythropoietin-stimulating agents. This is a true testament of the value of ourbroad-based business model.

That concludes my comments on our operating performance andI look forward to updating you at our meeting in January to discuss our full year2007 results.

Let's move on to the next portion of our program today. At our analyst meeting in June, we presentedthe growth plans for our pharmaceutical and consumer businesses and we havemade a good deal of progress since then that I would like to mention. Our consumer group is well into theintegration of Pfizer Consumer Healthcare and continues on track to meet orexceed our target of $500 million to $600 million in cost synergies by 2009. In January, we said weexpected this transaction to be breakeven or modestly accretive by 2009 -- afull year ahead of the original schedule -- and we continue to be on track toachieve this.

The consumer group continues to generate new platforms forgrowth through new products and geographic expansion. Listerine just released its new,quick-dissolving whitening strips in the U.S.,an exciting new market building on the strength of our oral care. New skincareproducts with the unsurpassed protection of Helioplex sunscreen are rolling outworldwide, and we are preparing to launch an OTC version of Zyrtec anti-allergymedication in the U.S.,shortly after Zyrtec moves from prescription to OTC status.

In June, we also spoke to you about our pharmaceuticalsegment, highlighting the many promising medicines we have in late-stagedevelopment. Looking at our late-stagepipeline of new medicines, we received FDA approval last week for Doribax,doripenem for injection for the treatment of complicated urinary tractinfections and intra-abdominal infections. At APAC we presented data showingthat Doribax is as effective as commonly-used therapies in treating nosocomialpneumonia. In June of this year, Doribaxwas filed in the U.S.and Europe for treatment of nosocomial pneumonia and in Europefor complicated urinary tract infections and complicated intra-abdominalinfections.

New data for Ceftobiprole also presented at APAC showed itwas as effective as combination therapy in treating patients with complicatedskin infections, including MRSA, a growing public health threat. Ceftobiprole is currently in registration inthe US and theEU for complicated skin and skin structure infections.

Our HIV medicine, TMC-125, was granted priority review bythe FDA last month and also has been filed for approval in Europe. In two studies published in the Lancet andpresented at the IAS meeting in Sydney,TMC-125 became the first medicine in the NNRTI class to show significantefficacy in HIV patients who are resistant to all other currently approvedNNRTIs.

We remain on track to file three additional medicines forapproval by the end of this year: Dapoxetine for premature ejaculation in theEU, CNTO 1275 for psoriasis and paliperidone palmitate for schizophrenia. Weannounced positive data on CNTO 1275 at the World Congress of Dermatology in Buenos Aires earlier this month. More than two-thirds of patients withmoderate to severe plaque psoriasis, receiving two doses of CNTO 1275, achievedat least 75% reduction in psoriasis at week 12, the primary endpoint of thestudy.

We also expect to file and number of medicines for approvalnext year, including [Pentadol], rivaroxaban and CNTO 148. As you know, we plan to file between sevenand ten medicines for approval between 2008 and 2010.

So we continue to make progress on a number of fronts inboth our consumer and pharmaceutical businesses. I am very pleased this morningto have our Worldwide Chairman of our medical device and diagnostics business,Nick Valeriani, with us today to talk to you about this exciting part of ourbusiness. Most of you know Nick verywell. He leads the largest medical device and diagnostic business in the world,with more than $20 billion in revenues last year.

As you may recall in September 2006, we had the full dayMD&D analyst meeting, and we plan to do so again in 2008. Today however,Nick is going to give you a brief update on the progress we have made in sevenfranchises in MD&D. At the end ofhis presentation, we look forward to taking your questions.

It is my pleasure to introduce my colleague on the executivecommittee of Johnson & Johnson, Nick Valeriani.

Nick Valeriani

Thank you, Dominic and good morning, everyone. Thank you for the opportunity to talk to youtoday about the Johnson & Johnson medical device and diagnosticssegment. This is an exciting time forour businesses. We are workingcomprehensively across our franchises to address some of the most pervasivediseases. We are committed to a vision of restoring the joys of life forpatients around the world, and there can be no doubt that our technologies makea difference.

More than 3 million patients live more active lives thanksto our Cypher stent. More than 100,000 people are dealing better with morbidobesity with our adjustable gastric band. More than 1 million knees bend androtate with less pain with our joint replacement. 40 million eyes focus more clearly wearing Acuvuelenses; 4 million people better manage diabetes with our OneTouch Ultraproducts; and in hospitals around the world, there are enough Ethicon suturesto wrap around the earth eight times.

We achieved this vision by focusing on our mission:listening to our customers to identify unmet need and develop innovativesolutions by paying particular attention to working with the grain ofhealthcare in terms of addressing issues like availability, access andaffordability and by enhancing our leadership position in markets around theglobe.

We are, as you can see here, the world's largest medicaltechnology business by a significant margin, and we have achieved strong andsteady growth relative to our competition. Over the past five years, theMD&D segment has achieved strong operational growth. In fact, our compound annual growth rate forthe past five years has exceeded that of our competitive set; and importantly,operating profit has grown well in excess of sales, a pattern we expect tocontinue growing forward.

Our consistent level of acquisitions and divestituressuggests that we have been disciplined in our approach, continuously refreshingour product portfolio. For the broadproduct portfolio, we are also the world's most diverse medical technologybusiness. I am going to have time todayto talk to you about just a few of our exciting platforms for growth, and theyare suggestive of a business that leverages strengths from throughout Johnson& Johnson. They include consumerinsights, direct-to-consumer marketing and pharmaceutical expertise, forexample, applied to our technologies to gain an unparalleled strategicadvantage.

Within their respective categories, most of our sevenfranchises are industry leaders or strong number 2 players. Their individually strong performances overthe past five years have enabled our MD&D segment to achieve an impressivefive-year compound annual operational growth rate of approximately 11%. Weparticipate in about 40% of the vast space of the global medical technologymarket of roughly $230 billion, leaving us plenty of room to continue to growin the areas we find attractive.

Our growth strategies consider that leadership in the keytherapeutic categories in which we compete is essential to our future. They includecardiology, orthopedics, diabetes, obesity, and vision care. We will lead hereand we will build on our core strengths, including those you see here andexpand in attractive adjacencies like women's health and biosurgicals tostrengthen our position in core markets.

We are continually assessing new market opportunities, oneof which I will talk about today, where we see significant growth opportunitiesin the medical technology space. Finally, we continue to actively explore attractive white spaces, just afew of which you see here.

As a segment of the Johnson & Johnson family ofcompanies, we believe we have significant advantages over our competition,including the strength of our pharmaceutical and consumer businesses. One of them is the capacity to educatephysicians and patients, an effort we have now put to work on behalf of the Cypherstent in the drug-eluting stent category. While we recognize that new entries will increase competitive pressurein this space, we continue to believe that we will compete successfully on afoundation of the world's largest and deepest body of clinical evidencesupporting the safety and efficacy of our product.

For the past several months, reported studies have helped todispel concerns about the safety of drug-eluting stents compared to bare metalstents. A recently published 18,000 patient network meta analysis furtherpoints out the positive advantages of the Cypher stent compared to bare metalstents.

Our educational campaign has two objectives: against thebackdrop of the newest literature and the impressive body of data supportingthe category, we are working to restore physician and patient confidence inpercutaneous coronary intervention as a treatment of choice for coronary arterydisease. And, we are speaking directly to patients, caregivers and physiciansabout the world's most used, most studied and most proven drug-eluting stent Cypher,and about the quality of what we call “life wide open”.

These newspaper ads and the slides you saw previously arejust a few of the efforts in this campaign, which began last month and which wewill continue into the coming year with a number of new elements. We arerunning in major national outlets, directing readers to an enhanced website formore information. That website,,is the foundation of the effort because it offers significant information forpatients to improve their dialogue with their physicians and to help them makemore informed decisions for themselves.

Now before I begin a review of selected technologies in ourpipeline, I would like to remind you of some of the updates we have providedlast fall at our medical devices and diagnostics business review. As you can see from this chart, we haveachieved most of the milestones we've projected about a year ago. More notableamong them are the ortho-clinical diagnostics' FDA clearance late last year ofthe world's first test to detect Chagas disease, an insect-borne illness.Already more than 70% of donated blood is now tested for this disease.

We anticipated a fourth quarter clearance of our adjustablegastric band and it came in the third quarter of this year. We are on targetfor the BLA submission for the Fibrin Patch and we have begun the globalrollout of the Pria skin closure system with CE marked clearance in Europe.We terminated development of Cypher NXT and Cypher Neo and launched, asplanned, the Firestar and Durastar balloon catheters.

So now let's turn to some of the exciting highlights on ournear, mid and long-term horizons. Iwould challenge that our pipeline in medical devices and diagnostics is as richas any company, and our recent launches and approvals demonstrate our diversitywith technologies ranging from blood glucose monitors that make it possible forpatients in developing markets to test for the first time, to adhesives thatcan trim hours from surgical procedures by replacing sutures.

As I indicated earlier, a disciplined approach to portfoliomanagement has allowed us to realize approximately 35% of sales in 2006 fromproducts introduced over the last three years. Now time only permits me to talkwith you today about a few of these highlights: the recent launches andapprovals and near-term technologies and platforms we see as game changers forthe way we deal with significant diseases and conditions. Before we conclude today, I will also offer aview of our aspiration for a future that leverages our technologies, ourexpansive breadth and our customer relationships to dramatically improve thecare of people with metabolic disorders that totally change the way we approachthat patient.

So let's start with diagnostics where development of novelmedical markers could change the way we approach disease. This is a skillset that derives from a partnershipbetween our diagnostics company and our pharmaceutical researchers. While many companies, including our own, arefocused on treating chronic illness that is only part of the equation. The keystrategic issue in healthcare is reducing the incidence of chronic illnessworldwide and we are creating, through our Ortho-Clinical Diagnosticsfranchise, a new generation of sophisticated diagnostics tests that we believehave the potential to not only help reduce chronic illness, but also improvepatient outcomes and reduce healthcare costs worldwide. These tests willaccomplish that by detecting diseases and medical conditions earlier than everbefore.

The market opportunity for these technologies issignificant, but the potential to impact the way patients are managed is evenmore significant. With this example of just one product in the space, the GeneSearch breast lymph node assay, surgeons have a new molecular tool to confirmthe spread of breast cancer while a patient is undergoing initial surgery,thereby sparing patients and the healthcare system the need for costly andpainful additional surgical procedures to remove cancerous lymph nodes. The GeneSearch BLN assay was the first intra-operative and gene-based test everapproved to detect if cancer had spread to the lymph nodes.

Our objective is to translate novel biomarkers into advanceddiagnostic tests to identify disease earlier than ever before. We have several other biomarkers in advancedstages of the development pipeline, including tests for pre-eclampsia, pre-diabetesand some of the world's most pervasive chronic diseases.

Obesity affects 300 million people worldwide and many ofthem experience multiple serious co-morbidities. It is estimated that obesity represents aglobal healthcare cost in excess of $100 billion, yet less than 1% of thepatients who are eligible actually get surgical treatment for this disease.With the recent USregulatory clearance of the Realize adjustable gastric band, EthiconEndo-Surgery is now the only company in the world with a complete portfolio ofofferings for the surgical treatment of obesity. Coupled with our capabilities inphysician education, consumer marketing, health economics and payer advocacy,Ethicon Endo-Surgery is better positioned than any company in this space toaddress the surgical treatment of obesity, a significant healthcare issue and asignificant driver of future growth for our business.

This is particularly exciting in light of clinical evidencepresented in two recently published studies in the New England Journal ofMedicine confirming the life-prolonging benefits of bariatric surgery.

Harmonic is a great example of an acquisition that becamethe linchpin of a successful growth strategy in action. Acquired in 1995 with a single product codeand just $12 million in revenue, Harmonic Energy technology is today aportfolio of over 50 product codes and more than $0.5 billion in revenue. It has become a standard in laparoscopicsurgery and is being used today in more open procedures as well. The mostrecent launch in this line shown here is the Harmonic Focus Curved Shears forwhich the initial applications are thyroidectomy and other ENT procedures.

I believe it is also a great example of how ourdecentralized philosophy works best. Bystaying close to the surgeon customer to understand his or her needs, we haveadapted this technology to procedures across specialties that enable bettercare. Take a look at this next set of photos to see what I mean. These are photos of facial plastic surgeryused in traditional techniques and Harmonic devices. The photo on the right depicts the resultsachieved with Harmonic Energy. Overtime, the Ethicon Endo-Surgery strategy is to leverage the use of Harmonic notonly to other areas of general surgery, but to specialties that are the focusof other Johnson & Johnson MD&D businesses; for instance, plasticsurgery, orthopedics and gynecology.

I will tell you more in a few minutes about our vision formaking a true difference in the way care is provided for people with diabetes,but it all started with the enormous insights we have gained over time from ourLifeScan business and its flagship OneTouch platform. We have been able to continue to leverage theOneTouch Ultra platform and strip technology by bringing out new meterinnovations that are aimed at driving better testing compliance, providinggreater patient insights with the goal of better outcomes.

The benefit is that we are able to leverage the capitalinvestments we have made within our facilities to support a single striptechnology. Some of the newest additionsto the line are those that support solutions tailored to this specific marketneed. Again, the customer's voice told us that many markets attempting to dealwith the epidemic of diabetes needed an affordable blood glucose monitoringsolution that offered basic information to patients who previously hadn't beentesting blood glucose levels at all. We continue to offer the best meters at alllevels, but these basic affordable models enable us to make an importantcontribution to the management of this pervasive disease.

Of course, the acquisition of Animas Corporation expandedour presence in the diabetes area and the company continues to innovate ininsulin delivery products. The most recent is the Animas 2020 pump, thesmallest full-featured pump available.

Now in MD&D, we also take advantage of our strengths byapplying them to important adjacencies. For example, the materials expertise of Ethicon, known for suture andmesh, coupled with our understanding of biologics puts us in a great positionin the emerging platform of biosurgicals. These products address the significant clinical challenge of dealingwith bleeding, whether it is leaks or severe bleeding in surgery.

This includes advanced hemostatic agents and sealants thatcan improve the management and control of bleeding, air and fluid leaks. Itincludes Evithrom, the first plasma-derived human thrombin for achievinghemostasis, and Evicel, a spot fibrin sealant that also includes humanthrombin. Commercialization of both products was the result of our partnershipwith OMRIX Biopharmaceuticals. Through this growing portfolio of products anddeveloping expertise, we expect to lead with products that can rapidly controla range of bleeding in trauma and other operating room procedures.

In cardiovascular disease, we remain committed to thepursuit of technologies that advance the safety and efficacy profile ofproducts to treat coronary artery disease. Among them, of course, is theplatform acquired through our acquisition of Conor Medsystems. Our firstpriority here is the development of a coronary stent with sirolimus, the provendrug of choice for drug-eluting stents along with the bioabsorbable polymer.

The promise for the future of this platform, however, is itsuse with multiple drugs for clinical indications both inside and outside ofcardiology. We remain committed andexcited to leveraging this platform across many therapeutic categories.

Of course, our Cordis franchise is not a one-dimensionalbusiness and we have continued to expand our focus outside of interventionalcardiology. For example, in ourendovascular business, we have now filed our PMA for the approval of theExoSeal vascular closure device, which we gained through the acquisition ofEnsure Medical in 2006.

We are also excited about the work of our Biosense Websterfranchise and the study of catheter ablation for the treatment of atrialfibrillation. This condition affectsabout 10 million people, mostly over the age of 65, and we expect to seeincidents doubling in the coming years. It's one of the leading causes ofstroke. Currently, ablation is recommended as second-line therapy in the U.S.after patients have failed drug therapy. There is no catheter ablation approved for this use in the U.S.;although a number of technologies, including ours, are available outside the U.S. We have now concluded enrollment in our IDEclinical trial for an indication for AFib for our Navistar ThermoCool Catheter,expecting to file our PMA next year and we are working and committed towardsleadership in this important category.

We see structural heart disease as a potential new frontierin cardiology and we are developing a number of solutions for structuralproblems such as a PFO closure device. We also have active development programs in percutaneous valve repairand replacement, including potential applications of the previously approved intra-cardiacEcho catheter. In all, we expectstructural heart disease to represent a multibillion dollar opportunity in thefuture.

In joint replacement, an aging population coupled withpatient demand will result in highly customized solutions. You don't have to look far to see evidence ofan increasingly competitive effort to gain consumer's mindshare in kneereplacement. Our consumer insights havedemonstrated that what patients really want is a joint implant closely matchedto their individual knee. For example, a patient in his early 50s with anactive lifestyle needs a joint that allows him to exercise everyday; while apatient in her 70s who walks to the corner grocery store has a different set ofneeds.

To that end, we are pursuing a patient segmentation strategyfocused on performance and next year, DePuy will launch a new high-performance singleknee platform, which will include new instrumentation and a series of newproduct introductions.

Another exciting opportunity we are pursuing is the deliveryof active pharmaceuticals through contact lenses. We are in late-stage clinical trials with thefirst of these products, which not only correct vision, but also deliversmedications to treat allergy symptoms in the eye. These products will appeal to consumers whohave not worn or have stopped wearing contact lenses because of discomfort andother issues. We see this as an excitingmarket expansion opportunity and it also represents further realization of ourstrategy to move from a vision correction business to a more comprehensivevision care franchise.

The next platform I want to discuss is probably one of ourmost transformational technologies that has the potential to truly disrupt howand where surgical and medical procedures are performed today. That is computer-assisted personalizedsedation or CAPS. Here, our vision is to create technologies that allow forless pain, less anxiety and a faster return to normal activity. An importantdriver to achieving this goal –

[Technical difficulties – presenter disconnected]

-- solutions to some of today’s most challenging clinicalneeds. We plan to update you on our progress against these efforts and at ourJohnson & Johnson Medical Devices and Diagnostics business review to beheld next June, so stay tuned for details.

Now before I close, I want to leave you with a sense of thepossibilities we are looking at in the longer term; possibilities that takeadvantage of the unique breadth of Johnson & Johnson across device,diagnostic, pharmaceutical and consumer technology.

We have a capacity by virtue of our size and depth toaddress some of the world’s most pervasive and challenging conditions in a wayno other company can do. Take a look at just one example, metabolic disease, tounderstand the strength our focus across the enterprise affords us. Despite theprevalence of diabetes and its incumbent co-morbidities, this remains aseriously under-treated, complex and overwhelming disease.

For instance, the diabetic patient often takes as many as 16prescription medicines, deals with conditions like obesity, coronary arterydisease and joint pain; and has a rolodex of care providers from physicians toeducators to retailers. We believe we have an unparalleled capacity, by virtueof our breadth and scope, to address diseases like this one and a morecomprehensive approach than any other company in the world.

In fact, in the next few days, we will be announcing acommitment to diabetes education through the creation of a Johnson &Johnson Diabetes Institute to be led by former Acting Surgeon General of the United States, Dr. Ken Moritsugu. We will be launching these DiabetesInstitutes in Japan,the U.S., Franceand Chinainitially as part of our commitment that goes well beyond products andtechnologies to addressing a global issue in a way that no other corporationcan do.

The first four centers will be open and operational bymid-2008, offering curriculum that is the result of consultation with leadersof the International Diabetes Organization and public health institutions. Wehave a vision for our presence in metabolic disease that transcends any singlebusiness segment and addresses the enormous breadth of needs faced by peoplewith these chronic conditions.

In all, we are diverse composite of innovative companies,aggregating to the world’s largest medical technology company and dedicated toa common vision. Our seven franchises are each industry leaders in their ownright. They are globally balanced, with roughly half of our business outsidethe United Statesand many unique market-specific solutions.

Our size enables us to pursue standardization and cost efficiencywhere it makes sense, but our individual franchise focus enables us to makedecisions close to the customer and with the best interest of the patient insight. We believe we are cultivating the right skills to innovate with thegrain of health care in areas that matter: convergent technologies,evidence-based medicine and educated and empowered stakeholders.

In order to participate as fully as possible in this space,we will continue to compete aggressively and manage efficiently; growing ourprofits in excess of sales. In all, we believe we are making a difference andthat our innovations will continue to improve the way medical technologyimpacts delivery of care around the world. Thank you.

Now let me turn the meeting back to Louise, who will open upthe question-and-answer session.

Question-and-Answer Session

Louise Mehrotra

Thank you, Nick. We will now begin the Q&A session. Iask that you wait for a microphone as the meeting is being webcast.

Unidentified Analyst

A quick question for Dominic. When we look at last quarterversus this quarter, last quarter you gave guidance of $4.02 to $4.05; thisquarter it is $4.10 to $4.13. The three categories that are different are FX,gains on the other income line and cost-cutting. Can you quantify how that corresponds withthe changes in guidance among those three categories?

Dominic Caruso

Sure, Glenn, I’ll give it a try. The previous guidance wasactually $4.02 to $4.07 and the increased guidance is now $4.10 to $4.13. FXhas had a not that significant of an impact to the overall change, because weessentially hedged most of our foreign currency exposure; therefore, we don’tgain the benefit and or suffer a loss associated with that.

In terms of cost-cutting, I think that is probably with mostof our efficiency in our operations, that’s the most significant part of thechange.

The third component is some additional other income that Ireferenced which was related to increased royalty income and gain on the salesof our investments in our development portfolio. I would say that costimprovement was the largest part of that swing in our guidance.

Unidentified Analyst

Dominic, can you give us any clear specificity on the other,any one-time items that are in the third quarter, outlook for the fourthquarter? Maybe you can just call that out.

Invega, can you give us some kind of update on how it istracking? I think your last public comment was it is on track to be where youwant it to be by the time Risperdal goes generic. Can you just update us onwhat that is and where things stand?

Could you review the U.S.stent pricing environment. Our context is suggesting J&J has beenincrementally more aggressive on price in stents. Could you tell us where stentprices were in the quarter and your strategy for dealing with new competitionthere? Thanks so much.

Dominic Caruso

With respect to other income in this particular quarter,other income and expense, you may remember that we executed a settlementagreement with the Department of Justice on the orthopedic industry matters andthat cost associated with that settlement, which we announced was $85 million,is included in our results, fully included in our results now. That’s the onlyone-time unusual item we wouldn’t expect to repeat in future quarters.

The royalty income we are experiencing is in certainagreements that have triggering aspects for the royalty agreements. I don’twant to tell you which particular ones they are, but we will see better royaltyincome through the remainder of the year.

With respect to Invega, we still continue to see in Invegaas a promising product for the treatment of schizophrenia. I would tell youthat we continue to see restrictions in the use of Invega based on formularystatus, so whether it is prior authorization, et cetera, we continue to seethat. It is a very difficult environment for new products in a newreimbursement arena. Those pressures are difficult to overcome withoutadditional data on the product, especially additional data comparing it otherproducts.

Now you may know that we have just recently, this past weekend,had a session on the head to head trial of Invega and Seroquel so it is recent data. Thattrial showed that Invega performed very nicely against the Seroquel placebo in termsefficacy and is very well-tolerated and in fact, the dropout rate for Invega patientsis far lower than either Seroquel or even placebo. So we are very pleasedbecause that is the kind of data that the reimbursement environment is waitingfor to see before lightening up on the respective pressures in place for it.Whether it lightens up enough, we will wait and see.

We have taken a realistic view of Invega in both our guidancefor this year and in the cost improvement programs that were previouslyannounced.

With respect to DES pricing, Louise might have the actualdata for the quarter.

Louise Mehrotra

So the U.S.price was down about 5%, and that’s down to about $2,000. OUS price was down asimilar amount, higher in terms of local currency, but we did have the favorableimpart of the currency

Unidentified Analyst

This it sounds like it might not be for use [inaudible]Risperdal goes generic. That is my final point on it.

Louise Mehrotra

Well, it is not tracking today where we hoped it would trackby this point and therefore, we have taken that into consideration in our plans.

Unidentified Analyst

First a pharma pipeline question and then maybe a couple ofquestions for Nick since we have him here. The pharma pipeline question is on CNTO148. We are going to see data in a couple of weeks at ACR, I believe inarthritis and ankylosing spondylitis. Could you talk about your filing strategyfor different indications for 148 RA as well as arthritis and so forth?

And then the question for Nick, you talked about aninteresting opportunity, and you touched on just a couple of them. The ability to deliver an agent with Acuvue,with your contact lenses franchise. What is the regulatory pathway for thattype of product? How much visibility do you have on that?

Anything you can give us, that you have in front of youtoday, on the clinical trials on for ThermoCool, AF and for the CAPS program?

Nick Valeriani

On the pharma pipeline question on CNTO 148 – Louise, helpme out here if I have missed one – our strategy there is in early ’08 we intendto file three indications: rheumatoid arthritis, ankylosing spondylitis and psoriaticarthritis. So all three indications are planned to be filed in early ’08.

Dominic Caruso

Mike, with regards to Acuvue contact lenses, the regulatoryprocess is a PMA filing so what we are able to do, obviously, with this sort ofconversional combination product is certainly in benefit of our pharmaceuticalexpertise that we have inside of Johnson & Johnson as well as otherexpertise that we have in MD&D that bring the right skillsets to bearthere, but it is PMA.

With regard to the ThermaCool for afib, we have completedenrollment of the patients for this trial, and so now we are in the follow-upperiod and we will be submitting that PMA in the future.

In CAPS, what we have done with CAPS is the pivotal trial isin gastroenterology, so it is for colonoscopy, predominately in the lab. Thatpivotal trial is ongoing today and we anticipate being able to file that PMA inthe early part of 2008. That is our first indication, in the GI lab set.

Unidentified Analyst

Just a follow up on ThermoCool. Is that a randomized trial?Do you know what that looks like and what you need to show in terms of the AFsuccess rates?

Dominic Caruso

Mike, I am not really sure.

Larry Biegelsen –Wachovia

First a pharma question and then just a couple of quickdevice questions. [Ceftobiprole], I think it was previously mentioned as a 2008filing, unless I am wrong. Dominic, you didn’t mention that today as an ’08filing. Could you please give us an update?

And then on devices, any sense of timing on the contactlenses with the active ingredient?

And then on the bands, the 1.7 billion in the market for2011, what is the split between band and bypass? I think that was a growthmarket.

Lastly, do you have a telemetrically adjustable band indevelopment? Thanks.

Dominic Caruso

Larry, on the pipeline I mentioned three filings, CNTA 148, rivaroxaban, and pentadol, but youare correct. There are actually six filings in ’08. [Ceftobiprole] is still ontrack to be filed in ’08; [Vacogen] in the EU is on track to be filed in ’08,as well as [Yondelese] for oncology. So we actually have six filings planned in’08, I happened to mention three earlier.

Nick Valeriani

Larry, again, the timing. We are in the clinical trial rightnow on the contact lenses so we will complete that trial and the submission forthe PMA, it is too early right now to really determine when that will besubmitted, but it is one of our top priority projects in the vision care business.

The 1.7 billion market potential for band versus bypass,that really is predominantly going to be, we believe, bypass surgery when youthink about the other clinical benefits associated with these procedures as itrelates to the resolution of other co-morbidities – diabetes and hypertension –but I think, you know, the jury is still out on that in terms of how that wouldfit with the surgery business in the marketplace with the Realize band and ourability to develop that market and work with physicians and payers andconsumers.

We are going to see, I think perhaps a changing dynamicthere. Obviously today the indication is BMI of 35 or greater with statedco-morbidities. Who knows where the band could ultimately end up and perhaps beutilized in less severely obese patients. So we might see a segmentation changethat could potentially affect that 1.7 billion projection.

As it relates to a remote control adjustment, we are not atliberty at this point to really talk about what is in the early stages rightnow.

Rob Hopkins – LehmanBrothers

Two questions for Nick, in light of the fact that next weekwe have the TCT meeting and the NAS meeting all in the same week, so I have a stentand spine question. First on the stentside, I just wanted to clarify, now your next generation deluding stent are contraplatform-based stent.

Then on the spine side, you guys have been losing some shareover the course of the last year. I am wondering, this is a market that is stillgrow in double-digits, how long do you think it will take you to get back to a marketrate of growth and what do you need to do? Are there any key product launchescoming in NAS in the near term that could turn that business around?

Nick Valeriani

As it relates to stents, as you saw in the pipeline we havetwo products that are underdevelopment. It’s our Cypher Elite, which is asurface coated product; and the Contra products. So we have a dual pack goingright now, and as per the plan, the first product for the will be Cypher Elite, but again, we remain very excited about the Contraprogram where we believe we will have our first experience in the early part of2008.

With regard to spine, we have had some challenges in therecent past. A couple things that were giving us some positive feelings aboutthat business. First and foremost, as we stabilized the distribution network inthe U.S. wewere having a significant degree of turnover on our distributors, and we made aleadership change a couple years ago now. Gary Fischetti has been leading that business and working well with thedistributors.

Our Expedian product line is out in the marketplace anddoing very well. Our MIS program as well is supporting the stabilization ofthat business and we are beginning to see a turnaround and some positivemomentum in that business.

When we will get the market rates of growth still remains tobe seen.

Rob Hopkins – LehmanBrothers

Just one quick follow-up, Louise. I was wondering if youcould give us the spine and hip and knee numbers, if you don’t mind; U.S.and worldwide.

Louise Mehrotra

Sure. This is operational growth: hip, 12%; outside the USalso 12% for a total worldwide of 12%. Knees are up 7% in the U.S. Outside theU.S. they’re up 12% for a total operational growth of 9%. Spine in the down 1%; outside the U.S.up 34% operationally, for a total of 8% growth operationally.

Unidentified Analyst

If you could just give us an update in terms of how you feelabout your visibility with regard to that product category; I know back in Julythings were very much in flux so if you could give us a quick update there.

Two quick follow-ups for Nick. Can you talk in terms of thediabetes products where you guys are, or what your interest is in continuous glucosesensors and also temporary or disposal insulin pump, which seems to be an emergingtechnology area there?

I was also surprised to see the amount of information youhave up there in terms of bio markers. If you could give us a sense of whereyou are in that development area and what your capabilities are? Thanks.

Nick Valeriani

With respect to the stimulating agent market, you areabsolutely right. Back in the second quarter call there was still someuncertainty about reimbursement and there was still some uncertainty about whatthe next panel discussion was going to entail; those were renal paneldiscussions that we still have to see the outcome of.

I guess two things happened: one is that the panel thataddressed renal did not recommend any reduction to the maximum dosing for ESAs,which is consistent with the ODAC panel. So that was good news in terms oflooking at the efficacy of these products.

There was unfortunately more restrictive reimbursement thanwe had thought was going to be the case with respect to CMS reimbursement, andalthough that was disappointing, at this point we have some more certainty overthat than we had before, as opposed to uncertainty. Sometimes you hope for certainty that ispositive, but to have uncertainty that is eliminated you can plan your businessin a more stable way.

I would say we are still going to continue discussions with CMS, the nature of thereimbursement decision. We believe, as others do, that that decision isnot based on any clinical evidence; although we have a final decision at thispoint, we are still working with CMS to ensure that they understand the pointof view of decisions of patients with respect to that decision.

I would say a little bit more certainty in the market thanwe had in a prior call with you, but still some instability in terms of whatmay happen eventually with the label. Asyou know, the FDA did not come out with any further label discussions, and sothat particular aspect is still up in the air.

But as I said, we were pleased to see no restriction ondosing was recommended by both parties.

Dominic Caruso

With regard to diabetes and continuous glucose monitoring,we see that as an important technology for the continuation and improvement in carefor the diabetic patients. We have two programs ongoing inside of our diabetesfranchise and had early clinical experience with one other devices.

One of the things, one of the key challenges to ensure thatyou have accuracy to deal with low readings, and if you think about what wewant to try to do with this technology is to monitor and then paste the load ofinfluence to the patient. So we are taking a thoughtful and disciplined approachto understand the benefit of this technology and enhancing care for thediabetics who are using insulin though.

With regard to temporary insulin pumps, we are staying abreast of what is going on inthe marketplace. Obviously we arecommitted and excited about the work at our Animas Corporation and the growthof that business year on year and the launch of the Animas 2020, though we alsosee the potential for temporary or disposable insulin pumps, perhaps forsituations like gestational diabetes where you may want a short use of theproduct as opposed to a $4,000 or $5,000 investment as the reusable pumps areused.

Then in our OCD business, in the area of bio markers, it isa space we are very excited about. Davis, who runs our OCD business has worked over the last four years nowto really reconfigure the OCD franchise and its strategy. We have been able toleverage some of the expertise we have in our pharmaceutical business, specifically[Adam Latoya] as well as some external licenses to put us in what we think isan exciting position as it relates to the development of these bio markers inthe area of cardiovascular disease, metabolic disorder, oncology and women’shealth.

So we see a real transition and obviously our core businessis important, but we really see the strategy moving to one of creating highvalue medical diagnostic testing in the future, and that is what the bio markerstrategy is all about.

Unidentified Analyst

I have a question for you regarding OTC Zyrtec. When you saythat you are preparing for that launch, should we assume that there could be acontribution from OTC Zyrtec on January 1st, 2008? If the launch timeline is beyond the 1stof the new year, what exactly is preventing you from launching at the time thatexclusivity expires?

Dominic Caruso

I would rather not comment on the specific timing, but whatI said is we are preparing for the launch shortly after the product goes offpatent and the product goes off patent in December of this year.

Unidentified Analyst

No indication as to whether that might be a manufacturingissue or approval issue, anything along those lines?

Dominic Caruso

It is just continuing to develop our plans on theappropriate launch strategy.

Unidentified Analyst

It doesn’t put you at a disadvantage with respect to otherswho might be waiting in the wings to launch an OTC version?

Louise Mehrotra

We really can’t comment any further on that at this time.

Unidentified Analyst

The second question is for Nick, one of the topics that you didnot touch on in your prepared comments was the ASR resurfacing system. Couldyou give us an update there as to what is going on, and particularly where westand in the PMA process?

Nick Valeriani

First with regards to ASR, it should be noted that product waslaunched outside the and is a very successful part of our hip program. As it relates to thetiming of the PMA submission, 2009 or 2010 timeframe.

Unidentified Analyst

I am just curious how progress is being made in the clinicaltrial for that PMA submission?

Nick Valeriani

I mean, it is progressing fine. Again, it’s a product thatwe have in the marketplace today. We don’t anticipate any issues with regard toproduct performance and surgeon uptake.

Catherine Arnold- CreditSuisse

Last Friday, the FDA issued draft guidance on antibacterials,suggesting that for some indications, non-inferiority would not be anappropriate endpoint. Could you just confirm that you still expect non-inferiorityto be okay for the three indications that you are filing, or have filed?

Dominic Caruso

Our design of the clinical trials obviously was initiated inconsultation with the FDA and the protocol was the protocol that we agreed with,with the FDA. So our plan is to move forward with that agreed-upon protocol andfile in accordance with that endpoint that was established with the FDA.

Celine Brown – Alliance Bernstein

A question for Nick on the drug-eluting stent market. Youhad mentioned that you continued to see declines in PCI procedure volumes aswell as penetration rates. Could you quantify that, if possible, and providesome additional color both for the U.S.and the OUS market?

Nick Valeriani

First of all, when you look at this, this quarter weestimate that PCI penetration year-on-year is probably down somewhere between13% and 15% versus last year. If you look at drug-eluting stent penetration asa percentage of total stents, it is probably somewhere in the 65% range ascompared to, let’s say at its peak it was probably 88%, 89% sometime a yearago.

What we see again as one considers the body of evidence thatcontinues to be published here, we believe that we’re going to see a turnaroundin both the PCI penetration and an uptake in the ES penetration. Thedirect-to-patient or direct-to-consumer campaign that we’re launching really isabout getting the word out and informing health care providers, patients andcaregivers that in fact drug-eluting stents, specially Cypher, is as safe as abare metal stent when you consider the long-term potential complications; saferthan [taxis] and more effective than both in treating coronary artery disease.

Over the last 12 to 15 months there has been all sorts ofpublicity that’s gone out there that has affected this and we continue to havegreat confidence in our product and its ability to best treat coronary diseasefor the appropriate patient, and that’s really what we’re attempting to do now.

Louise Mehrotra

With respect to everybody’s time, we have time for one morequestion.

Glenn Novarro - Bancof America

One of the concerns that we hear out there is the costcutting that you’re going to undertake in 2008 and beyond. Is that enough costcutting if Procrit disappoints further? If Cypher comes under more pressure? Canyou comment on whether or not there is still wiggle room within that P&Lfor the company to adjust if you haven’t made the right assumptions for 2008?Thanks.

Dominic Caruso

When we embarked on this cost-restructuring program weobviously had to look out in the future and try to get a sense of what theworld would look like with drug-eluting stents and competition, et cetera andthe products like Risperdal and Topamax and patent protection in’08 and ’09.

We believe we sized the business appropriately to do twothings. One is to get us through these near-term pressures but also to continueinvesting in the future. As Bill and I talked to you about this when weannounced the restructuring program, it was our goal not only to reduce costs,but to also provide focus on the more exciting, promising opportunities in thepipeline.

As we move forward, we will always keep that as a primaryconcern and move through this short-term period and come out of it strongerthan when we entered it. So I think the cost reduction programs are intended tohave a short-term impact and short-term pressures but we certainly don’t wantthem to have a long-term negative impact to reduce our growth rate going forward.So we will keep a close eye on that.

I would say our business leaders around the world have becomevery good at managing both cost and including things like implementingstandardization initiatives that I have talked to you about before. I think westill have room to grow there. That’s one area where we have just started andwe have tried to estimate that, but I think there is much more room there. They have also done a fabulous job of balancingcost containment with investment in the future.

Louise Mehrotra

That is the end of the Q&A session. I will now turn itover to Don for some final remarks

Dominic Caruso

Thanks, Louise. I would like to thank Nick for the over viewof the exciting opportunities in our MD&D business this morning. As you cansee from our strong earnings performance this quarter, our broad-based businessmodel enables us to continue delivering profitable growth while continuing toinvest in our future.

Thank you for your continued support of Johnson & Johnsonand we look forward to updating you in January on our full year 2007 results.

Thanks for your attention today and have a great day.

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