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Johnson & Johnson (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 Chief Financial Officer

Nick Valeriani - Worldwide Chairman, Medical Devices and Diagnostics


Larry Biegelsen – Wachovia

Rob Hopkins – Lehman Brothers

Catherine Arnold- Credit Suisse

Celine Brown – Alliance Bernstein

Glenn Novarro - Banc of America

Louise Mehrotra

Good morning and welcome. I am Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson. It is my pleasure this 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 - Vice President, Finance and CFO.

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

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

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

Before I get into the results, let me remind you that some of the statements made during this meeting 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, future events or developments. The 10-K is available through the company online.

Last item: during the meeting, non-GAAP financial measures may 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 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 billion for the third quarter of 2007, up 12.7% as compared to the third quarter of 2006. Our operational growth was 9.7% and currency had a positive impact of 3 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 approximately 2.4% operationally. Further, operational growth in the quarter was negatively impacted by approximately 5 points due to a number of factors: generics and sales rebate adjustments in our pharmaceutical business, and pressures causing decreases in the overall market for both drug-eluting stents and erythropoietin stimulating agents or ESAs. I will cover each of these items in more detail in the segment commentary.

If you turn to the schedule showing sales by geographic area, 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 rates positively 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 regions have 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 share were $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 have provided adjusted earnings information.

As a reference in the footnote, third quarter 2007 results were adjusted to exclude the after-tax impact of the costs associated with the previously announced restructuring program of $528 million. The third quarter 2006 results were adjusted to exclude the after-tax impact of an in-process research and development charge of $115 million associated with the acquisitions 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 relative to the components leading to the adjusted earnings before we move on to the segment 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 quarter results 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 basis points.

Selling, marketing and administrative expenses at 32.7% of sales were up 40 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, substantially offset by continued cost containment efforts across our business.

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

Interest income, net of interest expense of $52 million was down $142 million compared to the first quarter of 2006, due to a lower cash balance and higher debt position. Other expense, 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. As previously reported, the 2006 results included an increase to our product liability reserve.

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 third quarter of 2007, taxes were 23.3% as compared to the prior year rate of 23.9%. Dominic will provide further comments on taxes during his remarks.

Looking at year-to-date results, consolidated sales to customers for the first nine months of 2007 were $45.1 billion, an increase of 13.9% 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, I would first like to draw your attention to the boxed section. In 2007, the after-tax impact of charges for in-process research and development and the costs associated with the restructuring program have been excluded. In 2006, after-tax amounts for both in-process research and development and the Guidant acquisition termination fees have been excluded. With these adjustments, net earnings for the first nine months of 2007 were $9.5 billion, or $3.27 per share, up 9% and 10.8% respectively as compared to the same period in 2006.

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

For the third quarter of 2007, sales for the OTC pharmaceuticals and nutritionals increased 79% on an operational basis, compared to the same period 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 of the PCH acquisition in both periods, estimated operational sales growth was flat. Healthy growth for adult analgesics and SPLENDA was offset by lower sales of upper respiratory products. The 2006 upper respiratory sales included the impact of the launch of the products reformulated with phenylephrine.

Our skincare business achieved operational sales growth of 12% 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 new product 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 PCH acquisition in both periods, operational sales growth was approximately 6% ahead of projected category growth rates for the year. Baby and kids care products achieved operational growth of 7% when compared to the third quarter of 2006, driven by the strong performance of cleansers and powders. Sales growth 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 PCH acquisition in both periods, operational sales growth was approximately 5%, ahead of projected category growth rates for the year. Women's health achieved operational 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 net impact of the PCH acquisition in both periods, sales declined on an operational basis by approximately 3%, due to increased competition combined with retail inventory reductions in certain categories.

On a pro forma basis, including the net impact of the PCH acquisition in both periods, operational sales growth for the oral care business was approximately 10%, ahead of projected category growth rates for the year. Double-digit growth for Listerine mouthwash, driven by the strong results in the international markets and the U.S. launch of the Listerine dissolvable whitening strips were the major contributors to the growth in the quarter.

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

Worldwide net sales for the third quarter up $6.1 billion were up 3.7% compared to the same period a year ago. Operational growth was 1.2% 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 for sales rebates of approximately $130 million; while the third quarter 2007 included a reduction to sales rebate reserves of approximately $60 million. Both sales reserve adjustments were related to sales recognized in previous periods. The most significant impacts were to antipsychotics, Topamax and Levaquin and I will provide additional commentary as it relates to those products in a moment.

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

Additionally, e saw a retraction in the U.S. market for ESAs as a result of the ODAC discussions, the label changes and changes to reimbursement. The combined effect of the estimated impact of all items noted: generics, the declining ESA markets and the change in the reserve reductions, impacted the worldwide pharmaceutical operational sales growth by approximately 7.5 times.

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

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

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 6% when compared to the same period a year ago, 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 mentioned earlier, would have been double-digit.

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

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

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

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

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

Concerta, for attention deficit hyperactivity disorder, grew operationally by 4% in the third quarter as compared to the same period last year. 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 diagnostics segment. Worldwide medical devices and diagnostics segment sales of $5.2 billion grew 3% operationally as compared to the same period in 2006, while currency contributed 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 lower sales of Cypher, grew nearly 10% operationally with healthy growth seen across the other franchises.

Now turning to the franchises, starting with Cordis. Cordis sales declined approximately 23% in the third quarter due to lower sales of Cypher, our sirolimus-eluting stent, partially offset by strong growth in both our Biosense 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 rate of 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 of 2006. Sales outside the U.S. of approximately $190 million declined nearly 40% operationally. The international market decline versus the third quarter of 2006 was estimated at over 10%, while the estimated market share in the quarter of 37% was down from 51% in the third quarter of 2006 and 43% last quarter. Increased competition has impacted the share outside the U.S. Cypher estimated worldwide share for the quarter was 41%.

The Biosense Webster franchise, our electrophysiology business, 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% when compared 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 medicine businesses 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 spine business 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 many categories, namely hemostasis, women's health, biosurgical, meshes and drains.

Ethicon Endo-Surgery achieved operational growth of 8% in the 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 bariatric procedures, grew 13% operationally in the quarter and was a major contributor to the growth. Strong double-digit results were achieved in the energy business due to the continued success with the Harmonic Scalpel, up 18% operationally in the quarter.

The LifeScan franchise achieved operational growth of 13% in the third quarter of 2007. The U.S. sales increased 15%, reflecting the continued success of the Ultra Mini and the Ultra Strip, complemented by growth of the Animas business. The Animas business achieved sales growth of nearly 30% in the quarter, due to the launch of the 2020 pump earlier this year. Sales outside the U.S. increased 9% on an operational basis, due to the strong results of the Ultra products.

Ortho-clinical diagnostics sales grew on an operational basis 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 immuno diagnostics market and lower sales of donor screening products. The results in the U.S. were driven by the rapid uptake of the Chagas screening assay and strong results achieved in immuno diagnostic products.

Lastly, in the medical devices and diagnostics segment, our vision care franchise achieved operational sales growth of 16%, 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 continues to make strong contributions to growth in the quarter.

That completes highlights for the medical devices and diagnostics segment and concludes the segment highlights for Johnson & Johnson third quarter of 2007.

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

Dominic Caruso

Thank you, Louise and good morning, everyone. While we are pleased with our solid financial results for the third quarter as Louise highlighted for you, during the third quarter, our sales results were slightly above the mean of the analyst models published by First Call. Our solid earnings performance for the quarter demonstrates our ability to continue managing our costs and improving our margin, even in the face of sales pressures in certain markets while continuing to invest in the future.

In fact, if you were to look at the impact of adding the Pfizer Consumer Healthcare 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 nine months of this year, now including the PCH business, you will see an operating margin of 26.7%, or only 0.5% negative impact versus the 2006 period, thus indicating leverage in the base business of approximately 0.7%.

As you know, we recently announced a $10 billion share repurchase program, the largest in our history. We began purchasing shares in August and through the end of the third quarter we purchased $2 billion of our stock. 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.

In July, we announced cost restructure improvements that will help us manage through some near-term challenges in our pharmaceutical business and Cordis franchise. As you saw, our third quarter results reflect the restructuring charge of approximately $745 million on a pre-tax basis, consistent with the guidance that I provided during our conference call when we announced the restructuring activities 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 and the 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 actions are consistent with the guidance I have provided, namely reductions of approximately 3% to 4% of our global workforce in accordance with local work councils and labor laws, and we are on track to achieve annual cost savings for 2008 of approximately $1.3 billion to $1.6 billion.

Leaders in our operating companies have been spending the last few months talking with employees about adjustments in their respective business models and I am proud to say that our leaders are executing against these plans to reduce our cost infrastructure while maintaining the proper balance of investing in the future. Our goal remains to build on the strengths of our business, reduce our overall cost base and become better positioned for continued profitable growth in the years ahead.

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 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 million of net cash. This is approximately $8.3 billion of cash and investments and $7.9 billion of debt. This is an improvement of $2.9 billion in our overall net cash position from year end 2006. We achieved this improvement while completing the $1.4 billion acquisition of Conor Medsystems during the first half of this year and also utilizing $2 billion to repurchase shares as we began our share repurchase program 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 the impact from the share repurchase program but assuming not major additional acquisitions, I suggest you consider net interest income in the range of $125 million to $175 million for the full year 2007, slightly lower than our prior guidance, to reflect the impact of the share repurchase program which is now underway.

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 the gain on the divestitures of certain brands in connection with the PCH acquisition in the first quarter, as well as the integration costs associated with the PCH acquisition.

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

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

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

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 3 points.

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

Given the strength of our earnings performance for the third quarter and considering the fact that restructuring actions will result in approximately $0.02 to $0.03 per share of additional costs that will be reflected in our ongoing operations this year, we suggest that you consider full 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 per share. This enhanced earnings performance is a reflection of the fine work of the people of Johnson & Johnson who continue to integrate acquisitions and make appropriate changes to our cost structure, all the while continuing to move our promising new growth opportunities forward and make important advances in human healthcare.

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

That concludes my comments on our operating performance and I look forward to updating you at our meeting in January to discuss our full year 2007 results.

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

The consumer group continues to generate new platforms for growth 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 skincare products with the unsurpassed protection of Helioplex sunscreen are rolling out worldwide, and we are preparing to launch an OTC version of Zyrtec anti-allergy medication in the U.S., shortly after Zyrtec moves from prescription to OTC status.

In June, we also spoke to you about our pharmaceutical segment, highlighting the many promising medicines we have in late-stage development. Looking at our late-stage pipeline of new medicines, we received FDA approval last week for Doribax, doripenem for injection for the treatment of complicated urinary tract infections and intra-abdominal infections. At APAC we presented data showing that Doribax is as effective as commonly-used therapies in treating nosocomial pneumonia. In June of this year, Doribax was filed in the U.S. and Europe for treatment of nosocomial pneumonia and in Europe for complicated urinary tract infections and complicated intra-abdominal infections.

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

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

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

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

So we continue to make progress on a number of fronts in both our consumer and pharmaceutical businesses. I am very pleased this morning to 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 our business. Most of you know Nick very well. 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 day MD&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 seven franchises in MD&D. At the end of his presentation, we look forward to taking your questions.

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

Nick Valeriani

Thank you, Dominic and good morning, everyone. Thank you for the opportunity to talk to you today about the Johnson & Johnson medical device and diagnostics segment. This is an exciting time for our businesses. We are working comprehensively across our franchises to address some of the most pervasive diseases. We are committed to a vision of restoring the joys of life for patients around the world, and there can be no doubt that our technologies make a difference.

More than 3 million patients live more active lives thanks to our Cypher stent. More than 100,000 people are dealing better with morbid obesity with our adjustable gastric band. More than 1 million knees bend and rotate with less pain with our joint replacement. 40 million eyes focus more clearly wearing Acuvue lenses; 4 million people better manage diabetes with our OneTouch Ultra products; and in hospitals around the world, there are enough Ethicon sutures to 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 innovative solutions by paying particular attention to working with the grain of healthcare in terms of addressing issues like availability, access and affordability and by enhancing our leadership position in markets around the globe.

We are, as you can see here, the world's largest medical technology business by a significant margin, and we have achieved strong and steady growth relative to our competition. Over the past five years, the MD&D segment has achieved strong operational growth. In fact, our compound annual growth rate for the 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 to continue growing forward.

Our consistent level of acquisitions and divestitures suggests that we have been disciplined in our approach, continuously refreshing our product portfolio. For the broad product portfolio, we are also the world's most diverse medical technology business. I am going to have time today to talk to you about just a few of our exciting platforms for growth, and they are suggestive of a business that leverages strengths from throughout Johnson & Johnson. They include consumer insights, direct-to-consumer marketing and pharmaceutical expertise, for example, applied to our technologies to gain an unparalleled strategic advantage.

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

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

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

As a segment of the Johnson & Johnson family of companies, 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 educate physicians and patients, an effort we have now put to work on behalf of the Cypher stent in the drug-eluting stent category. While we recognize that new entries will increase competitive pressure in this space, we continue to believe that we will compete successfully on a foundation of the world's largest and deepest body of clinical evidence supporting the safety and efficacy of our product.

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

Our educational campaign has two objectives: against the backdrop of the newest literature and the impressive body of data supporting the category, we are working to restore physician and patient confidence in percutaneous coronary intervention as a treatment of choice for coronary artery disease. And, we are speaking directly to patients, caregivers and physicians about 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 are just a few of the efforts in this campaign, which began last month and which we will continue into the coming year with a number of new elements. We are running in major national outlets, directing readers to an enhanced website for more information. That website,, is the foundation of the effort because it offers significant information for patients to improve their dialogue with their physicians and to help them make more informed decisions for themselves.

Now before I begin a review of selected technologies in our pipeline, I would like to remind you of some of the updates we have provided last fall at our medical devices and diagnostics business review. As you can see from this chart, we have achieved most of the milestones we've projected about a year ago. More notable among them are the ortho-clinical diagnostics' FDA clearance late last year of the 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 adjustable gastric band and it came in the third quarter of this year. We are on target for the BLA submission for the Fibrin Patch and we have begun the global rollout of the Pria skin closure system with CE marked clearance in Europe. We terminated development of Cypher NXT and Cypher Neo and launched, as planned, the Firestar and Durastar balloon catheters.

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

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

So let's start with diagnostics where development of novel medical markers could change the way we approach disease. This is a skillset that derives from a partnership between our diagnostics company and our pharmaceutical researchers. While many companies, including our own, are focused on treating chronic illness that is only part of the equation. The key strategic issue in healthcare is reducing the incidence of chronic illness worldwide and we are creating, through our Ortho-Clinical Diagnostics franchise, a new generation of sophisticated diagnostics tests that we believe have the potential to not only help reduce chronic illness, but also improve patient outcomes and reduce healthcare costs worldwide. These tests will accomplish that by detecting diseases and medical conditions earlier than ever before.

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

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

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

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

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

I believe it is also a great example of how our decentralized philosophy works best. By staying close to the surgeon customer to understand his or her needs, we have adapted this technology to procedures across specialties that enable better care. Take a look at this next set of photos to see what I mean. These are photos of facial plastic surgery used in traditional techniques and Harmonic devices. The photo on the right depicts the results achieved with Harmonic Energy. Over time, the Ethicon Endo-Surgery strategy is to leverage the use of Harmonic not only to other areas of general surgery, but to specialties that are the focus of other Johnson & Johnson MD&D businesses; for instance, plastic surgery, orthopedics and gynecology.

I will tell you more in a few minutes about our vision for making 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 our LifeScan business and its flagship OneTouch platform. We have been able to continue to leverage the OneTouch Ultra platform and strip technology by bringing out new meter innovations that are aimed at driving better testing compliance, providing greater patient insights with the goal of better outcomes.

The benefit is that we are able to leverage the capital investments we have made within our facilities to support a single strip technology. Some of the newest additions to the line are those that support solutions tailored to this specific market need. Again, the customer's voice told us that many markets attempting to deal with the epidemic of diabetes needed an affordable blood glucose monitoring solution that offered basic information to patients who previously hadn't been testing blood glucose levels at all. We continue to offer the best meters at all levels, but these basic affordable models enable us to make an important contribution to the management of this pervasive disease.

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

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

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

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

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

Of course, our Cordis franchise is not a one-dimensional business and we have continued to expand our focus outside of interventional cardiology. For example, in our endovascular business, we have now filed our PMA for the approval of the ExoSeal vascular closure device, which we gained through the acquisition of Ensure Medical in 2006.

We are also excited about the work of our Biosense Webster franchise and the study of catheter ablation for the treatment of atrial fibrillation. This condition affects about 10 million people, mostly over the age of 65, and we expect to see incidents doubling in the coming years. It's one of the leading causes of stroke. 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 IDE clinical trial for an indication for AFib for our Navistar ThermoCool Catheter, expecting to file our PMA next year and we are working and committed towards leadership in this important category.

We see structural heart disease as a potential new frontier in cardiology and we are developing a number of solutions for structural problems such as a PFO closure device. We also have active development programs in percutaneous valve repair and replacement, including potential applications of the previously approved intra-cardiac Echo catheter. In all, we expect structural heart disease to represent a multibillion dollar opportunity in the future.

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

To that end, we are pursuing a patient segmentation strategy focused on performance and next year, DePuy will launch a new high-performance single knee platform, which will include new instrumentation and a series of new product introductions.

Another exciting opportunity we are pursuing is the delivery of active pharmaceuticals through contact lenses. We are in late-stage clinical trials with the first of these products, which not only correct vision, but also delivers medications to treat allergy symptoms in the eye. These products will appeal to consumers who have not worn or have stopped wearing contact lenses because of discomfort and other issues. We see this as an exciting market expansion opportunity and it also represents further realization of our strategy to move from a vision correction business to a more comprehensive vision care franchise.

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

[Technical difficulties – presenter disconnected]

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

Now before I close, I want to leave you with a sense of the possibilities we are looking at in the longer term; possibilities that take advantage 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 to address some of the world’s most pervasive and challenging conditions in a way no other company can do. Take a look at just one example, metabolic disease, to understand the strength our focus across the enterprise affords us. Despite the prevalence of diabetes and its incumbent co-morbidities, this remains a seriously under-treated, complex and overwhelming disease.

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

In fact, in the next few days, we will be announcing a commitment 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 Diabetes Institutes in Japan, the U.S., France and China initially as part of our commitment that goes well beyond products and technologies to addressing a global issue in a way that no other corporation can do.

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

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

Our size enables us to pursue standardization and cost efficiency where it makes sense, but our individual franchise focus enables us to make decisions close to the customer and with the best interest of the patient in sight. We believe we are cultivating the right skills to innovate with the grain 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 our profits in excess of sales. In all, we believe we are making a difference and that our innovations will continue to improve the way medical technology impacts delivery of care around the world. Thank you.

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

Question-and-Answer Session

Louise Mehrotra

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

Unidentified Analyst

A quick question for Dominic. When we look at last quarter versus this quarter, last quarter you gave guidance of $4.02 to $4.05; this quarter 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 with the changes in guidance among those three categories?

Dominic Caruso

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

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

The third component is some additional other income that I referenced which was related to increased royalty income and gain on the sales of our investments in our development portfolio. I would say that cost improvement 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 fourth quarter? Maybe you can just call that out.

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

Could you review the U.S. stent pricing environment. Our context is suggesting J&J has been incrementally more aggressive on price in stents. Could you tell us where stent prices were in the quarter and your strategy for dealing with new competition there? 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 settlement agreement with the Department of Justice on the orthopedic industry matters and that 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 only one-time unusual item we wouldn’t expect to repeat in future quarters.

The royalty income we are experiencing is in certain agreements that have triggering aspects for the royalty agreements. I don’t want to tell you which particular ones they are, but we will see better royalty income through the remainder of the year.

With respect to Invega, we still continue to see in Invega as a promising product for the treatment of schizophrenia. I would tell you that we continue to see restrictions in the use of Invega based on formulary status, so whether it is prior authorization, et cetera, we continue to see that. It is a very difficult environment for new products in a new reimbursement arena. Those pressures are difficult to overcome without additional data on the product, especially additional data comparing it other products.

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. That trial showed that Invega performed very nicely against the Seroquel placebo in terms efficacy and is very well-tolerated and in fact, the dropout rate for Invega patients is far lower than either Seroquel or even placebo. So we are very pleased because that is the kind of data that the reimbursement environment is waiting for 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 guidance for this year and in the cost improvement programs that were previously announced.

With respect to DES pricing, Louise might have the actual data 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 a similar amount, higher in terms of local currency, but we did have the favorable impart 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 track by 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 of questions for Nick since we have him here. The pharma pipeline question is on CNTO 148. We are going to see data in a couple of weeks at ACR, I believe in arthritis and ankylosing spondylitis. Could you talk about your filing strategy for different indications for 148 RA as well as arthritis and so forth?

And then the question for Nick, you talked about an interesting 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 that type of product? How much visibility do you have on that?

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

Nick Valeriani

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

Dominic Caruso

Mike, with regards to Acuvue contact lenses, the regulatory process is a PMA filing so what we are able to do, obviously, with this sort of conversional combination product is certainly in benefit of our pharmaceutical expertise that we have inside of Johnson & Johnson as well as other expertise that we have in MD&D that bring the right skillsets to bear there, but it is PMA.

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

In CAPS, what we have done with CAPS is the pivotal trial is in gastroenterology, so it is for colonoscopy, predominately in the lab. That pivotal trial is ongoing today and we anticipate being able to file that PMA in the 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 AF success rates?

Dominic Caruso

Mike, I am not really sure.

Larry Biegelsen – Wachovia

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

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

And then on the bands, the 1.7 billion in the market for 2011, what is the split between band and bypass? I think that was a growth market.

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

Dominic Caruso

Larry, on the pipeline I mentioned three filings, CNTA 148, rivaroxaban, and pentadol, but you are correct. There are actually six filings in ’08. [Ceftobiprole] is still on track 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 right now on the contact lenses so we will complete that trial and the submission for the PMA, it is too early right now to really determine when that will be submitted, 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 you think about the other clinical benefits associated with these procedures as it relates 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 would fit with the surgery business in the marketplace with the Realize band and our ability to develop that market and work with physicians and payers and consumers.

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

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

Rob Hopkins – Lehman Brothers

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

Then on the spine side, you guys have been losing some share over the course of the last year. I am wondering, this is a market that is still grow in double-digits, how long do you think it will take you to get back to a market rate of growth and what do you need to do? Are there any key product launches coming 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 have two products that are underdevelopment. It’s our Cypher Elite, which is a surface coated product; and the Contra products. So we have a dual pack going right now, and as per the plan, the first product for the U.S. market will be Cypher Elite, but again, we remain very excited about the Contra program where we believe we will have our first experience in the early part of 2008.

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

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

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

Rob Hopkins – Lehman Brothers

Just one quick follow-up, Louise. I was wondering if you could 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 US also 12% for a total worldwide of 12%. Knees are up 7% in the U.S. Outside the U.S. they’re up 12% for a total operational growth of 9%. Spine in the U.S. is 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 feel about your visibility with regard to that product category; I know back in July things 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 the diabetes products where you guys are, or what your interest is in continuous glucose sensors and also temporary or disposal insulin pump, which seems to be an emerging technology area there?

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

Nick Valeriani

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

I guess two things happened: one is that the panel that addressed 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 of looking at the efficacy of these products.

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

I would say we are still going to continue discussions with CMS, the nature of the reimbursement decision. We believe, as others do, that that decision is not based on any clinical evidence; although we have a final decision at this point, we are still working with CMS to ensure that they understand the point of view of decisions of patients with respect to that decision.

I would say a little bit more certainty in the market than we had in a prior call with you, but still some instability in terms of what may happen eventually with the label. As you know, the FDA did not come out with any further label discussions, and so that particular aspect is still up in the air.

But as I said, we were pleased to see no restriction on dosing 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 care for the diabetic patients. We have two programs ongoing inside of our diabetes franchise and had early clinical experience with one other devices.

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

With regard to temporary insulin pumps, we are staying abreast of what is going on in the marketplace. Obviously we are committed and excited about the work at our Animas Corporation and the growth of that business year on year and the launch of the Animas 2020, though we also see the potential for temporary or disposable insulin pumps, perhaps for situations like gestational diabetes where you may want a short use of the product as opposed to a $4,000 or $5,000 investment as the reusable pumps are used.

Then in our OCD business, in the area of bio markers, it is a space we are very excited about. Davis, who runs our OCD business has worked over the last four years now to really reconfigure the OCD franchise and its strategy. We have been able to leverage 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 is an exciting position as it relates to the development of these bio markers in the area of cardiovascular disease, metabolic disorder, oncology and women’s health.

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

Unidentified Analyst

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

Dominic Caruso

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

Unidentified Analyst

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

Dominic Caruso

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

Unidentified Analyst

It doesn’t put you at a disadvantage with respect to others who 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 did not touch on in your prepared comments was the ASR resurfacing system. Could you give us an update there as to what is going on, and particularly where we stand in the PMA process?

Nick Valeriani

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

Unidentified Analyst

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

Nick Valeriani

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

Catherine Arnold- Credit Suisse

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

Dominic Caruso

Our design of the clinical trials obviously was initiated in consultation 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 and file 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. You had mentioned that you continued to see declines in PCI procedure volumes as well as penetration rates. Could you quantify that, if possible, and provide some additional color both for the U.S. and the OUS market?

Nick Valeriani

First of all, when you look at this, this quarter we estimate that PCI penetration year-on-year is probably down somewhere between 13% and 15% versus last year. If you look at drug-eluting stent penetration as a percentage of total stents, it is probably somewhere in the 65% range as compared to, let’s say at its peak it was probably 88%, 89% sometime a year ago.

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

Over the last 12 to 15 months there has been all sorts of publicity that’s gone out there that has affected this and we continue to have great confidence in our product and its ability to best treat coronary disease for 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 more question.

Glenn Novarro - Banc of America

One of the concerns that we hear out there is the cost cutting that you’re going to undertake in 2008 and beyond. Is that enough cost cutting if Procrit disappoints further? If Cypher comes under more pressure? Can you comment on whether or not there is still wiggle room within that P&L for 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 we obviously had to look out in the future and try to get a sense of what the world would look like with drug-eluting stents and competition, et cetera and the products like Risperdal and Topamax and patent protection in’08 and ’09.

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

As we move forward, we will always keep that as a primary concern and move through this short-term period and come out of it stronger than when we entered it. So I think the cost reduction programs are intended to have a short-term impact and short-term pressures but we certainly don’t want them 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 become very good at managing both cost and including things like implementing standardization initiatives that I have talked to you about before. I think we still have room to grow there. That’s one area where we have just started and we have tried to estimate that, but I think there is much more room there. They have also done a fabulous job of balancing cost containment with investment in the future.

Louise Mehrotra

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

Dominic Caruso

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

Thank you for your continued support of Johnson & Johnson and 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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Source: Johnson & Johnson Q3 2007 Earnings Call Transcript
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