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Johnson & Johnson (NYSE:JNJ)

Q3 2008 Earnings Call

October 14, 2008 8:30 am ET

Executives

Louise Mehrotra - Vice President, Investor Relations

Dominic Caruso - Vice President, Finance and Chief Financial Officer

Chris Poon - Vice Chairman, Board of Directors and Worldwide Chairman Pharmaceuticals Group

Paul Stoffels - Company Group Chairman, Global Research and Development Pharmaceuticals Group

Analysts

Rick Wise - Leerink Swann

Matt Dodds - Citigroup

Seth [Diverga] – Deutsche Bank

David Roman – Morgan Stanley

Catherine Arnold - Credit Suisse

Louise Mehrotra

Welcome, I’m Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson and it is my pleasure this morning to review our business results for the third quarter of 2008. Joining me on the podium today are Chris Poon, Vice Chairman, Board of Directors and Worldwide Chairman, Pharmaceuticals Group, Paul Stoffels, Company Group Chairman, Global Research and Development Pharmaceuticals Group and Dominic Caruso, Vice President, Finance and Chief Financial Officer.

Also joining us today in the audience is Sheri McCoy, Worldwide Chairman, Surgical Care Group. As we announced last week, effective January 1, 2009, Sheri will assume the role of Worldwide Chairman, Pharmaceuticals Group.

A few logistics before we get into the details, the audio and visuals from these presentations are being made available to a broader audience via a webcast accessible through the Investor Relations section of the Johnson & Johnson website.

I’ll 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. Chris and Paul will then provide an update on our Pharmaceuticals Business. We will then open the floor to your questions. We will conclude our formal presentation at approximately 9:30 am and following Q&A with some final remarks by Dominic we’ll 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 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 presentation may be considered forward looking statements. The 10-K for the fiscal year 2007 identifies certain factors that could cause the company’s actual results to differ materially from those projected in any forward looking statements made this morning. The company does not undertake to update any forward looking statements as a result of new information or future events or developments. The 10-K is available through the company or online.

The Pharmaceutical Group presentation contains statements about new molecular entities or NMEs and other medicines or line extensions in various stages of development. These presentations are based on the company’s current knowledge of the status of development of the NMEs, medicines and line extensions and are subject to the challenges and difficulties inherent in product development. Not every compound highlighted today will make it to the market.

In Biopharmaceuticals there are higher possibilities of encountering infringement claims by competitors with respect to patents or other intellectual property rights. The company does not undertake to update any forward looking statements as the result of new information or future development.

Last item, during the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. These measures are reconciled to the GAAP measures and are available on the Johnson & Johnson website. Now I would like to review our results for the third quarter of 2008. If you would refer to your copy of the press release, let’s begin with the schedule titled supplementary sales data by segment of business.

Worldwide sales to customers were $15.9 billion for the third quarter of 2008, up 6.4% as compared to the third quarter of 2007. Our operational growth was 3.3% and currency added 3.1 points. If you turn to the schedule showing sales by geographic area, you will see that we achieved growth of 0.4% in the US.

In regions outside the US our operational growth was 6.5%, while the effect of currency exchange rates positively impacted our reported results by 6.6 points. Our strongest performing region was the Western Hemisphere excluding the US which grew 15.3% on an operational basis. The Asia/Pacific/Africa region grew by 11.3% operationally while Europe grew 1% operationally.

If you will now turn to the consolidated statement of earnings, net earnings on a reported basis were $3.3 billion and earnings per share were $1.17. This compares to $2.5 billion and $0.88 in the same period in 2007. Please direct your attention to the box section of the schedule where we have provided adjusted earnings information. As referenced in the footnote, third quarter 2007 were adjusted to exclude the after-tax impact of the cost associated with the restructuring program of $528 million. There were no adjustments to the 2008 results in the quarter.

Net earnings on an adjusted basis and earnings per share were up 7.6% and 10.4% respectively versus the third quarter of 2007.

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. Cost of goods sold at 30% was up 150 basis points versus the same period in 2007. Approximately half of the increase is due to changing mix within our businesses while the remaining half is due to additional costs incurred in our manufacturing operation.

Selling, marketing, and administrative expenses of 32.6% of sales were down 10 basis points versus last year. Cost containment efforts more than offset the impact of the change in mix of our business driven by the strong growth of the consumer business.

Our investment in research and development as a percent to sales was 11.7%, 60 basis points less than the third quarter of 2007 due to a combination of the change of mix of businesses and the timing of expenditures. Interest expense net of interest income of $25 million compares to $52 million of net interest income in the third quarter of 2007. This increase in expense was due to a higher average debt position in the quarter versus the same period last year as we continue buying back shares as part of our repurchase program.

Other income net of other expense was $224 million in the third quarter of 2008 compared to $2 million of net other expense in the same period last year. As discussed last quarter, we received a settlement payment Amgen for $200 million which is reflected in this account. With regard to taxes please direct your attention to the effective tax rate excluding special charges shown in the box section of the schedule. Taxes were 22.8% in the third quarter of 2008 versus 23.3% in the third quarter of 2007. Dominic will provide more commentary on taxes in his remarks.

Looking at year to date data consolidated sales to customers for the nine months of 2008 were $48.6 billion an increase of 7.6% as compared to the same period a year ago. On a year to date basis operational growth was 3% and currency had a positive impact of 4.6 points. On the consolidated statement of year to date earnings I’d first like to draw your attention to the box section. In both 2008 and 2007 charges for in process research and development have been excluded.

Additionally, in 2007 the costs associated with the restructuring program have been excluded. With these adjustments net earnings for the nine months of 2008 were $10.3 billion or $3.61 per share up 7.7% and 10.4% respectively as compared to the same period in 2007.

Turning now to business segment highlights, I’ll begin with the consumer segment. Worldwide consumer segment sales of $4.1 billion increased 13.1% as compared to the third quarter of 2007. Operational growth was 9.4% while currency added 3.7 points. US sales were up 11.2% while international sales grew 8.1% on an operational basis.

For the third quarter of 2008, sales for the over the counter pharmaceuticals and nutritionals increased 11% on an operational basis compared to the same period in 2007. Sales in the US were up 19% while sales outside the US were up 3% operationally. The successful US launch this year of Zyrtec was a major contributor to this increase.

Our skin care business achieved operational sales growth of 12% in the third quarter of 2008 with sales in the US growing at 15% and sales outside the US up 10% on an operational basis. Strong growth was driven by Neutrogena, Clean & Clear, Aveeno and Johnson’s Adult, due to a combination of new product launches and strength in the core businesses. Also contributing to the strong growth in the quarter were the newly acquired products from Dabao the leading moisturizer in China.

Baby care products achieved operational growth of 9% when compared to the third quarter of 2007. Sales in the US grew by 1% with some softness in category growth. Strong growth across most product lines resulted in an operational increase in sales outside the US of 12%.

Women’s health achieved operational growth of 6%. Sales in the US were up 10% due to the successful launch of the new products in our KY line. Sales outside the US were up on an operational basis by 3%.

Operational sales growth in the oral care franchise was 7% with US sales down 3%. A significant new product launch in the third quarter 2007 impacted the US growth comparisons for the quarter. Sales outside the US increased 18% operationally driven by very strong growth for Listerine across the major regions. That completes our review of the Consumer segment and I’ll now review highlights for the Pharmaceuticals segment.

Worldwide net sales for the third quarter of $6.1 billion were up 0.2% versus the same period last year. On an operational basis, sales were down 2.5% with positive currency adding 2.7 points. Sales in the US decreased 6% while sales outside the US increased on an operational basis by 3.3%. Our results continue to be impacted by generic competition on some of our products, namely Duragesic, and Risperdal Oral.

The combined effect of this generic competition has reduced the third quarter Worldwide Pharmaceutical operational sales growth rate by approximately 11 points with the US impact estimated at 13.5% and the impact outside the US estimated at nearly 8%. As we have previously reported we saw a continued retraction in the US market for Erythropoietin Stimulating Agents or ESAs. This retraction has impacted the overall Pharmaceutical growth rate by approximately 2 points.

Additionally, in the third quarter sales results outside the US were favorably impacted by a reduction to a reserve for sales of approximately $135 million related to Concerta. The majority of the reserve had been recorded as a reduction to sales in prior years. Excluding the negative impact of generics and the lower sales of Procrit and the positive impact of the reserve reduction the underlying operational sales growth was estimated at 8%.

Now reviewing the major products, both Procrit and Eprex declined operationally by 12% during the quarter as compared to the same quarter last year. New competition and softening of the market due to ongoing labor reviews have contributed to the lower sales results for Eprex.

Procrit results have been impacted by a decline in the market versus the third quarter of 2007, estimated at 18%, partially offset by an increase in overall market share. Procrit aggregate share across all markets was approximately 48% in the third quarter of 2008, up 3 points versus the same period last year.

Sales of Levaquin our anti-infective were down 10% on an operational basis when compared to the same period a year ago. The script volume in the market was down approximately 5% versus the third quarter of 2007 attributable to a lower incident of respiratory illnesses. Market share was negatively impacted by generics in the category.

Risperdal Oral had an operational decline of 63% when compared to the same period a year ago. Sales in the US were down 77% while sales outside the US declined 38% operationally. With the patent expiration in the US at the end of June this year there are now generic competitors for Risperdal in most markets.

AcipHex, as it’s known in the US market, and Pariet outside the US is a proton pump inhibitor, or PPI, that we co-market with Eisai. On an operational basis, sales were down 19%. US sales were down 18% and the sales outside the US were down 20% operationally. In the US, script share has been negatively impacted by additional generic launches in the PPI category. Similar market dynamics impacted sales outside the US, compounded by the impact of market entry in Canada of generic Rabeprazole, the active ingredient in Pariet.

Now moving on to our growth drivers, Remicade, a biologic approved for the treatment of a number of immune mediated inflammatory diseases, grew by 19% when compared to the third quarter of 2007. Sales growth in the US was 20%. Market growth in the Anti-TNF category continued to be strong. Sales to our customers for markets outside the US were up 16%.

As we reported in the first quarter there was a significant increase in sales outside the US due to timing of shipments reflecting inventory planning on our customer’s part. Both the second and the third quarter sales were impacted as the majority of the inventory build was depleted. Excluding the estimated change in inventory levels, sales outside the US were more in line with estimated increase in demand of approximately 30%.

Sales of Topamax, which is approved for the treatment of epilepsy and migraine prophylaxis, increased operationally by 18%. Sales in the US were up 22% while sales outside the US were flat on an operational basis. In the US, market share in the migraine category increased versus the same period last year. Outside the US, strong growth was achieved in many markets, offset by generic entries in certain other markets.

Risperdal Consta, our long acting injectable formulation, achieved third quarter sales growth of 10% on an operational basis. US sales growth was 6% ahead of the estimated market growth. Sales outside the US were up 12% operationally with continued positive momentum and share.

Concerta, a product for attention deficit hyperactivity disorder, grew 66% operationally in the third quarter as compared to the same period last year. As mentioned, sales results outside the US included a reduction to a reserve for sales of approximately $135 million related to Concerta. Excluding this reserve sales were up approximately 12% operationally, with sales in the US were up 7% and sales outside the US up 28% operationally.

In the US continued solid market growth has been partially offset by lower market share. The approval earlier this year of the Adult Indication for Concerta will enable us to compete in the broader ADHD market.

Velcade, a treatment for relapsed multiple myeloma, is being co-developed with Millennium Pharmaceuticals. We have commercialization rights in Europe and the rest of the world outside the US. Operational sales growth was 37%, with very strong results achieved across the regions.

Wrapping up the review of the pharmaceutical segment, a manufacturing supplement SNDA for [Iopsis] previously submitted to the FDA did not gain approval. We are continuing the evaluation of a next generational system. Additionally, in the quarter the EU filing for Invega for Bipolar mania was submitted.

I’ll now review the medical devices and diagnostic segment results. Worldwide medical devices and diagnostic segment sales of $5.7 billion grew 5.6% operationally as compared to the same period in 2007. Currency added 3.2 points to the sales growth to bring total growth to 8.8%. Sales in the US grew 3.1% while sales outside the US increased on an operational basis by 8%. Results have been impacted by lower sales of drug eluting stents. Sales excluding the impact of lower sales of drug eluting stents grew nearly 8% operationally.

Now turning to the franchises, starting with Cordis; Cordis sales were down 10% operationally with the US down 26% and sales outside the US up 4%. Cordis results were impacted by lower sales of Cypher, our Sirolimus-eluting stent, and endovascular products partially offset by strong growth in our Biosense Webster business. Cypher sales were approximately $290 million down 26% on an operational basis versus the prior year. Sales in the US of approximately $100 million were down 47%.

In comparison to the third quarter of 2007 the US drug eluting stent market growth is estimated at 15%. Penetration rates are estimated at 70% up from 63% a year ago while PCI procedures are up approximately 8% in the quarter versus the same period last year. These gains have been partially offset by a reduction in price. Estimated share in the US of 22% was down 15 points sequentially and down 22 points from the third quarter of 2007 due to the market entry of two new competitors in 2008.

Sales outside the US of approximately $190 million declined 6% operationally. The estimated market share in the quarter of 30% was flat on a sequential basis and down 4 point from the third quarter of 2007. Increased competition has impacted the share outside the US. Cypher estimated worldwide share for the quarter was 27%, down 6 points sequentially and down 11 points from the third quarter of 2007. Endovascular sales declined due to a combination of the recall of a reentry catheter and increased competition in multiple segments.

Now, turning to growth drivers within the Cordis franchise, the Biosense Webster business, our electro-physiology business, achieved double digit operational growth in the quarter driven by increased system placements as well as growth in catheter products. Our DePuy franchise operational growth of 8% when compared to the same period in 2007 with the US growing 7% and the business outside the US growing by 10% operationally.

Hip growth on a worldwide basis was 12% operational, with strong growth in both the US and International businesses. On an operational basis, worldwide knee growth was 4% while spine grew 7%. Mitech, our sports medicine business, grew 12% operationally. Ethicon Endo-Surgery achieved operational growth of 10% in the third quarter of 2008, with the US sales growing 8% and sales outside the US growing on an operational basis by 11%.

The Harmonic business achieved operational growth of nearly 20% due to the global success of the recently launched products and the underlying strength of this platform. Also contributing to the growth in the quarter was the realized gastric band launched earlier this year in the US and the strong performance of the endoscopy products and the strong performance of the endoscopy products in the international markets driven by increased awareness of the benefits of minimally invasive procedures as well as the metabolic benefits of obesity surgery.

Ethicon worldwide sales grew operationally by 5% with similar results both in and outside the US. Solid growth in sutures and strong double digit growth in homeostasis and bio-surgical were the major contributors to growth in the quarter. The diabetes franchise grew operationally by 10% in the third quarter of 2008. The US business grew by 9% while sales outside the US grew 12% on an operational basis. The success of the One-Touch Ultra line has been the major contributor to growth.

Additionally, the Animas business achieved operational growth of over 30% driven by continued market share gains in the pump business.

Our Vision Care franchise achieved operational sales growth of 9% in the third quarter compared to the same period last year. Sales in the US increased 10%. Sales outside the US grew 8% on an operational basis. Acuvue Oasys, One-Day Acuvue Moist and Acuvue Lens for were the major growth drivers in the quarter.

Rounding out the review of the medical devices and diagnostic segment, Ortho-Clinical Diagnostics achieved operational growth of 9% in the third quarter. Sales growth in the US was 11% while sales outside the US were up 6% on an operational basis. Immunohematology and immunodiagnostics products achieved double digit results.

That completes highlights for the medical devices and diagnostic segment and concludes the segment highlights for Johnson & Johnson's third quarter of 2008. I’ll now turn the discussion over to Dominic Caruso for some additional comments.

Dominic Caruso

I’d like to add my own welcome to members of the investment community who have joined us here today and to those who are listening via the webcast and conference call. We are very pleased today to report solid financial results for the third quarter. Our performance once again demonstrates how we are successfully managing the business through some short term business pressures while continuing to advance our key growth initiatives.

In the face of the recent financial market volatility we remain confident in our ability to continue investing in the future growth of our business while maintaining a strong balance sheet and generating strong cash flows. Louise has already reviewed the segments results for you so I will mention some financial updates, highlight a few of the recent business developments in the quarter and discuss our financial guidance for the year before handing things over for a more detailed pharmaceutical update.

Our sales results for the quarter were above the mean of the analysts estimate thus published by First Call. We also delivered another strong earnings performance for the quarter also above the mean of the analysts estimates published by First Call. We continue to implement the cost restructuring program that we announced last year and as I noted on our second quarter call we are on track to achieve annual cost savings of approximately $1.6 billion for 2008 which is at the higher end of our previous guidance.

Now a brief update on our share repurchase program. This $10 billion share repurchase program as you recall began in August 2007 and as of the end of September we have purchased approximately $7.4 billion of our stock. Our share repurchase program along with our dividends continue to illustrate our commitment to returning value to our share owners while maintaining a strong financial position that provides the flexibility to invest in business building activities.

This quarter we continue to make investments and take actions to drive the future growth of our business. Chris and Paul will provide highlights for our Pharma business so I’ll just mention some highlights for MD&D and Consumer.

In our Medical Devices and Diagnostics business we saw strong performances across six of our seven franchises driven by solid sales in our DePuy, Ethicon Endo-Surgery and Ethicon Surgical businesses as well as the Ortho-Clinical Diagnostic, Vision Care and Diabetes Care businesses. With new competitors in the US Drug-eluting stent market the Cordis business has seen a negative impact to sales of Cypher as we expected.

Meanwhile progress in other parts of the Cordis business looks promising. The development of the Nevo Sirolimus-eluting Coronary Stent is ongoing and the Biosense Webster continues to grow at double digit rates.

In the Consumer segment this quarter and as part of our focus on emerging markets we acquired Beijing Dabao Cosmetics, one of the most trusted skin care brands in China. Johnson & Johnson has been doing business in China since 1985 and Dabao marks our first acquisition in this market. Our work with Dabao and its employees has already enhanced our knowledge of this critical marketplace and we look forward to further developing this brand for the future.

Our Consumer business continued to see strong results from our allergy treatment Zyrtec which first became available without a prescription in stores across the US in January of this year. By the end of June, Zyrtec had captured approximately 26% of the US allergy market since its launch. Meanwhile, the integration of the Pfizer Consumer Healthcare business and brands continues to be on track to meet or exceed our target of $500 to $600 million of cost synergies by 2009 and we still expect this transaction to be break even or modestly accretive by 2009 one year ahead of the original schedule.

I’d like to update you where we are with a few brief items related to some recent activities. First, I’m pleased to inform you that Ethicon has now entered into a definitive agreement to sell its Professional Wound Care business to One Equity Partners. We have previously announced the receipt of One Equities offer in July and have been working through the process since that time. The guidance that I will discuss today does not reflect any gain from the divestiture of this business which is expected to close in the fourth quarter pending satisfaction of all closing conditions. This divestiture is en essence a decision to reshape our portfolio.

We expect any gain from this sale to be largely offset by increased investment spending or other actions. This anticipated gain affords us an opportunity to make additional investments and to consider other business decisions to enhance our longer term performance and financial condition. We also received good news recently regarding long standing patent litigation between our Cordis business and both Boston Scientific and Medtronic. On September 30, the US District Court in Delaware entered a final judgment of about $1.2 billion including accrued interest.

It is too early to say when we will receive these payments given the possibility of appeals. Interest will continue to accrue until paid. As has been our practice we will not record any gain from these judgments until the cash is received and we expect to record such gains as special items. Any potential impact is not reflected in today’s guidance.

I would like to provide you some comments for you to consider as you refine your models. Let’s start with a discussion of cash and debt as well as interest income and expense. During the third quarter of 2008 the company continued to generate strong cash flows. At the end of the third quarter we had approximately $150 million of net cash.

This consists of approximately $14.8 billion of cash in investments and $14.6 billion of debt. This is an increase of approximately $400 million in our overall net cash position from year end 2007. This reflects our strong operating cash flow and the use of approximately $3.8 billion to repurchase our stock so far this year.

Given the recent developments in the financial markets I’d like to share with you some important points about Johnson & Johnson. In our Corporate Investment Portfolio we had no exposure to sub-prime market or the financial services companies that have failed as a result of the recent credit crisis. We continue to have ready access to the Commercial paper market at attractive rates.

At the end of September we renewed our expiring 364 day credit facility for $6.3 billion and signed a new five year credit facility for $1.4 billion to replace an existing one, both of which has Triple A credit ratings affirmed. These facilities are part of our continuous effort to maintain our financial strength and flexibility.

Regarding interest income and expense, for purposes of your models, assuming no major acquisitions and considering the continuation but not full completion of the share repurchase program during 2008, I would suggest you consider modeling net interest expense between $50 and $100 million of net interest expense consistent with our previous guidance.

Turning to other income and expense, as a reminder, this is the account where we record royalty income as well as one time gains and losses resulting from such items as litigation, gains or losses from investments by our development corporation or asset sales. The gain associated with the Amgen settlement is recorded in this account. Assuming no other major one time gains or losses I would recommend that you consider modeling other income and expense for 2008 as a net gain ranging from approximately $350 to $400 million.

This is higher than our previous guidance but the impact will be more than offset by higher expenses in other line items as you saw some of this, this past quarter, due to actions taken or investments made with such funds.

Now a word on taxes, year to date the company’s effective tax rate was 23.6% reflecting adjustments made in the third quarter resulting from the finalization of our federal return. As you are aware, the R&D tax credit extension was passed by Congress earlier this month. Our guidance has been updated to reflect this. The full impact of the R&D tax credit for 2008 will be recorded in the fourth quarter.

Therefore we would suggest that you model our effective tax rate for 2008 in the range of 23% to 23.5% would not include any in process research and development charges or other special items. As always, we will continue to pursue opportunities in this area to improve upon this rate for the balance of the year.

Turning to sales, we would be comfortable with your models reflecting operational sales growth for the full year 2008 at the higher end of our previous guidance of 1% and 2% or even slightly higher. As you know currency rates are difficult to forecast. While we are not predicting the impact of currency movements on our sales to give you an idea of the potential impact of currency rates were to stay where they are today through the end of this year then our sales growth would be favorably impacted by approximately 3%, resulting in total reported sales growth for the year of approximately 5% versus our prior guidance of 5.5% and 6.5%.

This reflects stronger operational sales growth which is more than offset by the negative impact of currency. This is a significant change in currency from our previous guidance. For example, at current rates the fourth quarter impact of currency would reduce sales by approximately 1.5%. That’s compared to an implied 3.5% of growth based on currency at the time of our second quarter earnings call. This 5 point swing in currency would obviously have a resulting negative impact to earnings in the fourth quarter.

Although we don’t normally comment on the following year with respect to guidance the impact of the stronger dollar could have on our results is something I would like to highlight for you as you refine your models. If the Dollar/Euro rates were to remain the same as today for all of 2009 the impact to next years sales due solely to currency would be a reduction to sales of approximately 3% to 3.5%.

Now for earnings, when I last checked the first call mean estimate for our EPS for full year 2008 was $4.51 per share. Despite the potential impact of currency in the fourth quarter that I just outlined and taking into consideration the strength of our operating performance this past quarter and the items I have outlined for you we would be comfortable with your models reflecting full year 2008 earnings per share excluding in process research and development charges or other special items of between $4.50 and $4.53 per share, an increase from our previous EPS guidance range.

That concludes my update on our operating performance this quarter and guidance for 2008. Let’s move on now to the next portion of our program today.

Last year many of you joined us in New Brunswick for a full day review of our Pharmaceutical and Consumer businesses. Today we look forward to providing you with an update on our Pharmaceutical business and some of the pipeline highlights we described for you then. We typically provide these brief business updates every October as part of our ongoing effort to keep you informed about our long term strategy and prospects for growth.

We have the most robust pipeline in our history and continue to see progress on several of our lead space compounds which will be discussed today. I’m very pleased this morning to have Chris Poon with us, my colleague on the Executive Committee of Johnson & Johnson. As you know, Chris is Vice Chairman of Johnson & Johnson and Worldwide Chairman of our Pharmaceutical Group.

Chris and the Pharmaceutical leadership team have been continuing to invest in key pipeline compounds and major line extensions that will drive our long term growth while creating a more efficient and cost effective operation that addresses short term pressures.

Joining Chris today is Paul Stoffels; Paul is Company Group Chairman of Global Research and Development for the Pharmaceutical Group. He will speak to you today about some of the latest developments in some of our promising pipeline compounds, Rivaroxaban, Paliperidone Palmitate, Golimumab, and Ustekinumab. At the end of Chris and Paul’s presentations we look forward to taking your questions.

Before I hand over the podium to Chris, I would like to thank her on behalf of Johnson & Johnson for her dedication and commitment to bringing health and wellbeing to people around the world. Chris recently announced her plans to retire from Johnson & Johnson in March 2009. We will miss her leadership as we move forward with the business platforms, pipeline and talent she has fostered across the organization.

Few in healthcare today have so successfully combined a passion for business with a mission of transforming patient’s lives as Chris has. We wish her the best of luck in the next chapter of her life. Now for the Pharmaceutical update.

Chris Poon

It’s going to be a pleasure to discuss our Pharmaceutical business with you. We’re going to talk about our existing and exciting pipeline and our research and development strategy that underlies our success. As Dominic and Louise mentioned, Paul will also be here and he’s going to also give us progress not only on some of our pipeline compounds but also give you a glimpse of some of the compounds in earlier development.

First let me set the stage, the Johnson & Johnson Pharmaceuticals Group is a leader among the worldwide pharmaceuticals companies ranking 6th based on annual sales. The ranking in size and growth has been achieved through a combination of organic internal growth as well as selective licensing areas of strategic interest.

It’s also important to note that at the end of 2007 Johnson & Johnson ranked third largest among biotech companies. This biotech market continues to be an important source of growth for us. Biotech expertise in the industry is driven because of our capabilities through the entire value chain. Our R&D capabilities in monocle antibodies pioneered at Centocor are significant and are transferable to the next generation biologics. We have unmatched bio-manufacturing expertise and capacity actually dating back to the very early years of biotech and Centocor’s first plant in the Netherlands 25 years ago.

Throughout 2008 there have been several key compounds providing strong sales growth in our inline portfolio of medicines. The strong growth of these compounds continued in the third quarter fueled in some cases by new indications and in others by approvals in additional markets. Let me touch on a few of these; first Velcade. It continues its high sales growth and tremendous success with a 44% increase year to date versus prior year.

Your call that Velcade was granted approval in June of this year for front line use in multiple myeloma in the EU. More approvals of multiple myeloma front line during the third quarter bring the total number of countries to 47 that’s up from less than 20 at the end of the second quarter.

Our anti-psychotic franchise consists now of two growth products. Risperdal Consta continues its strong performance with sales growth of 11% versus the third quarter 2007 year to date and for Consta we’re pursuing additional indications in bipolar disorder and we expect to hear more about these indications next year. In addition, Invega contributed growth of 135% year to date.

Remicade continues its strong sales growth after 10 years on the market delivering 18% growth and maintaining market share of about a third of the anti-TNF market. Concerta’s new adult indication just received in July has helped Concerta to continue its strong sales growth for the year to date figure of 10%. Prezista continues it’s success fueled by the availability of Intelence which received marketing approval in January of this year in the US and recently in the EU.

With this breadth and depth of our growth products has enabled us to lessen the impact of generic competition and the slower sales of Procrit while our newer products that are still in launch mode continue to gain footing in their respective markets.

Not only do we think about products we also think about markets and so let me give you a glimpse of some of our performance in our emerging markets. This focus on emerging markets what we call the brick countries; we continue to see considerable growth in the third quarter. This is the result of several launches of new products, new indications and of course increased investments to expand our sales forces in these selective markets.

We continue to maximize our current portfolio and pursue new indications for our existing products. A few of the major line extensions that we have either filed or received approval for thus far in 2008 are shown here. I’ve already mentioned Concerta an adult ADHD. Topamax’s pediatric exclusivity approval this now extends the marketing exclusivity of Topamax until March 2009. Doribax we received approval in the EU for urinary tract infections, intra-abdominal infections and NP infections.

I just mentioned Velcade for front line approval in the EU for multiple myeloma and just last Wednesday we received approval for a new injection site for Risperdal Consta a deltoid injection site. You can see how busy we’ve been this first half of this year with the major line extension approvals but also with some additional filings. We filed Risperdal Consta and bipolar mania, Invega for bipolar mania in the EU, Doxil for metastatic breast cancer and Prezista for early experience patients in the EU.

I think you can see why we’re optimistic about our short and long term prospects for end market products and our pipeline. This slide shows some of the key strategic drivers we believe position us well into the future. To summarize, here are some of the key attributes of our pharmaceutical group. We have an experienced leadership team. As Louise mentioned, Sheri McCoy will be assuming the role of Worldwide Chairman for the Pharmaceuticals business. Sheri is a demonstrated leader, a close colleague and her breadth of experience helps position Johnson & Johnson well for the future.

Sheri inherits a leadership team that is one of the most highly experienced, dedicated with impressive track records and I do believe that our Pharmaceutical group is in fantastic hands with Sheri’s leadership.

As you’ve seen we have a diverse well balanced portfolio that includes a broad range of therapeutic areas with high end met needs and we have a robust late stage pipeline and are poised for several key product launches. Our early state pipeline is also promising. It’s important we continue to take actions to address the short term pressures in our business. These include the cost improvement programs that Dominic mentioned as well as organizing our R&D, our operations and our commercial organizations for growth, continuing to invest in our pipeline and ensuring that we have disciplined M&A and L&A.

Let me just take a few moments to discuss our research and development strategy and to paint a picture for you of our strong capabilities and what makes us unique as an organization. We have research being conducted in seven therapeutic areas in both large and small molecule platforms. We have established global operations with end to end capabilities and we are pursuing innovative platforms and technologies in the context of a regulatory environment that is increasingly demanding, outcomes based development.

This slide shows the seven therapeutic areas that are our strategic areas of interest. We are sharpening our focus in R&D on these therapeutic areas where we feel we can best play to win because we already lead in that market and/or because there continues to be a significant unmet medical need in that area. In order to accomplish our goal of a sustainable productive R&D organization we have evolved to a hybrid decentralized standardized model.

The responsibility for research and early development each of the therapeutic areas remains decentralized as we believe this is the model and environment that fosters innovation and entrepreneurship. At the same time we continue to standardize or centralize certain key functions such as clinical operations, bio statistics, pharmacology, these centers of excellence or shared services provide support for the research and development activities of each of the therapeutic areas in order to reduce duplication and to leverage our scale.

We believe that we’re already seeing the early results of this R&D operating model and Paul will give you a glimpse into some of the new compounds moving through the early development pipeline. We believe that sustain R&D productivity is the key to our future and we believe, therefore that our long term future remains very bright.

As we’ve discussed in prior meetings here with you we expect to file between seven and 10 new products for approval between the beginning of 2008 and the end of 2010. We’re on track. Paul will talk to you today about four of these Paliperidone Palmitate, Ustekinumab, Golimumab and Rivaroxaban. In 2008 thus far we have already received marketing approval for Intelence for HIV both in the US and in the EU and we have filed in the immediate release formulation of Tapentadol for pain.

Additionally, we have received an approval letter from the FDA for Ceftobiprole and have submitted complete response back to the agency. For the remainder of 2008 we remain on track to file Carisbamate for the treatment of Epilepsy and Yondelis in an oncology indication. In 2009 and 2010 we anticipate further filings for several other compounds.

Now let me turn the stage over to my colleague and friend, Paul Stoffels.

Paul Stoffels

It’s my pleasure today to discuss in more detail a few compounds in our late stage pipeline that we are excited about. Today’s I’ll focus on Rivaroxaban, the first oral Factor Xa inhibitor, Paliperidone Palmitate, a novel long acting anti-psychotic, Golimumab human anti-TNF therapy that holds a lot of promise and Ustekinumab a first in class mechanism of action for moderate to severe plack psoriasis. I’ll also spend a few minutes highlighting a few key compounds in our early development pipeline.

Let me begin with Rivaroxaban, our once daily oral direct Factor Xa Inhibitor. We are very excited about this compound which we are co-developing with Bayer. Rivaroxaban is initially being developed for prevention of VTE in patients undergoing hip or knee replacement surgery. A larger opportunity is with additional indications for VTE treatment, for SPAF and secondary prevention in patients with ACS.

For VTE prevention we filed for approval with the FDA in July based on outstanding data from the Records Clinical Program in which more than 12,500 orthopedic patients have been investigated. This is the largest program ever conducted in VTE prevention in patients undergoing knee or hip replacement surgery. It comprised four pivotal phase three clinical trials that compared Rivaroxaban with Enoxaparin the current standard of care.

Rivaroxaban demonstrated superior efficacy in the record program. This included head to head comparisons with Enoxaparin and a comparison of extended duration Rivaroxaban with short duration Enoxaparin. In each of the four trials Rivaroxaban and Enoxaparin demonstrated similar safety profiles and low rates of major bleeding. Details about all of these trial designs are available on ClinicalTrials.gov.

Last month, Bayer Healthcare announced that Health Canada was the first country to approve the drug for VTE prevention. In addition, earlier this month, Bayer Healthcare announced the European Commission granted approval to market Rivaroxaban for VTE prevention in adult patients who have undergone elective total hip and knee replacement surgery. We will be presenting our Phase II dose finding results from our studies of Rivaroxaban in ACS at the American Heart Association meeting in November.

In addition, we plan to present our pooled Record 1-4 data at the ASH meeting in December. This slide summarized the results of the Record 4 study which we presented in May. This was the first head to head study comparing Rivaroxaban at 10 mg once daily dose with Enoxaparin at 30 mg twice daily which is the FDA approved dosing regiment for Enoxaparin in this patient population.

By contrast, the Record 1, 2 and 3 studies compared Rivaroxaban against Enoxaparin dosed once daily at 40 mg. In this study Rivaroxaban was superior to Enoxaparin in preventing VTE in patients who underwent total knee replacement surgery. Patients showed a statistical significance 31% reduction in relative risk of total VTE events compared to Enoxaparin. Total VTE events which was the primary end point was defined in the study as the composite of all deep vein thrombosis non-fatal pulmonary embolism and all cost mortality.

Rates of major bleeding, the main safety end point while numerically greater in the Rivaroxaban treated patients were low in both treatment groups. Rivaroxaban was initially being developed for VTE prevention and there is a robust development program evaluating Rivaroxaban in several critical underserved areas where a drug with these properties can have a positive benefit to patients.

In the trials show on this slide as well as in early completed studies approximately 50,000 patients are expected to be enrolled in the Rivaroxaban clinical development program. This includes trials in the prevention and treatment of a broad range of clotting disorders. These trails, done in collaboration between Bayer and J&J include four Phase III clinical programs in VTE prevention in orthopedic surgery, VTE treatment, stroke prevention in patients with atrial fibrillation, VTE prevention in hospitalized medically ill patients and a Phase II study in secondary prevention in patients with acute coronary syndrome.

In summary, we are very excited about Rivaroxaban. We believe that Rivaroxaban’s combination of an exceptional efficacy and balanced safety provides a compelling and positive risk benefit profile that can help improve patient’s outcome.

Let’s now look at Paliperidone Palmitate which represents the first atypical long acting injectable antipsychotic with monthly dosing. Paliperidone Palmitate uses a novel technology to deliver daily medication over a one month period. We believe this is a significant advantage in antipsychotic therapy. The monthly dosing schedule may enhance compliance and provide pharmical economic value by reducing the number of patient visits, hospitalization and recurrence which the drivers of increased healthcare costs.

The advanced particle formulation allows storage at room temperature while the pre-filled syringes with smaller gauged needs can be administered through deltoid and gluteal injections. Palmitate is initially being developed for schizophrenia and we are considering a bipolar program in early 2009. We filed the US NDA for Palmitate for treatment of schizophrenia at the end of 2007. We presented data from those pivotal studies at the APA meeting in May and we have conducted comparative trials between Consta and Paliperidone Palmitate one of which is completed and one ongoing.

As I mentioned, Palmitate uses a novel delivery technology and as with the lobe of novel technologies you learn as you conduct more clinical trials about how best to use this technology. One of the things we have learned from the first comparative trial with Consta is that we can get much more consistent efficacy with Paliperidone Palmitate across broad populations of patients with higher initiation dose. We used this higher initiation dose in a placebo controlled study and found that this dosing regiment demonstrated strong efficacy and excellent tolerability.

We are now using this dosing regiment in a second comparative trial with Risperdal Consta which is ongoing. We have submitted data from the first comparative trial against Consta with a lower initiation dose as well as the data from the placebo controlled study with the higher initiation dose for presentation at ACNP a major medical meeting in December. We anticipate results from the final comparative clinical trial with the higher initiation dose of Paliperidone Palmitate versus Consta next year.

As I previous indicated we filed an NDA for Palmitate in Schizophrenia late last year and received a complete response from the FDA in August regarding our NDA. The complete response outlined additional information needed before FDA would approve the application including a re-analysis of a subset of the data. No additional studies were requested.

Given what we have learned about a higher initiation dosing providing an optimal level of patient outcome we plan to include this new dosing in a response submission to the FDA. We are in the process of preparing that data and anticipate the data will be ready to submit in the first half of 2009. Based on the new information to be submitted we believe that this will be a six month review.

Let me now turn to Golimumab, the first human anti-TNF therapy currently filed in the European Union and the United States. We believe that Golimumab will offer excellent efficacy and best class dosing. The subcutaneous dosing will be single monthly injection. This compares favorable to competitor regiments ranging from two injections each week to one every two weeks. Our state of the art auto-injector is also a differentiating factor and Golimumab had a very low rate of injection site reactions in the clinical trials.

We have filed for three indications simultaneously enabling us to efficiently and rapidly build a safety data base in support of Golimumab. We filed an MAA in Europe in the first quarter of 2008 and submitted a US filing in June 2008 for subcutaneous therapy for signs and symptoms of Rheumatoid Arthritis, Ankylosing Spondylitis, and Psoriatic Arthritis.

In June we presented Phase 3 data in RA for the first time at the EULAR meeting in Paris. Findings showed the efficacy of Golimumab in several important populations. First in methotrexate naive patients, second in patients with active RA despite ongoing treatment methotrexate and third in patients previously treating with anti-TNF biologic agents.

We have ongoing studies for all the potential findings including claims regarding impact on structural damage in RA and intravenous therapy for RA and for ulcerative colitis both intravenous and subcutaneous.

Let’s take a look at the data for our studies of Golimumab in combination with Methotrexate in patients with active RA despite ongoing treatment with Methotrexate. In this trial called Go Forward adult patients were randomly assigned to four arms. Placebo plus Methotrexate, 50 mg and 100 mg Golimumab in combination with Methotrexate, 100 mg Golimumab alone administered subcutaneously every four weeks.

Data was assessed at weeks 14 and 24 the co-primary end points where percentage of patients achieving ACR 20 response at week 14 and improvement from baseline and health assistant questionnaire or at week 24. Patients on the Golimumab 50 mg and 100 mg plus Methotrexate experienced significant improvements in the signs and symptoms of RA. Improvements were seen as early as the first clinical assessment which was four weeks after the first Golimumab injection and generally continued to improve over time.

Patients with RA receiving Golimumab also demonstrated significant improvement in physical function as assessed by the hack. This slide shows results from the first prospective double blind placebo controlled Phase 3 clinical trial to analyze the efficacy of an anti-TNF therapy in patients previously treated with at least one anti-TNF agent.

In the study 461 patients with active RA were randomized to receive either subcutaneous placebo or Golimumab at 50 mg or 100 mg every four weeks. The primary end point for this study was the proportion of patients in each group that achieved ACR 20 response rates at week 14. Patient responses were assessed through week 24 and improvements within hack were also recorded at week 24. Golimumab therapy significantly reduced the signs and symptoms of RA. At week 14 35% and 38% of patients receiving Golimumab 50 mg and 100 mg respectively achieve a primary end point of ACR 20.

This compares with only 18% of patients receiving placebo achieving ACR 20. These results were maintained through six months. Golimumab was generally well tolerated across clinical trials and was associated with a low rate of injection site reactions compared with patients receiving placebo. We believe Golimumab holds great promise in various RA patient populations including Methotrexate naïve patients, patients with active RA despite Methotrexate and patients who have previously discontinued all TNF inhibitors. Golimumab may provide an appropriate treatment option to many people facing this debilitating disease.

Now I would like to discuss Ustekinumab formerly know as CNTO 1275 a human mono-clonal anti-body which binds to the P40 sub unit shared by IL-20 and IL-23 and neutralizes both kinds. It has been initially developed for subcutaneous delivery for treatment of moderate to severe psoriasis. We believe Ustekinumab will transform the convenience of therapy requiring maintenance dosing only once every three months after two initiation doses at the zero and week four to achieve a very high response rates.

We believe this will be a significant competitive advantage. Psoriasis will be the first indication but we are also developing the drug in Crohn’s disease and have other indications under consideration. The BLA and MAA were filed at the end of last year. On June 17 the FDA dermatologic and ophthalmic advisory committee unanimously recommended Ustekinumab for approval. The FDA has formally extended the review for our application by three months and we now anticipate a response at the end of the year.

We recently presented the results of a comparative trial of Ustekinumab versus Etanercept. This was the first time a head to head trial has been done between two biologics in psoriasis. This was a Phase 3 multicenter randomized head to head study comparing Ustekinumab and Etanercept for the treatment of moderate to severe psoriasis. The study included three arms. Patients received either Etanercept twice weekly or 45 mg Ustekinumab at the zero and week four or 90 mg Ustekinumab at zero and week four.

Over the 12 week period this amounts to 24 doses of Etanercept in comparison to two doses in both Ustekinumab arms. The primary end point of the trial was the percentage of participants achieving at least a 75% reduction in psoriasis at week 12 as measured by the psoriasis area and severity index of PASI 75. This study was presented by investigators at the 17th Congress of the European Academy of Dermatology and Venereology in Paris, France in September.

At week 12, 68% of patients receiving 45 mg of Ustekinumab and 74% of patients receiving 90 mg of Ustekinumab achieved the PASI 75. This compared with 57% of patients receiving 24 50 mg doses of Etanercept over 12 weeks. Need less to say, we are excited about Ustekinumab which represents a first in class therapy for patients with psoriasis.

In the allotted time today I also wanted to share with you a glimpse of our advancing early development pipeline. We are extremely excited by the opportunities represented here which are for compounds that are now in Phase 2 development. Let me go over each of them briefly. The first is SGLT-2 inhibitor. This compound has the potential to be a novel treatment for Type 2 diabetes and obesity.

It has a novel mechanism of actions and works by inducing a significant increase in urine glucose excretion. It is well tolerated without associated hypoglycemia or weight gain. It represents a potential novel agent for weight loss. It is currently in Phase 2b and it has show positive proven concept.

The second is an MTP inhibitor which has the potential to be a different shade of treatment for obesity. This compound acts in the gut which is different from other MTP compounds that may be systemically absorbed. For both these compounds we are currently evaluating the Phase 2b data and anticipate making decisions on plans for Phase 3 studies early next year.

Finally, we have TMC435 which is a once daily organ protease inhibitor for treatment of Hepatitis C which has demonstrated good efficacy and safety in its initial proven concept. We are scheduled to present preliminary data on this compound at the American Association for the Study of Liver Disease meeting in San Francisco starting October 31st.

We believe that sustained R&D productivity is the key to our future. We believe we have one of the most robust late stage pipelines in the industry. As we have already discussed we also expect to file between seven and 10 new products for approval between the beginning of 2008 and the end of 2010.

This concludes our look at the Pharm pipeline so let me leave you with a few key take aways. We have an experienced leadership team that positions Johnson & Johnson well for the future. We have a diverse well balanced portfolio that spans a broad range of therapeutic areas. We have a robust late stage pipeline as well as promising early stage pipeline that will provide growth opportunities for the future. Thank you very much now I would like to turn it over to Louise.

Louise Mehrotra

We’ll now open the floor to your questions. If you could wait for a microphone as the meeting is being webcast.

Question-and-Answer Session

Rick Wise - Leerink Swann

Given the turmoil in the US and OUS economies credit markets maybe you could talk just to start us off broadly about the likely economic impact on your business planning, impact on the P&L maybe just broadly how it’s going to change your investment priorities, how you’re going to use the cash as we look ahead?

Dominic Caruso

Recently we have seen some impact of the current economic conditions but just in a few pockets of our business. To date as you’ve seen from our results it hasn’t really resulted in any significant impact to our overall broad based business performance. I’d like to point out that our business leaders have over time been able to make the appropriate adjustments in response to changing market conditions and I certainly expect that they’ll be able to do so in the future.

When we do that we’ll take a long term view of how to keep our business healthy for the long term. So far we’ve seen small pockets, a few pockets of impact but nothing that’s impacted our overall business performance.

Rick Wise - Leerink Swann

You highlighted the compelling growth you’ve seen in countries for example do you think that can continue given the global turmoil?

Dominic Caruso

We have, as a priority for the corporation we have accelerating growth in emerging markets as a key priority for all of our businesses because we believe that that is a great opportunity for us. We’ve already been present in many of those markets and as you saw we’re seeing significant up take and we’re continuing to invest in those markets. When we accelerate our investments these emerging markets tend to get a high priority.

Rick Wise - Leerink Swann

You highlighted the increased investments offsetting the gain maybe you could be more concrete with us about the investments where they’re going, what you expect to draw from it and maybe the longer term impact?

Dominic Caruso

I’d rather not be so specific about where the investments would be but whenever we have some one time gains like the Amgen gain or the gain from the divestiture of the Ethicon Wound Care business and we look at that gain as actually just a reshuffling of priorities. We want to take the opportunity to invest in a long term growth of our business. Our businesses have great growth opportunities that they present to us all the time. It’s our desire to help fund those investment opportunities and they span across all three of the major business segments. I’d rather not be specific at this time.

Matt Dodds - Citigroup

You didn’t highlight the pain franchise although you did have a little comment earlier. Can you just tell us what happened to Ionsis and where the next technology may be in timing? Also on tapentadol which you didn’t highlight can you just remind us do you expect the approval by year end and file in early ’09 for the extended release?

Paul Stoffels

First on Ionsis we recalled the product from the market because of the technical problem. We are planning on working on solving that and reintroducing whenever possible. On tapentadol the product was filed in January, our FDFA date is at the end of November but we are expected that this product will be a scheduled product and so typically that will take a DA review afterwards. We expect that will be a 60 to 90 day additional review. At this moment we are in active discussion with the FDA on tapentadol.

Chris Poon

You know that is for the acute indication immediate release. We’re still on track for the chronic program and extended release program.

Seth [Diverga] – Deutsche Bank

First on Concerta the reversal of the reserve of $135 million that’s I guess about two quarters of historical sales so can you give a little more color on that and also does that drop straight to the bottom line?

Dominic Caruso

This quarter we reversed our reserve for the anticipated pricing of Concerta in Canada. There was a ruling in Canada which increased the price of Concerta and we had estimated that perhaps that wouldn’t occur that did occur so that was favorable for us. The impact in the quarter of about $135 million in sales is roughly $0.02 or $0.03 to the bottom line.

Seth [Diverga] – Deutsche Bank

On the HIV franchise now that you’ve had a couple product approvals and another in Phase 3 have you considered a combination pill?

Paul Stoffels

The two first products Prezista and TMC125 so Intelence now are two products which are used mainly which are indicated for advanced patients. They are used in separate pills. We are developing TMC278 which is a very small dose which is a very combinable product with a number of different products. The product is now in Phase 3. Two Phase 3 studies are ongoing and we are looking for partnerships on how can we combine this product with different HIV especially in first line where they are desirable.

David Roman – Morgan Stanley

On the guidance it looks like for the full year your raised guidance by $0.03 to $0.05 relative to where you were previously. By my math the tax rate does that include the R&D tax credit? By my math the tax rate gets you probably $0.03 to $0.04. The fourth quarter relative to where the first call consensus it looks like guidance is implicitly below that number. Could you walk us through the moving parts there operationally, how much is FX hit the bottom line in the fourth quarter?

Dominic Caruso

Yes, the impact to FX, our guidance has in fact increases versus the previous guidance due most net net because of the R&D tax credit because the stronger performance we’ve seen in the business thus far we believe may be offset by negative impact of currency in the fourth quarter. I tried to give you an indication of the impact and we can’t predict currency so I’m just using currency at today’s rates the Euro today.

If that stayed where it was throughout the entire fourth quarter sales would decrease due to currency by 1.5 points whereas my prior guidance at the end for the second quarter based on rates then we expected sales to increase by 3.5 point in the fourth quarter. That delta of five points on our fourth quarter sales is the pressure we’ll face with earnings in the fourth quarter. We’ll overcome that but that obviously offset some of the earlier gains this year. Currency may not end up there but we think that’s prudent to give you that kind of expectation.

David Roman – Morgan Stanley

You said previously that of the contribution of currency growth or decline two thirds of that falls to the bottom line of the growth?

Dominic Caruso

That’s right. It varies by where it happens in each currency and in each country. Not 100% of the change in top line falls through to bottom line. It’s always historically been at least two thirds. So two thirds we can count on coming through to bottom line. Sometimes it’s as high as 80% to 85% but definitely two thirds would.

David Roman – Morgan Stanley

On the economy we’ve seen preannouncement from Advance Medical Optics and Nobel Biocare so far can you maybe be a little more specific about which pockets of the business you’re seeing an impact from the economy either in the third quarter and then specifically some of your competitors and other have commented specifically about the month of September can you maybe give us a sense of the trend throughout the quarter in those businesses.

Dominic Caruso

We don’t typically comment on monthly sales trends and we just finished the quarter so we don’t really have a lot of data to hang our hat on. We did see some, as I mentioned, some pockets, these were mostly in what I would call elective type procedures so either in sports medicine or in women’s health procedures but not a broad base decline. In fact, you saw results for the quarter were actually pretty strong across our surgery businesses.

In our Consumer business we’ve seen just a slight decline in the growth of those markets year over year. They’re still growing but just subsiding a little bit in growth.

Catherine Arnold - Credit Suisse

Obviously the world events have made balance sheets back in fashion and so as a result of that I’d like to probe a little bit on things like cash conversion. You’re actually above peers from our analysis in terms of your cash conversion but can you push that further as far as things like working capital and accounts receivable we may actually see some benefits on your top line as well as your free cash flow. If the cost of debt remains unchanged from current levels over the next 12 months would you reconsider your capital allocation priorities and I would put specifically out there repurchase as a question?

Dominic Caruso

With respect to balance sheet management one thing that I’m very proud to point out is that our businesses have managed the business well throughout up and down cycles and in fact you’re right, strong balance sheets are now in favor more broadly but they’ve always been in favor at Johnson & Johnson. It’s just the way we manage the business.

I think that our free cash flow right now represents about 100% of our net income so our businesses do a pretty good job of managing receivables and inventory levels. I think we might consider a little bit of caution on capital expenditure if times get a little bit tougher. Overall our businesses are able to manage this consistently through economic times and they’re used to this so this is not a major undertaking for them.

With respect to capital allocation and share repurchases it’s our policy to really complete the share repurchase that we’re undergoing before we make any other decision on how to use our capital allocation for things like share repurchases. As I mentioned before our priority is obviously the first pay our dividend, we have a 45 or 46 year history of paying a dividend and that right now is about a 40% payout ratio and a very nice yield at these lower prices.

After that we would prefer to build the business with our cash but lastly if we don’t think there’s value creating business building activities we always look to the next use of cash to do something else to return value to shareholders like share repurchases but I can’t tell you what our plans would be until we exhaust current plan then see what the outlook is for the future.

Catherine Arnold - Credit Suisse

I’d like to ask you about your Hepatitis franchise and for Telaprevir could you comment on if you’re filing strategy in terms of treatment duration and approach and the timing of that versus the United States and Vertex plans and then your follow on product obviously the one today benefit is something that would be very attractive versus Telaprevir. Is there going to be a similar back bone therapy there, anything else unique about that molecule that we should know about?

Paul Stoffels

With regard to Telaprevir everything is on track there and in line with what Vertex is telling. We have a common development program together with Vertex and it will be based on similar data in Europe and the US. With regard to the TMC435 this phase of Hepatitis C protease inhibitors is going to be a tremendously big new market.

These drugs work very well and we believe very much that there is space for more of these drugs, and 435 is a very attractive opportunity although it’s still in early development. We just finished Phase 2 data you will see them at the end of the month and we have to confirm efficacy and safety in next stages. We’ll continue with both drugs until further notice.

Catherine Arnold - Credit Suisse

Phase 2b is in the works now?

Paul Stoffels

Phase 2b is in the works for 435. We anticipate similar background therapies will continue to go for at least for a certain while. You know that there are also [noniclazides] and [niglazide] analogs in development for hepatitis C and you might anticipate that over time the background therapy for Hepatitis C might change like in HIV you will see new very potent drugs coming out of research and interferon’s they’re not that well tolerated so is any benefit of growing to highly effective combination therapy for Hepatitis C I think it will happen but it will take time.

Catherine Arnold - Credit Suisse

In the Phase 2b program do you have a lead in strategy as part of that program for [peg and rogriviran]?

Paul Stoffels

That is not yet, I will come back to you about that.

Rick Wise - Leerink Swann

Can you talk a little bit about the step pricing I think you mentioned prices were down?

Louise Mehrotra

In the US price in the quarter was $1,885 it’s down 3% sequentially and about 9% on year over year basis.

Rick Wise - Leerink Swann

You talked about cost of goods mix obviously I’m sure stents are a factor more consumer is factor. Is that all there is in the mix side? Maybe more specifics on the additional manufacturing costs is this a one quarter phenomenon you said half of it is it one quarter because at 70% again we’re sort of at a pretty low level of gross margin how should we think about gross margin going forward?

Dominic Caruso

In the quarter we did experience significant mix change and just as a reminder we obviously lost exclusivity for Risperdal in the US so that obviously impacted the quarter margin and the growth of the Consumer business obviously impacts the margin comparison. We had some manufacturing costs matters in the third quarter. They may continue a little bit in the fourth quarter through the rest of the year.

We’ll handle these matter, our teams know what to do but they may be a little bit more costly to us and that’ why we’ve indicated that some of the gains we’ve experienced may be offset not only investment opportunities but other actions we have to take to shore up operations.

Rick Wise - Leerink Swann

Can you be more specific about where?

Dominic Caruso

No, I’d rather not be more specific now.

Rick Wise - Leerink Swann

You highlighted the new credit facilities did rates change does that occur because of the environment or you’re renewing it similar rates?

Dominic Caruso

The credit facilities I referred to are back up credit facilities to our Commercial paper line so we’ve not actually used these credit facilities we’ve actually just accessed Commercial paper and as I said we continue to have access to Commercial paper in the market and I would call the rates today very, very attractive.

David Roman – Morgan Stanley

On the Pharma business could you give us an update on Velcade and non-Hodgkin’s where we are, I think you already got positive recommendation from the European agency and then secondly on Ceftobiprole Theravance and RP announced this morning that they would expect panels for their hospital based drugs.

Chris Poon

On Velcade we’re still underway with pursuing more indications for Velcade; non-Hodgkin’s is one of them. We don’t have any more update other than that. We did get an approval for front line multiple myeloma that might be what you’re thinking about.

Paul Stoffels

On Ceftobiprole we anticipate that today with all the new NCEs and important additional indications that we will get advisory panels at the FDA so we anticipate that Ceftobiprole will have an advisory panel although we don’t know yet.

David Roman – Morgan Stanley

On spine the 7% reported growth could you tell us what that was in the US, it actually looks like that’s getting a little better is that confidence that’s driving the growth there or is there something else in the numbers?

Louise Mehrotra

For the spine growth in the US was 5% and OUS was 12% to come up to the 7%.

David Roman – Morgan Stanley

That 5% is an acceleration over last quarter is the driver confidence?

Louise Mehrotra

Some of it would be the confidence as well as strength in the business as well.

Operator

There are no further calls.

Dominic Caruso

Before we close the meeting I would like to thank Chris and Paul for the overview of some of the exciting opportunities in our Pharmaceutical business today. I think they outlined very well how some of our compounds are progressing in our pipeline. We continue to execute against these and other key priorities that are critical to improving patient care and meeting customers needs across our broad base of healthcare businesses.

We’re also innovating and building leadership positions across our businesses while continuing to grow profitably all the while managing our costs and improving our operating margins. These successes are realized thanks to the excellent work and dedication of the extraordinary people across the Johnson & Johnson family of companies.

Thank you for your continued support of Johnson & Johnson and I look forward to updating you in January on our full year 2008 results. Thanks and have a great day.

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