Q3 2007 Johnson & Johnson Earnings Webcast and Analyst …online.wsj.com/public/resources/documents/JNJ-Transcript... · 2007. 10. 16. · Selling, marketing and administrative expenses

F I N A L T R A N S C R I P T

JNJ - Q3 2007 Johnson & Johnson Earnings Webcast and AnalystMeeting

Event Date/Time: Oct. 16. 2007 / 8:30AM ET

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C O R P O R A T E P A R T I C I P A N T S

Louise MehrotraJohnson & Johnson - VP, IR

Dominic CarusoJohnson & Johnson - VP, Finance & CFO

Nick ValerianiJohnson & Johnson - Worldwide Chairman, Medical Devices and Diagnostics

C O N F E R E N C E C A L L P A R T I C I P A N T S

Rick WiseBear Stearns - Analyst

Larry BiegelsenWachovia - Analyst

Bob HopkinsLehman Brothers - Analyst

Sara MichelmoreCowen & Co. - Analyst

Catherine ArnoldCredit Suisse - Analyst

Valerie BrownAlliance Bernstein - Analyst

Glenn NovarroBanc of America - Analyst

P R E S E N T A T I O N

Louise Mehrotra - Johnson & Johnson - VP, IR

Good morning and welcome. I am Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson and it is mypleasure 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 Chief Financial Officer.

A few logistics before we get into the details. The audio and visuals from this presentation are being made available to a broaderaudience 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 an additional commentary on the results for the quarter and the guidance for theyear. Nick will then provide an update on our Medical Devices and Diagnostics business. We will then open the floor to yourquestions. We will conclude our formal presentation at approximately 9.30 and following Q&A with some final remarks byDominic, we will conclude the meeting around 10 a.m.

Distributed with the copy of the press release that you just received is a schedule with actual revenues for the major productsand/or business franchises. For the listening audience, these are available on the Johnson & Johnson website as is a copy of thepress release.

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Oct. 16. 2007 / 8:30AM, JNJ - Q3 2007 Johnson & Johnson Earnings Webcast and Analyst Meeting


Before I get into the results, let me remind you that some of the statements made during this meeting may be consideredforward-looking statements. The 10-K for the fiscal year 2006 identifies certain factors that could cause the Company's actualresults to differ materially from those projected in any forward-looking statements made this morning. The Company does notundertake to update any forward-looking statements as a result of new information or future events or developments. The 10-Kis available through the Company or online.

Last item, during the meeting, non-GAAP financial measures may be used to provide information pertinent to ongoing businessperformance. 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 2007. If you would refer to your copy of the press release, let'sbegin with the schedule titled Supplementary Sales Data. Worldwide sales to customers were $15 billion for the third quarterof 2007, up 12.7% as compared to the third quarter of 2006. Our operational growth was 9.7% and currency had a positiveimpact of three points. The sales results include the net impact of the acquisition of Pfizer Consumer Healthcare or PCH, whichwas completed in December 2006.

On a pro forma basis, including the net impact of the PCH acquisition in both periods, worldwide sales increased approximately2.4% operationally. Further, operational growth in the quarter was negatively impacted by approximately five points due to anumber of factors. Generics and sales rebate adjustments in our pharmaceutical business and pressures causing decreases inthe overall market for both drug-eluting stents and erythropoietin stimulating agents or ESAs. I will cover each of these itemsin 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 US. In regionsoutside the US, our operational growth was 14.7% while the effect of currency exchange rates positively impacted our reportedresults by 6.8 points.

The Western Hemisphere, excluding the US, grew 24.9% on an operational basis. Europe grew 13.3% while the Asia-Pacific/Africaregion 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 earningsper 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 boxed section of the schedule where we have provided adjusted earnings information. Asa reference in the footnote, third-quarter 2007 results were adjusted to exclude the after-tax impact of the costs associated withthe previously announced restructuring program of $528 million. The third-quarter 2006 results were adjusted to exclude theafter-tax impact of an in-process research and development charge of $115 million associated with the acquisitions of ColbarLifeSciences and Ensure Medical. On an adjusted basis, third-quarter 2007 net earnings and earnings per share were up 7% and8.2% respectively.

I would now like to make some additional comments relative to the components leading to the adjusted earnings before wemove on to the segment highlights. For the third quarter of 2007, cost of goods sold at 28.5% was up 100 basis points ascompared 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 ofthe PCH business to our mix of businesses increased these expenses by an estimated 100 basis points, substantially offset bycontinued 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 percentage of sales by approximately 60 basis points.






Interest income net of interest expense of $52 million was down $142 million compared to the third quarter of 2006 due to alower cash balance and higher debt position. Other expense net of other income was $2 million in the third quarter of 2007compared to $45 million of net other expense in the same period last year. As previously reported, the 2006 results includedan 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 sectionof the schedule. In the third quarter of 2007, taxes were 23.3% as compared to the prior year rate of 23.9%. Dominic will providefurther 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 increaseof 13.9% as compared to the same period a year ago. On a year-to-date basis, operational growth was 11.3% and currency hada 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 programhave been excluded.

In 2006, after-tax amounts for both in-process research and development and the Guidant acquisition termination fees havebeen excluded. With these adjustments, net earnings for the first nine months of 2007 were $9.5 billion or $3.27 per share, up9% 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 salesof $3.6 billion increased 47.5% as compared to the third quarter of 2006. Operational growth was 43.4% while currency contributed4.1%. US sales were up 39.8% while international sales grew 46.5% on an operational basis. On a pro forma basis, including thenet impact of the acquisition of Pfizer Consumer Healthcare in both periods, sales were up an estimated 3.5% on an operationalbasis.

For the third quarter of 2007, sales for the over-the-counter pharmaceuticals and nutritionals increased 79% on an operationalbasis compared to the same period in 2006. Sales in the US were up 36% while sales outside the US were up 173% operationally.On a pro forma basis, including the net impact of the PCH acquisition in both periods, estimated operational sales growth wasflat.

Healthy growth for adult analgesics and SPLENDA was offset by lower sales of upper respiratory products. The 2006 upperrespiratory sales included the impact of the launch of the products reformulated with phenylephrine.

Our skincare business achieved operational sales growth of 12% from the third quarter of 2007 driven by strong US sales growthof 17%. Sales outside the US grew 8% on an operational basis. The addition of the PCH products and the new product launchesand successful promotional campaigns for Aveeno, Clean & Clear and Neutrogena productlines resulted in strong growth forthe quarter. On a pro forma basis, including the net impact of the PCH acquisition in both periods, operational sales growthwas 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 thestrong performance of cleansers and powders. Sales growth in the US was 10% while sales outside the US grew 6% on anoperational basis. On a pro forma basis, including the net impact of the PCH acquisition in both periods, operational sales growthwas approximately 5%, ahead of projected category growth rates for the year.

Women's health achieved operational growth of 2% with the US declining 1% and sales outside the US up on an operationalbasis by 3%. On a pro forma basis, including the net impact of the PCH acquisition in both periods, sales declined on an operationalbasis 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 carebusiness was approximately 10%, ahead of projected category growth rates for the year. Double-digit growth for LISTERINEmouthwash driven by the strong results in the international markets and the US launch of the LISTERINE dissolvable whiteningstrips 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. Worldwidenet sales for the third quarter up $6.1 billion were up 3.7% compared to the same period a year ago. Operational growth was1.2% with currency contributing 2.5%. Reported sales in the US decreased 2% while sales outside the US increased on anoperational basis by 7.2%.

As we discussed last year, US sales results in the third quarter of 2006 included a reduction to reserve for sales rebates ofapproximately $130 million, while the third quarter 2007 included a reduction to sales rebate reserves of approximately $60million. Both sales reserve adjustments were related to sales recognized in previous periods. The most significant impacts wereto 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 certain countries outside the US. The combined effect of this generic competitionhas reduced the third-quarter worldwide pharmaceutical growth rate by approximately three percentage points with a similarimpact both in and outside the US.

Additionally, we saw a retraction in the US market for ESAs as a result of the ODAC discussions, the label changes and changesto reimbursement. The combined effect of the estimated impact of all items noted -- generics, the declining ESA markets andthe change in the reserve reductions -- impacted the worldwide pharmaceutical operational sales growth by approximately7.5 times.

PROCRIT/EPREX had a combined operational decline of 17% with PROCRIT down 27% and EPREX up on an operational basisby 1%. New competition and label changes have contributed to the slowing growth for EPREX. PROCRIT results have beenimpacted by a decline in the market versus the third quarter of 2006 estimated at over 25%, partially offset by an increase inoverall marketshare. PROCRIT aggregate share across all markets was approximately 45% in the third quarter of 2007, up twopoints sequentially and three points versus the third quarter of 2006. Increased share in the hospital and retail markets waspartially 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 similarresults both in and outside the US. Both the worldwide and US sales growth, excluding the reductions for the rebate reservesmentioned earlier, would have been double-digit. Sales results outside the US were impacted by generic competition forRISPERDAL ORAL in certain markets. The global success of RISPERDAL CONSTA continue to contribute strongly to the thirdquarter 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% whencompared to the third quarter of 2006. Sales in the US increased 8%. Market growth in the anti-TNF category continues to bestrong 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 US 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 US was reported as 14% and excluding the rebate reserve adjustments mentioned earlier, growth wasapproximately 20%.

Continued success in the migraine category has been the major driver of growth. Sales outside the US grew by 10% on anoperational 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 therebate reserve adjustments mentioned earlier. Solid market growth contributed to the increase.

ACIPHEX as it is known in the US market and PARIET outside the US is a proton pump inhibitor that we co-market with Eisai.Overall operational growth was 6%. Sales in the US grew 8% with market growth partially offset by lower script share. Operationalsales growth outside the US was 4%.

CONCERTA for Attention Deficit Hyperactivity Disorder grew operationally by 4% in the third quarter as compared to the sameperiod last year. Sales in the US were down 1% due to lower marketshare partially offset by market growth. Sales outside theUS 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 salesof $5.2 billion grew 3% operationally as compared to the same period in 2006 while currency contributed three points to bringreported growth to a total of 6%. Sales in the US grew 2.4% while sales outside the US increased on an operational basis by3.7%. Sales, excluding the impact of lower sales of CYPHER, grew nearly 10% operationally with healthy growth seen across theother franchises.

Now turning to the franchises starting with Cordis. Cordis sales declined approximately 23% in the third quarter due to lowersales of CYPHER, our sirolimus-eluting stent, partially offset by strong growth in both our Biosense Webster business and ourneurovascular business. US sales were down 26% and sales outside the US declined 21% on an operational basis.

CYPHER sales in the US declined 44% to approximately $185 million. The reduction in PCI procedures and a lower penetrationrate of drug-eluting stents resulted in an estimated market decline in the US of over 40% versus the third quarter of 2006.Estimated share in the US of 46% were stable on both a sequential basis and versus the third quarter of 2006. Sales outside theUS 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 marketsharein the quarter of 37% was down from 51% in the third quarter of 2006 and 43% last quarter. Increased competition has impactedthe share outside the US. CYPHER estimated worldwide share for the quarter was 41%.

The Biosense Webster franchise, our electrophysiology business, achieved operational growth of 18% with the US growing over20% and sales outside the US growing 15%. Neurovascular sales also achieved strong growth in the quarter due to the relaunchof the TRUFILL DCS ORBIT coil system.

Our DePuy franchise had operational growth of 9% when compared to the same period in 2006 with the US growing 5% andthe business outside the US growing by 15% operationally. Both our worldwide hip and sports medicine businesses and ourknee business outside the US achieved double-digit operational growth.

In the US, sales were impacted by the continuing competitive challenges in our spine business and lower sales of traumaproducts to an international distributor. Ethicon worldwide sales grew operationally by 6% with the US up 7% and sales outsidethe US up 5% on an operational basis. Strong growth was achieved across many categories, namely hemostasis, women's health,biosurgical, meshes and drain.

Ethicon Endo-Surgery achieved operational growth of 8% in the third quarter of 2007 with the US up 6% and sales outside theUS growing 11%. The Endo-Cutter, the key product in performing bariatric procedures, grew 13% operationally in the quarterand was a major contributor to the growth. Strong, double-digit results were achieved in the energy business due to thecontinued 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 US sales increased 15% reflectingthe 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 outsidethe US 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 US sales up 19%. Sales outsidethe US were flat on an operational basis impacted by softness in the immuno diagnostics market and lower sales of donorscreening products. The results in the US were driven by the rapid uptake of the Chagas screening assay and strong resultsachieved in immuno diagnostic products.

Lastly, in the Medical Devices and Diagnostics segment, our Vision Care franchise achieved operational sales growth of 16%with sales in and outside the US growing at similar rates. Operational growth for the franchise was driven by the global successof ACUVUE OASYS, ACUVUE ADVANCE for Astigmatism and ACUVUE Moist. Additionally, outside the US, 1-DAY ACUVUE DEFINEcontinues 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?

Dominic Caruso - Johnson & Johnson - VP, Finance & CFO

Thank you, Louise and good morning, everyone. While we are pleased with our solid financial results for the third quarter asLouise highlighted for you, during the third quarter, our sales results were slightly above the mean of the analyst modelspublished by First Call.

Our solid earnings performance for the quarter demonstrates our ability to continue managing our costs and improving ourmargin even in the face of sales pressures in certain markets while continuing to invest in the future. In fact, if you were to lookat the impact of adding the Pfizer Consumer Healthcare business to our base business for 2006, as we filed in an 8-K earlier thisyear, 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, youwill see an operating margin of 26.7% or only 0.5% negative impact versus the 2006 period. Thus indicating leverage in thebase business of approximately 0.7%.

As you know, we recently announced a $10 billion share repurchase program, the largest in our history. We began purchasingshares 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 tocontinue to invest in business-building activities.

In July, we announced cost restructure improvements that will help us manage through some near-term challenges in ourpharmaceutical business and Cordis franchise. As you saw, our third-quarter results reflect the restructuring charge ofapproximately $745 million on a pretax basis, consistent with the guidance that I provided during our conference call when weannounced the restructuring activities and our estimate at that time of restructuring charges of between $550 million and $750million.

Our plans are being executed by our operating companies and the majority of the announcements have been made and actionshave been taken or are in the process of being implemented. I can tell you that these actions are consistent with the guidanceI have provided, namely reductions of approximately 3% to 4% of our global workforce in accordance with local works councilsand 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 intheir 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 ofour 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 adiscussion of cash and related interest income and expense. During the third quarter of 2007, the Company continued togenerate 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 positionfrom year-end 2006.

We achieved this improvement while completing the $1.4 billion acquisition of Conor Medsystems during the first half of thisyear 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 andconsidering the impact from the share repurchase program, but assuming not major additional acquisitions, I suggest youconsider net interest income in the range of $125 million to $175 million for the full year 2007, slightly lower than our priorguidance, 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 royaltyincome, as well as one-time gains and losses arising from such items as litigation, gains or losses from investments by ourdevelopment corporation or asset sales. This is also the account where we recorded the gain on the divestitures of certainbrands in connection with the PCH acquisition in the first quarter, as well as the integration costs associated with the PCHacquisition.

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

And now a word on taxes. For the first nine months year to date in 2007, the Company's effective tax rate, excluding specialcharges, was 23.7% as compared to 23.9% in the prior year period. We suggest you model our effective tax rate for 2007 in therange of 23.5% to 24%, consistent with our prior guidance. As always, we will continue to pursue opportunities in this area tofurther 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 operationalsales growth for the full year between 11.5% and 12%, consistent with the guidance I have provided during our conference callwith 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 notproviding a forecast based on currency. But to give you a sense of possible currency impacts, if currency were to remain whereit is today, currency would have a positive impact to our full-year sales growth of approximately three points.

Now turning to earnings. When I last checked the First Call mean estimate for our EPS for full year 2007, it was $4.06 per shareand this included both the dilutive effect of PCH, as well as the Conor acquisition, but not including any in-process researchand 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 willresult 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, restructuringcharges 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 tointegrate acquisitions, make appropriate changes to our cost structure, all the while continuing to move our promising newgrowth 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 performancedespite some of the pressures we face in the markets for drug-eluting stents and erythropoietin-stimulating agents. This is atrue 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 todiscuss 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 ourPharmaceutical 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 ourtarget 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 originalschedule, and we continue to be on track to achieve this. The consumer group continues to generate new platforms for growththrough new products and geographic expansion. LISTERINE just released its new quick-dissolving whitening strips in the US,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 preparingto launch an over-the-counter version of Zyrtec anti-allergy medication in the US shortly after Zyrtec moves from prescriptionto over-the-counter status.

In June, we also spoke to you about our pharmaceutical segment, highlighting the many promising medicines we have inlate-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 [ICAC], 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 US and Europe for treatment of nosocomial pneumonia and in Europe for complicatedurinary tract infections and complicated intra-abdominal infections.

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

Our HIV medicine, TMC125, 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, TMC125 became the first medicine in theNNRTI 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 ejaculationin 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. Morethan 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 tapentadol, rivaroxaban and CNTO 148. Asyou know, we plan to file between seven and ten medicines for approval between 2008 and 2010. So we continue to makeprogress 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 medicaldevice and diagnostic business in the world with more than $20 billion in revenues last year. As you may recall in September2006, we held a 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 theend of his presentation, we look forward to taking your questions. It is my pleasure to introduce my colleague on the executivecommittee of Johnson & Johnson, Nick Valeriani. Nick?

Nick Valeriani - Johnson & Johnson - Worldwide Chairman, Medical Devices and Diagnostics

Well, 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 comprehensivelyacross 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 ourtechnologies make a difference. More than three million patients live more active lives thanks to our CYPHER stent. More than100,000 people are dealing better with morbid obesity with our adjustable gastric band.

More than one million knees bend and rotate with less pain with our joint replacement. 40 million eyes focus more clearlywearing ACUVUE lenses. Four million people better manage diabetes with our OneTouch Ultra products and in hospitals aroundthe 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 innovativesolutions 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 achievedstrong and steady growth relative to our competition. Over the past five years, the MD&D segment has achieved strongoperational growth. In fact, our compound annual growth rate for the past five years has exceeded that of our competitive setand 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, continuouslyrefreshing our product portfolio. For the broad product portfolio, we are also the world's most diverse medical technologybusiness. I am going to have time today to talk to you about just a few of our exciting platforms for growth. They are suggestiveof a business that leverages strengths from throughout Johnson & Johnson. They include consumer insights, direct-to-consumermarketing 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 two players. Theirindividually strong performances over the past five years have enabled our MD&D segment to achieve an impressive five-yearcompound 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 plentyof 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 and attract adjacencies like women's health and biosurgicals to strengthen our positionin core markets.






We are continually assessing new market opportunities, one of which I will talk about today, where we see significant growthopportunities in the medical technology space. Finally, we continue to actively explore attractive white spaces, just a few ofwhich 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 business. One of them is the capacity to educate physicians andpatients, an effort we have now put to work on behalf of the CYPHER stent in the drug-eluting stent category. While we recognizethat new entries will increase competitive pressure in this space, we continue to believe that we will compete successfully ona 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 comparedto bare metal stents. In the recently published 18,000 patient network, meta analysis further points out the positive advantagesof the CYPHER stent compared to TAXUS and bare metal stents.

Our educational campaign has two objectives. Against the backdrop of the newest literature and the impressive body of datasupporting the category, we are working to restore physician and patient confidence in percutaneous coronary interventionas a treatment of choice for coronary artery disease and we are speaking directly to patients, caregivers and physicians aboutthe world's most used, most studied and most proven drug-eluting stent, CYPHER, and about the quality of what we call lifewide open.

These newspaper ads and the slides you saw previously are just a few of the efforts in this campaign, which began last monthand 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, www.cypherusa.com, is the foundation of theeffort because it offers significant information for patients to improve their dialog with their physicians and to help make them-- 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 wehave provided last fall at our Medical Devices and Diagnostics business review. As you can see from this chart, we have achievedmost 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 detectChagas disease, an insect borne illness. Already more than 70% of donated blood is now tested for this disease. We anticipateda 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 [Prinia] skin closuresystem with CE Mark clearance in Europe.

We terminated development of CYPHER NXT and CYPHER Neo and launched, as planned, the FIRE STAR and DURA STAR ballooncatheters.

So now let's turn to some of the exciting highlights on our near, mid and long-term horizons. I would challenge that our pipelinein Medical Devices and Diagnostics is as rich as any company, and our recent launches and approvals demonstrate our diversitywith technologies ranging from blood glucose monitors that make it possible for patients in developing markets to test for thefirst time, to adhesives that can trim hours from surgical procedures by replacing sutures. And as I indicated earlier, a disciplinedapproach to portfolio management has allowed us to realize approximately 35% of sales in 2006 from products introducedover 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 andnear-term technologies and platforms we see as game changers for the way we deal with significant diseases and conditions.And 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 changethe way we approach that patient.

So let's start with diagnostics where development of novel medical markers could change the way we approach disease. Thisis a skill set that derives from its partnership between our diagnostics company and our pharmaceutical researchers. Whilemany 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 ourOrtho-Clinical Diagnostics franchise, a new generation of sophisticated diagnostics tests that we believe have the potential tonot only help reduce chronic illness, but also improve patient outcomes and reduce healthcare costs worldwide. These testswill 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 evenmore significant. With this example of just one product in the space, GENESEARCH breast lymph node assay, surgeons have anew molecular tool to confirm the spread of breast cancer while a patient is undergoing initial surgery, thereby sparing patientsand the healthcare system the need for costly and painful additional surgical procedures to remove cancerous lymph nodes.The GENESEARCH BLN assay was the first intra-operative and gene-based test ever approved to detect if cancer has spread tothe lymph nodes.

Our objective is to translate novel biomarkers into advanced diagnostic tests to identify disease earlier than ever before. Wehave several other biomarkers in advanced stages of the development pipeline, including tests for preeclampsia, prediabetesand some of the world's most pervasive chronic diseases.

Obesity affects 300 million people worldwide and many of them experience multiple serious comorbidities. It is estimated thatobesity represents a global healthcare cost in excess of $100 billion; yet less than 1% of the patients who are eligible actuallyget surgical treatment for this disease.

With the recent US regulatory clearance of the REALIZE adjustable gastric band, Ethicon Endo-Surgery is now the only companyin the world with a complete portfolio of offerings for the surgical treatment of obesity. Coupled with our capabilities andphysician education, consumer marketing, health economics and payer advocacy, Ethicon Endo-Surgery is better positionedthan any company in this space to address the surgical treatment of obesity, a significant healthcare issue and a significantdriver of future growth for our business.

This is a particularly -- this is particularly exciting in light of clinical evidence presented in two recently published studies in theNew 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 in1995 with a single product code and just $12 million in revenue, HARMONIC Energy technology is today a portfolio of over 50product codes and more than $500 million in revenue. It has become a standard in laparoscopic surgery and is being used todayin 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 arethyroidectomy 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 acrossspecialties 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 techniquesand HARMONIC devices. The photo on the right depicts the results achieved with HARMONIC Energy. Over time, the EthiconEndo-Surgery strategy is to leverage the use of HARMONIC not only to other areas of general surgery, but to specialties thatare 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 withdiabetes, but it all started with the enormous insights we have gained over time from our LifeScan business and its flagshipOneTouch platform. We have been able to continue to leverage the OneTouch Ultra platform and strip technology by bringingout new meter innovations that are aimed at driving better testing compliance, providing greater patient insights with the goalof better outcomes.

The benefit is that we are able to leverage the capital investments we have made within our facilities to support a single striptechnology. 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 affordableblood glucose monitoring solution that offered basic information to patients who previously hadn't been testing blood glucoselevels at all. We continue to offer the best meters at all levels, but these basic affordable models enable us to make an importantcontribution to the management of this pervasive disease.

Of course, the acquisition of Animas Corporation expanded our presence in the diabetes area and the company continues toinnovate 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 materialsexpertise of Ethicon known for suture and mesh coupled with our understanding of biologics puts us in a great position in theemerging platform of biosurgicals. These products address the significant clinical challenge of dealing with bleeding whetherit is leaks or severe bleeding in surgery. This includes advanced hemostatic agents and sealants that can improve the managementand control of bleeding, air and fluid leaks.

It includes EVITHROM, the first plasma-derived human thrombin for achieving hemostasis, and EVICEL, a fibrin sealant that alsoincludes 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 controla 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 ofproducts to treat coronary artery disease. Among them, of course, is the platform acquired through our acquisition of ConorMedsystems. Our first priority here is the development of a coronary stent with sirolimus, the proven drug of choice fordrug-eluting stents along with the bioabsorbable polymer. The promise for the future of this platform, however, is its use withmultiple drugs for clinical indications both inside and outside of cardiology. We remain committed and excited to leveragingthis 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 ofinterventional cardiology. For example, in our endovascular business, we have now filed our PMA for the approval of the ExoSealvascular 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 ofatrial fibrillation. This condition affects about 10 million people, mostly over the age of 65, and we expect to see incidentsdoubling in the coming years. It's one of the leading causes of stroke.

Currently, ablation is recommended as second-line therapy in the US after patients have failed drug therapy. There is no catheterablation approved for this use in the US; although a number of technologies, including ours, are available outside the US. Wehave now concluded enrollment in our IDE clinical trial for an indication for AFib for our NaviStar ThermoCool Catheter, expectingto 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 forstructural problems such as a [CFO] closure device. We also have active development programs in percutaneous valve repair






and replacement, including potential applications of the previously approved Intracardiac Echo catheter. In all, we expectstructural 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'thave to look far to see evidence of an increasingly competitive effort to gain consumer's mindshare in knee replacement. Ourconsumer 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 patientin her 70s who walks to the corner grocery store has a different set of needs. To that end, we are pursuing a patient segmentationstrategy focused on performance and next year, DePuy will launch a new high-performance SIGMA knee platform, which willinclude 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 inlate-stage clinical trials with the first of these products, which not only corrects vision, but also delivers medications to treatallergy symptoms in the eye. These products will appeal to consumers who have not worn or have stopped wearing contactlenses because of discomfort and other issues. We see this as an exciting market expansion opportunity and it also representsfurther 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 trulydisrupt how and where surgical and medical procedures are performed today. That is computer-assisted personalized sedationor 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 is managing the intraoperative pain and anxiety of patients and that is what CAPSwill do. Today, there are more than 38 million short surgical and medical procedures performed that require some form ofsedation for the management of patient's pain and anxiety. These procedures are done in a variety of settings and anesthesiaproviders are not always available.

Gastroenterology alone represents nearly 16 million of these procedures and this is our initial target market and it is here whereearly clinical research gives us reason to believe this technology can dramatically improve current standard of care. We believebetter procedural sedation, more effective and efficient sedation has the potential to both increase practice capacity for coloncancer screening and minimize a main patient turn deterrent to getting screened, fear.

We are currently conducting the pivotal trial for this system. Results from two feasibility trials are very promising. As promisingas these results look in our initial area of focus, the transformational value of CAPS lies in its vision. That is the shift of site ofcare, reduce patient pain and increase access to care, the meaningful contribution to healthcare and an exciting platform forgrowth for Ethicon Endo-Surgery.

I think you will agree that our robust pipeline in the near and mid term puts us in a very competitive position, but more importantlyoffer meaningful solutions to some of today's most challenging clinical needs. We plan to update you on our progress againstthese efforts at a Johnson & Johnson Medical Devices and Diagnostics business review to be held next June, so stay tuned fordetails.

Now before I close, I want to leave you with the sense of the possibilities we are looking at in the longer term. Possibilities thattake advantage of the unique breadth of Johnson & Johnson across Device, Diagnostic, Pharmaceutical and Consumertechnologies. We have the capacity by virtue of our size and depth to address some of the world's most pervasive and challengingconditions 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. Despitethe prevalence of diabetes and its incumbent comorbidities, this remains a seriously undertreated, complex and overwhelmingdisease. 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 believewe have an unparalleled capacity by virtue of our breadth and scope to address diseases like this one in a more comprehensiveapproach than any other company in the world.

In fact, in the next few days, we will be announcing a commitment to diabetes education for the creation of the Johnson &Johnson Diabetes Institute to be led by former acting Surgeon General of the United States Dr. Ken Moritsugu. We will belaunching these diabetes Institutes in Japan, the US, France and China initially as part of our commitment that goes well beyondproducts and technologies to addressing a global issue in a way that no other corporation can do. The first four centers will beopen and operational by mid-2008, offering curriculum that is the result of consultation with leaders of the International DiabetesOrganization and public health institutions. We have a vision for a presence in metabolic disease that transcends any singlebusiness segment and addresses the enormous breadth of needs faced by people with these chronic conditions.

In all, we are a diverse composite of innovative companies aggregating to the world's largest medical technology companyand dedicated to a common vision. Our seven franchises are each industry leaders in their own right. They are globally balancedwith roughly half 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 focusenables us to make decisions close to the customer and with the best interest of the patient in sight. We believe we are cultivatingthe right skills to innovate with the grain of healthcare 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, growingour profits in excess of sales. In all, we believe we are making a difference and that our innovations will continue to improvethe way medical technology impacts delivery of care around the world. Thank you.

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


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.

Q U E S T I O N S A N D A N S W E R S

Unidentified Audience Member

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. I guess the three categories who are different are FX, gains on the other income line andcost-cutting. Can you quantify how that corresponds with the changes in guidance among those three categories?


I will 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 hashad a -- not that significant of an impact in that overall change because we essentially hedged most of our foreign currencyexposure. Therefore, we don't gain the benefit or suffer the loss associated with that.

In terms of cost-cutting, I think that is probably the most (inaudible) efficiency in our operations. That is the most significantpart of the change. And the (inaudible) component is some additional other income that I referenced, which was related to






increased royalty income and gains on the sales of our investments in our development portfolio. I would say that costimprovement probably is the largest part of that -- of that swing in our guidance.

Rick Wise - Bear Stearns - Analyst

Rick Wise, Bear Stearns. A couple of questions. First, maybe, Dominic, can you give us any greater specificity on the other -- anyone-time items that are there in the third quarter that are not likely to be there in the fourth quarter, maybe if you could justcall that out and I will ask my other two now and just go ahead and say them?

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 bewhere you want it to be by the time RISPERDAL goes generic". Can you just update us on what that is and where things standand last real quick maybe you could review the US stent pricing environment? Our contacts are suggesting J&J has beenincrementally more aggressive on price in stents. Maybe you could tell us where stent prices were in the quarter and whetherthat is valid and your strategy for dealing with the competition there. Thanks so much.


Sure, Rick. With respect to other income in this particular quarter, other income and expense, you may remember that weexecuted a settlement agreement with the Department of Justice on the orthopedics industry matters and that cost associatedwith that settlement, which we announced, was $85 million. It was included in our results -- fully included in our results now.That is the only one-time unusual item you wouldn't expect to repeat in future quarters.

The royalty income we are experiencing is higher in certain agreements that have triggering aspects where we get royaltyagreements. I don't want to tell you which particular entities they are, but we will receive see better royalty income for theremainder of the year.

With respect to INVEGA, we still continue to see INVEGA as a promising product for the treatment of schizophrenia. I would tellyou that we continue to see restrictions in the use of INVEGA based on formulary status. So whether it is tier 3, whether it isprior authorization, etc., we continue to see that. It is a very difficult environment for new products and the new reimbursementarena and those pressures are difficult to overcome without additional data on the product, especially this additional datacomparing it to other products.

So you may know that we have just recently this past weekend had a poster session on head-to-head trial of INVEGA andSeroquel. So it is recent data. That trial showed that INVEGA performed very nicely against Seroquel and placebo in terms ofefficacy and was very well-tolerated and in fact, the dropout rates for INVEGA patients due to adverse events was far lower thaneither Seroquel or even placebo frankly.

So we are very pleased because the factors are kind of data that the reimbursement environment is waiting for to see if we arelightening up on the restricted pressures we placed on it. Whether it lightens up enough, we will wait and see, but we havetaken a realistic view of INVEGA in both our guidance for this year and in targeting cost improvement programs that I previouslyannounced.

With respect to DES pricing, I think Louise has the actual data for the quarter.


For the US, price was down about 5% and that is down to about $2080. OUS price was down a similar amount, higher in termsof local currency, but we did have a favorable impact of the currency strengthen.







It sounds like it might not be where you would like it to be (inaudible) RISPERDAL goes generic. What's the final point on it?


Well, it is not tracking today where we had hoped it would track by this point and therefore, we have taken that into considerationin our plans.


(inaudible) JPMorgan. 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 CNTA 148. We are going to see data in a couple of weeks at ACR I believe in psoriatic arthritisand ankylosing spondylitis. Could you talk about your filing strategy for the different indications for 148 RA, as well as psoriaticarthritis and spondylitis and so forth?

And then the questions for Nick, you talked about a bunch of interesting opportunities. Let me just touch on a couple of them.The ability to deliver an agent with ACUVUE, with your contact lens franchise, what is the regulatory pathway for that type ofproduct? How much visibility do you have on that and then anything you can give us -- -- what you have in front of you todayon the clinical trial design for ThermoCool for AF and for the CAPS program and if you don't have that, understood.


On the pharma pipeline question on CNTA 148, Louise, help me out here if I miss one, but Mike, our filing strategy there is(inaudible) we intend to file three indications. Rheumatoid arthritis, ankylosing spondylitis and psoriatic arthritis are all threeindications planned to be filed in early '08.


Mike, with regards to action in contact lenses, the regulatory process of PMA filing, so what we are able to do obviously withthis sort of convergent of combination product is certainly gaining the benefit of our pharmaceutical expertise that we haveinside of Johnson & Johnson, as well as other expertise we have in MD&D to bring the right skill sets to bear there, but it is PMA.

With regards to the ThermoCool for AFib where we have completed enrollment of all the patients for this trial and so now weare in the follow-up period and we will be submitting that PMA in the future.

And then CAPS, what we have done with CAPS is the pivotal trial is in gastroenterology, so it is for colonoscopy predominatelyin the lab. That pivotal trial is ongoing today and we anticipate being able to file that PMA in the early part of 2008. So that isour first indication in the GI lab set.


Just a follow-up on ThermoCool. Is that a randomized trial and do you know what that looks like and what you need to showin terms of its (inaudible) success rates?







You know, Mike, I am not really sure.


Here, Larry.

Larry Biegelsen - Wachovia - Analyst

Larry Biegelsen, Wachovia. First, a pharma question and then just a couple quick device questions. Carisbamate, I think it waspreviously mentioned as a 2008 filing unless I am wrong. Dominic, you didn't mention that today as an '08 filing. Could youplease give us an update and then on devices, a follow-up to Mike's question, any sense of timing on that contact lens with theactive ingredient. Then on the REALIZE band, the $1.7 billion in the market for 2011, what is the split between band and bypass?I think that was a bariatric growth rate -- market. And just lastly, do you have a telemetrically adjustable band in development?Thanks.


Larry, on the pipeline, I mentioned three filings -- CNTO 148, rivaroxaban and tapentadol, but you are correct that there is actuallysix filings in '08. Carisbamate is still on track to be filed in '08, Dacogen in the EU is on track to be filed in '08, as well as YONDELISfor oncology. So we actually have six filings planned in '08, I happened to mention three earlier.


Larry, just again, the timing -- we are in the clinical trial right now on the contact lens, so we need to complete that trial and thesubmission for the PMA -- it is kind of too early right now to really determine when that will be submitted, but it is one of ourtop priority projects in the [actors] for our Vision Care business.

The $1.7 billion market potential for band versus bypass -- that really is predominately going to be we believe -- bypass surgerywhen you think about the other clinical benefits associated with these procedures as it relates to the resolution of othercomorbidities -- diabetes and hypertension -- I think the jury is still out on that in terms of how. And now with the EthiconEndo-Surgery business in the marketplace with the REALIZE band and our ability to develop that market, work with physiciansand payers and consumers, we are going to see I think a changing -- perhaps a changing dynamic there.

Obviously today the indication is BMIs of 35 or greater with stated comorbidities. Who knows where the band could ultimatelyend up and perhaps be utilized in less severely obese patients. So we might see a segmentation change that that could potentiallyaffect that $1.7 billion projection.

As it relates to a remote controlled adjustment, we are not at liberty at this point to really talk about what is in the early-stagepipeline.


Bob Hopkins.






Bob Hopkins - Lehman Brothers - Analyst

Thanks very much. Bob Hopkins from Lehman Brothers. Two questions for Nick in light of the fact that next week we have theTCT 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 wantedto clarify, Nick, is now your next-generation drug-eluting stent a Conor platform-based stent?

And then on the spine side, you guys have been losing some share over the course of the last year. I am wondering is the marketstill growing double digits. How long do you think it will take you to get back to a market rate of growth and what do you needto do? Are there any key product launches coming in NAS or in the relatively near term that could turn that business around?


Sure. As it relates to stents, as you saw in the pipeline, we have two products that are under development. It is our CYPHERELITE, which is a surface-coated product and the Conor sirolimus product. So we have a dual path going right now and as perthe plan, the first product for the US market would be CYPHER ELITE, but we -- again, we remain very excited about the Conorsirolimus program where we believe we will have our first in-human experience in the early part of 2008.

With regards to spine, you are right. We have had some challenges in the recent past, a couple of things that are giving us somesort of positive feelings about that business. First and foremost is we have stabilized the distribution network in the US. Wewere having a significant degree of turnover in our distributors and we made a leadership change a couple of years ago now.[Gary Frechette] has been leading that business and working well with the distributors.

Our [Expedian] productline is out in the marketplace and doing very well. Our MIS program as well is supporting the stabilizationof that business and we are beginning to see sort of a turnaround and some positive momentum in that business. Now whenwe will get to market rates of growth, that still remains to be seen.

Bob Hopkins - Lehman Brothers - Analyst

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,US and worldwide.


Okay. Sure. This is operational growth -- hip 12%, outside the US also 12% for a total worldwide of 12%; knees are up 7% in theUS, outside the US, they are up 12% for a total operational growth of 9%; spine in the US is down 1%, outside the US, up 34%operationally for a total of 8% growth operationally.

Sara Michelmore - Cowen & Co. - Analyst

Sara Michelmore from Cowen. First a question for Dominic on ESA. If you could just give us an update in terms of how you feelabout your visibility with regard to that product category. I know back in July, things were very much in flux, so if you couldgive us a quick update there and then 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 andalso temporary or disposable insulin pumps, which seems to be an emerging technology area there and I was also surprised tosee the amount of information you had up there in terms of biomarkers. If you can give us a sense of where you are in thatdevelopment area and what your capabilities are? Thanks.







With respect to the (inaudible) point in stimulating the 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 discussionwas going to entail. That was a renal panel discussion that we still had to see the outcome of. I guess two things happened.

One is that the panel in -- got addressed. [Renal] did not recommend any reduction in the maximum dosing for ESAs, which isconsistent with the ODAC panel, so that was good news in terms of looking at the efficacy of these products. It was anunfortunately more restrictive reimbursement than we had thought was going to be the case with respect to CMS reimbursementand although that was disappointing at this point, we had some more certainty over that than we've had before as opposedto uncertainty and sometimes you hope for certainty that is positive, but if you have uncertainty that is eliminated, you canplan your business in a more stable way.

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

But I would say more -- a little bit more certainty in the market that we have had in the prior call that we had with you, but stillsome instability in terms of what may happen eventually with the label. As you know, the FDA did not come out with any furtherlabel discussions even though they had two panel meetings and so that particular aspect is still up in the air, but as I said, wewere pleased to see that no restriction on dosing was recommended by both panels.


With regards to diabetes and continuous glucose monitoring, we see that as an important technology for the continuation andimprovement of care for diabetic patients. We have two programs ongoing inside of our diabetes franchise and have had earlyclinical exposure with one of the devices.

One of the things -- one of the key challenges to ensure that you have the accuracy to deal with low readings, because if youthink about what we want to try to do with this technology is to monitor and then pace the load of insulin to the patient, so weare taking a thoughtful and disciplined approach to understand the benefit of this technology and enhancing care for diabeticswho are using insulin.

With regard to temporary insulin pumps, we are staying abreast of what is going on in the marketplace. Obviously we arecommitted and excited about the work at our Animas Corporation and the growth of that business year on year and the launchof the Animas 2020 though we also see the potential for a temporary or disposable insulin pumps perhaps for situations likegestational diabetes where you might want to just a short use of the product as opposed to a $4000 or $5,000 investment fora type 1 diabetic as the reusable pumps are used.

And in our OCD business in the area of biomarkers, it is a space that we're very excited about. Lloyd Davis who runs our OCDbusiness has worked over the last four years now to really reconfigure the OCD franchise and its strategy and we really havebeen able to leverage some of the expertise we have in our pharmaceutical business typically out of La Jolla, as well as someextra licenses to put us in what we think is an exciting position as it relates to the development of these biomarkers in the areaof cardiovascular disease, metabolic disorders, oncology and women's health.

So we see a real transition and we are not going to -- obviously our core lab business is important, but we really see the strategymoving to one of creating high-value, medical -- high-value medical content diagnostic testing in the future and that is whatthe biomarker strategy is all about.







Charlie?


Thank you. Dominic, 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 1, 2008 and if the launch timeline is beyondthe first of the new year, what exactly is preventing you from launching at the time that exclusivity expires?


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


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


It is just continuing to develop our plans (inaudible).


And it doesn't put you at a disadvantage with respect to others who might be waiting in the wings to launch an OTC version?


We really can't comment any further on that at this point.


Okay. The second question is for Nick. One of the topics that you did not touch on in your prepared comments was the ASR hipresurfacing system. Could you give us an update there as to what is going on, in particular where we stand in the PMA process?


Well, first, with regard to ASR, it should be noted that that product is launched outside the US today and is a very successfulpart of our hip program in our DePuy franchise. As it relates to the timing of the PMA submission --


In the '09 timeframe, '09 or '10 timeframe.







And I am just curious how this progress -- how progress is being made in the clinical trial for that PMA submission.


I mean it is progressing fine. Again, it is a product that we have in the marketplace today. We don't anticipate any issues withregard to the product performance and (inaudible).


Catherine at the back of the room here.

Catherine Arnold - Credit Suisse - Analyst

Catherine Arnold from Credit Suisse. Last Friday, the FDA issued draft guidance on antibacterials suggesting that for someindications non-inferiority would not be an appropriate endpoint. Could you just confirm that you still expect non-inferiorityto be okay for the three indications that you are filing or have filed? One of them you filed for ceftobiprole.


Catherine, our design of the clinical trial obviously was initiated in consultation with the FDA and the protocol was the protocolthat we agreed with the FDA. So our plan to move forward was that agreed-upon protocol and filed in accordance with thatendpoint that was established with the FDA (inaudible).


Up there, in the third row.

Valerie Brown - Alliance Bernstein - Analyst

It's Valerie Brown with Alliance Bernstein. A question for Nick on the drug-eluting stent market. You had mentioned that youcontinued to see declines in PCI procedure volumes, as well as penetration rates. Could you quantify that if possible and providesome additional color both for the US and the OUS markets?


Sure. So when we look at this quarter, we estimate that PCI penetration year on year is probably down somewhere between13% and 15% versus last year. And if you look at drug-eluting stent penetration as a percentage of total stents, that is probablysomewhere in the 65% range as compared to let's say at its peak, it was probably 88%, 89%, you know some time a year ago.

So what we see -- again as one considers the body of evidence that continues to be published here, we believe that we aregoing to see a turnaround in both the PCI penetration and an uptake in DES penetration and the direct-to-patient ordirect-to-consumer campaign that we are launching really is about getting the word out and informing healthcare provid

Documents

Q3 2007 Johnson & Johnson Earnings Webcast and Analyst …online.wsj.com/public/resources/documents/JNJ-Transcript... · 2007. 10. 16. · Selling, marketing and administrative expenses