嬌生 (JNJ) 2006 Q3 法說會逐字稿

Good morning and welcome to the Johnson & Johnson 2006 third-quarter earnings conference call. All participants will be able to listen only until the question-and-answer session of the conference. This call is being recorded. (OPERATOR INSTRUCTIONS) I would now like to turn the conference call over to Johnson & Johnson. You may begin.

Good morning and 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 2006. Joining me on the call today is Bob Darretta, Vice Chairman and Chief Financial Officer.

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

I will review highlights of the third-quarter 2006 results for the Corporation and for our three business segments. Following additional remarks from Bob Darretta, we will open the call to your questions. We expect the total call to last approximately one hour.

Before I get into the results, let me remind you that some of the statements made during this call may be considered forward-looking statements. The 10-K for the fiscal-year 2005 identifies certain factors that could cause the Company's actual results to differ materially from those projected in any forward-looking statements made during this call. The Company does not undertake to update any forward-looking statements as a result of new information or future events or developments. The 10-K is available through the Company or online.

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

Now I would like to review our results for the third quarter of 2006. If you have referred to your copy of the press release, let's begin with the schedule titled Supplementary Sales Data. Worldwide sales to customers were $13.3 billion for the third quarter of 2006, up 7.9% as compared to the third quarter of 2005. Our operational growth was 6.7%; and currency contributed 1.2 points.

If you turn to the schedule showing sales by major geographic region, you will see that we achieved growth at 7.5% in the U.S., while sales outside the U.S. grew by 8.5%. In regions outside the U.S., operational growth was 5.7%, while the effect of currency exchange rates positively impacted our reported results by 2.8 points.

Our strongest performance performing region was the Western Hemisphere excluding the U.S., growing 10.6% on an operational basis. The Asia-Pacific, Africa region grew by 6.7% operationally; while Europe grew 3.8% operationally.

If you will now turn to the consolidated statement of earnings for the third quarter, I am pleased to report net earnings of $2.8 billion. Earnings were up 8.7% over the third quarter of 2005, while earnings per share of $0.94 were up 10.6%, reflecting the impact of the share repurchase program announced earlier this year.

Please direct your attention to the boxed section of the schedule, where we have provided pro forma earnings information. As referenced in the footnote, the 2006 results have been adjusted to exclude the after-tax impact of an in-process research and development charges of $115 million associated with the acquisitions of Ensure Medical and Colbar LifeSciences (sic).

Net earnings on a pro forma basis for the third quarter of 2006 were $2.9 billion and earnings per share were $0.98, up 13.3% and 15.3%, respectively.

I would now like to make some additional comments relative to the pro forma earnings before we move on to the segment highlights. Cost of goods sold at 27.5% is up 30 basis points as compared to the same period in 2005. The third quarter was impacted by unfavorable mix, primarily in the pharmaceutical business, partially offset by reductions in the manufacturing costs in our medical device businesses.

Selling, marketing, and administrative expenses at 32.3% of sales is a 150 basis point improvement as compared to 2005, reflecting cost-containment efforts across many of our businesses.

The investment in research and development increased 11.7% versus the same quarter last year. As a percent of sales, R&D is 12.9% for the third quarter of 2006, 40 basis points higher than the same period in 2005. The increase in the rate of R&D spending reflects higher levels of investment in our Medical Devices and Diagnostics segment and the significant number of pharmaceutical projects in late-stage development.

Interest income net of interest expense increased by $93 million from the third quarter of 2005 to $194 million. This year-to-year growth is primarily due to higher interest rates.

The increase in expenses shown in other income expense in the third quarter of 2006 included an increase to the product liability reserve.

With regards to taxes, as you can see by looking at the effective tax rate shown in the boxed section of the schedule, earnings benefited from a reduction in the tax rate to 23.9% versus the prior-year rate of 25.8%. Bob Darretta will provide further comments during his remarks on both taxes and other income and expense.

Now if you will turn once more to the schedule Supplementary Sales Data, please direct your attention to the nine-month information. Consolidated sales to customers for the first nine months of 2006 were $39.6 billion, an increase of 4.6% as compared to the same period a year ago. On a year-to-date basis, operational growth was 5% and currency had a negative impact of 0.4 points.

Now turning to the consolidated statement of earnings for nine months, I would first like to draw your attention to the boxed section. In 2006, charges for in-process research and development and the after-tax impact of the payment received from the termination of the planned acquisition of Guidant have been excluded. In 2005, IPR&D as well as the adjustment to the tax reserve related to the technical correction associated with the American Jobs Creation Act have been excluded. With these adjustments, net earnings for the first nine months of 2006 were $8.7 billion or $2.95 per share, up 8.1% and 9.7%, respectively, as compared to the same period in 2005.

Now let me begin the review of the business segment highlights for the quarter. I will begin with the Consumer segment. Worldwide Consumer segment sales of $2.5 billion increased 10.1% as compared to the third quarter of 2005. Operational growth was 8.1%, while currency contributed 2%. U.S. sales were up 5.9%, while international sales grew 10.2% on an operational basis.

Our skincare business achieved operational sales growth of 6% in the third quarter of 2006, with the sales in the U.S. decreasing 2% and sales outside the U.S. increasing operationally by 14%. Excluding the impact of initial inventory stocking for new products included in the 2005 results, U.S. sales growth would have shown a modest increase. Outside the U.S., growth was driven by suncare products and the newly acquired Group Vendome product line.

Baby and kids care products achieved strong operational growth of 12% when compared to the third quarter of 2005, with similar results in both the U.S. and international regions. Double-digit growth was achieved across the majority of the product line.

For the third quarter of 2006, sales for the McNeil consumer business of OTC pharmaceuticals and nutritionals were up 9% on an operational basis compared to the same period in 2005, with sales in the U.S. increasing by 7% and sales outside the U.S. increasing 13% operationally. In the U.S., sales of the OTC products were up 14% due primarily to the launch of new products for upper respiratory reformulated with [semmel essence]. The increase in sales outside the U.S. was due to a combination of strong demand growth and a shift in inventory levels for our OTC products.

Women's health achieved operational growth of 7%, with the U.S. up 8% and sales outside the U.S. growing operationally by 6%. That completes our review of the consumer segment.

I will now review highlights for the Pharmaceutical segment. Worldwide net sales for the third quarter of $5.9 billion were up 7.8% as compared to the same period in 2005. Operational growth was 6.7%, while currency contributed 1.1%. Sales in the U.S. increased 8.9%, while sales outside the U.S. increased on an operational basis by 2.7%.

Sales results in both the third quarter of 2006 and the third quarter of 2005 benefited from onetime adjustments. In the third quarter of 2006, we reduced our reserve for sales rebates by approximately $130 million, which had been established earlier in the year.

As we reported last year, U.S. sales in the third quarter of 2005 were positively impacted by a refund of approximately $80 million due to a retroactive change in the methodology used to calculate average manufacturers price from Medicaid charges. The net effect of these onetime gains contributed 0.8 points to the operational sales growth on a worldwide basis and 1.2 points to the U.S. sales growth. The net effect of these adjustments was not material on an individual product basis, with the exception of TOPAMAX, which I will comment on in a few minutes.

As we have previously commented, our results have been impacted by generic competition on some of our products, namely, DURAGESIC, oral contraceptives, ULTRACET, and SPORANOX. While this impact has abated during the year, the combined effect of this generic competition has reduced the third-quarter worldwide pharmaceutical growth rate by approximately 2 percentage points, with an approximate 5-point impact on sales growth outside the U.S.

The impact on the sales in the U.S. was much less, at approximately 1%, as the expiration of the DURAGESIC U.S. patent had anniversaried in the first quarter.

The third-quarter sales decline for both NATRECOR and ORTHO EVRA have also impacted the quarterly comparisons versus a year ago. PROCRIT in the U.S. and EPREX, as the product is known outside the U.S., had a combined operational decline of 7%, with PROCRIT down 9% and EPREX down 1% on an operational basis. The approval of the once-weekly administration for EPREX in Europe and the recent update to the label in Europe to restore the subcutaneous route of administration as an option for chronic kidney disease patients have contributed to volume gains, with pricing pressures offsetting the volume gains.

The lower sales of PROCRIT reflect both pricing pressure and lower volume. PROCRIT sales continue to be negatively impacted by our competitor's anticompetitive contracting strategy, both in oncology clinics and in the hospital setting. PROCRIT's share was approximately 43% in the third quarter of 2006 as compared to a 49% share in the third quarter of 2005.

ACIPHEX, as it is known in the U.S., marketed as PARIET outside the U.S., is a proton pump inhibitor that we co-market with Eisai. Overall, operational sales growth was flat, with the U.S. down 5% due to in part to lower script share. Regions outside the U.S. grew 5% on an operational basis.

Let me now move on to discuss some of our growth drivers. RISPERDAL, our agent for psychotic disorders, had operational growth of 15% when compared to the same period a year ago. Sales grew 24% in the U.S., and 5% operationally outside the U.S., fueled by very strong growth of both RISPERDAL ORAL and RISPERDAL CONSTA, our long-acting injectable formulation. RISPERDAL CONSTA achieved third-quarter sales of approximately $230 million, up over 40% on an operational basis.

In the U.S., the combined dollar market share of the RISPERDAL brand has increased by nearly 1 point versus the third quarter of 2005 to approximately 26%. In October, the FDA approved RISPERDAL for the treatment of irritability associated with autistic disorder, the only approved medication for use in children and adolescents with autism.

REMICADE, the biologic approved for the treatment of a number of immune-mediated inflammatory diseases, grew by 24% when compared to the third quarter of 2005. Growth in the U.S. was 15%, while sales to our partners for markets outside the U.S. grew over 70%. Strong market growth in the anti-TNF category continues to be fueled by new uses, such as psoriasis, psoriatic arthritis, and ulcerative colitis. Approximately half of the sales growth outside the U.S. resulted from increases in demand, while the remaining half was due to shifts in inventory levels.

In the third quarter, REMICADE receive two approvals from the FDA, the first for the treatment of adults with severe plaque psoriasis, and the second for structural damage in psoriatic arthritis. Total approved indications in the U.S. now number 13.

Sales of TOPAMAX, which is approved for the treatment of epilepsy and migraine prophylaxis, increased operationally by 23%. Sales growth in the U.S. of 33% benefited from the onetime reserve adjustment mentioned earlier. Adjusted for this impact, sales growth in the U.S. was still very strong at 24%. The migraine indication has been a key driver of growth. Sales outside the U.S. declined 7% on an operational basis due to the impact of generic competition in certain countries.

Sales of anti-infectives, principally LEVAQUIN, were up 5% operationally when compared to the same period a year ago. Script share for LEVAQUIN at approximately 17% has shown steady progress throughout 2006, up 2 points from our fourth-quarter 2005 share.

CONCERTA for attention deficit hyperactivity disorder grew 29% operationally in the third quarter as compared to the same period last year. Sales in the U.S. were up 28% due to a combination of price and an increase in dollar market share. Sales outside the U.S. grew 35% on an operational basis, with very strong growth in all regions.

I will now review the Medical Devices and Diagnostics segment results. Worldwide Medical Devices and Diagnostics segment sales of $5 billion grew 7.1% as compared to the same period in 2005, with operational growth of 6.1% and the positive impact of currency of 1%. Operational sales growth was 6.1% both in the U.S. and internationally.

Now turning to the franchises, starting with Cordis. Cordis's sales were down 2% operationally, with the U.S. declining 3% and businesses outside the U.S. flat on an operational basis. Sales of both CYPHER, our Sirolimus-eluting stent, and the neurovascular business were lower than a year ago, partially offset by very strong results in our Biosense Webster business. The neurovascular results were impacted by a temporary supply disruption of a key product.

CYPHER is the worldwide market leader in drug-eluting stents with an estimated 49% market share. Market share in the U.S. was estimated at 47%, up 2% sequentially from the prior quarter and 1% from the third quarter of 2005. CYPHER sales in the U.S. of $327 million were down 6% due to the combination of softness in the market and a lower average selling price.

CYPHER sales outside the U.S. were down 3% on an operational basis to $300 million, representing an estimated 51% share of the drug-eluting stent market outside the U.S. Increased competition, a plateauing of penetration rates, and modest decreases in prices in all regions have tempered the growth rate of sales outside the U.S.

In September, Cordis launched in most regions outside the U.S. the CYPHER SELECT PLUS product, which we believe offers superior deliverability.

The Biosense Webster franchise, our electrophysiology franchise, had an excellent quarter with operational growth nearing 35%. Growth was balanced between U.S. and international markets, fueled by strong results with navigational products.

Rounding out the Cordis update, in the third quarter the FDA approved the marketing of the PRECISE Nitinol Stent and ANGIOGUARD Emboli Capture Guidewire to treat carotid artery disease. Additionally, CYPHER received CE Mark for use below the knee, marking the first drug-eluting stent approved for peripheral use.

Our DePuy franchise had operational growth of 7% when compared to the same period in 2005, with both the U.S. and the businesses outside the U.S. growing at a similar rate on an operational basis. Operationally, joint reconstruction grew by 7%; and our trauma business grew over 30% due to the impact of the Hand Innovations acquisition.

Mitek, our sports medicine business, grew 24% operationally with strong growth in anchors, tissue management, and knee products, complemented by the incremental sales due to the acquisition of FMS.

Ethicon worldwide sales grew operationally by 6%, with the U.S. sales up 9% and sales outside the U.S. up 3% on an operational basis. Challenges within many European healthcare systems continue to impact growth outside the U.S. On a worldwide basis, the wound management division with Ethicon had solid results in the third quarter due primarily to the growth of the hemostasis product line. [Oral] surgicals, meshes, and women's health products all achieved strong double-digit growth in the quarter.

Ethicon Endo-Surgery achieved operational growth of 13% in the third quarter of 2006, with the U.S. and international markets growing at a similar rate. The Endo-Cutter, a key product in performing bariatric procedures, grew nearly 20% operationally and was a major contributor to the growth.

Very strong results were achieved in the energy business, paced by sales of the HARMONIC SCALPEL growing 25%. Advanced sterilization products also achieved sales growth over 20% due to a combination of new product introductions and an increased demand for consumables due to the expanding installation base. All regions achieved double-digit growth in the quarter.

The LifeScan franchise achieved operational growth of 7% in the third quarter of 2006. Sales in the U.S. grew 9%, with the acquisition of the Animas business contributing the majority of the increase. Sales outside the U.S. grew 6% on an operational basis due to the success of the OneTouch Ultra. In the third quarter, OneTouch Ultra Mini was approved and launched in the U.S.; and the UltraEasy, the European version, was launched in various countries in Europe. Both systems offer accuracy and ease of testing at a lower retail price.

Ortho-Clinical Diagnostics sales grew on an operational basis 4% in the third quarter, with the U.S. sales up 3% and sales outside the U.S. up 5% on an operational basis. Solid growth was achieved in the clinical laboratory sales both in the U.S. and international markets.

Lastly, in the Medical Devices and Diagnostics segment, our Vision Care franchise achieved operational sales growth of 12%, with sales in the U.S. up 10% and sales outside the U.S. growing 13% operationally. Growth for the franchise was driven by the global success of ACUVUE OASYS and ACUVUE ADVANCE for astigmatism. Additionally, outside the U.S. 1-DAY ACUVUE MOIST and 1-DAY ACUVUE DEFINE made very strong contributions to the growth in the quarter.

That completes highlights for the Medical Devices and Diagnostics segment and concludes the segment highlights for Johnson & Johnson's third quarter of 2006. I will now turn the discussion over to Bob Darretta for some additional comments. Bob?

Thank you, Louise. Good morning, ladies and gentlemen. Let me give you some additional color and details on our third-quarter performance. I will start with net cash. We ended the third quarter with $12.4 billion of net cash. This was an increase of $300 million during the quarter.

We accomplished this increase while repurchasing approximately $2.2 billion of stock during the quarter, effectively completing the previously announced $5 billion general-purpose share repurchase program. On a year-to-date basis, excluding the effect of the repurchase program, we have improved our net cash position by a very strong $3.9 billion.

Turning to interest income, in the third quarter we enjoyed interest income of $194 million, as contrasted with $101 million in the third quarter of '05. As Louise has already mentioned, the year-to-year gain is primarily attributable to the higher interest rates being earned on our cash holdings as well as the increase in our cash balance.

Excluding any impact from the acquisition of the Pfizer Consumer Healthcare business, I would recommend that you plan on total-year interest income in the 700 to $750 million range.

Turning to other income and expense. By the way, a little reminder, this is, of course, the account where we record our royalty income, as well as onetime gains and losses such as litigation settlements, Johnson & Johnson Development Corp. gains and losses, asset sales, etc. This quarter, we recorded a net loss of $45 million as contrasted with a net gain of $63 million in the third quarter of last year. This year-to-year unfavorable comparison of $108 million was due to additional product liability reserves provided during the quarter.

This account, of course, by its nature is difficult to forecast. But [basically saying] a review of our historical performance and the nine-month activity, we would recommend that you model a full-year net gain of 150 to $200 million. Of course, this guidance excludes the Guidant termination fee, some $622 million, which was recorded in the first quarter and has been treated as an extraordinary item.

Turning to the tax rate, as shown in the black box section of our consolidated statement of earnings, excluding the impact related to IPR&D and the Guidant acquisition termination fee, we achieved an effective tax rate of 23.9% in both the third-quarter and the first nine-month periods. For modeling purposes, we would recommend that you model a similar rate for the full year.

Turning to sales guidance and beginning with currency, obviously, we can't predict future movements in currency rates, but we can tell you that basis rates as of the end of last week, currency would add approximately 2% to the fourth-quarter growth rate and add approximately 3/10 of a percent to the full-year growth rate.

Operational growth. We anticipate fourth-quarter operational growth rates to be similar or modestly improved upon the third quarter 6.7% rate, yielding full-year operational growth between 5.5% and 6%.

A word on full-year earnings guidance. We are pleased that during the third quarter, as a result of both the improved sales growth and solid cost controls, that we were able to achieve double-digit rates of growth in both pre- and after-tax earnings. Excluding any effect associated with the Pfizer Consumer Healthcare acquisition, we remain on track to meet our earlier guidance of full-year EPS growth in the 8 to 10% range, which implies EPS ranging between $3.65 a share and $3.72 a share.

Indeed, in light of the strength of the quarter's performance, we would be comfortable with EPS estimates in the $3.72 to $3.74 range, which implies full-year growth of 9 to 10% and double-digit EPS growth in the fourth quarter.

Finally, a word on the PCH acquisition. Preparations for the completion of the transaction and integration of the businesses are proceeding very well. Steps to receive regulatory approval are progressing as planned. Buyers for assets that may need to be divested have been identified and contracts negotiated. The design of the merged Consumer organization is well underway. We are pleased to report that we have been very successful in retaining executive talent from both organizations.

Our work has also enabled us to confirm our earlier estimates of expense synergies and the anticipated dilution. At this point, we are anticipating closing the transaction sometime between December 15 and the end of the year. We would anticipate that the impact on '06 earnings will vary between essentially no impact in '06, and as much as $0.02 dilution, depending upon both the timing of the closing itself and the timing of the related potential asset sales.

As you have heard, our updated '06 guidance has not incorporated any impact from the transaction; but we will, of course, provide visibility as to the actual impact during the January analysts meeting. That concludes my comments, and let me turn the program back to you, Louise.

Thank you, Bob. Elizabeth, we would like to open the call to questions now.

(OPERATOR INSTRUCTIONS) Rick Wise with Bear Stearns.

Before I ask a question, I feel like I have to take just a minute and say a brief thank you and I hope just a temporary goodbye to Bob Darretta, as he gets set to retire. I also want to make sure, Bob, that you know how much you are appreciated and how much you'll be missed by I suspect everyone listening in to this call.

I just think your direct, (indiscernible) generous approach to communicating about J&J has made it a total pleasure to work with you. So thanks a lot. My first question is, why now and why so early?

Gee, if I had known there was that much love and support, I might have changed my decision.

It's not too late.

As you know, by the time I retire next year, it is going to be nearly 39 years with Johnson & Johnson, a very full career and time to move on to something else and give the exceptional talent that we have here at Johnson & Johnson an opportunity to contribute in even more important ways. So thank you for those comments, Rick.

Turning to a couple of FDA issues, can you just update us on the status of paliperidone ER and the CYPHER or Cordis warning letter issues? Just give us some perspective there.

Okay. As you know, (technical difficulty) we had anticipated, we did receive an Approvable on paliperi. We will respond to the FDA; I think our schedule is by the end of this month, Louise.

Yes.

As you probably know, there are no new studies that are required as a result of the questions that were raised. So we are quite hopeful that we will have a very quick turnaround from the FDA. But of course, that depends on the FDA.

I think they can categorize this as either something that would be a fairly short response time; I think two months would be the schedule. Or they could choose to consider it more significant and turn it into a six-month response time. We are very hopeful that they will consider it along the two-month timetable.

On the warning letter for Cordis, we were pleased to see the carotid approval, Rick. That is, I think, a good sign in terms of growing confidence in our quality systems. Unfortunately, there has been no news with regard to a schedule for when the FDA will be visiting our San German facility. We are prepared; but of course, it depends on the availability of the FDA.

I'm sure they are going to be able to accommodate us in a reasonable timely way. But we have no clarity as to the specific timeline.

One last quick one. Louise, you mentioned stent ASPs were down. Perhaps you could give us some sense of where they were U.S. and O-U.S. in the quarter. Thanks so much.

Okay, the U.S. ASP was $2250; and outside the U.S., it is about 15 to 20% lower than the U.S. price.

Thank you so much.

Next question, please.

Mike Weinstein with JPMorgan.

Bob, we certainly echo Rick's comments relative to your plans for retirement and hope you enjoy it as much as we have enjoyed working with you.

Thanks, Michael.

Let me start with a couple pipeline questions I was hoping we could get an update on, since the second-quarter meeting. You touched on paliperidone, but you have a bunch of filings that are coming up over the next several months. If you could just tell us whether those are still on track.

And a couple which we have seen data on during the third quarter, first, I would ask the two antibiotics, doripenem and ceftobiprole. Then the other one I would ask about would be YONDELIS.

All right, on the two anti-infectives, I think the guidance we had given was filing in '07. We continue to make good progress. If anything, the timeline looks like it is modestly accelerated, and we would guide you more towards filing in the first half of '07.

YONDELIS, I am not aware of any new information as to the schedule. Any news there at all, Louise?

No, it's still the projected filing is in 2007. We will file based on Phase II data once we have the Phase III trial under way for soft tissue sarcoma. Ovarian cancer is in Phase III already.

Got you, okay. Then two others I would just throw in there would be TMC125 and then paliperidone palmitate. Are both of those on track for '07 filing?

Yes, both on track.

Okay, great. Thank you.

Katherine Owen with Merrill Lynch.

Bob, I guess you're going to have to hear this from everybody who comes along, but (multiple speakers) on our end as well. I just was wondering if you could spend a little more time on SG&A; specifically the details of the cost-containment, because there was a lot more leverage in the quarter than we expected. Presumably that is part of the fourth-quarter upside. What is going on there? How sustainable are some of the year-over-year improvements, please?

Yes, I think it is broad-based, but I would say most significant within our pharmaceutical business. Obviously, they have responded to some of the softness in sales that came about as a result of generic competition and some of the disappointments with EVRA and NATRECOR by reexamining their cost structures.

They have taken, I think, a very comprehensive approach, very thorough approach. That was largely implemented in the middle of this year. We are now beginning to see the benefits associated with the actions that they have taken. So that is the real driver.

Yes, these are not one-time actions, but rather very well thought out program; and therefore, I do think these savings are sustainable.

Great, thank you. Then just a question on the stent side of the business. You talked about seeing a plateau of penetration rates. Given some of the safety concerns that have come out, any thoughts about what you expect over the next quarter or two, whether it's U.S. or Europe, in terms of any reversion back to bare metal?

What we have seen is some modest reduction in penetration in the U.S. during the quarter. We have seen a plateauing in terms of the penetration rates in Europe. So we are not seeing further inroads of the drug-eluting stent technology.

I think the key is going to be making more and more of the data regarding late stent thrombosis with both drug-eluting stents and bare metal stents more available and more transparent. We are looking forward to the TCT meeting where data will be presented. We are looking forward to the FDA panel.

I think transparency is, in the end, critical to making sure that these products are used properly. So I think that is going to be the key. Hopefully as that data becomes available, we will see people gain the confidence in the technology and continue to use it appropriately.

Great, thank you.

Bruce Nudell with Sanford Bernstein.

Bob, I had a question for you. We noticed that a letter was sent to IMPAX saying that the lawsuit regarding CONCERTA wasn't on the table any longer. We always thought the Citizens Petition had merit. Do you feel that we could count on CONCERTA through 2007 and perhaps longer, either based on the Citizens Petition and/or your patent position?

Louise, I just missed that O-U.S. pricing on CYPHER, if you could repeat that; I'm sorry.

I will do that one first. It is about a 15 to 20% discount versus the U.S. price, depending on which region you are in.

Thanks so much.

Bruce, our confidence in the sustainability of CONCERTA continues to increase. We believe that, as we have stated earlier, that the Citizens Petition raised very important issues regarding equivalence of clinical effect.

And the -- we also believe that our intellectual property, with regard to the way the drug is delivered over the course of the 24-hour period, makes it very difficult for other companies to provide equivalent clinical benefits to CONCERTA without violating our intellectual property. So yes, our confidence with regard to holding on to CONCERTA remains intact.

Thanks so much.

Matthew Dodds with Citigroup.

Just a couple questions. First, for Louise, the CONCERTA growth, you gave the total number. Can you break out just U.S., O-U.S. growth?

We actually have not broken that out historically, but the CONSTA sales are about 40% in the U.S. and 60% O-U.S.

All right, thanks, Louise. Then also for TOPAMAX, you mentioned generic competition O-U.S. It's not a huge product O-U.S.; but did that just hit? Or has that been an issue for a couple quarters and now you are really starting to see the impact?

It's actually in Canada, and it has been for most of this year. It is a very small impact, though.

Okay. Then finally, for the $130 million rebate benefit, it seems like the vast majority of that was in contraceptives. That is correct, right?

No, I think the way Louise described it was a $130 million reduction in the reserve that had been established in the first six months of this year for rebates. It was across a wide range of products. So no, you shouldn't associate it with an individual product.

Indeed, I think the only individual product that had any sort of appreciable effect on the year-on-year growth rate was TOPAMAX. Louise?

Correct.

I think Louise cited a percentage that had contributed towards TOPAMAX.

Right, in the U.S. TOPAMAX grew 33%; and if you exclude the impact of these two reserve adjustments, it would be 24%.

Okay, thanks, Louise. Thanks, Bob, and congratulations.

Glenn Reicin with Morgan Stanley.

Several questions on this $130 million reserve rebate benefit. Is that just a reduction in rebates, or is that a reversal of rebates?

It is a reversal of a reserve that had been previously established. But obviously, we continue to give substantial rebates. It is just that the rate at which we are giving them is lower than we had provided for.

Sure. What should we expect in Q4?

We think that we have gotten the reserve to the appropriate level.

Okay. Then if you were to weigh the bottom-line benefit of that reversal against the product liability increase, I know you never really want to tell us about that other income line and how big these reserves are. Can you give us a sense of the relative contribution?

Well, I think the other income, other expense year-on-year change was $108 million. That is entirely attributable to the product liability reserve. So that adjustment was actually modestly in excess of that $108 million account in that line on our income statement.

Okay, so that is pretty much a wash, those two one-timers?

Yes, pretty much.

Just to push a little bit on two other issues. The benefit of MMA on RISPERDAL and TOPAMAX I think has been significant this year as you are taking patients out of the Medicaid program and putting them into the Medicare program.

How should we view the impact going forward, now that we have annualized the impact -- sorry, in the fourth quarter?

Yes, I think you're right. If you look at Medicare, obviously we have had some products that have been adversely affected by the steeper discounts that we have provided to gain reasonable placement on formularies. ACIPHEX might be an example of a place where we have had to be more aggressive with our pricing. An area where we have had some benefit would be RISPERDAL and TOPAMAX.

Once we are fully into the new pricing environment or the new method of reimbursement, you're right, we won't see the same type of change in these individual products on a go-forward basis. So yes, you shouldn't expect the pricing to suddenly decline; but we have a new base from which we will work, and you will see natural competitive forces influence those prices over time.

And that would start in Q1?

I would say start in Q1.

Okay, then finally, obviously, a lot of us are very sad to see you go, here. But there has been very little discussion about another departure that took place this week in senior management. I'm just wondering whether we should expect more as we near that year-end process.

Well, I think you are talking about -- you're referencing Bill McComb and leaving as worldwide chairman of our orthopedics business, right?

Yes.

We were obviously very sad to see Bill leave. He is a very talented executive, and I'm sure he is going to do very well in his new position. We have a lot of talented people at JNJ. On an interim basis, Mike Dormer will be more personally involved in our orthopedics business until he names a successor for Bill and that individual gains his footing or she gains her footing in the business.

So it is a natural part. It is rare for us to see a senior executive leave midcareer. It is a natural part of business at Johnson & Johnson to see senior people reach the end of their careers and move on to other things. So -- but we have a (multiple speakers) -- pardon?

What does that mean for the remainder of the year with respect to other departures?

Normally, our departures are people who retire -- occur early in the year, after the year has been completed. There is not going to be anything out of the norm in terms of people leaving Johnson & Johnson. In each case, I'm sure the succession plans have been well attended to.

Okay, thank you.

Larry Keusch with Goldman Sachs.

Louise or Bob, could you guys, perhaps, just give a little color on hip and knee growth? Maybe reported or constant currency, whatever you have available.

Then maybe, Bob, if you could talk a little bit about how you guys are thinking about the pricing environment on a go-forward basis, now that we're coming into sort of that 4Q negotiating period.

Okay, I will do the knee growth. In the U.S., on an operational basis all these numbers, was 6%. International it was down 2%, for a total of 3%.

Hips grew 13% in the U.S.; 10% internationally; and 12% in total.

I think, Larry, that we expect that pricing is going to -- the environment is going to remain challenging. I think that people are becoming more and more mindful of negotiating competitive prices. Therefore, I would say, business is as it has largely been.

Perhaps there has been a little bit of an aberration with the movement into Medicare Part D; and it has affected different products in different ways. I think we are getting comfortable with the new environment. I think that we will continue to see a very competitive pricing environment on a go-forward basis.

Okay, then just one other question. I may have missed this, Louise, in your prepared comments. But anything new to note in dapoxetine and what you guys are doing there?

No, still on target to file in 2007. Still in the process and completing the trials, so it's still no new news.

Okay, great. Thanks very much. Bob, enjoy your time off from J&J.

Thank you.

Bob Hopkins with Lehman Brothers.

Could you, Louise, please give us the same information you just gave for hip and knees; but for spine, specifically? Would you have that?

Certainly. Spine on an operational basis in the U.S. is down 5%; internationally up 10%; for a total of down 2% on an operational basis.

Okay. Then I know it is early, but I was wondering if you could comment on the launch of PREZISTA at all, your new HIV compound.

Yes, Bob, it is early days. What I will tell you is we are getting a very enthusiastic response from the medical community, and that has been uniform.

The commercial pickup has been modest, so far, as you would expect in the treatment of a disease where you won't move people off their current treatments unless you have good reason to do so. So we are very confident in the success of the product, but we think the build will be a gradual one.

Okay, thank you, and my congratulations as well.

Thanks, Robert.

Tao Levy with Deutsche Bank.

Just two quick questions. On IONSYS, I think the launch is scheduled for next year. We were just -- you recently (indiscernible) one of those major medical conferences, and there was a huge presence for this product prelaunch. I was just wondering what is taking place between the approval and the launch; and if you can just update us on the timeline of the launch.

I'm not particularly close to that. I do know that, of course, this past year has been about refining the manufacturing process and putting the necessary capacity in place. The last update I had was that they are making good progress. But I'm not particularly current.

Okay. Maybe if you could comment on the inventory shift in REMICADE, O-U.S. Is that just a one-quarter phenomenon? Or are we going to see a couple more of that?

Well, no, we don't anticipate that -- if we are going to see more of it. Ultimately, they come back in line. The fact that it is -- their purchases from us have been higher than the rate at which they are selling it through to the end-user means inventories are building. We don't expect that pattern to continue. So we should begin to see their purchases from us mirror the third-party sales rates.

Just the last one, any thoughts on another stock buyback, now that you have completed the last one?

We haven't made any decision regarding a further stock buyback. It will, of course, be dependent upon other uses that we have for our cash. The next one is going to be, of course, the completion of the PCH transaction, which is a substantial transaction. So we will wait till we have that behind us; and then we will look at what we should do on a go-forward basis.

Thanks, and I will echo my congratulations as well on your retirement.

Thanks very much.

Larry Biegelsen with Prudential.

Just a couple of quick ones. Were there any inventory builds on the pharma side in the U.S.?

Nothing of a material nature. It was all within normal noise; and it varies product by product. Some a little bit of bleed, some a little bit of build, but nothing of a material nature in the quarter.

Does the new tax guidance include the R&D tax credit?

No, it does not.

Lastly on drug-eluting stent penetration, could you talk a little bit about Japan and if you have seen any impact in that market?

I don't have the -- my impression was that it is stable in Japan, is the latest information I have. So we hadn't -- I think we had seen penetration level off earlier. It hasn't moved as a result of the issues around late stent thrombosis. That has not been a phenomenon in Japan, so it hasn't affected the use of drug-eluting stents.

Thanks, Bob, and congratulations.

Thank you.

Sara Michelmore with Cowen and Company.

I just wanted to make a clarification on PROCRIT. Louise, you talked a little bit about the price volume dynamic in the U.S. and internationally. The U.S. number looked like it had deteriorated from the first half in the U.S. against what I thought was an easier comparison. Is there a worsening of the price environment, or a moderation of the volume in the U.S.? How would you interpret the change relative to the first half of the year?

I think -- I don't have first-half stats right in front of me. What I can tell you is that market is -- at least on a constant price basis, market is continuing to grow. I think the last estimate I saw was 12 to 13% type growth in the market.

We, as Louise has pointed out, have lost some share, and so our units have declined. I think we commented that PROCRIT was down approximately 9% in dollars versus the same period a year ago. That is pretty evenly split between a price decline and a unit decline. That unit declined is occurring because of market share erosion.

Okay. No appreciable change in the pricing dynamic, then?

I think the rate of price decline may have intensified just a bit. But as I said, it's something like a 4.5% versus the prior-year price decline, which may be just a tad steeper than what it had been.

Okay. Should we be looking for any improvement in the price or the volume environment there? Or should we continue to look at this as sort of a moderate decline?

I think we should really wait and see what the outcome is of the litigation that we have initiated. As you know, this is really a reflection of what we think is anticompetitive actions on the part of our competitor. So we are looking forward to hearing what the judge's point of view is. We should hear that over the next six weeks, eight weeks.

Okay, that is sound. That is great. That is extremely helpful. Any update on CHARITE and the discussions with CMS, or the potential prospects to get that covered more broadly?

Nothing that we haven't reported previously.

Right, and we are waiting for five-year data which should be in the first bit of 2007. We think that is critical, at least, for the private payers.

That's great. I hate when analysts beat a dead horse on these Q&A during these calls. But Bob, I also wanted to extend my best wishes to you. Thank you.

Thank you. No more references to a dead horse, here, please.

David Zimbalist with Natexis.

I was curious if you could talk a little bit about the -- what is going on in the hormonal contraceptives business. The scripts for EVRA have plummeted, clearly. I'm just curious to know if anything else is offsetting this; or if this also falls into the category of some of the rebate changes; and what we should expect going forward in the total hormonal contraceptives (indiscernible)?

Yes, I think clearly the year-on-year declines are a reflection of the decrease in the use of EVRA. As you know, there were safety concerns earlier in the year. There has been publicity at several different times during the year. Each time there has been publicity, it has further eroded the use of the product.

That has been somewhat mitigated by continued growth in our low product. I think as we are into the fourth quarter, our comparisons will become much more favorable and we will see this product go neutral -- or this category go neutral, and then return to growth.

Is there anything in pricing of products like low that have helped offset the volume and I presume somewhat price decline in EVRA?

No, I'm not aware of it. I think it is -- obviously one of the benefits of low is exactly the reason that some people are choosing not to use EVRA, a desire for lower levels of estrogen.

Okay. Second question, on dapoxetine, could you remind you of some of the key incremental data you are looking for out of the latest trial?

What we're looking to complete the trials, which are basically outside the U.S., and that is what we are waiting for, is those results. Then we will meet with the regulatory agencies; again, still on target with the 2007 filing.

Is there any additional type of information you are looking for out of the O-U.S. trials? Or is it just more an issue of time and people?

I think it is just expanding the database. Remember the issue here was to try to make it clear that this is not a lifestyle drug; that this is treating a very serious condition.

Every drug has some level of side effect, and so the agency needs to be comfortable with the benefit in relation to the risks associated with the side effects. So the more data that we have that demonstrate that the side effects are minimal and manageable, the better chance we have of making a case to the agency that the benefits warrant the risk associated with any drug.

Okay. The last question, product liability reserve. Was there a specific, single product that we're talking about here? Is it more broad? Is it series of pending settlements? Could you give us some color on that?

As you might imagine, one of the things that we do is we do an actuarial analysis of all of our product liability issues across our full product range. And when we see patterns that require an adjustment to the reserves, we adjust them accordingly.

So it was a comprehensive review not associated with an individual product.

Okay, and is this something you do every quarter and it just so happened this quarter with the changes, or is it something that is done less often?

Well, we do it periodically. It is not done quarterly, but we will redo the analysis if we see any flurry of activity in an area that makes it appropriate for us to confirm that our reserves are as they should be; or if not, adjust them.

Okay, thanks. Bob, congratulations. It has been a pleasure.

Thank you.

Marshall Gordon with Credit Suisse.

Thank you, very much. One of my questions was answered. I just wanted to find out whether or not you have a large meeting planned for paliperidone this year or next year.

I don't know. I try to stay on top of the business, but I'm not quite that close to knowing whether or not we have launch meetings planned for the individual products. I can't help you on that one.

All right, thanks.

We have time for one more question.

Glenn Novarro with Banc of America.

Hi, good morning, everyone. Bob, any chance that you'll be at the analyst meeting in January, so we can all say goodbye in person?

Well, I will still be with J&J in the first part of the year. I'm not sure whether I will attend that session. I think it is probably more appropriate for me to give some space to Mr. Caruso, who is going to do an outstanding job.

Well, if Dom is on the line -- Dom, you have got big shoes to fill. I will say congratulations and good luck.

My questions have to do with just some of the potential generic risks and some litigation that is pending. First on RISPERDAL, that patent expires at the end of '07; and you're going to seek a pediatric extension. Has that been filed? Have you gotten the pediatric extension? That is my first question.

Second, on TOPAMAX, there is a patent challenge there. Can you give us any update?

Then lastly, DITROPAN XL. Citizens Petition, anything new there?

Nothing new on the DITROPAN XL Citizens Petition. Then TOPAMAX, didn't we recently have a --?

A hearing on the preliminary injunction.

A hearing on the preliminary injunction, so we will wait to hear the judge's decision in that area.

You are right, we are going to seek the pediatric extension on RISPERDAL, but I'm not sure that we have filed that as of yet.

When will that file? Should we assume that goes into the FDA second half of next year?

It will be in 2007.

Okay. When do we hear on the hearing regarding TOPAMAX? I think the general consensus is that you should win the preliminary injunction there. But when do we hear something (indiscernible)?

It is it very difficult to predict. Sometimes we get very quick responses, sometimes they drag on. But I think it would be reasonable to expect that we're going to hear later this year.

Okay, great. (multiple speakers) Take care.

Thank you. Well, that concludes the conference call. We are, of course, very pleased with our third-quarter performance. We are very pleased that we're able to, basis the strength of the quarter, enhance our full-year guidance.

As always, we appreciate your interest in Johnson & Johnson. We look forward to seeing you in person -- or at least Dominic and Louise look forward to seeing you in person in January. Have a great day. Thank you.

Thank you. This concludes today's Johnson & Johnson 2006 third-quarter earnings conference call. You may now disconnect.