嬌生 (JNJ) 2006 Q4 法說會逐字稿

Good morning and welcome. I am Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson and it is my pleasure this morning to review our business results for the fourth quarter of 2006.

With me on the podium are our hosts for today's meeting, Bill Weldon, Chairman of the Board of Directors and Chief Executive Officer of Johnson & Johnson; Christine Poon, Vice Chairman Board of Directors 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 broader audience via a webcast (indiscernible) through the Investor Relations section of the Johnson & Johnson website. I will begin by briefly reviewing highlights of the fourth-quarter and full-year results for the Corporation and fourth-quarter highlights for our three business segments.

Following my remarks, Bill Weldon will briefly comment on the 2006 highlights and review some of the major growth strategies in each of our segments. At the completion of Bill's remarks, Dominic Caruso will provide some additional commentary on 2006, as well as 2007. We will then open the floor to your questions. Since Bill Weldon is our host today, I encourage you to address your questions to him on more strategic issues. We will conclude our formal presentation at approximately 9.30 and following Q&A, with some final remarks by Bill, we will conclude the meeting at approximately 10 a.m.

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

Before I get into the results, let me remind you that some of the statements made during this meeting 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 meeting. 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 meeting, 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 fourth quarter of 2006. Late in the quarter, we announced the completion of the acquisition of Pfizer Consumer Healthcare. Since the transaction closed in the final days of the year, the sales of Pfizer Consumer Healthcare were not included in the consolidated operating results of Johnson & Johnson as such amounts were not significant to total results.

If you would refer to your copy of the press release, let's begin with the schedule titled Supplementary Sales Data. Worldwide sales to customers were a record $13.7 billion for the fourth quarter of 2006, up 8.5% as compared to the fourth quarter of 2005. Our operational growth was 6.2% and currency contributed 2.3 points.

If you now turn to the schedule showing sales by geographic area, you will see that we achieved growth of 6.4% in the U.S. while sales outside the U.S. grew by 11.2%. In regions outside the U.S., operational growth was 6% while the effect of currency exchange rates positively impacted our reported results by 5.2 points.

Our strongest performing region was the Western Hemisphere, excluding the U.S., growing 11.2% on an operational basis. The Asia-Pacific Africa region grew by 6.6% operationally while Europe grew 4.1% operationally.

If you will now turn to the consolidated statement of earnings for the quarter, our net earnings on a GAAP basis for the fourth quarter of 2006 were $2.2 billion and earnings per share were $0.74, increases of 3.5% and 5.7% respectively.

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 have been adjusted to exclude the after-tax impact of in-process research and development of $217 million associated with the acquisition of Pfizer Consumer Healthcare. The 2005 results have been adjusted for after-tax IPR&D of $6 million. Net earnings for the fourth quarter of 2006, excluding IPR&D, were $2.4 billion and earnings per share were $0.81, up 13.5% and 15.7% respectively.

I would now like to make some additional comments relative to earnings before we move on to the segment highlights. Cost of goods sold at 29.3% is up 40 basis points as compared to the same period in 2005 due primarily to unfavorable product mix.

Selling, marketing and administrative expenses at 34.3% of sales is a 250 basis point improvement as compared to 2005 due to continued focus on strong cost control across a number of our businesses. Additionally, the year-on-year comparisons have been impacted by the aggressive investment spending on advertising and promotions in the fourth quarter of 2005.

As a percent of sales, the investment in research and development is 15% for the fourth quarter of 2006, 100 basis points lower than the same period in 2005. The very modest increase in spending in the quarter of 1.6% versus the prior year is due primarily to the timing of milestone payments. For the full year, R&D spending is up over 10%. Interest income net of interest expense increased by $26 million from the fourth quarter of 2005 to $195 million. This year-to-year growth is primarily due to higher interest rates.

The increase in expenses shown in other income and expense in the fourth quarter of 2006 as compared to the same period last year is due primarily to the integration costs associated with the acquisition of Pfizer Consumer Healthcare and the write-off of certain assets.

With regard to taxes, please direct your attention to the effective tax rate shown in the boxed section of the schedule. In the fourth quarter of 2006, taxes were 21.2% as compared to the prior year rate of 16.4%. Dominic will provide further comments on taxes during his remarks.

Now if you'll turn once more to the schedule, Supplementary Sales Data, please direct your attention to the 12-month information. Worldwide consolidated sales to customers for 2006 were $53.3 billion, an increase of 5.6% over sales of $50.5 billion in 2005. Operational growth was 5.3% with an additional 0.3 points attributable to currency.

Now turning to the consolidated statement of earnings for the full year. In 2006, on a reported basis, we achieved earnings of $11.1 billion or $3.73 per share compared with $10.1 billion and $3.35 per share in 2005.

Let me again direct your attention to the boxed section of the consolidated statement of year-to-date earnings. Excluding charges for in-process research and development, as well as the gain related to the termination of the Guidant acquisition agreement in 2006 and in 2005, the tax adjustment related to the American Jobs Creation Act, net earnings for 2006 were $11.1 billion or $3.76 per share, up 9.2% and 10.9% 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 grew 11.2% in the fourth quarter of 2006. Operational growth was 8.2% while currency contributed 3%. U.S. sales were up 5.2% while international sales grew 11.1% on an operational basis.

Our adult skin and hair care business continued to show solid growth with operational sales up 11% in the fourth quarter of 2006. In the U.S., sales were up 10% due to the very strong results achieved by AVEENO, Clean & Clear and RoC brands. Outside the U.S., operational sales growth of 12% was driven by strong results across the majority of brands and the addition of the Group Vendome productline. Baby and kids care products grew on an operational basis by 13% in the fourth quarter paced by operational sales growth outside the U.S. of 15% with the U.S. growing 8%.

The results outside the U.S. were driven by strong growth across all major brands, notably lotions and creams, cleansers, powders and hair care. In the U.S., strong growth was achieved in lotions and creams primarily due to the SOOTHING NATURALS products, the BUDDIES brand gift sets, as well as hair care products.

For the fourth quarter of 2006, sales for the McNeil Consumer business of OTC, Pharmaceuticals and Nutritionals were up 2% on an operational basis compared to the same period in 2005. Sales in the U.S. were flat with growth in upper respiratory products offset by lower sales in adult analgesics.

Sales outside the U.S. increased 8% operationally due in part to strong growth in SPLENDA, our no calorie sweetener. Women's health achieved operational growth of 5% with similar rates both in and outside the U.S. That concludes the Consumer segment commentary.

Next, I will review the Pharmaceutical segment results. Worldwide net sales for the fourth quarter of $6 billion were up 8.5% versus the same period last year. On an operational basis, sales were up 6.6% with currency contributing 1.9 points. Sales in the U.S. increased 8.3% while sales outside the U.S. increased on an operational basis by 3.5%.

As we have previously commented, our results have been impacted by generic competition on some of our products, namely DURAGESIC, oral contraceptives, SPORANOX and starting in the fourth quarter, DITROPAN XL. The combined effect of this generic competition has reduced the fourth-quarter worldwide Pharmaceutical growth rate by approximately 3 percentage points with an approximate 4 point impact on sales growth outside the U.S. and 3 point impact on U.S. growth.

PROCRIT/EPREX had a combined operational decline of 3% with PROCRIT down 9% and EPREX sales up 8% on an operational basis. Solid results for EPREX were seen across the regions. In Europe, the indication for once-weekly dosing and the recent restoration to the label of subcutaneous administrations were strong contributors to the growth.

PROCRIT sales continued to be negatively impacted by our competitors' anti-competitive contracting strategy in the oncology clinics. PROCRIT's share was approximately 43% in the fourth quarter of 2006 as compared to a 47% share in the fourth quarter of 2005.

ACIPHEX, as it is known in the U.S. market, and Pariet outside the U.S., is a proton pump inhibitor that we co-market with Eisai. Overall operational sales growth was flat with the U.S. up 5% offset by lower sales in regions outside the U.S., primarily Europe.

Let me now move on to discuss some of our growth drivers. RISPERDAL, our agent for psychotic disorders, had operational growth of 16% compared to the same period a year ago with the U.S. during 32% and sales outside the U.S. down on an operational basis by 2%. Sales in all regions benefited from the continued success with RISPERDAL CONSTA, our long-acting injectable formulation, achieving fourth-quarter sales of approximately $225 million, up nearly 30% on an operational basis. RISPERDAL ORAL achieved very strong growth in the U.S. while sales outside the U.S. declined on an operational basis due to the impact of generic competition in certain countries.

In the fourth quarter, we submitted data to the FDA to obtain pediatric exclusivity for RISPERDAL.

REMICADE, a biologic approved for the treatment of a number of immune-mediated inflammatory diseases, grew by 13% when compared to the fourth quarter of 2005. Growth in the U.S. was 11% while sales to our partners for markets outside the U.S. grew by 19%. Strong market growth in the anti-TNF category continues to be fueled by new uses such as psoriasis, psoriatic arthritis and ulcerative colitis. Total approved indications in the U.S. now number 14.

Sales of TOPAMAX, which is approved for the treatment of epilepsy and migraine prophylaxis, increased operationally by 27%. Sales growth in the U.S. was very strong at 35%. Migraine indication has been a key driver of growth. Sales outside the U.S. were flat.

Anti-infectives grew 10% operationally during the fourth quarter with growth in the U.S. of 9% benefiting from strong market growth. In the fourth quarter, we submitted data to the FDA to obtain pediatric exclusivity for LEVAQUIN. CONCERTA for Attention Deficit Hyperactivity Disorder grew 22% operationally in the fourth quarter with similar results both in and outside the U.S. Sales in all regions achieved very strong double-digit growth. That completes the highlights for the Pharmaceutical segment.

I will now review highlights for Medical Devices and Diagnostics segment. Worldwide, the Medical Devices and Diagnostics segment sales to customers were $5.2 billion, representing operational growth of 4.8% in the fourth quarter of 2006. Currency contributed 2.4 points to the sales growth to bring total growth to 7.2%. Sales in the U.S. grew 4.2% while sales outside the U.S. increased on an operational basis by 5.4%. In the fourth quarter, we announced the pending acquisition of Conor Medsystems with their unique controlled drug delivery technology.

Now turning to the franchises, starting with Cordis. Cordis' sales were down 6% operationally with the U.S. declining 7% and the businesses outside the U.S. declining 6% on an operational basis. Sales of CYPHER, our sirolimus-eluting stent, were lower than a year ago, partially offset by very strong results in our Biosense Webster business and our endovascular business.

CYPHER sales were approximately $580 million, down 15% versus the prior year due primarily to overall softness in the stent market. Sales in the U.S. of approximately $280 million were down 18% while sales outside the U.S. of approximately $300 million were down 12%. The softness in the market and lower prices have impacted the U.S. sales while increased competition and lower price have impacted the international sales.

CYPHER remains the worldwide market leader in drug-eluting stents with an estimated 48% marketshare. Marketshare in the U.S. held constant at an estimated 46% with CYPHER share outside the U.S. estimated at 51%.

As an update on the pipeline, the filing for [NXT] has been canceled as we focus our resources on the next-generation stent.

As I mentioned earlier, the Biosense Webster business had an excellent quarter with operational growth over 25%. Our endovascular business grew nearly 20% in the quarter driven by sales of newly launched carotid systems and the continued growth of the chronic total occlusion devices.

The reinspection of the San German, Puerto Rico site commenced in the fourth quarter and is expected to conclude during the first quarter of 2007. In January, the reinspection of the Warren, New Jersey site was initiated and successfully completed with no issues or observations. We believe San German is the last site requiring reinspection related to the warning letter.

Moving on to our DePuy franchise. DePuy sales grew on an operational basis by 6% with similar results both in and outside the U.S. Operationally, joint reconstruction grew by 5%. Our trauma business grew over 35% due primarily to the impact of the Hand Innovation acquisition. Mitek, our sports medicine business, grew 25% operationally with strong growth in anchors, tissue management and knee products, complemented by the incremental sales due to the acquisition of FMS.

Ethicon achieved worldwide operational growth of 5% in the fourth quarter as compared to the same period in 2005 with the U.S. growth at 3% and sales outside the U.S. at 6% on an operational basis. Growth was driven by strong double-digit increases in biosurgicals, meshes and women's health. Ethicon Endo-Surgery achieved operational growth of 7% in the fourth quarter of 2006 as compared to the same period in 2005. U.S. growth was 3% with operational growth of 9% outside the U.S.

Very strong results were achieved in the energy business paced by sales of the HARMONIC SCALPEL growing over 20%. Advanced sterilization products and the endoscopic productline also achieved solid sales growth in the quarter. LifeScan achieved operational growth of 12% in the fourth quarter of 2006 as compared to the same period in 2005 with similar results both in and outside the U.S. The acquisition of the Animas business and OneTouch Ultra have been the major drivers of growth.

Ortho-Clinical Diagnostics achieved operational growth of 11% in the fourth quarter of 2006 paced by the U.S. growth of 16%. International sales increased 6% on an operational basis. Solid growth was achieved in clinical laboratory sales both in the U.S. and international markets.

In the U.S., very strong growth was achieved in immunohematology driven by customer adoption of more automated testing methods. During the fourth quarter, 10 new assays were launched. Our Vision Care franchise achieved a fourth-quarter operational sales increase of 12% with the U.S. growing by 8% and the international markets growing a very strong 14%. Results were driven by the strong global success of ACUVUE OASYS with HYDRACLEAR PLUS and ACUVUE ADVANCE for astigmatism. Additionally, outside the U.S., 1-day ACUVUE DEFINE and ACUVUE MOIST achieved strong results.

That concludes the review of the results of the Medical Devices and Diagnostics segment and concludes the segment highlights for Johnson & Johnson's fourth quarter of 2006. It is my pleasure to now introduce Bill Weldon, Chairman and Chief Executive Officer of Johnson & Johnson. Bill?

Thanks, Louise. Good morning, everyone. We are here with you today to provide context for Johnson & Johnson's financial results for 2006 and share with you how we will drive growth and performance going forward. In our dialogue this morning I want to assure you that besides achieving solid revenue and earnings growth for 2006, we have continued to make the substantial investments required to keep our Company growing.

In the first part of today's presentation, I will illustrate for you how the strength of Johnson & Johnson's business will be enhanced by our management philosophies with an emphasis on being broadly based in human healthcare. I will touch briefly on the full-year performance of our Company, then I will do a deeper dive into opportunities that will drive growth for some of our key business segments.

Strong business results can only happen when a company possesses great people and great products. This morning, I want to give you a sense of the extraordinary nature of our markets, our people and our products.

Human healthcare is an exceptional business. It is the business of saving lives, restoring joy and well-being and keeping people healthy. Because our products and services bring such value, our markets are characterized by high demand, which is driven in part by demographics. This demand is also driven by advances in human healthcare made possible by innovation.

The science of health and well-being is evolving rapidly and so are the technologies that support science-based solutions. This means there are good business prospects for companies like ours that understand how to harness innovation and deliver it to the benefit of customers and patients.

Upward pressures on demand also create countervailing social forces. These forces impact all companies in our industry. On the left side of the screen, you can see factors that represent growth drivers for companies like Johnson & Johnson. On the right side, you can see the external forces that challenge these opportunities.

The test for any business is to find the right path to navigate these challenges, involve all stakeholders and achieve sustainable long-term results. At Johnson & Johnson, for over 60 years, our credo has directed us toward the responsibilities we have to a wide range of stakeholders; customers, patients, family members, employees, communities, and of course shareholders.

Viewed in the context of our sustained growth and our underlying strength, we have faced year-to-year challenges very successfully in the past and we will do so in the future. Who better than Johnson & Johnson to balance the needs of so many important constituents.

Serving so many stakeholders well requires above all else the dedication and commitment of thousands upon thousands of skilled people of character. At Johnson & Johnson, we have what may be the world's most diverse, talented, accomplished and expert employees focused on human health and well-being.

As you may remember from our past discussions, Johnson & Johnson is guided by four strategic principles. Our work is inspired by the shared values of our credo. The credo has been an integral part of who we are for over 60 years. We have remained broadly based in human healthcare ever since we diversified beyond strictly hospital products in the 1920s. We continue to operate under a decentralized approach and bring the best of two worlds together; entrepreneurial company spirit, agility and closeness to our companies and the resources and know-how of a Fortune 50 company.

Finally, we manage for the long term by building sustainable leadership positions in rapidly growing business segments. Together, these principles create a winning formula for delivering superior performance over the long term.

You have heard us describe Johnson & Johnson as being the most broadly based company in human healthcare. Let's talk about why this is such a powerful platform and why it brings us strategic advantage.

When I refer to the breadth of our Company, I am not only referring to our product portfolio, but also to our geographic reach. This is important because geographic breadth strengthens us and enhances our growth opportunities. Being broadly based has helped deliver consistent and strong performance to Johnson & Johnson's shareholders. When one portion of our business or one region of the world has been growing vigorously another may require stepped-up investment for future growth.

You can see here the exceptionally consistent performance we have delivered over the long term. In 2006, we achieved our 74th consecutive year of sales increases, our 23rd consecutive year of earnings increases and our 44th consecutive year of dividend increases. Overall, an extraordinary long-term record that few, if any, can match.

So our breadth helps us to sustain consistent performance, but what is even more important is that breadth allows us to elevate our performance. Let me explain what we mean by this. First, breadth allows us to capitalize on the most attractive business opportunities in human health. We have powerful vantage points through our closeness to professionals and customers. These vantage points allow us to identify and rapidly enter high-growth market segments.

Closeness to our customers extends to virtually every healthcare market and geographic region. Through our relationships, combined with our financial strength, we have the flexibility to be opportunistic in terms of the markets we develop ourselves, the products we license and the companies we acquire. Given our broad portfolio, we are disciplined in nurturing our most promising businesses while pruning and paring those that have become less attractive.

Close knowledge of customers and markets gives us first-hand insight into those seed investments than can grow into large businesses over time. In this slide, you can see some of the companies we have nurtured this way. Each started as a seed investment or acquisition. Today, if you add together the revenues from these companies alone, they represent nearly one quarter of our annual turnover.

Currently, we are investing in four internal ventures, promising geographic markets like China and Russia and a number of start-up companies. By contrast, as our businesses become less valuable, we are disciplined in shedding them to free resources for better growth opportunities.

Over the past five years, we made divestitures of 10 businesses with sales exceeding $600 million. Johnson & Johnson refines itself continuously through this process of investing and divesting.

The strategic transfer of knowledge and capabilities is another advantage of Johnson & Johnson's breadth. Our corporation is strengthened by our ability to transfer our strong leadership, our technology and our knowledge within and across business segments. CYPHER is one example of this and from the consumer segment, our AVEENO products, which draw from our strong science expertise and our deep knowledge of consumer needs.

Our MDD group has been drawing expertise from our Consumer group and direct-to-consumer advertising. In addition, we have been successful at establishing targeted centers of excellence within our organization. For instance, we established a center for biomaterials and other advanced technologies that draws on our historical expertise in suture, mesh and polymers. They are taking us into newer categories like advanced adhesives, sealants and regenerative materials.

In our internal ventures unit, we nurture attractive new platform technologies and in a venture capital style framework. We have been able to establish a center for advertising excellence and media buying. This gives us the best possible value for Johnson & Johnson's large global advertising spend.

Increasingly, breakthrough innovations occur by careful integration of multiple technologies. Our people are accustomed to working across business boundaries to incorporate technical breakthroughs on behalf of customers. This can pave the way to unprecedented opportunities.

An excellent example is PREZISTA, our recently launched protease inhibitor for treatment-resistant HIV. PREZISTA was designed based on results of diagnostic tests shared between Virco, one of the Johnson & Johnson diagnostic companies and Tibotec, one of our therapeutics companies.

Virco performed diagnostics, which charted the many types of resistant HIV strains around the world. Tibotec used this information to develop a molecule that could inhibit the most prevalent global resistant HIV strains. Experts from our Janssen Pharmaceuticals unit also participated in the development of this compound, which as you know was approved in the United States this past June and we expect to gain approval in Europe this year.

As another example, consider our work with retinitis pigmentosa, a form of retinal degeneration. This is an early-stage example of cross-fertilization and convergence where four Johnson & Johnson units have come together to treat this genetic eye disease. Retinitis pigmentosa usually leads to blindness and has no currently approved treatment.

VISTAKON always had exceptional understanding of the human eye. For this program, VISTAKON joined with Centocor for its understanding of biotechnology and with Ethicon for its expertise in sourcing biomaterials. Together, the three operating companies collaborated, along with our internal development corporation and completed an IND filing in December. This potentially will bring VISTAKON into an entirely new business category. These are two significant results from the continuing collaboration taking place across our broad base of businesses.

The rapid growth in demand for health products and services in developing nations creates unprecedented geographic expansion opportunities, especially for companies with an active presence in many markets. Our operations in over 175 countries, plus our decentralized approach to management, means that Johnson & Johnson is ideally suited to capitalize on global expansion and healthcare products and services.

We are also able to leverage our scale by applying our resources most efficiently. For example, in shared services like finance and IT, we increasingly standardized to facilitate organizational effectiveness and to improve our cost infrastructure, thus freeing up resources for other uses.

In summary, being broadly based is a cornerstone of our success and will amplify our growth going forward. Breadth is not only a driver of consistent performance, it is a strategic advantage. It elevates our performance to best address the health and well-being of people around the world.

Now let's turn to our financial highlights. We continue to grow our business and importantly make the investments necessary to build for the future. In 2006, we invested nearly $25 billion in opportunities for future growth, including R&D, licensing and acquisitions. This is by far the largest one-year investment of growth we have ever made. Even as we work to deliver strong current performance, we keep the future firmly in sight.

During this past year, we made significant progress on multiple fronts, solidifying our position as the world's premier consumer healthcare company, advancing our Pharmaceutical portfolio and strengthening several of our Medical Devices and Diagnostics franchises. In addition, we maintained a continued focus on optimizing our cost infrastructure.

Sales for 2006 grew to a record $53.3 billion with a growth rate of 5.6% and operational growth of 5.3%. On a pro forma basis, our earnings of $11.1 billion grew by more than 9%, once again outpacing sales growth. We achieved solid earnings growth in a year of slower sales growth by continued focus on productivity and cost management. Our adjusted earnings per share of $3.76 reached double-digits growing by nearly 11% and EPS grew at a higher rate than earnings due to the completion of our share repurchase.

Despite the challenges faced by our industry in 2006, we were able to deliver sales growth of 5.6%, significantly leverage our earnings and invest for the future at the highest level ever. Importantly, investments made during the past year helped set the stage for solid future growth.

Our cash flow from operations in 2006 continued to be very strong at $14.2 billion, the highest level in our history. Free cash flow, the cash flow left after making necessary capital investments, came in at $11.6 billion. We ended the year in a net debt position of $2.5 billion, driven primarily by the $16.6 billion acquisition of the Pfizer Consumer Healthcare assets and a $5 billion share repurchase.

We remain one of only five industrial companies with a AAA credit rating. Our financial strength gives us continued flexibility to pursue important business building activities wherever they may exist.

We continue to make progress in improving the balance of operating profits across our business segments. You can see here that over the past five years, operating profits have nearly doubled. During this time, Pharmaceuticals and Medical Devices and Diagnostics have grown closer together in their profit contributions.

This is a high-growth timeframe for technology-based healthcare. The fact that our Consumer group maintained its profit contribution percentage is a testament to the significantly improving operating margins in the Consumer business and its ability to grow faster than its competitors. Looking forward, our Consumer group will play an increasingly important component of our business.

Let's now turn to some of the significant accomplishments and growth drivers in each of our three business segments. In Johnson & Johnson's consumer segment, 2006 was a watershed year. In addition to operating growth of 6.4% and over 400 new products introductions, we completed one of the most significant acquisitions in our Company's history, the purchase of Pfizer Consumer Healthcare and its iconic brands.

Our Consumer segment strategy remains constant, to grow by bringing consumers the best in scientifically-based and professionally-endorsed products and to make these brands available to consumers around the world. We are drawing on research and innovation from across Johnson & Johnson as we develop new and improved products.

In 2006, our Consumer business reached nearly $10 billion with growth in each of our Consumer franchises; OTC, skincare, baby care and women's health.

Organic growth is at the heart of our Consumer strategy, but occasionally a rare acquisition opportunity comes along with the ability to strengthen and transform a portion of our business. The acquisition of Pfizer Consumer Healthcare, and I will call it PCH, presented this type of opportunity. As you know, the deal closed in December.

It is extraordinary that two highly complementary businesses could come together in a deal of this size. The brands we have acquired are an ideal fit with our current portfolio. Categories in which PCH was particularly strong like oral care, eye care and smoking cessation are either new to us or build on categories where our Consumer offerings were limited. In other areas, PCH products fit nicely into some of our strongest categories. For instance, LUBRIDERM in skincare; NEOSPORIN in wound care and DESITIN in baby care.

Geographically, it is much the same story. We will bring acquired PCH brands into fast-growing markets like China and Brazil where our presence was much deeper than PCH's. Meanwhile, PCH gives us added strength in developed markets, including Europe and Canada and gives us a stronger foothold in some emerging markets like Mexico. And across the board, PCH's science-based approach is a perfect match with our own.

With this acquisition, our already strong consumer business gets even stronger. U.S. category leadership jumps from 13 to 22. Our industry-leading OTC medicine business nearly doubles to over $4 billion. With the addition of Listerine, we become the fourth largest global player in oral care and we gain entry into the promising smoking cessation market.

As you can see in this slide, the addition of Pfizer Consumer Healthcare will further balance Johnson & Johnson's business with respect to sales. The Consumer health category looks attractive for the long term. We see trends towards increasing levels of consumer-directed healthcare and increasing pressures on healthcare budgets.

From the perspectives of our business portfolio, the PCH acquisition not only reduces risk, but builds on this increasingly attractive Consumer business segment. The more we learn about the people, products and capabilities we gain with PCH, the more enthusiastic we become.

Johnson & Johnson's acquisition of PCH may have been the headline for 2006, but that should not overshadow the strong performance of our overall Consumer segment. In our OTC business, upper respiratory sales grew at a double-digit rate, driven by our reformulated pseudoephedrine-free productline, primarily offset by lower analgesic sales.

The key future growth driver here will be the OTC launch of ZYRTEC. This is anticipated following its patent expiration in December of this year. ZYRTEC is the number one prescription allergy medicine in the United States with sales of over $1.5 billion. ZYRTEC's outstanding safety and efficacy make it a strong switch candidate.

In our skincare business, operational growth was 9% driven by strong performance by AVEENO, the Johnson's skincare line and the new Group Vendome products. Much of this growth was due to increasing consumer preference for products made from natural ingredients. The success of our skincare franchise reflects our ability to develop breakthrough technology and deliver it to consumers along with strong professional recommendation.

The patented sun protectant Helioplex used in our NEUTROGENA and AVEENO sunscreens is a great example. Helioplex stabilizes a sun protectant allowing it to block the sun longer and providing superior protection against UVA rays. Johnson's Baby has remained vibrant, achieving double-digit operational growth in a brand that is over 100 years young. Increasingly, Baby's growth is driven by our expanded efforts in developing in emerging markets.

For example, there are 10 times more babies born each year in China and India than in the United States. These markets remain highly attractive for our Baby franchise. Johnson & Johnson's Consumer business is healthy and growing. It is positioned for consistently strong growth for years to come. Our iconic brands, including our latest acquisitions, will grow on a foundation of strong science, professional endorsement and global availability.

Our Medical Devices and Diagnostics segment is focused on setting standards of care. The seven franchises represent the world's largest medical technology business with unparalleled breadth. Innovation is the lifeblood of our medical technology business and has made us leaders in most of the categories where we compete. In fact, roughly 40% of 2006 sales came from products launched in only the last five years. 80% of our sales come from products that hold number one or number two market positions.

We were also highly acquisitive in medical technology where we concluded six key acquisitions in 2006. The MDD segment achieved sales of $20.3 billion and operational growth of 6.4% in 2006. Let me share just a few highlights of the year from our businesses in MDD and then I'll talk more in depth about growth strategies for three of our largest franchises.

With total sales of $1.9 billion, Vision Care grew operational by 12%. The group succeeded by focusing on three core competitive advantages; proprietary manufacturing processes, a highly productive R&D organization and strong brand equity with physicians and consumers.

Ortho-Clinical Diagnostics achieved sales of $1.5 billion dollars and operational growth of 6%. The Company introduced a number of tests, including a blood screening diagnostic for Chagas Disease. This is an insect-borne parasitic illness that affects more than 18 million people worldwide. The Veridex unit gained an important FDA approval in December for CellSearch, a diagnostic platform used to more rapidly identify, count and characterize tumor cells.

Ethicon had total sales of $3.2 billion and operational growth of 4%. Several innovative products were introduced, including the GYNECARE MORCELLEX to facilitate less invasive hysterectomies. MORCELLEX has the potential to transform the standard of care for many of the 5 million women around the world who face hysterectomies each year.

LifeScan, with sales of $2.1 billion and operational growth of 8%, has succeeded in making diabetes testing more accessible to global markets. Diabetes is the sixth leading cause of death in the United States and the fourth leading cause of death around the world. Given unmet needs in diabetes, LifeScan is expanding from its platform of diabetes monitoring, we are providing a full range of diabetes treatments.

The integration of Animas Corporation, an insulin delivery company, brings us a step closer to creating a closed loop system that mimics the activity of the natural pancreas. This is an early step in our ongoing search for effective diabetes therapies. In fact, the treatment of diabetes and its co-morbidities is a focus across all three of Johnson & Johnson's business segments.

Now let me talk about growth drivers for three of our largest medical device businesses. For 2006, DePuy achieved total sales of $4.1 billion and operational growth of 7%. The breadth of DePuy's unique full-line orthopedics portfolio is illustrated here on this slide.

DePuy is driving innovation in the joint reconstruction market with a strong portfolio of proprietary products like the rotating platform knee and the surface replacement hip. In the challenging spine market, DePuy is leading a transformation to dynamic fusion technologies. Our DISCOVER cervical replacement disc was just launched successfully in Europe and is in clinical trials here in the United States.

DePuy's fast-growing sports medicine business, Mitek, added state-of-the-art visualization technology through the acquisition of Future Medical Systems. Sports medicine is an important entry point into orthopedics for both patients and physicians.

DePuy's strategy for growth includes the following elements; maintaining a highly competitive reconstruction product portfolio, leading a transformation in motion-preserving spinal surgery and building necessary critical mass in the trauma business.

Cordis had sales of $4.1 billion and operational growth of 3% in 2006. The franchise launched a dozen products across its business units and you can see a few of them here. Questions regarding drug-eluting stents captured much attention in 2006. But other areas of the Cordis business were experiencing strong growth. It was a good year for the Cordis Endovascular business. Growth approached double digits for the year and as you heard was up nearly 20% in the fourth quarter. Cordis Endovascular achieved important product approvals like the carotid stent. The acquisition of Ensure Medical, which makes devices for post-categorization closure of the femoral artery, complements the existing portfolio.

Biosense Webster experienced robust growth of approximately 30% for the year. Biosense also executed a number of key partnership agreements. The CYPHER SELECT PLUS was successfully launched in 30 countries outside the United States. We expect it to help Cordis retain the lead in global marketshare even as new competitors enter the category in 2007.

The exciting acquisition of Conor Medsystems is on track to close this quarter. Conor's CoStar stent is already available in Europe and Asia and in clinical trials in the United States. Cordis responded to challenges in the drug-eluting stent category by emphasizing its unparalleled library of clinical evidence with more than 40 studies in over 45,000 patients. Cordis recently presented persuasive evidence to the FDA about the safety and efficacy of CYPHER. The recent consensus findings of the FDA panel on drug-eluting stents confirms safety and efficacy for indicated uses.

Cordis also demonstrated CYPHER's clear, clinical advantage in challenging populations like diabetics. Going forward, Cordis will remain focused on next generation interventions that will treat coronary artery disease and expand its endovascular and cardiac arrhythmia portfolios.

Ethicon Endo-Surgery had a good year achieving sales of $3.4 billion and operational growth of 9%. Here you can see a few of the franchise's new product introductions, including the HARMONIC WAVE, an advanced energy surgical device that cuts and seals tissue in complex surgical procedures.

In surgery, Ethicon Endo-Surgery is a market leader and a market maker. The franchise has pioneered techniques and technologies that have made it possible to detect disease earlier, to treat obesity with less invasive options and to remove tumors at earlier stages of disease. The franchise is the global leader in technologies for gastric bypass, a potential surgical solution for morbidly obese patients who are expected to number 50 million by 2010.

Beyond strengthening productlines in existing categories, the franchise has exciting growth opportunities in platforms like conscious sedation and natural orifice procedures.

Across our Medical Devices and Diagnostics segment, we are well-situated for the future with number one and two positions in most of the categories in which we compete. Last year, we continued to invest aggressively in R&D for Medical Devices and Diagnostics. Our revenue generation is geographically well-diversified with half our sales coming from markets outside the United States. Simply put, we are committed to restoring the joys of life for patients and we will lead and innovate in the markets that make that possible.

Moving onto our Pharmaceuticals business. Our Pharmaceutical units focus on discovering and developing superior medicines that address important unmet medical needs for patients everywhere. 2006 started with the objective of increasing productivity in our R&D organization by gaining approval for key products, by advancing projects in development, by increasing our drug discovery capability and by succeeding in the competitive licensing arena and we have made excellent progress in each of these areas.

2006 was characterized by strong growth in major products, new indications and greater penetration of key markets. Through investments in our own R&D efforts and the aggressive pursuit of quality licensing candidates, our pipeline is more robust than ever. 2007 will be another important year as we anticipate eight NME filings or approvals by the end of the year.

This builds on our outstanding accomplishments this past year when we achieved four approvals; INVEGA, JURNISTA, PREZISTA and IONSYS. Consistent with the commitment we made in May of 2005, we are on track to file or secure approval of between 10 and 13 NMEs by the end of 2007.

R&D has remained a major focus. We invested more in 2006 in Pharmaceutical R&D than ever before. We are seeing the fruits of our continuing investments in new product approvals, advancement through the pipeline and product launches.

During 2006, a number of exciting compounds moved into late stages of development. These included RIVAROXABAN for the prevention of venous thromboembolism and more recently for stroke prevention and atrial fibrillation and also an anti-epileptic carisbamate. We also filed doripenem for two indications ahead of schedule. Several compounds moved from discovery and advanced into early phases of clinical development.

Meanwhile, we completed a number of product licensing deals during the year, including Macugen from MGI Pharma, a treatment for myelodysplastic syndromes, two diabetes compounds for metabolics and VX-950 from Vertex for hepatitis C, which we are calling Telaprevir.

Our growth strategy for Pharmaceuticals is straightforward. We are working to enhance leadership positions we already have in CMS, in mediated inflammatory disease, pain management and anemia. Meanwhile, we are expanding our presence in new areas where the science is dynamic and evolving and where innovative products can drive growth. This includes the fields of virology, anti-bacterials, oncology, cardiovascular disease and metabolics.

Turning to 2006 results, sales reached $23.3 billion, representing operational growth of 3.9%. As you can see, we achieved strong double-digit growth with key products such as RISPERDAL and RISPERDAL CONSTA, REMICADE, TOPAMAX and CONCERTA.

As we have previously discussed, generics impacted our sales for 2006. Excluding the one-year impact of generics, our operational growth in Pharmaceuticals would have been in the 8% range.

Let's turn to business highlights and future growth strategies in some of our core areas. Our CMS franchise serves an important therapeutic area and continued to achieve excellent growth in 2006. RISPERDAL, a leading treatment for psychosis, has long been a strong growth driver. That continued in 2006 with $4.2 billion in sales, which represents an operational growth rate of 18%.

In October, we received approval from the FDA to market an additional indication for RISPERDAL for the treatment of children with autistic disorder and in the fourth quarter, we submitted data to the FDA to obtain pediatric exclusivity. FDA's approval of INVEGA at the end of 2006 reinforces our leadership position in the psychiatric market. INVEGA launched this month and it is the first new treatment for schizophrenia approved by the FDA in three years.

Paliperidone palmitate, a long-acting injectable, continues to advance in the late stages of development and we expect to file later this year. We are excited about carisbamate, our new first-in-class anti-epileptic, which we expect to file in 2008. These will all be important compounds in helping our CMS franchise offset future loss of exclusivity for RISPERDAL and TOPAMAX.

Immune-mediated inflammatory diseases remain an area of significant unmet need spanning from rheumatoid arthritis to inflammatory bowel disease to psoriasis. Treatments in this area remain one of our key business and growth drivers. REMICADE continues to be our lead product in this field, with 2006 growth approaching 20%. The label in the U.S. was expanded ulcerative colitis and psoriatic arthritis, as well as for two new indications, pediatric Crohn's and psoriasis.

Our pipeline of compounds in this area is strong and includes two important near-term products, CNTO 148, a follow-on to REMICADE, a fully-human, highly-potent anti-TNF that will allow for monthly subcutaneous dosing. It will also be available in an IV infusion. This dual formulation will be unique in the anti-TNF category. We expect to file CNTO 148 in early 2008.

We are also enthusiastic about CNTO 1275, a first-in-class anti IL-12 and IL-23 inhibitor that is initially in development for psoriasis and expected to be filed in the US and Europe later this year. Virology is an area where we are dedicated to developing clinical products and an area where we are poised to realize growth.

2006 was highlighted by U.S. approval and launch of PREZISTA, a potent protease inhibitor that has demonstrated significant activity against important drug-resistant strains of HIV. We're looking to expand the label and have initiated trials in naive and moderately experienced HIV-1 infected patients. In December we received a positive CHMP recommendation in the EU, and we anticipate marketing approval in Europe this year.

TMC 125, our second anti-HIV compound, is anticipated to be best in class. It is the first sequentiable NNRTI for resistant HIV patients. It is on track to be filed this year. TMC 278 is a novel NNRTI with a number of parameters that may make it an interesting first-line treatment for naive patients. We anticipate a U.S. filing in 2010.

Rounding out our lineup of near-term products, growth products in virology, is Telaprevir. Under an agreement with Vertex, Janssen has acquired commercial rights to Telaprevir in markets outside the United States. Telaprevir is a first-in-class oral protease inhibitor being studied initially for treatment naive patients with chronic hepatitis C. Vertex expects to initiate Phase III studies this year, and we anticipate making a submission in Europe in the second half of 2009. Telaprevir is a first step in our efforts to improve the diagnosis and treatment of HCV, a serious public health concern affecting 170 million patients.

Moving to oncology. In 2006, we expanded our relationships with Millennium to co-promote VELCADE in the United States. We are excited about co-promoting VELCADE in the U.S. as it is a highly complementary addition to our existing oncology portfolio. Outside the U.S., VELCADE continues to grow. In Japan it was approved for relapsed and refractory multiple myeloma, and we are continuing to collaborate with Millennium on new indications, including front-line therapy for multiple myeloma, non-Hodgkin's lymphoma, and non-small cell lung cancer.

We also have three oncology products in late-stage development for indication where patients have few or no treatment options. YONDELIS is in Phase III for ovarian cancer and on track for a 2008 submission. We will not file for STS in the U.S. in 2007. We are currently in discussions with Pharmamor regarding next steps in development for small tissue sarcoma.

ZARNESTRA's AML Phase III trial is proceeding, and we plan to re-file it this year. We hold global rights outside North America for DACOGEN, which is in Phase III in Europe for myelodysplastic syndromes. This year, we expect to submit it for approvals in several Asian and Latin American countries, and we expect to complete a major submission in Europe in 2008.

DOXIL for patients with progressed ovarian cancer increased its share in the second-line ovarian cancer market during 2006. The FDA has just accepted our sNDA for the combination use of DOXIL and VELCADE, the second-line treatment for patients with multiple myeloma. For the longer term, we are investigating the effectiveness of DOXIL in the treatment of breast cancer.

In Pharmaceuticals, we will maintain our leadership in current markets and build leadership in new markets. The many products emerging from our pipeline will drive our future growth.

As we step back from our individual business segments and look across all of Johnson & Johnson, you can see why we are exceptionally well-positioned for growth in one of the most dynamic businesses in the world. We will drive good growth by identifying and participating in the most promising, fastest-growing business segments in human health. We will build and sustain leadership positions in these segments by employing our superior capabilities by bringing science-based innovations to the market.

It is the people of Johnson & Johnson, their creativity and resolve, that have always been the fuel that powers this Company. So much change is occurring everywhere in the world, but think about the qualities that our people bring to their work, expertise, character, tenacity and a commitment to our credo responsibilities. The people of Johnson & Johnson are what really ensure the growth of our business. Most importantly, they ensure that we keep delivering important innovations to our customers and patients. Thank you very much for your support of Johnson & Johnson.

Many of you have already had an opportunity to meet our new CFO, Dominic Caruso. Dominic joined us as part of the Centocor acquisition in 1999 where he was Vice President of Finance and a key contributor to the growth of that organization. At Johnson & Johnson, Dominic most recently was head of our group finance function. He has proven to be very effective in leading growth throughout the many facets of our business and I am sure you will come to value your association with Dominic just as much as I have. Now, let me turn to Dominic for some additional comments.

Thank you, Bill and good morning, everyone. We are pleased with our solid financial results for the year as Bill and Louise highlighted for you. In particular, we are pleased that in the fourth quarter, we were able to achieve strong earnings growth while absorbing the 2006 piece of the Pfizer Consumer Healthcare integration costs.

That said, I would like to provide some comments for you to consider as you refine your models for 2007, including of course the impact of the acquisition of the Pfizer Consumer Healthcare business.

My comments initially will not include the impact of the pending acquisition of Conor Medsystems, but I will provide you a brief update on that transaction at the conclusion of my remarks.

Let's start with a discussion of cash and interest expense. During 2006, the Company continued to generate strong cash flows from operations. As Bill showed you earlier, our free cash flow or cash from operations after expenditure for capital improvements, was $11.6 billion or greater than our net earnings of approximately $11 billion reflecting another year of strong cash flow generation by our businesses.

At year-end 2006, the Company was in a net debt position of approximately $2.5 billion. For your information, that is $4.1 billion of cash investments and $6.6 billion of debt. This reflects the issuance of approximately $4 billion of commercial paper in connection with the closing of the acquisition of the Pfizer Consumer Healthcare business.

For purposes of your models and assuming no additional major acquisition or general share repurchase program, I suggest that you consider net interest expense for 2007 in the range of approximately $50 million to $100 million.

Turning to other income and expense. As a reminder of the nature of this account, this is the account where we record royalty income, as well as one-time gains on losses arising from such items as litigation, gains or losses from investments by our development corporation or asset sales. In addition, this is the account where we will record the gains associated with the divestiture of certain products, as well as the restructuring charges we will incur in connection with the Pfizer Consumer Healthcare acquisition.

In the first quarter of 2007, we will record a net pretax gain related to these items of approximately $150 million. During the remainder of the year, the balance of the restructuring charges will more than offset this gain for the full year. This account is difficult to forecast, but assuming no other major one-time gains or losses, I would recommend that you consider modeling other income and expense for 2007 as a net gain ranging from approximately $50 million to $100 million.

A word on our taxes. For 2006, the Company's effective tax rate, excluding special items, was 23.3%. As a reminder, during 2006 in the second quarter, we recorded an adjustment to a previously recorded tax reserve reflecting the approval of PREZISTA and our confidence in the operations of our Tibotec subsidiary to generate earnings from this and other products in the [royalty] space. For 2006, excluding this adjustment, our effective tax rate would have been 24.2%.

As you know, the R&D tax credit has been reinstated. I suggest that you consider for now modeling our effective tax rate with the inclusion of the Pfizer Consumer Healthcare business in the range of 24% to 24.5%. As always, we will continue to pursue opportunities to further improve upon this rate as the year unfolds.

Turning to operational sales growth and of course including the addition of the Pfizer Consumer Healthcare brands to our Consumer business, we would be comfortable with your models reflecting operational sales growth for the full year between 11.5% and 12.5%. The addition of the Pfizer Consumer Healthcare brands represents approximately 7% of that annual sales growth. As a reminder, we divested several brands in connection with the Pfizer Consumer Healthcare acquisition and those brands amounted to approximately $0.25 billion in sales.

When constructing your models for the first quarter of 2007, I recommend that you consider modeling somewhat lower sales growth in the first quarter than for the full year. During the first quarter, while we expect continued growth in many of our products, we will be impacted by difficult comparisons to the prior year due to the softness in the drug-eluting stent market, as well as the impact of generics in our Pharmaceutical business during 2006. We would be comfortable therefore with your modeling our operational sales growth for the first quarter, including the Pfizer Consumer Healthcare brands, at approximately 10% to 11%.

Regarding currency, we cannot predict the impact that currency movements will have on our sales growth and we are not providing a forecast on currency, but to give you a sense of possible currency impacts, if currency were to remain where it is today, currency would have a positive impact to our full-year growth of approximately half a point and the impact in the first quarter is expected to be 1 to 1.5 points.

Now turning to earnings. When I last checked, the First Call mean estimate for our EPS for 2007 was $4.05 per share and this was from our business excluding the impact of Pfizer Consumer Healthcare. We are comfortable with that estimate and suggest that you consider EPS estimates for our business, again excluding the impact of Pfizer Consumer Healthcare, in the $4.05 to $4.10 per range or growth of approximately 8% to 9%. I suggest that at this early stage in the year, you plan towards the middle of this range.

I would like to now turn to earnings for the full year of 2007, including the addition of the Pfizer Consumer Healthcare business. Now let me be clear, not reflecting the impact of the pending acquisition of Conor Medsystems, which I will comment on separately.

We were very pleased to have closed the Pfizer Consumer Healthcare acquisition at the end of 2006 as we expected. This is an important strategic acquisition for our Consumer business and for our Company as it provides a strong source of growth creating sustainable leadership positions in exciting areas of consumer healthcare.

As you know, we have been thoughtful in our pursuit of growth through acquisitions and we fully expect this acquisition to join a string of successful acquisitions achieving exceptional performance over time. The acquisition provides us a unique opportunity to achieve meaningful growth synergies from the combination of complementary capabilities and strong brands. While we expect the primary value of the transaction to be delivered from the ongoing growth of the business, we also expect to achieve savings from efficiencies gained in areas of overlap.

In our prior guidance to you, we indicated potential cost synergies in the range of $500 million to $600 million per year, which we expect to achieve gradually and to fully implement by 2009. I am happy to report that as a result of the efforts of the team of dedicated individuals working on the integration, we are comfortable with these initial estimates.

As we have refined the valuation work and progressed in the integration work, I would like to update you on our latest thinking regarding dilution. On a cash basis, that is excluding the impact of non-cash charges consisting of amortization and inventory step-up, we expect the transaction to be dilutive in 2007 and 2008 by $0.12 and $0.03 per share respectively and to be accretive thereafter. This is consistent with our previous guidance in this part.

On a GAAP basis, we now expect the transaction to be dilutive to earnings in 2007 by $0.17 and dilutive to earnings in 2008 by $0.06 and to be breakeven or modestly accretive to earnings starting in 2009, one full year earlier than our previous guidance in this regard. This represents an improvement to our previous estimates of the dilutive effect of the transaction of $0.05 in '07 and $0.04 in '08. The improvement from the estimates we previously provided are largely due to the completion of the valuation work I mentioned earlier.

Non-cash charges consist principally of ongoing amortization expense, which is now estimated at $0.03 per share per year versus our previous estimate of $0.06 per share. This amortization expense is now based on the allocation of $3.7 billion of the purchase price to intangible assets, which are being amortized over an average 30-year period. The change from our previous estimates in this regard relates to the charge for in-process research and development we recorded in the fourth quarter of 2006 as Louise described and the allocation of a greater portion of the purchase price through assets that have longer estimated useful lives.

Additionally, the 2007 impact of the step-up in inventory value is now estimated to be approximately $0.02 per share versus our previous estimate of $0.03 per share and there is no longer any step-up in property plant and equipment values as a result of the valuation work. Therefore, including the impact of the addition of the Pfizer Consumer Healthcare business, we suggest that you consider GAAP EPS estimates for 2007 in the range of $3.88 to $3.93 per share. However, by way of reminder, given this early stage in the year, I recommend that you plan towards the middle of this range. I look forward to updating you throughout the year.

Regarding the first quarter of 2007, I want to remind you that although our sales growth may be somewhat softer than the full-year growth rate, we will have the benefit of the gain on divested assets partially offset by restructuring charges as I discussed previously.

Given this net positive after-tax impact of approximately $0.03 per share, which will be more than offset during the remainder of the year by the impact of the remaining restructuring charges, we recommend that you consider slightly higher EPS ranges for the first quarter of 2007 than in the remaining quarters of the year. EPS estimates in the range of $1.04 to $1.06 per share for the first quarter of 2007 would seem reasonable.

Finally, a word about the planned $1.4 billion acquisition of Conor Medsystems, which we announced in November. We have received FTC clearance for the transaction and the vote by the Conor Medsystems' shareholders is expected to take place on January 31. We continue to expect that we will close this transaction during the first quarter of 2007.

Financial returns from this transaction will flow from accelerated growth of products already on the market and also more importantly the application of this unique technology to future products. By way of reminder, when we announced the transaction in November, we indicated that we expected the transaction to be modestly dilutive to 2007 earnings and breakeven in 2008. By way of reminder, our guidance at that time was additional 2007 dilution related to this acquisition estimated at $0.24 of which $0.21 is associated with a charge of approximately $600 million for in-process research and develop them.

Again, my comments earlier did not include the impact of this pending acquisition. We will continue to refine our estimates for this transaction and we will provide you a further update on the impact of our 2007 EPS after the completion of the closing of the transaction.

That concludes my remarks on matters we trust are helpful for you as you refine your estimates, including the addition of the extraordinary brands we acquired in the Pfizer Consumer Healthcare transaction. I look forward to updating you throughout the year at our quarterly earnings calls. Thank you, and Louise, back to you.

We will now open the floor to your questions. As Bill is our host for today's meeting, we encourage you to address your questions to him on more strategic issues and if you could wait until you get a microphone because it is being webcast.

It's Rick Wise, Bear Stearns. Two questions, Bill. First on the SG&A cost cutting side, we are seeing other large companies like Pfizer announced major cost cutting issues. Obviously, Johnson & Johnson has been focused on cost reductions for years. Does this send some new signal to you all that you feel like you have to make some extraordinary cost reduction efforts incrementally to be competitive? I'd appreciate your perspective there.

And second, we've seen General Electric make a foray, aggressive foray to diagnostics. How does that change your strategic vision of what is happening in the device industry and are you likely to respond on that side?

On the first one, I think as you mentioned and I think as you saw this year, we have always had a focus on trying to keep our costs under control and maintain our attention in that area. I think there has been a lot of attention yesterday on salesforce size and we have continued to keep that in place. I think Chris could speak better than I could to this, but I know we are actually down well below the highest number of sales reps that we have had before and that is because it's a continual as I said.

I talked about the paring of our businesses, but we do the same in our organization and try and leverage it. So we try and keep our costs under control so we don't have to go through any major initiatives in these areas, but the salesforce -- we focus not in these large [JP] areas, but more in the specialized areas. So I think we're in good shape and really positioned well for the future. So Chris, I don't know if you want to comment any more on that.

I do think we have to -- we try and do that as a basic part of our business so we don't have to go through that -- hopefully, we don't have to go through that unless a catastrophic event hits.

As far as diagnostics, I think that GE coming into this space is just the change of one competitor to another one. One thing that was interesting is that one of the things that did not move, as I talked to earlier, is the whole area of the diabetes, diabetes monitoring and delivery, and that is something that is very important to us. So I think it is just changing from one competitor to another and we will still keep our strategic focus in the diabetes -- in the diagnostics area.

Also I think very importantly and I continue to go back to being broadly based, I do think that the convergence of technologies and looking at genetic makeup of people and other things is going to allow us to really have a leg up over time as these technologies develop and as we're able to move forward.

Glenn Reicin, Morgan Stanley. In 2006, you got some benefit I would assume, especially in your CMS franchise, from the implementation of MMA. I am curious when you think we annualize or if we annualize those benefits, whether we will see a decline in growth and so I would love you just to quantify that and when those numbers would start to kick in.

The impact of MMA for us on our entire business was actually very minor and was not at all a significant impact to our sales for 2006 and therefore, I don't see it as a major factor in comparing our '07 to '06 sales growth.

Is there any way also that you can quantify what the generic impact is on RISPERDAL in 2007 overseas?

As you know, we don't provide specific forecasts with any one particular product for the year, but, Chris, if you have any other comments on that.

The effect in 2007 for generics will probably be not much more than what we saw in '06. Generic cessation has not hit all of Europe and as you know, generic cessation in Europe takes on a very different dynamic than here in the United States. So right now, it is areas like Spain, Portugal, areas up in the Nordic that have been hit. We don't see the major impact until 2008.

Bill, if we look back the last 10 years, 10 years ago, you had about almost 30% of your sales from the Consumer business and over the last decade, the growth of the Pharmaceutical business and Device business (inaudible) part through acquisitions as well, maybe the Consumer business would drop to under 20%, but then you pulled the trigger on this large deal last year, which shifts the balance making Consumer a bigger piece again of the Company.

When you announced the transaction, there seemed to be a view on the street that in part you were making a statement about the attractiveness of the Consumer business versus the drug business and one, do you think people should be interpreting it that way as if the Consumer business is a more attractive business throughout the business longer term?

And two, how would you think investors should be evaluating J&J. We tend to think of the Company as a hybrid, but value it with pharmaceutical stock. And you have just completed this big transaction in Consumer. Do you think people should be evaluating you more as a conglomerate because Consumer stocks traded 20 times, [livestocks] traded about that, if not more, the pharma stock are a lot lower? Thanks.

Let me take the first one on the Pfizer Consumer acquisition. Our Consumer business, as I stated earlier, has done remarkably well. Our Pharmaceutical business has done remarkably well and our medical devices businesses have. I wouldn't view this as a deemphasis of anything else as much as there is -- there was this extraordinary opportunity of iconic brands and products and if you look at the sustainability of the Consumer business, we have often described it almost as an annuity. If you treat it well and you continue to invest in it, you see it really moving in a spectacular way that continues to be fuel for the business growth in that area. [Colleen] is here where we launched 400 new products last year, but also to feed the growth in the other areas where you see a much more volatility.

I think the other thing that was really exciting about it and we talked about was the geographical side of it where we have seen areas where Pfizer had great strengths where we were not as strong and areas where we had extraordinary strengths where they were not as strong to be able to leverage that and when you look at the global opportunities around the world, they are truly extraordinary and I think the penetration in many of those markets is very low.

I think the other side of it is the whole attention of I think third-party pay, people taking interest in their own health is causing a lot more attention in the Consumer area. But if you also look at gum disease, for examples, smoking cessation, the movement of ZYRTEC into the OTC area, I think that there is a lot of synergies that can be gained through our businesses in these areas.

So I wouldn't look at it all as a deemphasis of any of our business or more of an emphasis in Consumer; I would say it is a rebalancing of our portfolio. It took some risk out because it doesn't have the volatility of others, but it also just enhances our opportunities as we go further into the future, which is one of the basic cornerstones of Johnson & Johnson, being broadly based and we will continue to look for great opportunities, whether they are in pharm, Medical Devices and Diagnostics or the Consumer business to advance ourselves.

As far as the best way to look at J&J, I think you have to look at it that it has three great business segments. It has I think synergies that are -- or opportunities to share knowledge, to share skills, to share people across businesses that can enhance the value, enhance the value of all of them that actually brings greater growth. I think as you fast forward into the future and you start looking at some of the areas where you do see a lot of convergence, I think it is really looking into the future where you're going to see biotechnology products enhancing the orthopedic implant area, that you're going to start to see areas of personalized medicine, where you're going to see genetic makeup and genomics starting to play or the genetic makeup of people playing roles in pharmaceuticals. You see all of these things happening and I think you will see some devices that are going to start playing the role of where pharmaceutical products have failed in the past.

So I think you're going to see a convergence in these areas and we are going to get a breadth of opportunities that no one else has the opportunity to benefit from. I don't know Dominic or Chris or Louise, if you all want to comment on that.

The only thing I would say is -- obviously the valuation of our Company is something that you -- that's all in your hands as you derive your models, but I know that many of you do sum of the parts analysis and in looking at that, it is up to you whether you pick the median PE of the sector we operate in or those towards the higher end given the strength and breadth of our business, especially our Consumer business, which as you know has outpaced the industry for several years now and we expect to do so in the future now being the premier consumer healthcare company in the industry.

It's Matt Dodd, Citigroup. Bill, if you look at M&A on the pharma biotech side, I would say some of the competition paid some pretty rich prices recently. What is your view there in terms of what is being paid in the competitive area in pharma biotech? You are pretty tough on ROIC, things like that.

The other area I wanted to look at was Japan. My understanding is in May, the M&A laws may actually get a little less restrictive for outsiders making acquisitions in Japan. I was just wondering maybe from your comment or Chris's comment is that still a very attractive market in terms of generics maybe taking a little longer there. I mean how do you view the Japanese market as an opportunity?

I think as far as price, I think that is kind of in the eyes of the beholder. Not to tease a cliche, but the way we look at things and I think you all know this is that if we don't see the price bringing value to our shareholders or the risk reward potential, we are not going to make the investment.

So I think our strategy has always been to look for opportunities that we see out there to be able to bring great technology, great products, great people into Johnson & Johnson if you look at it in the M&A area and I think we will continue to look at it that way. Others may have different approaches to it.

Same thing with licensing of compounds or licensing of products. We have to see value that we are going to gain over the long term. If we don't see the value that is associated with it, we are not going to pay the price. So I think everybody has to use their own models, look at it their own way but our is always what is the return we are going to be able to give to our shareholders over time and if we don't feel it is there, we are not going to make the investment. So I think things have gotten more expensive. We all recognize that, but it all has to go into the assessment and we have to look at it in that way.

As far as Japan, I think Japan is a very attractive market. I will let Chris talk to it in her views, but there are challenges in Japan as there are every place in the world, but I think there are opportunities that are going on there. I think the whole area of generics, as you mentioned, is an area that allows you to have -- it is harder to get your projects registered and approved in Japan, but once you've got them there, you feel you are in pretty good shape. And I think that holds true for both Medical Devices and Diagnostics, as well as Pharmaceuticals. Chris, I know you have been there recently. I don't know if you want to --.

Yes. Japan is the second largest market for pharmaceutical. So it is an important and strategic market. You may know that about six years ago, we bought out our piece of the joint venture with our partner and then put a lot of effort into our R&D pipeline. We had something like six approvals last year in Japan and we are geared up for another six approvals or filings again this year in Japan. So we feel that the pipeline that we have invested in and the R&D organization over there is just extraordinary. And so we don't feel a compelling reason now to do anything other than what we have always done, which is we continue to look for strategic opportunities there.

That being said, we are still a very small player in Japan. I think we are maybe number 24 in Japan. So we will continue to look at strategic opportunities, whether that is in partnering, licensing and product acquisitions.

Catherine Arnold from Credit Suisse. On your schizophrenia franchise, can you tell us whether or not you have filed the pediatric exclusivity filing and if not, if you think you're still on track to get that in for a 10-month review prior to the original patent expiry?

Also could you give us more color on palmitate in terms of the injectable form and if you will be filing that by the end of this year? And then on the stent numbers you gave for international markets, could you just give us the split between Japan and rest of world?

We no longer break out the growth of our CYPHER stent. We only give the two numbers, U.S. and O.U.S. and we actually adopted that at the beginning of this year.

As far as the pediatric exclusivity for RISPERDAL, that has already gone in. That was applied for last year and I don't know if you want to make any comments on palmitate.

Palmitate is still on track for filing this year.

Bruce Nudell from Bernstein. Chris and Bill, we looked at the script growth in U. S. pharma for identified drugs. It looked like price was important this year. Given Part D exposure and stuff, do you expect to be able to -- first of all, were we in error in some way and secondly, do you believe that you will be able to take price to the extent you took it this year or next year?

The second question is has CONSTA moved from Part B status to some other status. It didn't show up in the Medicare formulary?

So on CONSTA, CONSTA is still on Part B status as a buy and bill product and on price, irrespective of what happened with the MMA issues, I think our price is -- our prices have been fairly nominal increases over the last few years and we don't expect any big change from that.

Scott Braunstein, JPMorgan Asset Management. Can you talk a little bit about the INVEGA launch, specifically how we should think about new anti-psychotic in terms of formulary acceptance, how long that should take? I am also curious about the pricing strategy, at lease talking to a few clinicians out there. I haven't really got the exact price, but it sounds like you are going to really be at parity to your RISPERDAL franchise and the decision to do that versus to discount it (indiscernible) with the Lexapro launch. (inaudible). So I was just wondering if you could talk about those issues.

Sure. As you know, we got the approval late last year right before the holidays for INVEGA. Our reps have already been out in the field promoting and last week, we were together for a final training and sales meeting. So it is early days. I think if anecdotes are truth, people have been pretty pleased with the formulary acceptance already. I heard anecdotally that we have already gotten on the New York State Medicaid formulary, which we weren't expecting to do that for probably another 90 to 120 days. So I think so far so good.

The acceptance from the physicians has been terrific. They understand the efficacy profile. They understand the tolerability and safety profile and from a pricing standpoint, we are at just a slight discount to RISPERDAL.

(inaudible) respect to everybody's time, we have time for two more questions.

Bob Hopkins from Lehman Brothers. Just two quick questions. First for Bill, we have talked a lot about M&A, but some of your competitors have also been divesting assets, mainly [AVID] and Medtronic, and I was wondering if you could comment on your portfolio of assets as you look forward over the next 12 to 24 months and whether we should perhaps expect some parsing of the portfolio if you will.

And then just a very quick question for Dominic. I was surprised to see a negative currency impact for the device business. Could you just explain how that happened? I was surprised. I would have expected about --.

As far as the M&A and divestitures, we continue to look of our portfolio. We review it all the time and I wouldn't build in anything. That is not to say there is nothing that we would be doing. We wouldn't comment if we were. But basically we feel we are in pretty good shape moving forward and we will continue to assess it as we go forward and if we feel like there's products that don't bring as much value, we will divest them or opportunities or businesses, but there is nothing that I would comment on that and I'll let Dominic speak to the --.

Bob, you were referring to the negative impact of currency for the Medical Devices for the -- you mentioned the quarter, but it is actually slightly negative for the year in the Medical Device business, about 2/10 of a point. Now in the quarter, the Medical Device had a currency benefit of 2.4 points.

That's got to be the last question.

Larry Biegelsen, Prudential. Questions on INVEGA and CONCERTA. Regarding INVEGA, Chris, could you talk about your goal for converting the oral franchise to INVEGA by June 2008? And secondly, how much of a handicap do you think the QT warning in the label will be? Has it changed your expectations for the product and then just lastly on CONCERTA, Dominic, could you please, or Chris, tell us if that -- what your assumptions are for 2007 regarding generic CONCERTA? Thank you.

So on CONCERTA, we are still cautiously optimistic with our citizens petition we will hold and I think as you know we recently filed additional patents around CONCERTA. So again, we are cautiously optimistic with that product.

On INVEGA, on the QTc, I think you know that INVEGA was the first product approved since the FDA has asked for the so-called thorough QTc studies and we have been extraordinarily thorough in our studying of this effect, both in our Phase III programs, but also in some Phase I head-to-head studies versus Seroquel. We Seroquel thinking that it seems to have a profile that would be good to compare it to.

On the head-to-head comparisons with Seroquel, we filed that study data with the FDA within the last 30 days. I would just tell you that the results of that data validate our belief that there is comparability between the INVEGA profile for QTc and Seroquel. So I think more will be coming over the next six months as the FDA evaluates that date. But it has not -- because we absolutely have confidence in the profile of this product, it has not changed our belief of what this product can be.

On the conversion rate and also whether CONCERTA is in the guidance, the assumption for the guidance is that it does not go generic in 2007.

The last is correct and as you know, we don't project sales for INVEGA.

I would like to thank everyone for coming today and I would like to remind you that June 7th, we are planning another meeting where we will be reviewing our Consumer and Pharmaceutical. Spend a whole day on the business. So thank you once again.