Johnson & Johnson's CEO Discusses Q2 2013 Results - Earnings Call Transcript

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Johnson & Johnson (JNJ) Q2 2013 Earnings Call July 16, 2013 8:30 AM ET

Executives

Louise Mehrotra - Vice President, Investor Relations

Alex Gorsky - Chairman of the Board, Chief Executive Officer

Sandra Peterson - Group Worldwide Chairman

Dominic Caruso - Chief Financial Officer, Vice President - Finance

Analysts

Mike Weinstein - JPMorgan

Rajeev Jashnani - UBS

Matthew Dodds - Citigroup

Kristen Stewart - Deutsche Bank

Larry Biegelsen - Wells Fargo

Derrick Sung - Sanford Bernstein

Jami Rubin - Goldman Sachs

Danielle Antalffy - Leerink Swann

Tony Butler - Barclays Capital

Glenn Navarro - RBC Capital Markets

Matt Miksic - Piper Jaffray

Jeff Holford - Jefferies

Bob Hopkins - Bank of America Merrill Lynch

David Lewis - Morgan Stanley

Operator

Good morning, and welcome to the Johnson & Johnson second quarter 2013 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. If anyone has any objections you may disconnect at this time. (Operator Instructions).

I will now turn the call over to Johnson & Johnson. You may begin.

Louise Mehrotra

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 second quarter of 2013. Joining me on the call today are Alex Gorsky, Chairman of the Board and Chief Executive Officer and Sandy Peterson, Group Worldwide Chairman and Dominic Caruso, Vice President Finance and Chief Financial Officer.

A few logistics before we get into the details. This review is being made available to a broader audience via a webcast accessible through the Investor Relations section of the Johnson & Johnson website. I will begin by briefly reviewing highlights of the second quarter for the corporation and highlights for our three business segments.

Following my remarks, Alex will provide some additional commentary on our results and an update on our near term priorities and Sandy will provide an update on our consumer business and our global supply chain. Please note, the presentation for the company's, Sandy's and Alex's remarks are available on our website. Dominic will provide some additional commentary on the financial results and guidance for 2013.

We will then open the call to your questions. We expect the call to last approximately one and a half hour. Included with the press release that was issued earlier this morning is the schedule of sales for key products and/or businesses to facilitate updating your models. These schedules are available on the Johnson & Johnson website as is the press release.

Before I get into the results, let me remind you that some of the statements made during this review may be considered forward-looking statements. The 10-K for the fiscal year 2012 identifies certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made today. 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 and online.

During the review, non-GAAP financial measures are used to provide information pertinent to ongoing business performance. These non-GAAP financial measures should not be considered replacements for GAAP results. Tables reconciling these measures to the most comparable GAAP measures are available in the press release and on the Investor Relations section of the Johnson & Johnson website at investor.jnj.com.

Now, we would like to review our results for the second quarter of 2013. If you would refer to your copy of the press release, let's begin with the schedule titled, supplementary sales data by geographic area. Worldwide sales to customers were $17.9 billion for the second quarter of 2013, up 8.5% as compared to the second quarter of 2012. On an operational basis, sales were up 10% and currency had a negative impact of 1.5%.

In the U.S., sales were up 8%. In regions outside the U.S., our operational growth was 11.8%, while the effect of currency exchange rates negatively impacted our recorded results by 2.8 points. Sales included the impact of the acquisition of Synthes, net of the divestiture of the DePuy trauma business. Excluding this impact, worldwide operational sales growth was 5.6%.

The western hemisphere, excluding the U.S. grew by 14% operationally while Europe grew 11.4% on an operational basis. Asia-Pacific, Africa region grew 11% operationally. The success of new product launches and Synthes sales made strong contributions to the results in all regions.

If you will now turn to the consolidated statement of earnings. Net earnings were $3.8 billion compared to $1.4 billion in the same period in 2012. Earnings per share were $1.33 versus $0.50 a year ago. Please direct your attention to the box section of the schedule where we have provided earnings adjusted to exclude special items. As a reference to the accompanying table reconciling non-GAAP measures, 2013 second quarter net earnings were adjusted to exclude special items related to increases in litigation expense accrual, integration and transaction cost related to the acquisition of Synthes and cost associated with the DePuy ASR Hip program.

Second quarter 2012 net earnings included after-tax special items of approximately $2.2 billion as shown in the accompanying reconciliation of non-GAAP financial measures. Excluding these special items for both periods, net earnings for the current quarter were $4.3 billion and diluted earnings per share were $1.48, representing increases of 17.7% and 13.8%, respectively, as compared to the same period in 2012.

I would now like to make some additional comments relative to the components leading to earnings before we move onto the segment highlights. For the second quarter of 2013, cost of goods sold at 30.7% was down 50 basis points from the same period last year, primarily due mix, lower cost associated with strong volume growth in our pharmaceutical business and cost improvement initiatives across all the businesses. This was partially offset by incremental amortization expense related to Synthes of approximately $140 million, or 80 basis points and the impact of the medical device excise tax.

Second quarter selling, marketing and administrative expenses were 30.1% of sales consistent with our 2012 results. Our investment in research and development as a percent of sales was 10.9%, up 20 basis points due to milestone payments.

Interest expense net of interest income of $101 million was down $28 million versus the second quarter of 2012, due to a lower average debt level. Other expense, net of other income was $172 million in the second quarter of 2013, compared to $2 billion in the same period last year.

Excluding special items, other income net of other expense of $394 million was $220 million favorable compared to 2012, the gain on sale of the ECHELON investment is reflected in this amount.

Excluding special items, the effective tax rate was 20% in the second quarter of 2013, compared to 21.6% in the same period last year. Dominic will provide commentary on taxes in his remarks.

Turning now to business segment highlights, please refer to the supplementary sales schedule highlighting key products or businesses for the second quarter of 2013. I will begin with the consumer segment.

Worldwide consumer segment sales for the second quarter of 2013 of $3.7 billion, increased 1.1% as compared to the same period, last year. On an operational basis, sales increased 1.7%, while the impact of currency was negative 0.6% U.S. sales were up 1%, while international sales grew 2% on an operational basis.

Excluding the impact of divestitures net of acquisitions operational growth was approximately 2.5%. Baby Care products increased on an operational basis by 3.1% when compared to the second quarter of 2012, primarily due to hair care and cleansers. Sales in the Oral Care business increased operationally 0.2%. Results were driven by strong international sales of LISTERINE, due to the continued success of new product launches partially offset by the impact of the divestiture of manual toothbrushes in North America.

Beginning this quarter, we are reporting OTC Pharmaceuticals separately and have moved Nutritionals to the other line. To assist in updating your models, a summary under the new format is included in the sales schedule that accompany the press release.

For the second quarter of 2013, sales for OTC pharmaceuticals increased 5.4% on an operational basis compared to the same period in 2012. U.S. sales were up 17.4% driven by strong growth in analgesics and other key brands as we continue to make progress in returning a reliable supply products to the marketplace.

International sales were up 0.9% operationally. Our Skin Care business was down 0.4% on an operational basis in the second quarter of 2013. Strong results for [renal] were offset by the impact of divestitures. Excluding divestitures, operational growth was approximately 1%.

Women's health grew 3.6% on an operational basis due to strong growth in women's sanitary protection products. Wound Care other sales decreased 4.3% on an operational basis, impacted by competitive pressures as well as a divestiture and nutritionals.

That completes the review of the Consumer segment, and I will now review highlights for the pharmaceutical segment.

Worldwide net sales for the second quarter of $7 billion increased 11.7% versus the same period last year. On an operational basis, sales increased 12.9% with a negative currency impact of 1.2 points. Sales in the U.S. increased 9.1%, while sales outside the U.S. increased on an operational basis by 16.5%.

Now reviewing sales for major therapeutic areas. Immunology products were 17.6% operationally, with sales in the U.S. up 7.3% and sales outside the U.S. up 51.5% operationally. During the quarter, the company made certain supply chain changes from for REMICADE, resulting in sales to distributors previously recorded as U.S. exports sales now being international sales. Adjusting for this impact, the U.S. immunology growth was approximately 14% with REMICADE excluding expert sales up approximately 4%, SIMPONI up 38.1% and STELARA up 53.3%. Results were driven by market growth across the major products, complemented by increased market share for both STELARA and SIMPONI.

With the strength of our portfolio, we continue to be the U.S. market leader in immunology. Adjusted immunology sales outside the U.S. increased by over 25% operationally, with REMICADE up approximately 20% due to strong growth in Canada and the emerging markets including a tender shipment. STELARA made significant contributions due to market share gains and market growth across the major regions, while very strong growth in Japan drove the results for SIMPONI.

Sales of infectious disease products increased 23.9% on an operational basis. INCIVO, a treatment for Hepatitis C grew 71.8% on an operational basis due to the success of the continued rollout most notably in Latin America as well as a shipment for tender business. Continued momentum in market share growth of PREZISTA made notable contributions to the results as did the combined sales of COMPLERA and EDURANT.

Neuroscience product sales increased 0.4% operationally. U.S. sales declined 4.9% impacted by generic competition primarily for CONCERTA. The long-acting injectable antipsychotics, RISPERDAL CONSTA and INVEGA SUSTENNA or XEPLION achieved operational growth of approximately 15% due to an increase in combined market share.

Sales of oncology products increased 53.2% on an operational basis due to the very strong results for ZYTIGA and VELCADE. ZYTIGA is now approved to treat both chemo refractory and chemo naïve metastatic castration resistant prostate cancer. In the quarter, ZYTIGA achieved operational sales growth of 70% with U.S. sales growing 54% due to very strong market growth of over 20% and increased market share in the combined metastatic castrate resistant prostate cancer market. ZYTIGA has captured over 30% of that market and is up approximately 3.5 points sequentially. Operational sales outside the U.S. grew 85.2% versus second quarter 2012 and on a sequential basis, ZYTIGA was up over 20%. Additional country rollouts and the expansion of the label to chemo naïve patients drove the strong results. ZYTIGA is approved in more than 80 countries.

VELCADE is a treatment for multiple myeloma. Sales increased 22.7% on an operational basis. Strong performance in patient share in the frontline setting and the launch of the subcutaneous version continue to drive sales growth.

Other oncology increased primarily due to DOXIL/CAELYX. Other pharmaceutical products declined 2.7% on an operational basis with lower sales for ACIPHEX and PARIET, related primarily to generic competition. PROCRIT sales declined 18.1%, due primarily to a market decline. Positively impacting results, XARELTO sales grew over 20% on a sequential basis capturing nearly 39% of new to brand scripts in cardiology, surpassing warfarin. Total prescription share in the broader anticoagulant market grew 1.7 points on a sequential basis to 7.4%.

As an update on the pipeline, during the quarter, in immunology the FDA approved SIMPONI for the treatment of moderately to severely active ulcerative colitis and the EMA application for SIMPONI IV for the treatment of adults with moderately to severely active RA was resubmitted. In infectious diseases, a marketing authorization application was submitted to the European Medicines Agency seeking approval for simeprevir for Hepatitis C, and it was granted U.S. priority review status by the FDA with a PDUFA in late November. The European Commission approved a new twice daily dosing for INCIVO. In neuroscience, regarding bapineuzumab, JANSSEN Alzheimer Immunotherapy and its alliance partner Pfizer have decided to discontinue development of the subcutaneous formulation.

Studies with other compounds in earlier stages of development in the alliance portfolio are ongoing and future development strategies will be discussed jointly by the alliance partners. We remain committed to our efforts to discover and develop promising new treatments for people with Alzheimer's disease.

Regarding the stent thrombosis sNDA for XARELTO, a complete response letter was received from the FDA. We remain confident in the results of the ATLAS ACS trial and are in ongoing discussions with the FDA regarding this sNDA.

In oncology, Breakthrough Therapy Designation for daratumumab, for the treatment of certain patients with multiple myeloma was granted by the FDA and the positive opinion from the European authorities on two variations relating to the use of VELCADE were received.

The first recommendations for the use of VELCADE as retreatment in adult who had previously responded to the treatment with the same medicine, the second recommendation was for using induction combination therapy for certain adult patients. And, ibrutinib was submitted to the FDA for use in the treatment of previously treated patients with chronic lymphocytic leukemia or CLL, and small lymphocytic lymphoma or SLL and for its use in treatment of previously treated patients with mantle cell lymphoma or MCL.

That completes the review of the Pharmaceutical segment. I will now review the Medical Devices and Diagnostics segment results. Worldwide Medical Devices and Diagnostics segment sales of $7.2 billion grew 12% operationally as compared to the same period in 2012.

Currency had a negative impact of 2.4 points resulting in a total sales increase of 9.6%. Sales excluding the net impact of Synthes were up 0.5% on an operational basis, with U.S. sales down 3.3% and sales outside the U.S. up 3.5% on an operational basis. Adjusted for divestitures and exits from certain businesses, underlying growth was approximately 1.5%, reflecting continued market and pricing pressures. I will provide more commentary on these factors in the franchise reviews.

Now, turning to the MD&D businesses starting with, Cardiovascular Care. Cardiovascular Care sales were up 7.7% operationally, with U.S. up 4.6% and sales outside the U.S. up 9.6%, operationally, driven by Biosense Webster, our electrophysiology business with worldwide operational growth of over 16% in the quarter.

The success of a number of catheter launches made strong contributions to the results. The Diabetes Care business operational sales declined 11.8% in the second quarter of 2013 with U.S. business down 23.1%, due to the impact of lower price, competitive pressures and softness in the retail market. The business outside the U.S. was down 0.5%, operationally, with strong growth in the emerging markets offset by lower sales in many of the developed markets.

The Diagnostics business declined 4% on an operational basis. Excluding the impact of divestitures of RhoGAM and Theracos businesses operational sales grew approximately 2.5%, primarily due to growth and donors screening in the U.S. and emerging markets outside the U.S.

Infection Prevention increased 5.2% on an operational basis, with sales in the U.S. down 4% due to lower sales of capital equipment. Outside the U.S. operational growth of 12.3% was driven by both, consumables and capital item sales.

Orthopedic sales were up 48.9% on an operational basis when compared to the same period in 2012. Excluding the net impact of Synthes, operational sales were up approximately 3% with U.S. up approximately 2% and outside the U.S. up approximately 3.5%, operationally.

Operationally, Hips were up 4% worldwide driven by 5% growth in the U.S., due to strong results in primary stent platform sales, partially offset by continued pricing pressure. Hips outside the U.S. were up 4% on an operational basis, driven mainly by heads and acetabular products.

Knees worldwide increased 2% on an operational basis with the U.S. up 3% driven by the ATTUNE fixed bearing knee as well as revision platforms offset by lower sales of rotating platforms. Sales outside the U.S. were up 1%. Including the Synthes business in both periods and excluding the divested DePuy trauma business in both periods, trauma grew approximately 4% on an operational basis due to both, new products and stronger underlying demand.

Growth in the U.S. was 2% and 7%, operational outside the U.S. Including the Synthes business in both periods, worldwide spine was down 2% on an operational basis, with U.S. down approximately 7%, impacted by continued softness in the market, as well as the impact of the attrition of the commercial sales organization as we integrate the businesses. Outside the U.S., sales were up approximately 6% operationally with strong growth in Latin America, Canada and Asia-Pacific.

Specialty surgery operational growth was 2.8% in the second quarter of 2013. U.S. Sales were down 1.5% and sales outside the U.S. were up 7.5% on an operational basis. Strong sales of balloon sinuplasty products from Acclarent and biosurgical products were partially offset by lower sales of Mentor products due to competitive and pricing pressures. Sales of energy products were flat on an operational basis with new product launches and continued penetration driving strong sales outside the U.S. offset by softer sales of HARMONIC products in the U.S. Surgical care worldwide sales were down 1.2% on an operational basis with the U.S. down 4.2% and sales outside the U.S. up 0.6% operationally.

Negatively impacting growth were divestitures and business exits. Excluding these items, the underlying business was flat with lower sales of women's health and urology offset by strong demand for endocutter products, with the ECHELON FLEX Powered ENDOPATH Stapler.

Rounding out the review, the medical devices and diagnostics segment, our Vision Care business achieved operational sales growth of 5.4% in the second quarter with the U.S. up 3.6% and sales outside the U.S. up 6.4% operationally. Growth was driven by daily lenses and astigmatism lenses. That completes highlights for the medical devices and diagnostics segment and concludes the segment highlights for Johnson & Johnson second quarter of 2013.

It is now my pleasure to turn the call over to Alex Gorsky. Alex?

Alex Gorsky

Well, hello everyone and thank you, Louise, and thanks to everyone for joining us on this call today. Now it is really my pleasure to review our results for the first half of the year and also the progress we made under near-term priorities. Now, you recall, in January, that I discussed the framework for managing our business. The success of our enterprise is built first on Our Credo, which unites Johnson & Johnson as a global enterprise. Our strategic operating principles continue to service well in the evolving marketplace and with our four growth drivers, we have a sound approach to sustaining and driving growth in today's dynamic global healthcare environment.

At the mid-year point, we have achieved strong growth across our enterprise. A year ago, our team established a set of critical near-term priorities for moving the business forward. As part of our commitment to keeping you appraised of how we are doing against them, I am pleased to say that with the laser focus approach we have taken, we have made solid demonstrable progress in delivering on our financial commitments, restoring a reliable supply of OTC products to consumers, continuing the successful integration of Synthes and building on the strong momentum in our pharmaceutical business.

Reflecting our broad base of leadership in healthcare, we have generated sales of $35.4 billion thus far in 2013, up a strong 9.9% operationally versus this time a year ago, 4.8% operationally, excluding the net impact of Synthes. Medical devices and diagnostics represents 40% of our total sales, generating $14.3 billion in sales year-to-date. Sales grew 12% operationally driven by the positive growth contribution of the Synthes acquisition.

Excluding Synthes, overall growth in this segment was impacted by portfolio decisions to divest and exit certain businesses as well as the continued economic and pricing pressures within these markets. Underlying growth was essentially flat year-to-date. With $13.8 billion, the pharmaceutical segment represented 39% of our total sales and has continued its strong momentum reporting operational growth of 12.1%. Our consumer segment generated 21% of our total sales at $7.3 billion in revenue at an operational growth rate of 2.4%.

Now as the global economy evolves, more people are entering the middle-class in emerging markets and increasing demands on the healthcare system. As I outlined at our year-end earnings meeting in January, we are investing in growth and expansion in the broader emerging markets by leveraging our strong iconic brands as well as acquiring market specific products and to-date they account for nearly a quarter of our sales. As a subset of the emerging markets, we are also seeing growth in the brick nations, which account for approximately 10% of our overall sales this year.

We are encouraged by the double-digit growth rates we are seeing in these countries driven by our core pharmaceutical and the Indian consumer brands as well as the complementary acquisitions we have made in Russia and China. As our global reach with local focus, strategy for driving growth matures, we will overtime be introducing more products that will increase options for consumers in these fast-growing parts of the world.

Moving now to the segment highlights. I will start with pharmaceuticals. Our pharmaceutical segment continues to drive robust growth by delivering meaningful innovations that will improve patient care, demonstrating the effect of the transformation we made in this segment. I am very proud of the accomplishments that our pharma team has exhibited in this process.

Our market leading execution in support of the 11 new products we've launched since 2009 has led our Pharmaceuticals business to a record 13 consecutive quarters of operational growth. That pace positions us as the fastest growing, top-10 global pharmaceutical company and U.S. leader in new product sales. Those new products, which includes ZYTIGA, STELARA and INVEGA SUSTENNA comprise 24% of our global pharmaceutical sales in the first half of 2013.

Now, we gave you a full review of our Pharmaceutical business in May, at which time we announced our intention to file more than 10 new molecular entities and 25 significant brand line extensions by 2017, so today I will just comment on two important developments we made in the quarter within our oncology division since the meeting which will really help to increase our leadership position in the category.

As we announced last week, ibrutinib became one of the first medicines to be filed with the FDA and the new breakthrough therapy designation. And if approved, it will be a first-in-class treatment option for patients who received prior therapy for chronic lymphocytic leukemia and small lymphocytic lymphoma, and also for patients who received prior therapy for mantle cell lymphoma, population today have very limited options.

Now recognizing this need, we and our strategic partners at Pharmacyclics are pleased to have been able to open an expand access program for relapsed or refractory MCL patients in the U.S. The program began enrolling in May. It is allowed by the FDA as a means of making an investigational drug available to patients with a serious or immediately life-threatening disease without comparable or satisfactory alternatives.

We also announced a definitive agreement to acquire Aragon Pharmaceuticals, a move that will add their androgen receptor antagonist program to our R&D engine, including a lead development stage product ARN-509 for prostate cancer, which is attractive to us because the way it complements ZYTIGA were also increasing new options we can eventually offer patients in this important and growing segments of the oncology field.

So, now let's look at the market performance of some of our recent pharmaceutical launches. By combining superior science with best-in-class commercial capabilities, many of our newly launched products are delivering robust growth and outpacing our peers. As you can see, XARELTO, which is the broadest indication among novel oral anticoagulants is tracking well at of warfarin and the others in the category, in new to brand prescriptions among cardiologists and ZYTIGA is continuing on its strong growth trajectory gaining 22% in the U.S. chemo naïve market since its approval in this indication in December.

INVOKANA, our new treatment for Type 2 diabetes was launched in the U.S. in April, was demonstrating very strong early results with the primary care and endocrinologists. Access INVOKANA is also building steadily and we are seeing strong interest from payers. Overall, 80% of patients with commercial plans now have access to INVOKANA in either Tier 2 or Tier 3. The success coupled with the supported joining the forces our pharmaceutical group with our Diabetes Care business has helped INVOKANA overtake Januvia, Onglyza and Trajenta in share of new to brand prescriptions in the important Endocrinologists segment.

This type of early progress demonstrates the power of leveraging our enterprise-wide capabilities to offer patients a full solutions based approach to diabetes management, and we are looking at leveraging our broad capabilities across the enterprise to support the growth of our products in other categories in similar ways.

As I referred to earlier, the pace of growth in the global MD&D markets has slowed and competition is intensifying. In spite of the economic compression however, the medical device industry remains attractive and we are transforming our go-to-market approach to drive our competitiveness in this dynamic environment and ensure we continue to lead the sector.

With market-leading platforms and products, we succeeded in sustaining or grown share in the majority of our key platforms, holding number one or number two positions in about 85% of them. We are continuing to bring innovations to patients and providers through meaningful product launches that will help sustain and drive growth and we are especially excited about the steady cadence of innovation emerging across the segment.

For example, Biosense Webster, a business unit that's on track to deliver another year of double-digit growth as it has for more than 10 years in a row. Their nMARQ, circular ablation catheter is designed to reduce cardiac ablation procedure time and complexity to key customer needs. It launched last year in Europe and we began enrolling patients in the clinical trial that will support our regulatory filing in the U.S. planned for next year.

Also, the ThermoCool SmartTouch Catheter is an important innovative product that measures the catheter tip contact force and direction inside the heart during ablation procedures in real time. We launched this product in the EU in 2012 and compelling new safety and efficacy data were presented recently at the Heart Rhythm Society meeting. These data will be included in our application for U.S. approval that we plan to submit later this year.

We are also bringing products to patients to meet specific market needs. The Bioseal fibrin sealant in China is just one of many. We are Also focusing our resources to advance more strategic options in our portfolio that start with taking a comprehensive view on the disease like we have done in large chronic disease states such as diabetes. Now to help dim the cost curve in healthcare we are focusing our broad and diverse R&D approach and portfolio to deliver total solutions of products that will increase the clinical value we offer patients and providers as well as the economic value we offer for healthcare systems and payers across the globe.

Consider the ATTUNE knee system which DePuy Synthes has just recently launched. The development team conducted extensive research in its design to help improve functional outcomes for patients, performance for surgeons and efficiency for providers. From the patient perspective, ATTUNE is designed to provide better range of motion and address the unstable feeling some knee replacement patients experienced and also provides an extensive range of sizes for better patient matching. From the provider perspective, simply reducing the number of instruments used with ATTUNE in addition to several innovative design features flattens the learning curve and delivers more efficiencies for the surgeon and operating room staff.

Now an update on DePuy Synthes. We are a year into the integration and as we envisioned, by broadening our base of offerings and expanding our reach in emerging markets, we have built a compelling growth combination that solidified our leadership in the $40 billion global orthopedics and neurologics marketplace. Our joint reconstruction business continues to do well especially with hips in the U.S. which have grown approximately 5% thus far in 2013. The ATTUNE knee that I just described has had a favorable initial response.

In trauma, we are encouraged by the second quarter results that generated mid single-digit operational growth in international markets, fueled by Europe as well as in emerging markets, notably China. In spine, disruption due to sales force attrition has improved and favorable increases in volume are being seen as the sales force continues to see momentum with cross-selling by the combined forces especially outside the U.S. with operational growth this past quarter in the mid-single digits.

While we still have work to do in certain areas of the integration, we are making good progress and we are seeing the benefits of bringing a broader portfolio of products to our customers to cross-selling including the collaboration between our cranio-maxillofacial and Codman businesses. We are also looking forward to similar results and to begin cross-selling products from our power tools and biomaterials platforms.

Now as we advance, we see additional growth in synergy opportunities within the organization and we are turning our attention to R&D and manufacturing and supply chain and to standardizing the IT infrastructure across the globe to improve our focus, speed and efficiency in order to realize them. You will hear more about the progress of our orthopedics business in the third quarter when Michel Orsinger, our worldwide chairman for DePuy Synthes will be on the call.

Our consumer segment is showing signs of its continued return to growth through its increasing momentum in returning a reliable supply of U.S. OTC products to the shelves, the continued expansion of iconic brands in the emerging markets and an overall focused portfolio and management approach. Sandy Peterson, who joined at the end of last year has already made an important impact on the organization. As group worldwide chairman, she holds a broad leadership role leading our supply chain, information technology and our consumer business sector. She is bringing a high level of broad and relative experience to our enterprise and I am pleased to be turning the call over to her in just a minute so that she can discuss her vision and plans for these vital areas of our business.

To recap, the year is off to a strong start. We have also made strong progress against our near-term priorities and long-term growth drivers to help sustain and drive growth in this dynamic global market. I will end by thanking our employees who work everyday on behalf of the patients, communities and shareholders that depend on us to deliver a high-quality and innovative products and solutions.

Now it is my pleasure to turn the call over to Sandy Peterson.

Sandra Peterson

Thanks, Alex. I have been with Johnson & Johnson now a little over seven months. It has been a great beginning and the longer I am here, the more excited I am about our ability to have a meaningful impact on people's lives around the globe. I have had the privilege to work at a number of well-respected companies, both inside and outside of healthcare and across geographies.

With that perspective, I am convinced that Johnson & Johnson is uniquely differentiated by its virtue of its broad portfolio, talented people and geographic reach to make a profound difference in health care. As you know, health care across the globe is changing as governments and consumers work to improve the quality of care and the rolls that providers, healthcare professionals and retailers also adapt and become more global.

I have spent much of my time so far meeting our customers and colleagues around the globe and learning our business. I have been to our major business and manufacturing campuses in the US, Brazil, Ireland, Puerto Rico, Belgium, China, Singapore, Vietnam and Thailand. I have met with numerous retail and provider payer customers in the U.S. and in our key other regions, both, large global customers as well as small mom-and-pop operation. What is most striking to me is the talent and diversity of our colleagues around the globe. And equally impressive is experiencing our credo as the source of constancy and inspiration in a time of remarkable change inside our company and in health care across the globe.

Our consumer brands are strong and resilient. Our breadth is a source of strength and competitive advantage. Although we have been challenged in recent years, our reputation with consumers, retailers, healthcare professionals and providers remain strong. As you know, I have accountability for some of the company's key enterprise functions, supply chain, including quality and information technology, as well as our consumer business sector. This integrated portfolio affords us the capacity to leverage these important functions to help deliver innovation and value to our customers and company across sectors and across the globe. We have the opportunity to leverage our scale and breadth through world-class deployment of information technology services and supply chain to better serve the evolving needs of our customers and consumers.

Today, I will provide update related to our consumer businesses and the Johnson & Johnson supply chain. Let's start with what Alex had previously identified for you as one of our top enterprise-wide priorities, restoring a reliable supply of our U.S. OTC products. Our priorities in the U.S. OTC business are, first, to deliver on our consent decree milestones, second, to ensure reliable supply of OTC products to retailers and consumers. Third, to achieve both, brand leadership and sustained healthcare professional number one recommended status, fourth, to rebuild customer trust and become our customers' preferred partner and fifth to execute a return to market plan for core U.S. OTC brands and SKUs.

Our consent decree work plan was approved by the FDA without modification in the fourth quarter of 2012. We've achieved 100% on-time execution of the prescribed step through the second quarter. Additionally, all reports have been submitted to the FDA on time. We are making good progress on restoring our OTC brands to the shelf. We have achieve solid steady unit sale rates and consistent delivery commitments to customers and retailers.

By year end, our plan is to deliver reliable and consistent supply of three quarters of the product brands. In the first half of 2013, we achieved the U.S. OTC operational growth of 19.7%, which includes 26% growth in revenues in over-the-counter medicines, and we are winning the hearts of consumers as these products return to the shelves in all four segment cough, cold and flu, allergy, pain and digestive health. For instance, Extra Strength TYLENOL is the number one code in adult pain. Children's TYLENOL and MOTRIN are the top two SKUs in pediatric pain, and we are leading in other important categories such as allergy care with ZYRTEC and our digestive health brands IMODIUM and IMODIUM are returning the strength.

We are focusing on our top retail customers. We have achieved full distribution of key brands and point-of-sale has improved with all top retailers. We are partnering with them on strategic initiatives that are rebuilding our relationships and supporting their health and wellness strategies in order to educate consumers, simplify their purchasing experience and ultimately to help bring more consumers into their stores. Our strategic purpose for our consumer segment is caring for people around the world by anticipating their needs and creating solutions and experiences that help them and those they care for to live a healthy, vibrant lives and we are uniquely suited to do just that.

Our broad consumer portfolio, from well-being and beauty to health and (inaudible) is a competitive advantage as are our iconic brands. We have a legacy of innovation that leverages our scientific heritage and wins us unparalleled professional endorsements, trust-based relationships with healthcare professionals and deep consumer insights. We are applying the portfolio of discipline that calls on us to make choices that will drive global brand growth in key priority markets, including rationalizing SKUs and harmonizing formulations. With our long history in emerging markets, which represent a proportionately higher share of segment sales than elsewhere in Johnson & Johnson, we are globalizing existing brands such as Listerine, Motrin, Johnson's Baby and Carefree and complementing our portfolio with key local brands like Elsker in China and Rinzai and Dr. Mom brands in Russia.

Our consumer segment is not only a critical component of Johnson & Johnson's diverse portfolio and growth plan, our iconic brands are those that stakeholders most closely identify with Johnson & Johnson. We are pleased with the value creation opportunities ahead of us but we know, there is still work to be done to restore our OTC businesses to sustainable growth, while globalizing our remaining brand portfolio and investing in key market growth.

Let us now shift to how we are working to deliver a reliable and cost competitive supply of high quality products to our customers, consumers and patients across our businesses. Three years ago, we created a global enterprise supply chain. Our goal was to integrate into a network that would employ consistent quality standards and systems, leverage the scale and technological breadth of our portfolio and enable continuous production of cost-effective and high-quality products. This is a multiyear effort to integrate and leverage over 120 manufacturing sites, over 500 external manufacturers, 450 distribution centers and over 60 ERP systems that support about 275 operating companies. But the opportunity to leverage our scale and breadth to better meet our customers' evolving needs and maintain the highest quality and regulatory standards is significant.

We have implemented a new quality and compliance operating model to ensure consistent standards and capabilities across all products, businesses and geographies while strengthening independent oversight processes. For instance, we have adapted and are now deploying 34 common quality standards for all companies around the world. An independent internal audit program launched three years ago is ensuring that all Johnson & Johnson sites are in full compliance with health authority regulations and our own quality requirements.

Each of the three business segments has a chief quality officer responsible for developing the quality and compliance strategy and overseeing quality results for all companies in the segment globally. Each of the three business segments had the quality and compliance systems group to drive standardization and quality and compliance practices. We are evolving our supply chain model to enable leverage across our global network in sourcing, logistics, transportation and distribution management, and to strengthened business continuity plan.

Our improved product launch performance demonstrates tighter commercial integration. We have begun to consolidate and harmonize ours ERP landscape. This is a four-year program that will deliver efficiencies in terms of cost to offset pricing pressures and working capital improvements, supply reliability and flexibility for years to come.

We are integrating Synthes, into our global supply chain network and quality systems, and we are optimizing our products supply network both, internally and externally to meet our growth objectives for new product launches and emerging market growth.

Health care is a challenging, but intensely rewarding space. In a few months that I have been part of the Johnson & Johnson leadership team, I have gained even more conviction and we are making a real difference for consumers, for patients, for customers, providers and health care system. I see the enormous opportunity we have to do more and I am looking forward to growing our businesses and creating meaningful innovation for our customers and value for shareholders.

Thank you for the opportunity to share some of my thoughts with you today.

And now, I'll turn it over to Dominic.

Dominic Caruso

Thank you, Sandy, and good morning, everyone. It is really great to have Sandy join us today on the call and it's a real pleasure working with her as a new member of our executive committee,

I would like to now provide some brief comments about our results and also provide our guidance for you to consider in refining your models for the balance of 2013. I am pleased to say, we've had a strong first half of 2013. The breadth of our business, which provides balance and consistency to our overall performance, as well as the extraordinary achievements and dedication of our people in all of our locations around the world positions us well to sustain growth in this increasingly dynamic global health care market.

While there are some indicators of general economic improvement, the healthcare market data we see in terms of utilization is still relatively flat over the prior year, with just a modest sequential improvement over the first quarter utilization data. Overall, however, we continue to drive growth in many areas of our business, especially in the pharmaceutical segment with the launch of new products addressing unmet needs.

Alex and Louise already commented on our results for the quarter, so let me just mention the impact of special items this quarter. There were special items recorded in the other income and expense line during the second quarter of approximately $560 million on a pretax basis. That consisted of charges for litigation expense accruals related to various legal matters DePuy ASR hip program cost. And, as expected, continued costs associated with the global integration of Synthes. Excluding these special items, our adjusted earnings per share for the quarter of $1.48 exceeded the mean of the analyst estimates as published by first call. Now, let me provide some guidance for you to consider as you refine your models for 2013.

Let me begin with a discussion of cash and interest income and expense. At the end of the quarter, we had approximately $10 billion of net cash. This consists of approximately $25 billion of cash and marketable securities and $15 billion of debt. We continue to generate very strong cash flows. For purposes of your models assuming no major acquisitions, I suggest you consider modeling net interest expense of between $400 million and $450 million, a slight improvement from our previous guidance.

Turning now to other income and expense, as a reminder, this is the account where we record royalty income as well as gains and losses arising from such items as litigation, investments by our development corporation. and other divestitures, asset sales or write-offs. As previously disclosed, during the second quarter, we sold our equity interest in ECHELON and that gain is reflected in this line. This account is difficult to forecast, but we would be comfortable with your models for 2013, reflecting other income and expense as a net gain, excluding special items ranging from approximately $750 million to $850 million, which is consistent with our previous guidance and includes the gain from the sale of our equity interest in ECHELON.

Now, a word on taxes. Through the second quarter of 2013, the company's effective tax rate excluding special items was approximately 19.5%. We suggest that you model our effective tax rate for the full year 2013 at approximately between 19% and 20%, or slightly lower rate than our previous guidance. As always, we will continue to pursue opportunities in this area to improve upon this rate during the remainder of the year.

Now, turning to sales and earnings. We would be comfortable with your models reflecting operational sales growth on a constant currency basis of between approximately 6% and 7% for the year, which is higher than our previous guidance. This would result in estimated sales for 2013 on a constant currency basis of approximately $71.3 billion to $71.9 billion.

While we are not predicting the impact of currency movements, to give you an idea of the potential impact if currency exchange rates for the remainder of 2013 were to stay where they were as of last week, then our sales growth rate would be negatively impacted by approximately 2% for the year. Thus under this scenario, we would expect reported sales growth to be between approximately 4% and 5% for the year for an expected level of reported sales of approximately between $70 billion and $70.6 billion which is lower than our prior guidance simply due to the overall weakening of foreign currency rates versus the U.S. dollar, particularly the Japanese Yen, Brazilian Real and the British Pound.

Now, turning to earnings. Considering the strength we saw in our operating results for the first half, we suggest that you consider full year 2013 earnings per share estimates, excluding the impact of special items, of between $5.42 and $5.49 per share on an operational basis at constant currency rates or an operational growth rate of between 6.5% and 7.5%, which is higher than our previous guidance. As a reminder, the benefit from the Elan gain, as we noted, would largely be reinvested in the business and our other income guidance is unchanged. So this increase is related to the operational performance of the business which we see improving.

We are not predicting the impact of currency movements but to give you an idea of the potential impact on earnings per share if currency rates for the balance of 2013 were to remain where they were as of last week, then our reported EPS, excluding special items, would be negatively impacted by approximately $0.02 per share or $0.04 lower than the impact we had previously estimated in our guidance solely due to exchange rate fluctuations. We therefore suggest that you model our reported earnings per share excluding special items in the range between $5.40 and $5.47 per share or a growth rate of between 6% and 7%, resulting in a reported EPS guidance being higher than our previous reported EPS guidance, reflecting our strong operational performance somewhat offset by the movement in currency rates.

Overall, as you update your models for the guidance I just provided, you should see pretax operating margins will continue to show improvement over the prior year as we indicated at the beginning of this year and which we feel confident we can achieve, given the strength our operating performance while we continue to invest for future growth.

Now, Louise, back to you for the Q&A session.

Louise Mehrotra

Thank you, Dominic. Stephanie, can you please give the instructions for the Q&A session?

Earnings Call Part 2: Q&A with Johnson & Johnson CEO at SeekingAlpha.com

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