2Q 10Q 6-30-13
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ | | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2013 |
or
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o | | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to |
Commission file number 1-3215
(Exact name of registrant as specified in its charter)
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NEW JERSEY (State or other jurisdiction of incorporation or organization) | | 22-1024240 (I.R.S. Employer Identification No.) |
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
(Address of principal executive offices)
Registrant’s telephone number, including area code (732) 524-0400
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ | | Accelerated filer o | | Non-accelerated filer o | | Smaller reporting company o |
| | | | (Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
On July 26, 2013 2,818,073,863 shares of Common Stock, $1.00 par value, were outstanding.
JOHNSON & JOHNSON AND SUBSIDIARIES
TABLE OF CONTENTS
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EX-31.1 |
EX-32.1 |
EX-101 INSTANCE DOCUMENT |
EX-101 SCHEMA DOCUMENT |
EX-101 CALCULATION LINKBASE DOCUMENT |
EX-101 LABELS LINKBASE DOCUMENT |
EX-101 PRESENTATION LINKBASE DOCUMENT |
EX-101 DEFINITION LINKBASE DOCUMENT |
Part I — FINANCIAL INFORMATION
Item 1 — FINANCIAL STATEMENTS
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions Except Share and Per Share Data)
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| | June 30, 2013 | | December 30, 2012 |
ASSETS |
Current assets: | | | | |
Cash and cash equivalents | | $ | 17,307 |
| | $ | 14,911 |
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Marketable securities | | 7,822 |
| | 6,178 |
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Accounts receivable, trade, less allowances for doubtful accounts $421(2012, $466) | | 11,614 |
| | 11,309 |
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Inventories (Note 2) | | 7,822 |
| | 7,495 |
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Deferred taxes on income | | 3,283 |
| | 3,139 |
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Prepaid expenses and other receivables | | 3,425 |
| | 3,084 |
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Total current assets | | 51,273 |
| | 46,116 |
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Property, plant and equipment at cost | | 35,401 |
| | 34,654 |
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Less: accumulated depreciation | | (19,607 | ) | | (18,557 | ) |
Property, plant and equipment, net | | 15,794 |
| | 16,097 |
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Intangible assets, net (Note 3) | | 27,704 |
| | 28,752 |
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Goodwill (Note 3) | | 22,337 |
| | 22,424 |
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Deferred taxes on income | | 4,740 |
| | 4,541 |
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Other assets | | 2,477 |
| | 3,417 |
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Total assets | | $ | 124,325 |
| | $ | 121,347 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
Current liabilities: | | | | |
Loans and notes payable | | $ | 5,339 |
| | $ | 4,676 |
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Accounts payable | | 5,687 |
| | 5,831 |
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Accrued liabilities | | 6,646 |
| | 7,299 |
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Accrued rebates, returns and promotions | | 3,138 |
| | 2,969 |
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Accrued compensation and employee related obligations | | 2,001 |
| | 2,423 |
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Accrued taxes on income | | 956 |
| | 1,064 |
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Total current liabilities | | 23,767 |
| | 24,262 |
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Long-term debt (Note 4) | | 9,643 |
| | 11,489 |
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Deferred taxes on income | | 3,685 |
| | 3,136 |
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Employee related obligations | | 8,996 |
| | 9,082 |
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Other liabilities | | 8,569 |
| | 8,552 |
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Total liabilities | | 54,660 |
| | 56,521 |
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Shareholders’ equity: | | | | |
Common stock — par value $1.00 per share (authorized 4,320,000,000 shares; issued 3,119,843,000 shares) | | $ | 3,120 |
| | $ | 3,120 |
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Accumulated other comprehensive income (loss) (Note 7) | | (6,810 | ) | | (5,810 | ) |
Retained earnings | | 89,449 |
| | 85,992 |
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Less: common stock held in treasury, at cost (305,655,000 and 341,354,000 shares) | | 16,094 |
| | 18,476 |
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Total shareholders’ equity | | 69,665 |
| | 64,826 |
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Total liabilities and shareholders' equity | | $ | 124,325 |
| | $ | 121,347 |
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See Notes to Consolidated Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; Dollars & Shares in Millions Except Per Share Amounts)
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| | Fiscal Second Quarters Ended |
| | June 30, 2013 | | Percent to Sales | | July 1, 2012 | | Percent to Sales |
Sales to customers (Note 9) | | $ | 17,877 |
| | 100.0 | % | | $ | 16,475 |
| | 100.0 | % |
Cost of products sold | | 5,489 |
| | 30.7 |
| | 5,143 |
| | 31.2 |
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Gross profit | | 12,388 |
| | 69.3 |
| | 11,332 |
| | 68.8 |
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Selling, marketing and administrative expenses | | 5,376 |
| | 30.1 |
| | 4,965 |
| | 30.1 |
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Research and development expense | | 1,946 |
| | 10.9 |
| | 1,766 |
| | 10.7 |
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In-process research and development | | — |
| | — |
| | 429 |
| | 2.6 |
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Interest income | | (17 | ) | | (0.1 | ) | | (14 | ) | | (0.1 | ) |
Interest expense, net of portion capitalized | | 118 |
| | 0.7 |
| | 143 |
| | 0.9 |
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Other (income) expense, net | | 172 |
| | 0.9 |
| | 2,008 |
| | 12.2 |
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Earnings before provision for taxes on income | | 4,793 |
| | 26.8 |
| | 2,035 |
| | 12.4 |
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Provision for taxes on income (Note 5) | | 960 |
| | 5.4 |
| | 627 |
| | 3.9 |
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NET EARNINGS | | $ | 3,833 |
| | 21.4 | % | | $ | 1,408 |
| | 8.5 | % |
NET EARNINGS PER SHARE (Note 8) | | | | | | | | |
Basic | | $ | 1.36 |
| | | | $ | 0.51 |
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Diluted | | $ | 1.33 |
| | | | $ | 0.50 |
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CASH DIVIDENDS PER SHARE | | $ | 0.66 |
| | | | $ | 0.61 |
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AVG. SHARES OUTSTANDING | | | | | | | | |
Basic | | 2,809.7 |
| | | | 2,747.4 |
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Diluted | | 2,893.0 |
| | | | 2,798.2 |
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See Notes to Consolidated Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; Dollars & Shares in Millions Except Per Share Amounts)
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| | Fiscal Six Months Ended |
| | June 30, 2013 | | Percent to Sales | | July 1, 2012 | | Percent to Sales |
Sales to customers (Note 9) | | $ | 35,382 |
| | 100.0 | % | | $ | 32,614 |
| | 100.0 | % |
Cost of products sold | | 11,043 |
| | 31.2 |
| | 10,058 |
| | 30.8 |
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Gross profit | | 24,339 |
| | 68.8 |
| | 22,556 |
| | 69.2 |
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Selling, marketing and administrative expenses | | 10,599 |
| | 30.0 |
| | 9,980 |
| | 30.6 |
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Research and development expense | | 3,730 |
| | 10.5 |
| | 3,411 |
| | 10.5 |
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In-process research and development | | 64 |
| | 0.2 |
| | 429 |
| | 1.3 |
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Interest income | | (38 | ) | | (0.1 | ) | | (31 | ) | | (0.1 | ) |
Interest expense, net of portion capitalized | | 243 |
| | 0.7 |
| | 290 |
| | 0.9 |
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Other (income) expense, net | | 687 |
| | 1.9 |
| | 1,397 |
| | 4.3 |
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Earnings before provision for taxes on income | | 9,054 |
| | 25.6 |
| | 7,080 |
| | 21.7 |
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Provision for taxes on income (Note 5) | | 1,724 |
| | 4.9 |
| | 1,762 |
| | 5.4 |
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NET EARNINGS | | $ | 7,330 |
| | 20.7 | % | | $ | 5,318 |
| | 16.3 | % |
NET EARNINGS PER SHARE (Note 8) | | | | | | | | |
Basic | | $ | 2.62 |
| | | | $ | 1.94 |
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Diluted | | $ | 2.55 |
| | | | $ | 1.91 |
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CASH DIVIDENDS PER SHARE | | $ | 1.27 |
| | | | $ | 1.18 |
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AVG. SHARES OUTSTANDING | | | | | | | | |
Basic | | 2,799.5 |
| | | | 2,741.7 |
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Diluted | | 2,878.8 |
| | | | 2,792.4 |
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See Notes to Consolidated Financial Statements |
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; Dollars in Millions)
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| Fiscal Second Quarters Ended | | Fiscal Six Months Ended |
| June 30, 2013 | | July 1, 2012 | | June 30, 2013 | | July 1, 2012 |
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Net Earnings | $ | 3,833 |
| | 1,408 |
| | 7,330 |
| | 5,318 |
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Other Comprehensive Income (Loss), net of tax | | | | | | | |
Foreign currency translation | (116 | ) | | (1,619 | ) | | (1,326 | ) | | (796 | ) |
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Securities: | | | | | | | |
Unrealized holding gain (loss) arising during period | 2 |
| | (38 | ) | | 179 |
| | 69 |
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Reclassifications to earnings | (289 | ) | | — |
| | (289 | ) | | (1 | ) |
Net change | (287 | ) | | (38 | ) | | (110 | ) | | 68 |
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Employee benefit plans: | | | | | | | |
Prior service cost amortization during period | — |
| | — |
| | 2 |
| | 1 |
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Gain (loss) amortization during period | 131 |
| | 95 |
| | 260 |
| | 188 |
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Net change | 131 |
| | 95 |
| | 262 |
| | 189 |
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Derivatives & hedges: | | | | | | | |
Unrealized gain (loss) arising during period | 178 |
| | (111 | ) | | 183 |
| | (85 | ) |
Reclassifications to earnings | (27 | ) | | 9 |
| | (9 | ) | | 52 |
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Net change | 151 |
| | (102 | ) | | 174 |
| | (33 | ) |
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Other Comprehensive Income (Loss) | (121 | ) | | (1,664 | ) | | (1,000 | ) | | (572 | ) |
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Comprehensive Income (Loss) | $ | 3,712 |
| | (256 | ) | | 6,330 |
| | 4,746 |
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See Notes to Consolidated Financial Statements
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The tax effects in other comprehensive income for the fiscal second quarters were as follows for 2013 and 2012, respectively: Securities: $155 million and $20 million; Employee Benefit Plans: $67 million and $49 million; Derivatives & Hedges: $81 million and $55 million. |
The tax effects in other comprehensive income for the fiscal six months were as follows for 2013 and 2012, respectively: Securities: $60 million and $37 million; Employee Benefit Plans: $136 million and $98 million; Derivatives & Hedges: $93 million and $18 million. |
Foreign currency translation is not adjusted for income taxes as it relates to permanent investments in international subsidiaries. |
JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited; Dollars in Millions) |
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| | Fiscal Six Months Ended |
| | June 30, 2013 | | July 1, 2012 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | |
Net earnings | | $ | 7,330 |
| | $ | 5,318 |
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Adjustments to reconcile net earnings to cash flows from operating activities: | | | | |
Depreciation and amortization of property and intangibles | | 2,026 |
| | 1,625 |
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Stock based compensation | | 423 |
| | 369 |
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Venezuela currency devaluation | | 108 |
| | — |
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Asset write-downs | | 69 |
| | 1,368 |
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Net gain on equity investment transactions | | (401 | ) | | — |
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Deferred tax provision | | 92 |
| | (511 | ) |
Accounts receivable allowances | | (29 | ) | | 83 |
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Changes in assets and liabilities, net of effects from acquisitions: | | | | |
(Increase)/decrease in accounts receivable | | (647 | ) | | 155 |
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Increase in inventories | | (547 | ) | | (618 | ) |
(Decrease)/increase in accounts payable and accrued liabilities | | (715 | ) | | 899 |
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Increase in other current and non-current assets | | (437 | ) | | (512 | ) |
Increase/(Decrease) in other current and non-current liabilities | | 56 |
| | (1,136 | ) |
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NET CASH FLOWS FROM OPERATING ACTIVITIES | | 7,328 |
| | 7,040 |
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CASH FLOWS FROM INVESTING ACTIVITIES | | | | |
Additions to property, plant and equipment | | (1,357 | ) | | (1,100 | ) |
Proceeds from the disposal of assets | | 147 |
| | 690 |
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Acquisitions, net of cash acquired | | (174 | ) | | (4,324 | ) |
Purchases of investments | | (8,569 | ) | | (5,211 | ) |
Sales of investments | | 7,997 |
| | 9,883 |
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Other | | (16 | ) | | (8 | ) |
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NET CASH USED BY INVESTING ACTIVITIES | | (1,972 | ) | | (70 | ) |
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CASH FLOWS FROM FINANCING ACTIVITIES | | | | |
Dividends to shareholders | | (3,562 | ) | | (3,241 | ) |
Repurchase of common stock | | — |
| | (12,919 | ) |
Proceeds from short-term debt | | 1,682 |
| | 2,518 |
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Retirement of short-term debt | | (1,274 | ) | | (4,780 | ) |
Proceeds from long-term debt | | 6 |
| | 6 |
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Retirement of long-term debt | | (1,504 | ) | | (10 | ) |
Proceeds from the exercise of stock options/excess tax benefits | | 1,842 |
| | 1,148 |
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Other | | 56 |
| | (160 | ) |
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NET CASH USED BY FINANCING ACTIVITIES | | (2,754 | ) | | (17,438 | ) |
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Effect of exchange rate changes on cash and cash equivalents | | (206 | ) | | (32 | ) |
Increase/(decrease) in cash and cash equivalents | | 2,396 |
| | (10,500 | ) |
Cash and Cash equivalents, beginning of period | | 14,911 |
| | 24,542 |
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CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 17,307 |
| | $ | 14,042 |
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JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited; Dollars in Millions) |
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| | Fiscal Six Months Ended |
| | June 30, 2013 | | July 1, 2012 |
Supplemental schedule of non-cash investing and financing activities | | | | |
Issuance of common stock associated with the acquisition of Synthes, Inc. | | $ | — |
| | 13,335 |
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Acquisitions | | | | |
Fair value of assets acquired | | $ | 192 |
| | $ | 18,868 |
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Fair value of liabilities assumed and noncontrolling interests | | (18 | ) | | (1,209 | ) |
Net fair value of acquisitions | | 174 |
| | 17,659 |
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Less: Issuance of common stock associated with the acquisition of Synthes, Inc. | | — |
| | 13,335 |
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Net cash paid for acquisitions | | $ | 174 |
| | $ | 4,324 |
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See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of Johnson & Johnson and its subsidiaries (the Company) and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2012. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented.
During the fiscal first quarter of 2013, the Company adopted the Financial Accounting Standards Board (FASB) guidance and amendments related to testing indefinite-lived intangible assets for impairment. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to determine the fair value. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. This update became effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this standard is not expected to have a material impact on the Company’s results of operations, cash flows or financial position.
During the fiscal first quarter of 2013, the Company adopted the FASB guidance related to additional reporting and disclosure of amounts reclassified out of accumulated other comprehensive income (AOCI). Under this new guidance, companies are required to disclose the effect of significant reclassifications out of AOCI on the respective line items on the income statement if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional details about those amounts. This update became effective for annual and interim reporting periods for fiscal years beginning after December 15, 2012. The Company has disclosed the reclassification details in Note 7 to the Consolidated Financial Statements.
During the fiscal first quarter of 2013, the FASB issued amended guidance clarifying the release of accumulated Foreign Currency Translation from OCI into current year Net Earnings. The amendment requires that when the parent company ceases to have a controlling interest in a subsidiary or a business within a foreign entity the parent is to release accumulated Foreign Currency Translation from OCI. This update is required to be adopted for all annual periods and interim reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company's results of operations, cash flows or financial position.
In July 2013, the FASB adopted clarifying guidance on the presentation of unrecognized tax benefits when various qualifying tax credits exist. The amendment requires that unrecognized tax benefits be presented on the Consolidated Balance Sheet as a reduction to deferred tax assets created by net operating losses or other tax credits from prior periods that occur in the same taxing jurisdiction. To the extent that the unrecognized tax benefit exceeds these credits, it shall be presented as a liability. This update is required to be adopted for all annual periods and interim reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the presentation of the Company's financial position.
Revision to previously issued Cash Flow Statement related to the Synthes acquisition
As previously disclosed in the third quarter of 2012, a misclassification was identified with respect to the manner in which the Company presented the shares of common stock issued in connection with the acquisition of Synthes, Inc. in the Consolidated Statement of Cash Flows for the six months ended July 1, 2012. The Company determined that the issuance of these shares, including appreciation between June 13, 2012 and June 14, 2012, should have been reported as supplemental non-cash information. The effect of the misclassification in the Statement of Cash Flows for the six months ended July 1, 2012 resulted in net cash used by investing activities to be overstated by $13.3 billion, net cash used by financing activities to be understated by $12.8 billion and net cash flows from operating activities to be overstated by $0.5 billion. The Company assessed this misclassification and concluded that it was not material to the Company's previously issued financial statements. The revised Consolidated Statement of Cash Flows for the six month period ended July 1, 2012 is included in this Form 10-Q. The Company's Consolidated Statements of Earnings for the fiscal second quarter and fiscal six months ended July 1, 2012 and the Consolidated Balance Sheet as of July 1, 2012 remain unchanged.
NOTE 2 — INVENTORIES
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(Dollars in Millions) | | June 30, 2013 | | December 30, 2012 |
Raw materials and supplies | | $ | 1,332 |
| | 1,416 |
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Goods in process | | 2,604 |
| | 2,262 |
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Finished goods | | 3,886 |
| | 3,817 |
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Total inventories | | $ | 7,822 |
| | 7,495 |
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NOTE 3 — INTANGIBLE ASSETS AND GOODWILL
Intangible assets that have finite useful lives are amortized over their estimated useful lives. The latest impairment assessment of goodwill and indefinite lived intangible assets was completed in the fiscal fourth quarter of 2012. Future impairment tests for goodwill and indefinite lived intangible assets will be performed annually in the fiscal fourth quarter, or sooner if warranted, as was the case for the Acclarent IPR&D in the fiscal first quarter of 2013.
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(Dollars in Millions) | | June 30, 2013 | | December 30, 2012 |
Intangible assets with definite lives: | | | | |
Patents and trademarks — gross | | $ | 8,878 |
| | 8,890 |
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Less accumulated amortization | | 3,647 |
| | 3,416 |
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Patents and trademarks — net | | 5,231 |
| | 5,474 |
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Customer relationships and other intangibles — gross | | 18,539 |
| | 18,755 |
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Less accumulated amortization | | 4,410 |
| | 4,030 |
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Customer relationships and other intangibles — net | | 14,129 |
| | 14,725 |
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Intangible assets with indefinite lives: | | | | |
Trademarks | | 7,501 |
| | 7,648 |
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Purchased in-process research and development | | 843 |
| | 905 |
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Total intangible assets with indefinite lives | | 8,344 |
| | 8,553 |
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Total intangible assets — net | | $ | 27,704 |
| | 28,752 |
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Goodwill as of June 30, 2013 was allocated by segment of business as follows:
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(Dollars in Millions) | | Consumer | | Pharm | | Med Dev & Diag | | Total |
Goodwill, net at December 30, 2012 | | $ | 8,519 |
| | 1,792 |
| | 12,113 |
| | 22,424 |
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Acquisitions | | 80 |
| | — |
| | 9 |
| | 89 |
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Currency translation/Other | | (188 | ) | | (14 | ) | | 26 |
| | (176 | ) |
Goodwill, net as of June 30, 2013 | | $ | 8,411 |
| | 1,778 |
| | 12,148 |
| | 22,337 |
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The weighted average amortization periods for patents and trademarks and customer relationships and other intangible assets are 17 years and 24 years, respectively. The amortization expense of amortizable intangible assets was $653 million and $488 million for the fiscal six months ended June 30, 2013 and July 1, 2012, respectively. The estimated amortization expense for the five succeeding years approximates $1,300 million, before tax, per year. Amortization expense is included in cost of products sold.
NOTE 4 — FAIR VALUE MEASUREMENTS
The Company uses forward exchange contracts to manage its exposure to the variability of cash flows, primarily related to the foreign exchange rate changes of future intercompany product and third-party purchases of materials denominated in foreign
currency. The Company also uses cross currency interest rate swaps to manage currency risk primarily related to borrowings. Both types of derivatives are designated as cash flow hedges. The Company also uses forward exchange contracts to manage its exposure to the variability of cash flows for repatriation of foreign dividends. These contracts are designated as net investment hedges. Additionally, the Company uses forward exchange contracts to offset its exposure to certain foreign currency assets and liabilities. These forward exchange contracts are not designated as hedges, and therefore, changes in the fair values of these derivatives are recognized in earnings, thereby offsetting the current earnings effect of the related foreign currency assets and liabilities. The Company does not enter into derivative financial instruments for trading or speculative purposes, or that contain credit risk related contingent features or requirements to post collateral. On an ongoing basis, the Company monitors counterparty credit ratings. The Company considers credit non-performance risk to be low, because the Company enters into agreements with commercial institutions that have at least an A (or equivalent) credit rating. As of June 30, 2013, the Company had notional amounts outstanding for forward foreign exchange contracts and cross currency interest rate swaps of $25.0 billion and $2.4 billion, respectively.
All derivative instruments are recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction, and if so, the type of hedge transaction.
The designation as a cash flow hedge is made at the entrance date of the derivative contract. At inception, all derivatives are expected to be highly effective. Changes in the fair value of a derivative that is designated as a cash flow hedge and is highly effective are recorded in accumulated other comprehensive income until the underlying transaction affects earnings, and are then reclassified to earnings in the same account as the hedged transaction. Gains/losses on net investment hedges are accounted for through the currency translation account and are insignificant. On an ongoing basis, the Company assesses whether each derivative continues to be highly effective in offsetting changes in the cash flows of hedged items. If and when a derivative is no longer expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is included in current period earnings in Other (income) expense, net.
As of June 30, 2013, the balance of deferred net gains on derivatives included in accumulated other comprehensive income was $182 million after-tax. For additional information, see the Consolidated Statements of Comprehensive Income and Note 7. The Company expects that substantially all of the amounts related to foreign exchange contracts will be reclassified into earnings over the next 12 months as a result of transactions that are expected to occur over that period. The maximum length of time over which the Company is hedging transaction exposure is 18 months excluding interest rate swaps. The amount ultimately realized in earnings will differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity of the derivative.
The following table is a summary of the activity related to derivatives designated as hedges for the fiscal second quarters in 2013 and 2012:
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Gain/(Loss) Recognized in Accumulated OCI(1) | | Gain/(Loss) Reclassified from Accumulated OCI into Income(1) | | Gain/(Loss) Recognized in Other Income/Expense(2) |
| | Fiscal Second Quarters Ended |
Cash Flow Hedges by Income Statement Caption | | June 30, 2013 | | July 1, 2012 | | June 30, 2013 | | July 1, 2012 | | June 30, 2013 | | July 1, 2012 |
(Dollars in Millions) | | | | | | | | | | | | |
Sales to customers(3) | | $ | 34 |
| | (42 | ) | | 10 |
| | (10 | ) | | — |
| | (1 | ) |
Cost of products sold(3) | | 173 |
| | (97 | ) | | 38 |
| | (13 | ) | | 6 |
| | 1 |
|
Research and development expense(3) | | (17 | ) | | 30 |
| | (14 | ) | | 11 |
| | — |
| | — |
|
Interest (income)/Interest expense, net(4) | | 18 |
| | (41 | ) | | (2 | ) | | (6 | ) | | — |
| | — |
|
Other (income)expense, net(3) | | (30 | ) | | 39 |
| | (5 | ) | | 9 |
| | (1 | ) | | (1 | ) |
Total | | $ | 178 |
| | (111 | ) | | 27 |
| | (9 | ) | | 5 |
| | (1 | ) |
The following table is a summary of the activity related to derivatives designated as hedges for the fiscal six months in 2013 and 2012:
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Gain/(Loss) Recognized in Accumulated OCI(1) | | Gain/(Loss) Reclassified from Accumulated OCI into Income(1) | | Gain/(Loss) Recognized in Other Income/Expense(2) |
| | Fiscal Six Months Ended |
Cash Flow Hedges by Income Statement Caption | | June 30, 2013 | | July 1, 2012 | | June 30, 2013 | | July 1, 2012 | | June 30, 2013 | | July 1, 2012 |
(Dollars in Millions) | | | | | | | | | | | | |
Sales to customers(3) | | $ | (3 | ) | | (14 | ) | | 7 |
| | (30 | ) | | — |
| | — |
|
Cost of products sold(3) | | 178 |
| | (39 | ) | | 21 |
| | (34 | ) | | 4 |
| | — |
|
Research and development expense(3) | | (7 | ) | | 11 |
| | (17 | ) | | 13 |
| | (3 | ) | | — |
|
Interest (income)/Interest expense, net(4) | | 8 |
| | (42 | ) | | (4 | ) | | (9 | ) | | — |
| | — |
|
Other (income)expense, net(3) | | 7 |
| | (1 | ) | | 2 |
| | 8 |
| | (1 | ) | | (1 | ) |
Total | | $ | 183 |
| | (85 | ) | | 9 |
| | (52 | ) | | — |
| | (1 | ) |
| | | | | | | | | | | | |
All amounts shown in the tables above are net of tax.
(1) Effective portion
(2) Ineffective portion
(3) Foreign exchange contracts
(4) Cross currency interest rate swaps
For the fiscal second quarters ended June 30, 2013 and July 1, 2012, a gain of $94 million and a loss of $17 million, respectively, were recognized in Other (income)expense, net, relating to foreign exchange contracts not designated as hedging instruments.
For the first fiscal six months ended June 30, 2013 and July 1, 2012, a gain of $50 million and a loss of $26 million, respectively, were recognized in Other (income)expense, net, relating to foreign exchange contracts not designated as hedging instruments.
Fair value is the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that is determined using assumptions that market participants would use in pricing an asset or liability. The authoritative literature establishes a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels within the hierarchy are described below with Level 1 having the highest priority and Level 3 having the lowest.
The fair value of a derivative financial instrument (i.e., foreign exchange contract or cross currency interest rate swap) is the aggregation by currency of all future cash flows discounted to its present value at the prevailing market interest rates and subsequently converted to the U.S. dollar at the current spot foreign exchange rate. The Company does not believe that fair values of these derivative instruments materially differ from the amounts that could be realized upon settlement or maturity, or that the changes in fair value will have a material effect on the Company’s results of operations, cash flows or financial position. The Company also holds equity investments which are classified as Level 1 because they are traded in an active exchange market. The Company did not have any other significant financial assets or liabilities which would require revised valuations under this standard that are recognized at fair value.
The following three levels of inputs are used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets and liabilities.
Level 2 — Significant other observable inputs.
Level 3 — Significant unobservable inputs.
The Company’s significant financial assets and liabilities measured at fair value as of June 30, 2013 and December 30, 2012 were as follows:
|
| | | | | | | | | | | | | | | | |
| | June 30, 2013 | | | | December 30, 2012 |
(Dollars in Millions) | | Level 1 | | Level 2 | | Level 3 | | Total | | Total(2) |
Derivatives designated as hedging instruments: | | | | | | | | | | |
Assets: | | | | | | | | | | |
Foreign exchange contracts | | $ | — |
| | 693 |
| | — |
| | 693 |
| | 423 |
|
Cross currency interest rate swaps(3) | | — |
| | 59 |
| | — |
| | 59 |
| | 98 |
|
Total | | — |
| | 752 |
| | — |
| | 752 |
| | 521 |
|
Liabilities: | | | | | | | | | | |
Foreign exchange contracts | | — |
| | 163 |
| | — |
| | 163 |
| | 252 |
|
Cross currency interest rate swaps(4) | | — |
| | 28 |
| | — |
| | 28 |
| | 10 |
|
Total | | — |
| | 191 |
| | — |
| | 191 |
| | 262 |
|
Derivatives not designated as hedging instruments: | | | | | | | | | | |
Assets: | | | | | | | | | | |
Foreign exchange contracts | | — |
| | 27 |
| | — |
| | 27 |
| | 75 |
|
Liabilities: | | | | | | | | | | |
Foreign exchange contracts | | — |
| | 66 |
| | — |
| | 66 |
| | 23 |
|
Other Investments(1) | | $ | 295 |
| | — |
| | — |
| | 295 |
| | 1,247 |
|
| |
(1) | Classified as non-current other assets. The change in the fair value from December 30, 2012 was primarily due to the sale of Elan American Depositary Shares. |
| |
(2) | As of December 30, 2012, these assets and liabilities are classified as Level 2 with the exception of Other Investments of $1,247 million which are classified as Level 1. |
| |
(3) | Includes $57 million and $96 million of non-current assets for June 30, 2013 and December 30, 2012, respectively. |
| |
(4) | Includes $25 million and $4 million of non-current liabilities for June 30, 2013 and December 30, 2012, respectively. |
Financial Instruments not measured at Fair Value:
The following financial assets and liabilities are held at carrying amount on the consolidated balance sheet as of June 30, 2013:
|
| | | | | | | |
(Dollars in Millions) | | Carrying Amount |
| | Estimated Fair Value |
|
Financial Assets | | | | |
Current Investments | | | | |
Cash | | $ | 2,947 |
| | 2,947 |
|
Government securities and obligations | | 19,695 |
| | 19,695 |
|
Corporate debt securities | | 687 |
| | 687 |
|
Money market funds | | 1,260 |
| | 1,260 |
|
Time deposits | | 540 |
| | 540 |
|
Total cash, cash equivalents and current marketable securities | | $ | 25,129 |
| | 25,129 |
|
| | | | |
Fair value of government securities and obligations and corporate debt securities was estimated using quoted broker prices and significant other observable inputs. |
Financial Liabilities | | | | |
| | | | |
Current Debt | | $ | 5,339 |
| | 5,339 |
|
Non-Current Debt | | | | |
2.15% Notes due 2016 | | 898 |
| | 933 |
|
5.55% Debentures due 2017 | | 1,000 |
| | 1,162 |
|
5.15% Debentures due 2018 | | 898 |
| | 1,038 |
|
4.75% Notes due 2019 (1B Euro 1.3033) | | 1,298 |
| | 1,556 |
|
3% Zero Coupon Convertible Subordinated Debentures due in 2020 | | 204 |
| | 298 |
|
2.95% Debentures due 2020 | | 542 |
| | 560 |
|
3.55% Notes due 2021 | | 446 |
| | 472 |
|
6.73% Debentures due 2023 | | 250 |
| | 327 |
|
5.50% Notes due 2024 (500 GBP 1.5248) | | 757 |
| | 913 |
|
6.95% Notes due 2029 | | 296 |
| | 399 |
|
4.95% Debentures due 2033 | | 500 |
| | 556 |
|
5.95% Notes due 2037 | | 995 |
| | 1,240 |
|
5.85% Debentures due 2038 | | 700 |
| | 859 |
|
4.50% Debentures due 2040 | | 539 |
| | 562 |
|
4.85% Notes due 2041 | | 298 |
| | 322 |
|
Other | | 22 |
| | 22 |
|
Total Non-Current Debt | | $ | 9,643 |
| | 11,219 |
|
The weighted average effective interest rate on non-current debt is 5.10%.
Fair value of the non-current debt was estimated using market prices, which were corroborated by quoted broker prices and significant other observable inputs.
NOTE 5 — INCOME TAXES
The worldwide effective income tax rates for the fiscal six months of 2013 and 2012 were 19.0% and 24.9%, respectively. The lower effective tax rate in 2013 as compared to 2012 was primarily due to the inclusion of the benefit from the U.S. Research & Development (R&D) tax credit and the Controlled Foreign Corporation (CFC) look-through provisions from the 2012 fiscal year and increases in taxable income in lower tax jurisdictions relative to higher tax jurisdictions. The higher effective tax rate in 2012 was also due to lower tax rates associated with the deductions for Synthes integration and transaction costs and litigation accruals, which added approximately 3.0 points to the tax rate. The R&D tax credit and the CFC look-through provisions were enacted into law in January 2013 and were retroactive to January 1, 2012. The entire 2012 R&D tax credit and the CFC look-through provisions were reflected in the fiscal six months of 2013 and decreased the tax rate by 1.2 points. Additionally, the quarterly impact of the 2013 R&D tax credit and the CFC look-through provisions is reflected in the 2013 fiscal six months financial results.
As of June 30, 2013, the Company had approximately $2.9 billion of liabilities from unrecognized tax benefits. The Company believes it is possible that audits may be completed by tax authorities in some jurisdictions over the next twelve months, including the U.S. Internal Revenue Service audit related to tax years 2006-2009. However, the Company is not able to provide a reasonably reliable estimate of the timing of any other future tax payments relating to uncertain tax positions.
NOTE 6 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Components of Net Periodic Benefit Cost
Net periodic benefit cost for the Company’s defined benefit retirement plans and other benefit plans for the fiscal second quarters of 2013 and 2012 include the following components:
|
| | | | | | | | | | | | | |
| | Retirement Plans | | Other Benefit Plans |
| | Fiscal Second Quarters Ended |
(Dollars in Millions) | | June 30, 2013 | | July 1, 2012 | | June 30, 2013 | | July 1, 2012 |
Service cost | | $ | 205 |
| | 168 |
| | 50 |
| | 45 |
|
Interest cost | | 227 |
| | 219 |
| | 38 |
| | 41 |
|
Expected return on plan assets | | (361 | ) | | (308 | ) | | (2 | ) | | (1 | ) |
Amortization of prior service credit | | (1 | ) | | — |
| | — |
| | (1 | ) |
Recognized actuarial losses | | 172 |
| | 124 |
| | 27 |
| | 20 |
|
Net periodic benefit cost | | $ | 242 |
| | 203 |
| | 113 |
| | 104 |
|
Net periodic benefit cost for the Company’s defined benefit retirement plans and other benefit plans for the first fiscal six months of 2013 and 2012 include the following components:
|
| | | | | | | | | | | | | |
| | | | | | | | |
| | Retirement Plans | | Other Benefit Plans |
| | Fiscal Six Months Ended |
(Dollars in Millions) | | June 30, 2013 | | July 1, 2012 | | June 30, 2013 | | July 1, 2012 |
Service cost | | $ | 411 |
| | 329 |
| | 98 |
| | 89 |
|
Interest cost | | 455 |
| | 441 |
| | 75 |
| | 82 |
|
Expected return on plan assets | | (724 | ) | | (620 | ) | | (3 | ) | | (2 | ) |
Amortization of prior service cost/(credit) | | 3 |
| | 2 |
| | (1 | ) | | (2 | ) |
Recognized actuarial losses | | 340 |
| | 248 |
| | 55 |
| | 38 |
|
Curtailments and settlements | | — |
| | (1 | ) | | — |
| | — |
|
Net periodic benefit cost | | $ | 485 |
| | 399 |
| | 224 |
| | 205 |
|
| | | | | | | | |
Company Contributions
For the first fiscal six months ended June 30, 2013, the Company contributed $25 million and $18 million to its U.S. and international retirement plans, respectively. The Company plans to continue to fund its U.S. defined benefit plans to comply with the Pension Protection Act of 2006. International plans are funded in accordance with local regulations.
NOTE 7 — ACCUMULATED OTHER COMPREHENSIVE INCOME
Components of other comprehensive income (loss) consist of the following:
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Foreign | | Gain/(Loss) | | Employee | | Gain/(Loss) | | Total Accumulated |
| | Currency | | on | | Benefit | | on Derivatives | | Other Comprehensive |
(Dollars in Millions) | | Translation | | Securities (1) | | Plans (2) | | & Hedges (3) | | Income (Loss) |
December 30, 2012 | | $ | (296 | ) | | 195 |
| | (5,717 | ) | | 8 |
| | (5,810 | ) |
Net change | | (1,326 | ) | | (110 | ) | | 262 |
| | 174 |
| | (1,000 | ) |
June 30, 2013 | | $ | (1,622 | ) | | 85 |
| | (5,455 | ) | | 182 |
| | (6,810 | ) |
Amounts in accumulated other comprehensive income are presented net of the related tax impact. Foreign currency translation is not adjusted for income taxes as it relates to permanent investments in international subsidiaries. For additional details on comprehensive income see the Consolidated Statements of Comprehensive Income.
Details on reclassifications out of Accumulated Other Comprehensive Income:
| |
(1) | Gain/(Loss) on Securities - reclassifications released to other (income) expense, net. |
| |
(2) | Employee Benefit Plans - reclassifications are included in net periodic benefit cost. See Note 6 for additional details. |
| |
(3) | Gain/(Loss) on Derivatives & Hedges - reclassifications to earnings are recorded in the same account as the hedged transaction. See Note 4 for additional details. |
NOTE 8 — EARNINGS PER SHARE
The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the fiscal second quarters ended June 30, 2013 and July 1, 2012:
|
| | | | | | | | |
| | Fiscal Second Quarters Ended |
(Shares in Millions) | | June 30, 2013 | | July 1, 2012 |
Basic net earnings per share | | $ | 1.36 |
| | $ | 0.51 |
|
Average shares outstanding — basic | | 2,809.7 |
| | 2,747.4 |
|
Potential shares exercisable under stock option plans | | 162.5 |
| | 138.1 |
|
Less: shares which could be repurchased under treasury stock method | | (115.2 | ) | | (104.1 | ) |
Convertible debt shares | | 3.5 |
| | 3.6 |
|
Accelerated share repurchase program | | 32.5 |
| | 13.2 |
|
Average shares outstanding — diluted | | 2,893.0 |
| | 2,798.2 |
|
Diluted earnings per share | | $ | 1.33 |
| | $ | 0.50 |
|
The diluted earnings per share calculation for both fiscal second quarters ended June 30, 2013 and July 1, 2012 included the dilutive effect of convertible debt that was offset by the related reduction in interest expense.
The diluted earnings per share calculation for the fiscal second quarter ended June 30, 2013 and July 1, 2012 included the dilutive effect of 32.5 million shares and 13.2 million shares, respectively, related to the accelerated share repurchase program, associated with the acquisition of Synthes, Inc. See Note 10 to the Consolidated Financial Statements for additional details. A $1 increase/decrease in the volume weighted average share price would impact this estimate by approximately 2.3 million shares.
The diluted earnings per share calculation for the fiscal second quarter ended June 30, 2013 included all shares related to stock options, as the exercise price of all options was less than the average market value of the Company's stock during the quarter. The
diluted earnings per share calculation for the fiscal second quarter ended July 1, 2012, excluded 57 million shares related to stock options, as the exercise price of these options was greater than their average market value, which would result in an anti-dilutive effect on diluted earnings per share.
The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the first fiscal six months ended June 30, 2013 and July 1, 2012:
|
| | | | | | | | |
| | | | |
| | Fiscal Six Months Ended |
(Shares in Millions) | | June 30, 2013 | | July 1, 2012 |
Basic net earnings per share | | $ | 2.62 |
| | $ | 1.94 |
|
Average shares outstanding — basic | | 2,799.5 |
| | 2,741.7 |
|
Potential shares exercisable under stock option plans | | 163.0 |
| | 138.0 |
|
Less: shares which could be repurchased under treasury stock method | | (119.7 | ) | | (104.1 | ) |
Convertible debt shares | | 3.5 |
| | 3.6 |
|
Accelerated share repurchase program | | 32.5 |
| | 13.2 |
|
Average shares outstanding — diluted | | 2,878.8 |
| | 2,792.4 |
|
Diluted earnings per share | | $ | 2.55 |
| | $ | 1.91 |
|
| | | | |
The diluted earnings per share calculation for both fiscal six months ended June 30, 2013 and July 1, 2012 included the dilutive effect of convertible debt that was offset by the related reduction in interest expense.
The diluted earnings per share calculation for the fiscal six months ended June 30, 2013 and July 1, 2012 included the dilutive effect of 32.5 million shares and 13.2 million shares, respectively, related to the accelerated share repurchase program, associated with the acquisition of Synthes, Inc. See Note 10 to the Consolidated Financial Statements for additional details. A $1 increase/decrease in the volume weighted average share price would impact this estimate by approximately 2.3 million shares.
The diluted earnings per share calculation for the fiscal six months ended June 30, 2013 included all shares related to stock options, as the exercise price of all options was less than the average market value of the Company's stock during the quarter. The diluted earnings per share calculation for the fiscal six months ended July 1, 2012, excluded 57 million shares related to stock options, as the exercise price of these options was greater than their average market value, which would result in an anti-dilutive effect on diluted earnings per share.
NOTE 9 — SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
SALES BY SEGMENT OF BUSINESS
|
| | | | | | | | | | | |
| | Fiscal Second Quarters Ended |
(Dollars in Millions) | | June 30, 2013 | | July 1, 2012 | | Percent Change |
| | | | | | |
Consumer | | | | | | |
United States | | $ | 1,326 |
| | $ | 1,313 |
| | 1.0 | % |
International | | 2,332 |
| | 2,306 |
| | 1.1 |
|
Total | | 3,658 |
| | 3,619 |
| | 1.1 |
|
Pharmaceutical | | | | | | |
United States | | 3,377 |
| | 3,094 |
| | 9.1 |
|
International | | 3,648 |
| | 3,197 |
| | 14.1 |
|
Total | | 7,025 |
| | 6,291 |
| | 11.7 |
|
Medical Devices & Diagnostics | | | | | | |
United States | | 3,243 |
| | 2,953 |
| | 9.8 |
|
International | | 3,951 |
| | 3,612 |
| | 9.4 |
|
Total | | 7,194 |
| | 6,565 |
| | 9.6 |
|
Worldwide | | | | | | |
United States | | 7,946 |
| | 7,360 |
| | 8.0 |
|
International | | 9,931 |
| | 9,115 |
| | 9.0 |
|
Total | | $ | 17,877 |
| | $ | 16,475 |
| | 8.5 | % |
|
| | | | | | | | | | | |
| | | | | | |
| | Fiscal Six Months Ended |
(Dollars in Millions) | | June 30, 2013 | | July 1, 2012 | | Percent Change |
| | | | | | |
Consumer | | | | | | |
United States | | $ | 2,674 |
| | $ | 2,629 |
| | 1.7 | % |
International | | 4,659 |
| | 4,585 |
| | 1.6 |
|
Total | | 7,333 |
| | 7,214 |
| | 1.6 |
|
Pharmaceutical | | | | | | |
United States | | 6,848 |
| | 6,120 |
| | 11.9 |
|
International | | 6,945 |
| | 6,304 |
| | 10.2 |
|
Total | | 13,793 |
| | 12,424 |
| | 11.0 |
|
Medical Devices & Diagnostics | | | | | | |
United States | | 6,449 |
| | 5,830 |
| | 10.6 |
|
International | | 7,807 |
| | 7,146 |
| | 9.2 |
|
Total | | 14,256 |
| | 12,976 |
| | 9.9 |
|
Worldwide | | | | | | |
United States | | 15,971 |
| | 14,579 |
| | 9.5 |
|
International | | 19,411 |
| | 18,035 |
| | 7.6 |
|
Total | | $ | 35,382 |
| | $ | 32,614 |
| | 8.5 | % |
SEGMENT PRE-TAX PROFIT |
| | | | | | | | | | | |
| | Fiscal Second Quarters Ended |
(Dollars in Millions) | | June 30, 2013 | | July 1, 2012 | | Percent Change |
Consumer (1) | | $ | 511 |
| | $ | 267 |
| | 91.4 | % |
Pharmaceutical (2) | | 2,992 |
| | 515 |
| | 481.0 |
|
Medical Devices & Diagnostics(3) | | 1,517 |
| | 1,875 |
| | (19.1 | ) |
Segments operating profit | | 5,020 |
| | 2,657 |
| | 88.9 |
|
Less: Expense not allocated to segments(4) | | 227 |
| | 622 |
| | |
Worldwide income before taxes | | $ | 4,793 |
| | $ | 2,035 |
| | 135.5 | % |
|
| | | | | | | | | | | |
| | | | | | |
| | Fiscal Six Months Ended |
(Dollars in Millions) | | June 30, 2013 | | July 1, 2012 | | Percent Change |
Consumer (1) | | $ | 1,058 |
| | $ | 729 |
| | 45.1 | % |
Pharmaceutical (2) | | 5,409 |
| | 3,106 |
| | 74.1 |
|
Medical Devices & Diagnostics (3) | | 3,035 |
| | 3,953 |
| | (23.2 | ) |
Segments operating profit | | 9,502 |
| | 7,788 |
| | 22.0 |
|
Less: Expense not allocated to segments (4) | | 448 |
| | 708 |
| | |
Worldwide income before taxes | | $ | 9,054 |
| | $ | 7,080 |
| | 27.9 | % |
(1) Includes a gain on the sale of intangible and other assets of $55 million recorded in the first fiscal six months of 2013. Includes intangible asset write-downs of $294 million recorded in the fiscal second quarter and the first fiscal six months of 2012.
(2) Includes litigation expense of $178 million recorded in the first fiscal six months of 2013 and a net gain of $420 million on equity investment transactions, primarily the sale of Elan American Depositary Shares in the fiscal second quarter and first fiscal six months of 2013. Includes litigation expense of $658 million, intangible asset write-downs of $499 million and in-process research and development charges of $429 million recorded in the fiscal second quarter and the first fiscal six months of 2012.
(3) Includes litigation expense of $375 million, Synthes integration/transaction costs of $122 million and $69 million for the ASRTM Hip program in the fiscal second quarter of 2013. Includes litigation expense of $720 million, Synthes integration/transaction costs of $380 million, an in-process research and development write-down of $64 million and $82 million for the ASRTM Hip program in the first fiscal six months of 2013. Includes Synthes integration/transaction costs of $192 million and $223 million recorded in the fiscal second quarter and first fiscal six months of 2012, respectively, and intangible asset write-downs of $146 million recorded in the fiscal second quarter and first fiscal six months of 2012.
(4) Amounts not allocated to segments include interest income/(expense), noncontrolling interests and general corporate income/expense. The first fiscal six months of 2013 includes litigation expense of $6 million. The fiscal second quarter and first fiscal six months of 2012 includes currency losses related to the Synthes acquisition of $382 million and $234 million, respectively, and litigation expense of $11 million recorded in the fiscal second quarter and the first fiscal six months of 2012.
SALES BY GEOGRAPHIC AREA
|
| | | | | | | | | | | |
| | Fiscal Second Quarters Ended |
(Dollars in Millions) | | June 30, 2013 | | July 1, 2012 | | Percent Change |
United States | | $ | 7,946 |
| | $ | 7,360 |
| | 8.0 | % |
Europe | | 4,672 |
| | 4,165 |
| | 12.2 |
|
Western Hemisphere, excluding U.S. | | 1,905 |
| | 1,728 |
| | 10.2 |
|
Asia-Pacific, Africa | | 3,354 |
| | 3,222 |
| | 4.1 |
|
Total | | $ | 17,877 |
| | $ | 16,475 |
| | 8.5 | % |
|
| | | | | | | | | | | |
| | | | | | |
| | Fiscal Six Months Ended |
(Dollars in Millions) | | June 30, 2013 | | July 1, 2012 | | Percent Change |
United States | | $ | 15,971 |
| | $ | 14,579 |
| | 9.5 | % |
Europe | | 9,153 |
| | 8,359 |
| | 9.5 |
|
Western Hemisphere, excluding U.S. | | 3,688 |
| | 3,442 |
| | 7.1 |
|
Asia-Pacific, Africa | | 6,570 |
| | 6,234 |
| | 5.4 |
|
Total | | $ | 35,382 |
| | $ | 32,614 |
| | 8.5 | % |
NOTE 10— BUSINESS COMBINATIONS AND DIVESTITURES
During the fiscal second quarter of 2013, the Company announced a definitive agreement to acquire Aragon Pharmaceuticals, Inc., a privately-held, pharmaceutical discovery and development company focused on drugs to treat hormonally-driven cancers. Under the terms of the agreement, the Company will make an upfront cash payment of $650 million, plus additional contingent payments of up to $350 million based on reaching predetermined milestones. The transaction is expected to close in the fiscal third quarter of 2013.
During the fiscal first quarter of 2013, the Company completed the acquisitions of Flexible Stenting Solutions, Inc., a leading developer of innovative flexible peripheral arterial, venous and biliary stents and Shanghai Elsker Mother & Baby Co., Ltd, a baby care company in China, known for its position in the naturals segment.
During the fiscal second quarter of 2012, the Company completed the acquisition of Synthes, Inc., a global developer and manufacturer of orthopaedics devices, for a purchase price of $20.2 billion in cash and stock. The net acquisition cost of the transaction was $17.5 billion based on cash on hand at closing of $2.7 billion.
Under the terms of the agreement, each share of Synthes, Inc. common stock was exchanged for CHF 55.65 in cash and 1.717 shares of Johnson & Johnson common stock, based on the calculated exchange ratio. The exchange ratio was calculated on June 12, 2012 and based on the relevant exchange rate and closing price of Johnson & Johnson common stock on that date, the total fair value of consideration transferred was $19.7 billion. When the acquisition was completed on June 14, 2012, based on the relevant exchange rate and closing price of Johnson & Johnson common stock on that date, the total fair value of the consideration transferred was $20.2 billion. Janssen Pharmaceutical, a company organized under the laws of Ireland and
a wholly-owned subsidiary of Johnson & Johnson, used cash on hand to satisfy the cash portion of the merger consideration.
The stock portion of the merger consideration consisted of shares of Johnson & Johnson common stock purchased by Janssen Pharmaceutical, from two banks, pursuant to two accelerated share repurchase (ASR) agreements dated June 12, 2012. On June 13, 2012, Janssen Pharmaceutical purchased an aggregate of approximately 203.7 million shares of Johnson & Johnson common stock at an initial purchase price of $12.9 billion under the ASR agreements, with all of the shares delivered to Janssen Pharmaceutical on June 13, 2012. Final settlement of the transactions under each ASR agreement is expected to occur in either stock or cash in the third quarter of 2013. Based on the theoretical settlement of the ASR agreements, an additional 32.5 million shares would be issued, or approximately $2.8 billion in cash would be used, to settle the ASR agreements as of June 30, 2013.
In addition, while the Company believes that the transactions under each ASR agreement and a series of related internal transactions were consummated in a tax efficient manner in accordance with applicable law, it is possible that the Internal Revenue Service could assert one or more contrary positions to challenge the transactions from a tax perspective. If challenged, an amount up to the total purchase price for the Synthes shares could be treated as subject to applicable U.S. tax at approximately the statutory rate to the Company, plus interest.
The following table summarizes the consideration transferred to acquire Synthes, Inc. valued on the acquisition date of June 14, 2012:
|
| | | | |
(Dollars in Millions) | | |
Cash (multiply 55.65CHF by shares of Synthes common stock outstanding by the exchange rate)(A) | | $ | 6,902 |
|
Common Stock (multiply 1.717 by shares of Synthes common stock outstanding by J&J stock price)(B) | | $ | 13,335 |
|
Total fair value of consideration transferred | | $ | 20,237 |
|
(A) Synthes common stock outstanding of 118.7 million shares as of the acquisition date and CHF/USD exchange rate of .95674
(B) Johnson & Johnson closing stock price on the New York Stock Exchange as of acquisition date of $65.45 per share.
The Company has finalized the purchase price allocation to the individual assets acquired and liabilities assumed using the acquisition method. The following table presents the amounts recognized for assets acquired and liabilities assumed as of the acquisition date with adjustments made through June 30, 2013:
|
| | | |
(Dollars in Millions) | |
Cash & Cash equivalents | $ | 2,749 |
|
Inventory | 1,194 |
|
Accounts Receivable, net | 738 |
|
Other current assets | 238 |
|
Property, plant and equipment | 1,253 |
|
Goodwill | 6,074 |
|
Intangible assets | 12,861 |
|
Other non-current assets | 46 |
|
Total Assets Acquired | 25,153 |
|
| |
Current liabilities | 1,081 |
|
Deferred Taxes | 3,506 |
|
Other non-current liabilities | 329 |
|
Total Liabilities Assumed | 4,916 |
|
| |
Net Assets Acquired | $ | 20,237 |
|
The adjustments made since the date of acquisition were to account for changes to inventory, based on the results of the physical inventory counts and deferred taxes, to reflect the statutory tax rate that is being applied to the intangible assets. The revisions to the purchase price allocation were not material to the Statements of Consolidated Earnings or the Consolidated Balance Sheet for the fiscal second quarter of 2013 and prior fiscal quarters.
The assets acquired are recorded in the Medical Devices and Diagnostics segment. The acquisition of Synthes, Inc. resulted in $6.1 billion of goodwill. The goodwill is primarily attributable to synergies expected to arise from the acquisition of Synthes, Inc. The goodwill is not deductible for tax purposes.
The purchase price allocation to the identifiable intangible assets is as follows:
|
| | | | |
(Dollars in Millions) | | |
Intangible assets with definite lives: | | |
Customer Relationships | | $ | 9,870 |
|
Patents and Technology | | 1,508 |
|
Total amortizable intangibles | | 11,378 |
|
Trademark and Trade name | | 1,420 |
|
In-process research and development | | 63 |
|
Total intangible assets | | $ | 12,861 |
|
The Customer Relationship intangible lives were determined using the projected customer retention period based
on historical experience. Synthes has a broad product portfolio, including trauma, spine, cranio-maxillofacial, biomaterials and
power tools. An analysis was performed to determine the lives for each of the Customer Relationship assets in the distinct product areas. The calculations to determine useful lives included attrition rates and discounted future cash flows by product area. This analysis resulted in a weighted average life of 22 years for the Customer Relationship assets.
The Patents and Technology intangible lives were derived based on technology obsolescence rates that are commensurate with the nature of the Synthes businesses. New product introductions are predominantly incremental enhancements to existing platforms and are infrequently transformational. An analysis was performed to determine the lives for each of the Patents and Technology assets in each distinct product area. The calculations to determine useful lives included assumptions on technology obsolescence and discounted future cash flows by product area. This analysis resulted in a weighted average life of 18 years for the Patents and Technology assets.
A weighted average of the values and lives ascribed to the Customer Relationship and Patents and Technology intangible assets results in a 21 year weighted average life.
The Trademark and Trade name asset values were determined to have an indefinite life based on a number of factors, including trade name history, the competitive environment, market share and future operating plans. Additionally, in-process research and development intangible assets were valued for technology programs for unapproved products.
The value of the IPR&D was calculated using cash flow projections discounted for the risk inherent in such projects. The discount rate applied was 14%.
The Company is in the process of executing the integration plans to combine businesses, sales organizations, systems and locations as a result of which the Company has and will continue to incur integration costs.
The operating results of Synthes were reported in the Company's financial statements beginning on June 14, 2012.
The following table provides pro forma results of operations for the fiscal second quarter and first fiscal six months ended July 1, 2012, as if Synthes, Inc. had been acquired as of January 3, 2011. The pro forma results include the effect of divestitures and certain purchase accounting adjustments such as the estimated changes in depreciation and amortization expense on the acquired tangible and intangible assets. However, pro forma results do not include any anticipated cost savings or other effects of the planned integration of Synthes, Inc. Accordingly, such amounts are not necessarily indicative of the results if the acquisition had occurred on the dates indicated or which may occur in the future.
|
| | | | | | |
| Unaudited Pro forma consolidated results |
| 2012 |
(Dollars in Millions Except Per Share Data) | Fiscal Six Months Ended | | Fiscal Second Quarter Ended |
Net Sales | $ | 34,481 |
| | 17,410 |
|
Net Earnings | $ | 5,641 |
| | 1,631 |
|
Diluted Net Earnings per Common Share | $ | 2.02 |
| | 0.58 |
|
In the first fiscal six months of 2013, the Company recorded acquisition-related costs of $380 million before tax, which were recorded in Cost of products sold and Other (income)expense.
In connection with the Synthes acquisition, DePuy Orthopaedics, Inc. agreed to divest certain rights and assets related to its trauma business to Biomet, Inc. and completed the initial closing for this transaction in the fiscal second quarter of 2012, including those countries that represented the majority of sales. As of December 30, 2012, the transaction had closed worldwide.
Additionally, during the fiscal second quarter of 2012, the Company acquired Guangzhou Bioseal Biotech Co., Ltd., a privately held biopharmaceutical company specializing in the design, development and commercialization of a porcine plasma-derived biologic product for controlling bleeding during surgery; CorImmun GmbH, a privately held drug development company in Germany, whose lead compound, COR-1, is a small cyclic peptide currently in early clinical development for the treatment of heart failure; and certain assets of the Angiotech Pharmaceuticals, Inc. barbed suture business.
During the fiscal first quarter of 2012, the Company completed the divestiture of its U.S. patents and other U.S. and Canadian intellectual property for BYSTOLIC® (nebivolol), which is currently approved in the U.S. for the treatment of hypertension, to Forest Laboratories, Inc. Proceeds received from the divestiture were $357 million.
NOTE 11 — LEGAL PROCEEDINGS
Johnson & Johnson and certain of its subsidiaries are involved in various lawsuits and claims regarding product liability, intellectual property, commercial and other matters; governmental investigations; and other legal proceedings that arise from time to time in the ordinary course of their business.
The Company records accruals for such contingencies when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. As of June 30, 2013, the Company has determined that the liabilities associated with certain litigation matters are probable and can be reasonably estimated. The Company has accrued for these matters and will continue to monitor each related legal issue and adjust accruals for new information and further developments in accordance with ASC 450-20-25. For these and other litigation and regulatory matters currently disclosed for which a loss is probable or reasonably possible, the Company is unable to determine an estimate of the possible loss or range of loss beyond the amounts already accrued. These matters can be affected by various factors, including whether damages sought in the proceedings are unsubstantiated or indeterminate; scientific and legal discovery has not commenced or is not complete; proceedings are in early stages; matters present legal uncertainties; there are significant facts in dispute; or there are numerous parties involved.
In the Company's opinion, based on its examination of these matters, its experience to date and discussions with counsel, the ultimate outcome of legal proceedings, net of liabilities accrued in the Company's balance sheet, is not expected to have a material adverse effect on the Company's financial position. However, the resolution in any reporting period of one or more of these matters, either alone or in the aggregate, may have a material adverse effect on the Company's results of operations and cash flows for that period.
PRODUCT LIABILITY
Certain subsidiaries of Johnson & Johnson are involved in numerous product liability cases. The damages claimed are substantial, and while these subsidiaries are confident of the adequacy of the warnings and instructions for use that accompany the products at issue, it is not feasible to predict the ultimate outcome of litigation. The Company has established product liability accruals in compliance with ASC 450-20 based on currently available information, which in some cases may be limited. Changes to the accruals may be required in the future as additional information becomes available.
Multiple products of Johnson & Johnson subsidiaries are subject to product liability claims and lawsuits in which claimants seek substantial compensatory and, where available, punitive damages, including LEVAQUIN®, the ASR™ XL Acetabular System and DePuy ASR™ Hip Resurfacing System, the PINNACLE® Acetabular Cup System, RISPERDAL®, pelvic meshes, DURAGESIC®/fentanyl patches and TOPAMAX®. As of June 30, 2013, in the U.S. there were approximately 1,540 plaintiffs with direct claims in pending lawsuits regarding injuries allegedly due to LEVAQUIN®, 11,500 with respect to the ASR™ XL Acetabular System and DePuy ASR™ Hip Resurfacing System, 4,450 with respect to the PINNACLE® Acetabular Cup System, 490 with respect to RISPERDAL®, 12,250 with respect to pelvic meshes, 30 with respect to DURAGESIC®/fentanyl patches and 130 with respect to TOPAMAX®.
In August 2010, DePuy Orthopaedics, Inc. (DePuy) announced a worldwide voluntary recall of its ASR™ XL Acetabular System and DePuy ASR™ Hip Resurfacing System used in hip replacement surgery. Claims for personal injury have been made against DePuy and Johnson & Johnson, and the number of pending lawsuits continues to increase. Cases filed in Federal courts in the United States have been organized as a multi-district litigation in the United States District Court for the Northern District of Ohio. Litigation has also been filed in countries outside of the United States, primarily in the United Kingdom, Canada and Australia. The Company continues to receive information with respect to potential costs associated with this recall. During the fiscal second quarter of 2013, the Company increased its accruals for the DePuy ASR™ Hip recall program and related product liability after the Company completed an analysis of additional information. Changes to these accruals may be required in the future as additional information becomes available.
Claims for personal injury have also been made against DePuy and Johnson & Johnson relating to DePuy's PINNACLE® Acetabular Cup System. The number of pending product liability lawsuits continues to increase, and the Company continues to receive information with respect to potential costs and the anticipated number of cases. Cases filed in Federal courts in the United States have been organized as a multi-district litigation in the United States District Court for the Northern District of Texas. The Company has established a product liability accrual in anticipation of product liability litigation associated with DePuy's PINNACLE® Acetabular Cup System. Changes to this accrual may be required in the future as additional information becomes available.
Claims for personal injury have been made against Ethicon, Inc. (Ethicon) and Johnson & Johnson arising out of Ethicon's pelvic mesh devices used to treat stress urinary incontinence and pelvic organ prolapse. The number of pending product
liability lawsuits continues to increase, and the Company continues to receive information with respect to potential costs and the anticipated number of cases. Cases filed in Federal courts in the United States have been organized as a multi-district litigation in the United States District Court for the Southern District of West Virginia. In addition, a class action and several individual personal injury cases have been commenced in Canada, Australia, England, Italy, Scotland and the Netherlands seeking damages for alleged injury resulting from Ethicon's pelvic mesh devices. The Company has established a product liability accrual in anticipation of product liability litigation associated with Ethicon's pelvic mesh products. Changes to this accrual may be required in the future as additional information becomes available.
The Company believes that the ultimate resolution of these matters based on historical and reasonably likely future trends is not expected to have a material adverse effect on the Company's financial position, annual results of operations and cash flows. The resolution in any interim reporting period could have a material impact on the Company's results of operations and cash flows for that period.
INTELLECTUAL PROPERTY
Certain subsidiaries of Johnson & Johnson are subject, from time to time, to legal proceedings and claims related to patent, trademark and other intellectual property matters arising out of their business. The most significant of these matters are described below.
PATENT INFRINGEMENT
Certain subsidiaries of Johnson & Johnson are involved in lawsuits challenging the coverage and/or validity of the patents on their products. Although these subsidiaries believe that they have substantial defenses to these challenges with respect to all material patents, there can be no assurance as to the outcome of these matters, and a loss in any of these cases could potentially adversely affect the ability of these subsidiaries to sell their products, or require the payment of past damages and future royalties.
Medical Devices and Diagnostics
In October 2004, Tyco Healthcare Group, LP (Tyco) and U.S. Surgical Corporation (now Covidien plc) filed a lawsuit against Ethicon Endo-Surgery, Inc. (EES) in the United States District Court for the District of Connecticut alleging that several features of EES's HARMONIC® Scalpel infringed four Tyco patents. In October 2007, on motions for summary judgment prior to the initial trial, a number of claims were found invalid and a number were found infringed. However, no claim was found both valid and infringed. Trial commenced in December 2007, and the Court dismissed the case without prejudice on grounds that Tyco did not own the patents in suit. The dismissal without prejudice was affirmed on appeal. In January 2010, Tyco filed another complaint in the United States District Court for the District of Connecticut asserting infringement of three of the four patents from the previous lawsuit and adding new products. Tyco is seeking monetary damages and injunctive relief. The case was tried in July 2012, and in March 2013, the Court ruled that EES's HARMONIC Scalpel infringed on Tyco's patents and ordered EES to pay damages of approximately $176 million. The Company believes EES has strong arguments supporting its appeal. Because the Company believes that the potential for an unfavorable outcome is not probable, it has not established an accrual with respect to the case.
In October 2007, Bruce Saffran (Saffran) filed a patent infringement lawsuit against Johnson & Johnson and Cordis Corporation (Cordis) in the United States District Court for the Eastern District of Texas alleging infringement on U.S. Patent No. 5,653,760. In January 2011, a jury returned a verdict finding that Cordis's sales of its CYPHER® Stent willfully infringed the '760 patent. The jury awarded Saffran $482 million. In March 2011, the Court entered judgment against Cordis in the amount of $593 million, representing the jury verdict, plus $111 million in pre-judgment interest. Cordis appealed the judgment, and in April 2013, the United States Court of Appeals for the Federal Circuit reversed the judgment and held that Cordis did not infringe Plaintiff's patent as a matter of law. Plaintiff's petition with the Court of Appeals to reconsider the decision was denied.
In November 2007, Roche Diagnostics Operations, Inc., et al. (Roche) filed a patent infringement lawsuit against LifeScan, Inc. (LifeScan) in the United States District Court for the District of Delaware, accusing LifeScan's entire OneTouch® line of blood glucose monitoring systems of infringement of two patents related to the use of microelectrode sensors. In September 2009, LifeScan obtained a favorable ruling on claim construction that precluded a finding of infringement. The Court entered judgment against Roche in July 2010 and Roche appealed. The Court of Appeals reversed the District Court's ruling on claim construction and remanded the case to the District Court for new findings on the issue. The parties are awaiting a ruling on claim construction. Roche is seeking monetary damages and injunctive relief.
In June 2009, Rembrandt Vision Technologies, L.P. (Rembrandt) filed a patent infringement lawsuit against Johnson & Johnson Vision Care, Inc. (JJVC) in the United States District Court for the Eastern District of Texas alleging that JJVC's manufacture and sale of its ACUVUE®ADVANCE® and ACUVUE® OASYS® Hydrogel Contact Lenses infringe their U.S. Patent No. 5,712,327 (the Chang patent). Rembrandt is seeking monetary relief. The case was transferred to the United States District Court for the Middle District of Florida. In May 2012, the jury returned a verdict holding that neither of the accused lenses infringe the '327 patent. Rembrandt has filed an appeal with the United States Court of Appeals for the Federal Circuit. Rembrandt has also asked the District Court to grant it a new trial based on alleged new evidence, and a hearing on that motion has been set for August 2013.
In September 2011, LifeScan filed a lawsuit against Shasta Technologies, Instacare Corp and Conductive Technologies (collectively, Shasta) in the United States District Court for the Northern District of Northern California for patent infringement for the making and marketing of a strip for use in LifeScan's OneTouch® Blood Glucose Meters. In November 2012, Shasta got a limited approval from the United States Food and Drug Administration for its strips. In December 2012, LifeScan filed an additional lawsuit alleging violation of the Lanham Act based on Shasta's packaging. LifeScan moved for, and the District Court granted, a preliminary injunction prohibiting Shasta from marketing their strips. Shasta appealed, and the Court of Appeals granted Shasta's motion for stay of the preliminary injunction. Oral argument on the appeal was heard in June 2013 and the parties are awaiting a decision. Litigation regarding the preliminary injunction and the underlying merits of the claims is continuing.
In November 2011, Howmedica Osteonics Corp. (Howmedica) and Stryker Ireland Ltd. (Stryker) filed a patent infringement lawsuit against DePuy Orthopaedics, Inc. (DePuy) in the United States District Court for the District of New Jersey alleging infringement by DePuy's PINNACLE® Acetabular Cup System and DURALOC® Acetabular Cup System of a patent relating to a dual-locking mechanism feature in an acetabular cup system. Howmedica and Stryker are seeking monetary damages and injunctive relief. DePuy filed its answer in February 2012 and filed a counterclaim asserting that Stryker's Trident Acetabular Hip System infringes DePuy's U.S. Patent No. 6,610,097. DePuy is seeking damages and injunctive relief from Howmedica and Stryker.
In May 2012, Medtronic MiniMed, Inc., Medtronic Puerto Rico Operations Co. and MiniMed Distribution Corp. (collectively, Medtronic MiniMed) filed a patent infringement lawsuit against Animas Corporation in the United States District Court for the Central District of California alleging that Animas' OneTouch® Ping® Glucose Management System infringes nine of their patents. Medtronic MiniMed is seeking monetary damages and injunctive relief.
In March 2013, Medinol Ltd. (Medinol) filed a patent infringement lawsuit against Cordis Corporation (Cordis) and Johnson & Johnson in the United States District Court for the Southern District of New York alleging that Cordis's past sales of the CYPHER® and CYPHER SELECT® Stents willfully infringed four of Medinol's patents directed to the geometry of articulated stents. Medinol is seeking damages and attorney's fees.
Pharmaceutical
In May 2009, Abbott Biotechnology Ltd. (Abbott) filed a patent infringement lawsuit against Centocor, Inc. (Centocor) (now Janssen Biotech, Inc. (JBI)) in the United States District Court for the District of Massachusetts alleging that SIMPONI® infringes Abbott's U.S. Patent Nos. 7,223,394 and 7,541,031 (the Salfeld patents). Abbott is seeking monetary damages and injunctive relief. In April 2012, the parties participated in an arbitration on the issue of JBI's defense that Abbott is equitably estopped from asserting the patents. In May 2012, the arbitrator rejected JBI's defense. The case has been reinstated in the District Court. Oral argument on summary judgment motions is scheduled for October 2013.
In August 2009, Abbott GmbH & Co. (Abbott GmbH) and Abbott Bioresearch Center filed a patent infringement lawsuit against Centocor (now JBI) in the United States District Court for the District of Massachusetts alleging that STELARA® infringes two United States patents assigned to Abbott GmbH. JBI filed a complaint in the United States District Court for the District of Columbia for a declaratory judgment of non-infringement and invalidity of the Abbott GmbH patents, as well as a Complaint for Review of a Patent Interference Decision that granted priority of invention on one of the two asserted patents to Abbott GmbH. The cases have been transferred from the District of Columbia to the District of Massachusetts. Trial was held in September 2012 with a jury verdict in favor of JBI, invalidating Abbott's patent claims. In March 2013, the Court denied Abbott's post-trial motions challenging the outcome and granted JBI's motion on the appeal of the interference decision. Abbott filed its notice of appeal in April 2013. Also in August 2009, Abbott GmbH and Abbott Laboratories Limited brought a patent infringement lawsuit in The Federal Court of Canada alleging that STELARA® infringes Abbott GmbH's Canadian patent. A trial is scheduled for December 2013 in the Canadian Case. In addition to the U.S. and Canadian litigations, in August 2012, Abbott filed patent infringement lawsuits in the Netherlands, Switzerland and Germany. In each of the above cases, Abbott is seeking monetary damages and injunctive relief.
LITIGATION AGAINST FILERS OF ABBREVIATED NEW DRUG APPLICATIONS (ANDAs)
The following summarizes lawsuits pending against generic companies that filed Abbreviated New Drug Applications (ANDAs) seeking to market generic forms of products sold by various subsidiaries of Johnson & Johnson prior to expiration of the applicable patents covering those products. These ANDAs typically include allegations of non-infringement, invalidity and unenforceability of these patents. In the event the subsidiaries are not successful in these actions, or the statutory 30-month stays expire before the United States District Court rulings are obtained, the third-party companies involved will have the ability, upon approval of the United States Food and Drug Administration (FDA), to introduce generic versions of the products at issue, resulting in very substantial market share and revenue losses for those products.
ORTHO TRI-CYCLEN® LO
A number of generic companies have filed ANDAs seeking approval to market generic versions of ORTHO TRI-CYCLEN® LO. Janssen Pharmaceuticals, Inc. (JPI) filed patent infringement lawsuits against these generic companies seeking an Order enjoining them from marketing their generic versions of ORTHO TRI-CYCLEN® LO prior to the expiration of JPI's patent relating to ORTHO TRI-CYCLEN® LO (the OTCLO patent). In 2012, JPI entered into settlement agreements with certain of these generic companies. The two remaining cases were concluded in the fiscal first quarter of 2013, as described below.
In January 2010, Ortho-McNeil-Janssen Pharmaceuticals, Inc. (OMJPI) (now JPI) filed a patent infringement lawsuit against Lupin Ltd. and Lupin Pharmaceuticals, Inc. (collectively, Lupin) in the United States District Court for the District of New Jersey in response to Lupin's ANDA seeking approval to market a generic version of ORTHO TRI-CYCLEN® LO prior to the expiration of the OTCLO patent. Lupin filed a counterclaim alleging invalidity of the patent. Trial concluded in June 2012, and in September 2012, the Court issued a decision in favor of JPI upholding the validity of the patent. In particular, the Court ordered that the effective date of the approval of Lupin's ANDA (which had previously been approved) be not earlier than the expiration of the OTCLO patent. Lupin appealed the decision to the Court of Appeals for the Federal Circuit. Oral argument was heard in February 2013. In March 2013, JPI and Lupin entered into a settlement agreement pursuant to which Lupin was granted a license under the OTCLO patent to market its generic version of ORTHO TRI-CYCLEN® LO starting December 31, 2015 (or earlier under certain circumstances).
In October 2011, JPI filed a patent infringement lawsuit against Sun Pharma Global FZE and Sun Pharmaceutical Industries (collectively, Sun) in the United States District Court for the District of New Jersey in response to Sun's ANDA seeking approval to market a generic version of ORTHO TRI-CYCLEN® LO prior to the expiration of the OTCLO patent. In February 2013, JPI and Sun entered into a settlement agreement pursuant to which Sun was granted a license under the OTCLO patent to market its generic version of ORTHO TRI-CYCLEN® LO starting December 31, 2015 (or earlier under certain circumstances), if and when they obtain FDA approval.
PREZISTA®
A number of generic companies have filed ANDAs seeking approval to market generic versions of PREZISTA®. In November 2010, Tibotec, Inc. (now Tibotec, LLC) and Tibotec Pharmaceuticals (now Janssen R&D Ireland) (collectively, Tibotec) filed a patent infringement lawsuit against Lupin, Ltd., Lupin Pharmaceuticals, Inc. (collectively, Lupin), Mylan, Inc. and Mylan Pharmaceuticals, Inc. (collectively, Mylan) in the United States District Court for the District of New Jersey in response to Lupin's and Mylan's respective ANDAs seeking approval to market generic versions of Tibotec's PREZISTA® product before the expiration of Tibotec's patent relating to PREZISTA®. Lupin and Mylan each filed counterclaims alleging non-infringement and invalidity. In July 2011, Tibotec filed another patent infringement lawsuit against Lupin in the United States District Court for the District of New Jersey in response to Lupin's supplement to its ANDA to add new dosage strengths for its proposed product. In August 2011, Tibotec and G.D. Searle & Company (G.D. Searle) filed a patent infringement lawsuit against Lupin and Mylan in response to their notice letters advising that their ANDAs are seeking approval to market generic versions of Tibotec's PREZISTA® product before the expiration of two patents relating to PREZISTA® that Tibotec exclusively licenses from G.D. Searle.
In March 2011, Tibotec and G.D. Searle filed a patent infringement lawsuit against Teva Pharmaceuticals USA, Inc. and Teva Pharmaceuticals, Ltd. (collectively, Teva) in the United States District Court for the District of New Jersey in response to Teva's ANDA seeking approval to market a generic version of PREZISTA® before the expiration of certain patents relating to PREZISTA® that Tibotec either owns or exclusively licenses from G.D. Searle.
In March 2011, Tibotec filed a patent infringement lawsuit against Hetero Drugs, Ltd. Unit III and Hetero USA Inc. (collectively, Hetero) in the United States District Court for the District of New Jersey in response to Hetero's ANDA seeking approval to market a generic version of PREZISTA® before the expiration of certain patents relating to PREZISTA® that Tibotec exclusively licenses from G.D. Searle. In July 2011, upon agreement by the parties, the Court entered a stay of the lawsuit pending a final decision in the lawsuit against Teva with respect to the validity and/or enforceability of the patents that Tibotec licenses from G.D. Searle, with Hetero agreeing to be bound by such final decision.
In September 2011, the Court consolidated the above lawsuits, as well as lawsuits brought by the United States Government against each of the defendants for infringement of a United States Government-owned patent relating to PREZISTA®, for purposes of pre-trial discovery and trial, with the proviso that after discovery is completed, any party can move to have the cases de-consolidated for trial.
In May and June 2012, Janssen Products, LP and Janssen R&D Ireland (collectively, Janssen) and G.D. Searle filed a patent infringement lawsuit against Lupin, Teva and Mylan in the United States District Court for the District of New Jersey, alleging infringement of newly issued United States Reissue Patent No. Re42,889, which Janssen exclusively licenses from G.D. Searle. In August 2012, Janssen and G.D. Searle filed a patent infringement lawsuit against Lupin, Teva and Mylan in the United States District Court for the District of New Jersey, alleging infringement of newly issued United States Reissue Patent No. Re43,596, which Janssen exclusively licenses from G.D. Searle. These cases have been consolidated with the above lawsuits. In October 2012, Janssen filed a motion to file a Supplemental Complaint against Lupin, Teva and Mylan in the United States District Court for the District of New Jersey, alleging infringement of United States Patent Nos. 7,772,411 (Mylan only), 7,126,015 (Lupin and Teva only) and 7,595,408 (Lupin and Teva only). In January 2013, the Court permitted these three additional patents to be added to the consolidated action. In March 2013, Janssen filed a patent infringement lawsuit against Hetero in the United States District Court for the District of New Jersey, alleging infringement of United States Patent Nos. 7,126,015 and 7,595,408. In June 2013, Janssen and G.D. Searle dismissed their claims relating to the patents owned by G.D. Searle against Lupin and Mylan. A trial on the remaining patents has been scheduled for March 2014.
In May 2013, Lupin notified Janssen that it filed an ANDA seeking approval to market a new dosage strength of its generic version of PREZISTA®. In response, Janssen filed a patent infringement lawsuit in the United States District Court for the District of New Jersey, alleging that Lupin's new dosage strength would infringe the same patents that Janssen is asserting against Lupin in the original action.
In each of the above lawsuits, Tibotec and Janssen are seeking an Order enjoining the defendants from marketing their generic versions of PREZISTA® before the expiration of the relevant patents.
CONCERTA®
In June 2013, ALZA Corporation and Janssen Pharmaceuticals, Inc. (collectively, Janssen) filed patent infringement lawsuits against (1) Par Pharmaceuticals, Inc., Actavis Elizabeth LLC and Actavis, Inc. (collectively, Actavis) in the United States District Court for the District of Delaware and (2) Osmotica Kereskedelmies Szolgaltato Kft (Osmotica) in the United States District Court for the Northern District of Illinois, in response to those parties' ANDAs seeking approval to market a generic version of CONCERTA® before the expiration of United States Patent No. 8,163,798 (the '798 patent). In each of the above lawsuits, Janssen is seeking an Order enjoining the defendants from marketing their generic versions of CONCERTA® before the expiration of the '798 patent.
NUCYNTA® AND NUCYNTA® ER
In July 2013, Janssen Pharmaceuticals, Inc. (JPI) filed patent infringement lawsuits in the United States District Court for the District of New Jersey against Actavis Elizabeth LLC, Actavis Inc. and Actavis LLC (collectively, Actavis), as well as Alkem Laboratories Limited and Ascend Laboratories, LLC (collectively, Alkem). The patent infringement claims against Actavis and Alkem relate to their respective ANDAs seeking approval to market a generic version of NUCYNTA® ER before the expiration of United States Reissue Patent No. 39,593 (the '593 patent), United States Patent No. 7,994,364 (the '364 patent) and, as to Actavis only, United States Patent No. 8,309,060 (the '060 patent). The lawsuit also includes a patent infringement claim against Alkem in response to its ANDA seeking approval to market a generic version of NUCYNTA® before the expiration of the '593 and '364 patents. JPI is seeking an Order enjoining the defendants from marketing their generic versions of NUCYNTA® ER and NUCYNTA® before the expiration of the asserted patents.
OTHER INTELLECTUAL PROPERTY MATTERS
In December 2009, the State of Israel filed a lawsuit in the District Court in Tel Aviv Jaffa against Omrix Biopharmaceuticals, Inc. and various affiliates (Omrix). In the lawsuit, the State claims that an employee of a government-owned hospital was the inventor on several patents related to fibrin glue technology that the employee developed while he was a government employee. The State claims that he had no right to transfer any intellectual property to Omrix because it belongs to the State. The State is seeking damages plus royalties on QUIXIL™ and EVICEL™ products, or alternatively, transfer of the patents to the State.
In March 2012, Noramco, Inc. (Noramco) moved to intervene in three patent infringement lawsuits filed in the United States District Court for the Southern District of New York (SDNY) by Purdue Pharma L.P. and others (Purdue) against Noramco oxycodone customers, Impax Laboratories, Inc. (Impax), Teva Pharmaceuticals USA, Inc. (Teva) and Amneal Pharmaceuticals, LLC (Amneal). In February 2013, Noramco appeared on behalf of Noramco customers Watson Laboratories, Inc. - Florida and Andrx Labs, LLC (collectively, Watson/Andrx) in a similar lawsuit filed by Purdue in the SDNY. The lawsuits are in response to the defendants' respective ANDAs seeking approval to market generic extended release oxycodone products before the expiration of certain Purdue patents. Three of the asserted patents relate to oxycodone and processes for making oxycodone, and Noramco has agreed to defend the lawsuits on behalf of Impax, Teva, Amneal and Watson/Andrx. Although Noramco did not participate, in November 2012, a trial in a lawsuit brought by Purdue against another Noramco customer, Actavis Elizabeth, LLC (Actavis), took place. Because the active ingredient at issue in the Actavis lawsuit is the same as the active ingredient at issue in the above lawsuits, the District Court's decision in the Actavis case may affect those lawsuits. In April 2013, Actavis and Watson/Andrx entered into confidential settlements with Purdue. Another trial is scheduled to take place in September 2013 in a similar lawsuit brought by Purdue against two Noramco customers, Sandoz, Inc. (Sandoz) and Par Pharmaceuticals, Inc. (Par) in the SDNY. The lawsuits against Teva and Impax will also be tried with the Sandoz/Par case, and as discussed above, Noramco will defend Teva and Impax.
In May 2012, Hospira UK Limited (Hospira) filed a revocation proceeding against The Kennedy Institute of Rheumatology (Kennedy) against European Patent (UK) Nos. 0914157, 1593393 and 1941904, which relate to REMICADE®. Janssen Biotech, Inc. licenses those patents, as well as their foreign counterparts, from Kennedy. Hospira is also seeking a declaration of non-infringement of those patents. In July 2013, the parties entered into a confidential settlement. In addition, in March, May and June 2013, Hospira affiliates filed impeachment/revocation proceedings against Kennedy's Canadian, Finnish and Hong Kong counterpart patents, respectively; however, the revocation proceedings in Finland and Hong Kong were withdrawn in July 2013.
In August 2012, Dr. James M. Swanson filed a lawsuit against ALZA Corporation (ALZA) in the Northern District of California seeking to be added as an inventor on three ALZA-owned patents relating to CONCERTA®. Alternatively, Dr. Swanson has alleged, among other things, that the patents-in-suit are invalid and/or unenforceable as a result of ALZA's alleged omission of Dr. Swanson as a named inventor on the patents. Dr. Swanson is seeking damages and an award of unjust enrichment. ALZA filed a motion to dismiss Dr. Swanson's claims. The Court granted the motion in part, and denied it in part. Discovery in the case is ongoing.
GOVERNMENT PROCEEDINGS
Like other companies in the pharmaceutical and medical devices and diagnostics industries, Johnson & Johnson and certain of its subsidiaries are subject to extensive regulation by national, state and local government agencies in the United States and other countries in which they operate. As a result, interaction with government agencies is ongoing. The most significant litigation brought by, and investigations conducted by, government agencies are listed below. It is possible that criminal charges and substantial fines and/or civil penalties or damages could result from government investigations or litigation.
AVERAGE WHOLESALE PRICE (AWP) LITIGATION
Johnson & Johnson and several of its pharmaceutical subsidiaries (the J&J AWP Defendants), along with numerous other pharmaceutical companies, are defendants in a series of lawsuits in state and federal courts involving allegations that the pricing and marketing of certain pharmaceutical products amounted to fraudulent and otherwise actionable conduct because, among other things, the companies allegedly reported an inflated Average Wholesale Price (AWP) for the drugs at issue. Payors alleged that they used those AWPs in calculating provider reimbursement levels. Many of these cases, both federal actions and state actions removed to federal court, were consolidated for pre-trial purposes in a Multi-District Litigation (MDL) in the United States District Court for the District of Massachusetts.
The plaintiffs in these cases included three classes of private persons or entities that paid for any portion of the purchase of the drugs at issue based on AWP, and state government entities that made Medicaid payments for the drugs at issue based on AWP.
In June 2007, after a trial on the merits, the MDL Court dismissed the claims of two of the plaintiff classes against the J&J AWP Defendants. In March 2011, the Court dismissed the claims of the third class against the J&J AWP Defendants without prejudice.
AWP cases brought by various Attorneys General have proceeded to trial against other manufacturers. Several state cases against certain subsidiaries of Johnson & Johnson have been settled, including Kentucky, which had been set for trial in January 2012 and Kansas which had been set for trial in March 2013. Mississippi is set for trial in October 2013, Illinois is set for trial in May 2014, and Alaska is set for trial in July 2014. Other state cases are likely to be set for trial in due course. In addition, an AWP case against the J&J AWP Defendants brought by the Commonwealth of Pennsylvania was tried in Commonwealth Court in October and November 2010. The Court found in the Commonwealth's favor with regard to certain of its claims under the Pennsylvania Unfair Trade Practices and Consumer Protection Law (“UTPL”), entered an injunction, and awarded $45 million in restitution and $6.5 million in civil penalties. The Court found in the J&J AWP Defendants' favor on the Commonwealth's claims of unjust enrichment, misrepresentation/fraud, civil conspiracy, and on certain of the Commonwealth's claims under the UTPL. The J&J AWP Defendants have appealed the Commonwealth Court's UTPL ruling to the Pennsylvania Supreme Court. The Company believes that the J&J AWP Defendants have strong arguments supporting their appeal. Because the Company believes that the potential for an unfavorable outcome is not probable, it has not established an accrual with respect to the verdict.
RISPERDAL®
In January 2004, Janssen Pharmaceutica Inc. (Janssen Pharmaceutica) (now Janssen Pharmaceuticals, Inc. (JPI)) received a subpoena from the Office of the Inspector General of the United States Office of Personnel Management seeking documents concerning sales and marketing of, any and all payments to physicians in connection with sales and marketing of, and clinical trials for, RISPERDAL® from 1997 to 2002. Documents subsequent to 2002 have also been requested by the Department of Justice. An additional subpoena seeking information about marketing of, and adverse reactions to, RISPERDAL® was received from the United States Attorney's Office for the Eastern District of Pennsylvania in November 2005. Numerous subpoenas seeking testimony from various witnesses before a grand jury were also received. JPI cooperated in responding to these requests for documents and witnesses. The United States Department of Justice and the United States Attorney's Office for the Eastern District of Pennsylvania (the Government) are continuing to actively pursue both criminal and civil actions. In February 2010, the Government served Civil Investigative Demands seeking additional information relating to sales and marketing of RISPERDAL® and sales and marketing of INVEGA®. The focus of these matters is the alleged promotion of RISPERDAL® and INVEGA® for off-label uses. The Government has notified JPI that there are also pending qui tam actions alleging off-label promotion of RISPERDAL®. The Government informed JPI that it will intervene in these qui tam actions and file a superseding complaint.
In 2011, discussions to resolve criminal penalties under the Food Drug and Cosmetic Act related to the promotion of RISPERDAL® resulted in an agreement in principle with the United States Attorney's Office for the Eastern District of Pennsylvania on key issues relevant to a disposition of criminal charges pursuant to a single misdemeanor violation of the Food Drug and Cosmetic Act, but certain issues remain open before a settlement can be finalized. During 2011, the Company accrued amounts to cover the financial component of the proposed criminal settlement.
In 2012, the Company also reached an agreement in principle with the United States Department of Justice to settle three pending civil False Claims Act matters that are pending in (1) the Eastern District of Pennsylvania concerning sales and marketing of RISPERDAL® and INVEGA®; (2) the Northern District of California regarding the sales and marketing of NATRECOR®, discussed separately below; and (3) the District of Massachusetts alleging that the defendants provided the Omnicare, Inc. (Omnicare) long-term care pharmacy with rebates and other payments regarding RISPERDAL® and other products, discussed separately below. Assuming these agreements are finalized, they will resolve the federal government's claims under the federal False Claims Act, resolve all pending state and federal government litigation regarding Omnicare and NATRECOR®, and settle the RISPERDAL® Medicaid-related claims for those states that opt into the settlement. With the tentative settlement agreements described above, issues remain open that must be resolved before the settlements can be finalized.
The Company has accrued amounts to cover these tentative settlement agreements. However, the settlements will not resolve all pending state litigation matters regarding RISPERDAL®, and some states may elect to opt out of the settlements. To the extent any state has a claim and has or will elect to opt out of these settlements, the Company has not accrued an amount to cover the claimed amounts but rather an amount at least equal to what that state would receive if it was participating in the settlements. Among other states, Arkansas, Louisiana and South Carolina are not expected to participate in the settlements (as discussed below).
In addition, the Attorneys General of multiple states, including Alaska, Arkansas, Kentucky, Louisiana, Massachusetts, Mississippi, Montana, New Mexico, South Carolina, and Utah, have pending actions against Janssen Pharmaceutica (now JPI) seeking one or more of the following remedies: reimbursement of Medicaid or other public funds for RISPERDAL® prescriptions written for off-label use, compensation for treating their citizens for alleged adverse reactions to RISPERDAL®, civil fines or penalties, damages for “overpayments” by the state and others, violations of state consumer fraud statutes, punitive damages, or other relief relating to alleged unfair business practices. Certain of these actions also seek injunctive relief relating to the promotion of RISPERDAL®. In January 2012, JPI settled a lawsuit filed by the Attorney General of Texas. In April 2012, in the lawsuit brought by the Attorney General of Arkansas, the jury found against both JPI and Johnson & Johnson, and the Court imposed penalties in the amount of approximately $1.2 billion. JPI and Johnson & Johnson have filed an appeal and believe that they have strong arguments supporting the appeal. In January 2013, the same court awarded attorney fees of approximately $180 million. This judgment will also be appealed.
The Attorney General of West Virginia commenced a lawsuit in 2004 against Janssen Pharmaceutica (now JPI) based on claims of alleged consumer fraud as to DURAGESIC®, as well as RISPERDAL®. JPI was found liable and damages were assessed at $4.5 million. JPI filed an appeal, and in November 2010, the West Virginia Supreme Court reversed the trial court's decision. In December 2010, the Attorney General of West Virginia dismissed the case as it related to RISPERDAL® without any payment. Thereafter, JPI settled the case insofar as it related to DURAGESIC®.
In 2004, the Attorney General of Louisiana filed a multi-count Complaint against Janssen Pharmaceutica (now JPI). Johnson & Johnson was later added as a defendant. The case was tried in October 2010. The issue tried to the jury was whether Johnson & Johnson or JPI had violated the State's Medicaid Fraud Act (the Act) through misrepresentations allegedly made in the mailing of a November 2003 Dear Health Care Professional letter regarding RISPERDAL®. The jury returned a verdict that JPI and Johnson & Johnson had violated the Act and awarded $257.7 million in damages. The trial judge subsequently awarded the Attorney General counsel fees and expenses in the amount of $73 million. In August 2012, an interlocutory appellate court affirmed the judgment. In January 2013, the Louisiana Supreme Court accepted Johnson & Johnson and JPI's request for appeal. Oral argument on the appeal took place in March 2013 and the parties are awaiting a decision.
In 2007, the Office of General Counsel of the Commonwealth of Pennsylvania filed a lawsuit against Janssen Pharmaceutica (now JPI) on a multi-Count Complaint related to Janssen Pharmaceutica's sale of RISPERDAL® to the Commonwealth's Medicaid program. The trial occurred in June 2010. The trial judge dismissed the case after the close of the plaintiff's evidence. The Commonwealth filed an appeal in April 2011, and in July 2012, the Pennsylvania Appeals Court upheld the dismissal of the Commonwealth's case.
In 2007, the Attorney General of South Carolina filed a lawsuit against Johnson & Johnson and Janssen Pharmaceutica (now JPI) on several counts. In March 2011, the matter was tried on liability only, at which time the lawsuit was limited to claims of violation of the South Carolina Unfair Trade Practice Act, including, among others, questions of whether Johnson & Johnson or JPI engaged in unfair or deceptive acts or practices in the conduct of any trade or commerce by distributing the November 2003 Dear Health Care Professional letter regarding RISPERDAL® or in their use of the product's FDA-approved label. The jury found in favor of Johnson & Johnson and against JPI. In June 2011, the Court awarded civil penalties of approximately $327.1 million. JPI has appealed this judgment and the Company believes it has strong arguments supporting the appeal. Oral argument on the appeal took place before the South Carolina Supreme Court in March 2013 and the parties are awaiting a decision.
The Attorneys General of approximately 40 other states and the District of Columbia indicated an interest in pursuing similar litigation against JPI, and obtained a tolling agreement staying the running of the statute of limitations while they pursued an investigation of JPI regarding potential consumer fraud actions in connection with the marketing of RISPERDAL®. In September 2012, JPI settled with 36 of the states and the District of Columbia non-Medicaid claims in connection with the sales and marketing of RISPERDAL® and INVEGA®