Johnson & Johnson (JNJ) Q4 2011 Earnings Report, Transcript and Summary

Good morning and welcome. I'm Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson, and it is my pleasure this morning to review our business results for the fourth quarter and full year of 2011. Joining me on the podium today are Bill Weldon, Chairman of the Board of Directors and Chief Executive Officer of Johnson & Johnson; and Dominic Caruso, Vice President, Finance and Chief Financial Officer. A few logistics before we get into the details. The audio and visuals from this presentation are being made available to a broader audience via a webcast accessible through the Investor Relations section of the Johnson & Johnson website. I'll begin by briefly reviewing highlights of the fourth quarter for the Corporation and highlights for our 3 business segments. Following my remarks, Bill Weldon will comment on the 2011 results and provide a strategic outlook for the company. At the completion of Bill's remarks, Dominic Caruso will provide some additional commentary on the fourth quarter financial results and guidance for the full year of 2012. We will then open the meeting to your questions. We will conclude our formal presentation at approximately 9:30 and following Q&A with some final remarks by Bill, will conclude the meeting around 10 a.m. Included with the press release that was sent to the investment community earlier this morning is the schedule showing sales for major products and/or businesses to facilitate updating new models. These are also available on the Johnson & Johnson website, as is the press release. Before I get into the results, let me remind you that some of the statements made during this meeting may be considered forward-looking statements. The 10-K for the fiscal year 2010 identify certain factors that could cause the company's actual results to differ materially from those…

Thanks, Louise, and thank you all for being here today. Let me start by saying I'm very pleased to be here with you to share our latest business results, discuss the way we are shaping and leading the future of healthcare. Thanks to the extraordinary achievements and dedication of our people, we are better positioned today than in any time in recent history to deliver sustainable growth for our shareholders and meaningful innovations for our patients and customers. After 2 challenging years, I am proud to say Johnson & Johnson returned to delivering sales growth in 2011, and we grew adjusted earnings for the 28th consecutive year. We continue to strengthen our platform for leadership and profitable growth through new product launches, strong pipelines and investments in key growth areas. Though we continue to face challenging macroeconomic conditions, our ongoing investments have us well positioned to grow and increase our market leadership in one of the most important and rewarding industries in the world. Today I'll begin by discussing our business highlights for 2011, then I'll review the state of the global healthcare market and discuss 3 major strategies for delivering sustainable growth to Johnson & Johnson. As our theme this year suggests, we are talking about how Johnson & Johnson is delivering sustainable growth built by meaningful innovations in healthcare. All the work we do is focused on making a difference to people, patients and customers in a personal way, and that's what our credo has reminded us for decades. From the breakthrough of prostate cancer drug that extends a grandfather's life, to the new replacement that brings the joy of walking and exercise back to someone's mother, to the newest soap and shampoo that make bath time a memorable moment for someone's child; these are all meaningful innovations…

Thank you, Bill, and good morning, everyone. I'd like to provide some comments on our 2011 fourth quarter and full year results, as well as provide guidance for you to consider in updating your models for 2012. As Bill said at the beginning of his presentation, it is a great pleasure to report performance that showed a return to sales growth, as well as an increase in adjusted earnings for the 28th consecutive year. At the beginning of 2011, we provided you with an outlook of our financial performance for the year that would be impacted by several factors. Specifically, we indicated that net income margins would contract by more than 0.5% versus 2010, partly due to an expected increase in our effective tax rate and partly due to a contraction in our pretax operating margins. As we discussed throughout the year, the margin impact was due to the dilutive impact of the Crucell acquisition, the continued and incremental pricing pressure across our businesses, the incremental cost associated with the U.S. Healthcare Reform fee, as well as the incremental cost of remediation activities in our McNeil Consumer Healthcare business. We also continued investing across our businesses for sustainable growth, including the launch of new exciting products as well as the continued strengthening of our pipeline, all of which as we expected resulted in margin contraction. Over the course of the year, however, we managed to contain the margin erosion to less than 0.5% for the year, an improvement over our forecast. We did complete several divestitures throughout the year and some were completed in the fourth quarter, which resulted in a higher level of other income than our most recent guidance. Additionally, we implemented some tax planning strategies late in the year, which resulted in a lower effective tax rate…

We will now open the meeting to questions. As we have Bill Weldon with us today, we would appreciate it if you could keep your questions at the strategic level and please wait for the microphone as we are webcasting this meeting. Over here, Mike? Michael N. Weinstein - JP Morgan Chase & Co, Research Division: Mike Weinstein, JPMorgan. I'll start with financials. Dominic, just to clarify. On that other income guidance, you commented before that the quarterly run rate of other income, all the different things [ph] for the pluses and minuses that occurs is going to be about $100 million a quarter, so about $400 million a year. I think you commented on that in one of the earnings calls earlier in 2011. You're guiding to $1 billion of other income, so it looks like you're assuming some gains in 2012. Can you just give us the visibility into what gains you're assuming will occur in 2012 so we can model this correctly?

Right. So just to clarify, we think that the underlying run rate in that account approximates $500 million to $600 million. It's royalty income and some other gains, so think about $500 million to $600 million that we expect early this year as we continue to adjust our portfolio and redeploy investments. That will have a divestiture that we record early in 2011 resulting in this now increased to a level of between $900 million and $1 billion. I can't comment on the specific divestiture we're referring to, but we expect to complete it early in 2012. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: Okay. Bill, let me ask you about 2 pipeline areas. A big driver in 2012 is going to be INCIVO, telaprevir, for the company. The landscape for HCV has changed a lot in the last 6 to 12 months. Obviously, there's a lot of competition for assets right now. Can you just talk about, given how important that's going to become to the company as a revenue contributor in 2012 and '13, how you're viewing the competitive positioning of J&J going forward in that area because it becomes an important area for you? And then the second one I'd like to comment on is on Bapi. We're going to get the readout on 2 of the North American trials in 2012. You mentioned in your slides, potential filing in '12, '13. Is that your expectation in how you are positioning? How do you want us to think about potential for the Bapi data in '12, '13? Should we be assuming that this is going to file in '12, '13 on the data that you're going to be generating?

Yes, the Bapi one I'll answer first, Mike. Yes, we expect that we'll have the data analyzed and we'll be filing obviously on a positive outcome by the end of the year would be our expectation on Bapi. And then when you go to INCIVO in the hepatitis C, that's an area where there's a whole lot of interest in various areas. There's a Pharmasset acquisition that's taking place and others. We feel really good about where we are with INCIVO. We feel very good about 435, which will be a complementary product. And we feel that we'll be able to get out there and work in the hepatitis C area with those compounds. And then the other ones that are there, they're still very early in development there. I guess they're going into IIb right now, and we're going to wait and see what exactly happens there. But we think that we're very well positioned for the hepatitis C with the 2 compounds we have. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: So in short, you feel you have in-house right now what you need to be competitive in what will be the second wave of new compounds that are coming out?

We feel we're in a good position and there may be opportunities to look to the future and see how we could work with others if those nukes become better products.

Rick?

Rick Wise, Leerink Swann. Maybe I'll start with Dominic as well, or Bill. Gross margins, you talked about that the margin pressures, the cost pressures. How do we think about gross margin in 2012? Can it be better than 2011? And maybe, Dominic, if you could talk a little bit about what gets you back to the 70% level we've seen in years past. Or are we now more permanently -- given the mix, given the collaborations, are we -- is the upper 60s the new normal for J&J?

Yes. Well the gross margin, of course, is just one aspect of the total P&L. And as I mentioned for 2012, we expect pretax operating margins to improve by 100 to 150 basis points versus '12. And that, as I mentioned, is across every line, R&D, cost of goods sold and selling and marketing expenses. So we do expect gross margins to improve in '12 versus '11. I think the major factors are, as new products are launching and ramping up more rapidly, of course they are contributing more to that line. The mix in the business, the Pharmaceutical business growing obviously has a higher margin component than the rest of the businesses. And also, as the McNeil Consumer products return to the marketplace, compared to 2011 and '10, when they were not basically in the sales, those are relatively high-margin products when compared to the rest of our business so that mix of the business should improve as well. And as Bill mentioned, we're undergoing pretty extensive plan regarding our enterprise supply chain. And although the goal is first always to maintain quality, we obviously think there are some efficiencies in our supply chain. We'll continue to develop those as the years move along. We're early in that process. We've already seen some good improvements. I think we'll see more in the next couple of years.

Bill, one for you. The balance sheet remains incredibly strong, cash continues to grow. We talked about it earlier. The challenge here, given price pressures, given growth pressures, is to bring ever more innovative, faster-growing products in the portfolio. Can you talk a little bit about how you're challenging the J&J team to move faster in these times? Could we -- should we expect J&J to be more aggressive on the acquisition front in 2012 to achieve these goals? Maybe you can talk about your challenges to the team and how you're going to use the cash more aggressively strategically.

Yes, a couple of things. I think, as you say, innovation is what's critical to all of us. And I gave you a look at the performance of our R&D organizations, then you look at what's in the pipeline, we're actually -- if you look in the near-term and further out, which we don't talk a lot about, but we feel arguably we have one of the best if not the best pipelines in the industry, talking about pharmaceuticals as well as the others. I think, Rick, as I said earlier, we continue to look for opportunities. The Pharmacyclics, we thought, was an extraordinary opportunity in the oncology area. There's lot of things that we go and look for but as always, we're going to continue to look to make sure we're going to return value to shareholders. And I think if you have the good fortune that we have at this point in time of having a really extraordinary pipeline, we're doing all we can to continue to advance that pipeline and move it forward, as well as looking for other opportunities, whether they're through acquisitions, licenses or collaborations. We'll continue to do that. A lot of these have become extraordinarily expensive. Well you guys have seen them all, and some of them it's hard to justify the prices people are paying. But I think there's a continuing push in our organization to make sure we're making good choices. And I think if you look at the productivity we have of 75% coming out with approvals and even the cost we have in development of these and cycle times, the group's doing an extraordinary job. They're going to keep doing that and they're going to keep looking for the right opportunities where we can bring our resources and others together to get these products in the marketplace. So I think we're going to continue to do what we're doing. We're going to be aggressive. If we see a great opportunity, we're going to go and get it or try and get it. But I think we're in a very good position, but we have to just keep the pressure on to keep looking for what else is there, what are the new opportunities, are they internal, are they external, enter a collaboration or license or an acquisition and to continue to march forward that way. There's no clear-cut answer, I think we have to do everything. I think the strength of J&J and our R&D organization today is they are truly agnostic. They're looking for the best opportunity wherever they exist and then they're absolutely going to try and get it. So it's not embedded here, it's what is the best opportunity, where is it and how do we bring it into J&J and then get it to the market.

Matt?

Matt Dodds, Citigroup. Bill, for you first. I think I asked this one a lot in the past. On R&D and pharma, just looking at the growth rate for the year, I assume you're still over 20% of sales in pharma for R&D. And I've kind of been asking when this big part of the recent pipeline gets through, does that number come down? And it doesn't seem like it is. Should we be thinking longer-term that your success is encouraging you to continue to spend above industry average in pharma?

Matt, I think we'll spend where the opportunities take us. And that's what we've said all along. We spend more because, and I think you've seen it, the productivity of our pipeline over the last few years has been second to none really. And if you look at the pipeline today, huge opportunities with Bapi, Canagliflozin and these type of opportunities and beyond. So I think we're going to spend what -- we'll deliver those products in the market and spend appropriately. And it maybe that the numbers will be in the relative range they've been in. But there's also the opportunity to come down. But the cost of development of compounds, as you know, is not going backwards. The critical piece of it is the productivity of the pipeline, which is what I talked about earlier, the amount of products that we're able to deliver when we get into Phase III, where your primary cost is or the total cost of the cycle time. So it's planning, it's making sure you're doing good work in getting the product in the market because the most expensive one is the one that never gets there.

And then quickly, Dominic, one for you. On the cash, and if we don't consider Synthes as part of this, at what point do you consider repatriating if there's no change in the tax code or tax holiday? Is that something you may be more likely to consider now given the buildup?

Yes, it's a great question, Matt. And of course, we're all hopeful that the corporate tax reform will actually take hold and we already saw some good movement towards a territorial system there. I think we're encouraged by that. I think consistent with the territorial system, which I think what all multinational companies want to remain competitive in a global economy, will be some transition plan with respect to cash that's already outside the U.S. I think we'd rather wait and see and work with our government to develop first the territorial system, and then an appropriate transition plan that makes sense for U.S. taxpayers.

Tony?

Tony Butler, Barclays Capital. Just 2 questions. The first for Bill, the second for Dominic. Bill, one of the more exciting products, I think, in the pharmaceutical development have been Factor Xa inhibitors, at least replacements for warfarin. The early signs for XARELTO, though, have been really quite poor in AF. And I recognize that a number of other indications are still to come. So I'd love for you to comment on that and maybe why those scripts have been very poor. And then second for Dominic. Dominic, as you think about remediation costs collectively over the next several years, are you actually bringing forward some of those costs now more so into 2012 than you might have done in the past?

Yes. I think the XARELTO question actually, there were a lot of borderline warfarin products or COUMADIN for patients that they wanted to get out. And PRADAXA was out in the market first and gained a lot of those products. So what's happened is we've only been in the market a short period of time. We're finding that there is a very -- that the physicians who are using the product are very happy with it and they're starting to look at more and more patients. The thing that's been most encouraging to us is the most recent results we saw, which was the week of January 13. We saw a 21.6% share of patients with new prescription written going on to the XARELTO patients. So we think that physicians are now becoming aware of it. They're looking at the next group of patients that can go on and the failures under PRADAXA, and also if there are potential adverse events. I think there's a kind of a halo, if you want to call it, a negative halo, around all of these products that I think will play itself out over time. But we're actually very encouraged by the most recent results we've seen.

Tony, with respect to remediation costs, I'm going to assume you're referring to the McNeil Consumer Healthcare. We said that in '12, we expected slightly higher level of remediation costs than in '11. But it's not because we're advancing them more into '12 for future years. It's really just progress being made under the Consent Decree and the actions we're committed to take along with the FDA. So there's no shifting of those expenses. It's the normal course, we obviously want to do all of the things in the appropriate manner under the Consent Decree, but there's no shifting of expenses.

Rajeev?

Rajeev Jashnani, UBS. I had a question regarding the pricing impact on margins that you talked about, 50 to 100 basis points. Is that something you're anticipating to sort of continue into perpetuity? And maybe if you could talk about how you plan to sustain margins in the face of that potential and on an ongoing basis.

Yes, Rajeev. Of course, perpetuity is a very long time, so I can't really comment on perpetuity.

Maybe intermediate.

Yes. So for 2012, one thing that's happening that's more incremental versus '11 is that in Japan, you may know that pharmaceutical pricing reductions have been on a sort of biannual basis. So 2012 in Japan, our business will experience much greater pricing decline than they saw the previous year because of that anniversary. Of course that will then change in '13, and then we'll see it again in '14. And then also, we do expect that the European austerity measures and the pressure in Europe will continue to cause pressure in pricing in 2012 to a greater extent than we saw in 2011. I really can't comment any further on what may happen as those economies improve. But one thing I'm sure you'll appreciate, I think that as we develop innovative products that are important to the healthcare system, that's really the best way to address the pricing question because the system needs and healthcare needs are still are unmet, and therefore we're trying to focus attention on that, and with that should come the appropriate pricing for our products.

Okay. One follow-up on OTC. It seems that U.S. was minus 4%. I think that's a better rate than we've seen in some time for that business. I was wondering if you can just talk about the products that you've relaunched there. I think you mentioned you've got a modest relaunch of some products. How are those products doing in the market? Are they -- is it too early to say if they're reclaiming their previous share? Or perhaps some additional color there would be helpful.

Yes. I think it will be a while until we reclaim the share. What we're doing is getting them out as quickly as we can and what we're getting in the market is selling. I think by the middle of 2012, we'll have most of the products that are going to put back in the market definitely by the end of 2012. So I think you'll see a continual increase in those areas. And as we have product supply going into the market, we'll obviously put promotional dollars behind it to reestablish it. But we're very pleased, we have to say, with the support we've had from the consumer and the support we've had from many areas to be able to bring these products back. And I think people are looking forward to them getting back in the market.

Larry?

Larry Biegelsen, Wells Fargo. Dominic, just to clarify, is it your expectation that there's little to no DOXIL sales in 2012?

In our guidance, we're assuming we won't have any supply from our supplier until very late 2012.

On the ASR Hip recall, could you give us a sense of the total charges you've taken so far and the expectations going forward? And just lastly for Bill, not to push you out, but is 2012 the year we may hear about your successor?

Let me take the first part. So Larry, with respect ASR Hip recall, there's 2 components of it. Just to be clear, there's the ASR Hip recall program. And in the table that we provide a tax to the press release where we give you GAAP versus non-GAAP reconciliation, you'll see that over the 2 years, those program costs have amounted to about $800 million, so that's disclosed in our table. The other component of the ASR Hip recall is our estimate of product liability. That number we're not providing publicly. And I will say that as we got more information based on most recently revised -- most recent updates to national registries, et cetera, on revision rates, we made our best estimate of what the ultimate revision rates may be based on the information we have available to date. So as we said, as more information would become available, we would update as much as we could and as much as we now know. And we think for what we know today, we've captured all the potential that we're aware of today based on the data that we've seen.

Yes. Let me make one comment about DOXIL first. It is our highest priority. We've worked with the FDA, we've had meetings with the FDA. We're looking for any type of quality, high-quality source that we could possibly come up with or other ways to get that product in the market. We do realize how critical it is for individuals, and it is one of our highest priorities. And we're doing every possible. I think, as Dom said, if you look at the current supplier, they're saying not until the end of the year at the earliest. Well, I guess at the end of the year, they're saying. But we're looking for ways to maybe get that product back in the market sooner, if possible. As far as my future, I'm doing my job, I've got a job to do. I really can't comment on that. There'll be a point in time when I'll be ready to leave and the board will feel I'm ready to leave, and I let you all know.

Sara? Sara Michelmore - Brean Murray, Carret & Co., LLC, Research Division: Bill, you touched on it briefly in your remarks. But can you just talk about emerging markets? It's clearly something, especially with the med tech peers, everyone is talking about making large incremental investments in their emerging markets, both commercial infrastructure and manufacturing capabilities. And I'm just wondering if you can orient us to where you are currently in med tech specifically, what you think your current strengths are and what your investment priorities are near-term.

Yes. We've made significant investments. We have an innovation center that we set up for the Consumer group, which is developing specific products for those areas. In Xuzhou, we've set up a facility for innovation for the med tech area to be looking at specific products developed for the emerging markets in those areas and looking at that as kind of an innovation center for that area. The pharm business, we're doing -- we've got a clinical trial for the center set up in Hong Kong. We're working closely with Tianjin University in the oncology area and others where there's opportunities. I think that it's important to -- and I said this in the talk, everybody really gets excited about emerging markets. And I think that we should be excited about them. But I think we can't lose sight of the developed markets also. We have to make sure we're developing products for both areas. But we have very specific centers that have been set up. The other thing that we've done that we think is very important in the med tech area is we've set up training centers to help educate and train surgeons, especially in the area of replacements. If you look at the orthopedic area, big opportunities. We have to make sure we have the right products, and then we have to make sure that the surgeons are capable of doing it. So we have innovation centers that we've set up throughout and then training centers to complement that. So we think we've made the appropriate investments, and we're seeing -- we're very excited about the growth we're seeing throughout all of our businesses. But we have very high expectations.

Bob?

Bob Hopkins from Bank of America Merrill Lynch. First, a quick one for Dominic. Just to be very clear, the difference in the other income line that you talked about in terms of the run rate of $500 million to $600 million, and then 2012 being a year where that's going to be higher because of a pending announcement that you'll make, that gain is included in the $5.05 to $5.15?

Yes, Bob, that is, yes.

And then for Bill, just a big-picture question on the Medical Device segment. First, exiting 2011, can you give some overview comments on just how you feel about the trends exiting the year from a utilization perspective, from a procedure volume perspective? And then I noticed that you -- I think I saw on the slide that your operating margins in that division were flat year-over-year despite what you described as a very challenging environment. And I think a lot of the investors that I talked to about the medical device industry broadly are very hesitant about investing in the group because they see margin pressure going forward, given the challenges. So my question is again, one, how you feel about top line utilization trends? But two, how do you feel about the ability to sustain the kind of margins you have in that business, given the challenges that we see out there?

Sure. I think when you look at -- the big area is elective surgery. And we're still seeing, though, much lower than it had been previously, but kind of the slope of the line and the decline is to starting to smooth out a little bit. The last time I looked at it, it was about 0.5% drop in elective surgery in that area. So we think we're getting close to the bottom of the trough. The other piece of that, that we think is really important and why it's important that we continue to gain share is that there's going to be the people that need this elective surgery are not having it done because they're unemployed. They've lost insurance or anything else, they're putting it off. But you can only put these procedures off for so long. And there's going to be a bolus of people that will come back in the market over time. Now I don't know it's going to be in 2012 or 2013, but I don't think the market is going to decline as precipitously as it had previously. So I think that the procedures are going to be coming back, and I think we need to invest there. Now there's going to be continued pressure -- well let me, before I -- there's going to be continued pressure on pricing. We saw a significant pressure in this spinal area in the last period of time. I think that the hips we've seen basically continued to decline and in the knees, it's pretty constant right about now. But I think we're going to see pricing pressure continue, but I think we'll start to see the procedures coming back. I think if you also look into the emerging markets, you're going to see significant opportunities for growth in those areas as I said before, a lot of it is due to training and moving into that area. And that's the surgical area and the orthopedic area. But the other areas, there's going to be pressures. But I think as you continue to innovate and bring new products out, we're going to able to see things, for example in the diabetes area, in the ocular lens area. And these types of things are going to see opportunities for growth and continued growth. So we think the investment's there, I think the markets totally grew about 3% last year, give or take if you put them all together, and that's about where we were, even with the challenges we had. So we feel pretty good about where we are and where we're going in that market. And again, the whole area of elective surgery can only continue to decline for so long. And there has to come a point when it hits bottom, and then we're going to start to see a ramp back up over time. And what we want to do is be in a position to take advantage of that.

[indiscernible]

Yes, I think that's going to come to us. If you look at what I said before in the MD&D area, we've really refocused our business to have real clear focus on the appropriate areas. One of the things that we saw is we had all these medical device businesses that were scattered around. What we've done is been able to able to take them into the 3 groups which we said is going to give us focus, going to allow us to be able to penetrate the markets and be able to take advantage of the opportunities in those markets and continue to grow our business and maintain margins, let's put it that way.

Catherine? Catherine J. Arnold - Crédit Suisse AG, Research Division: Catherine Arnold from Credit Suisse. Bill, I know you've been looking forward to entering 2012 and getting past a lot of the headwinds that you had mentioned in your presentation on 2011. But in some ways, I guess, I'm wondering if 2013 isn't the new 2012, in the sense of considering your sort of midpoint of your guidance and the growth implied versus what you achieve this year. Are we looking to next year to kind of see an inflection point where some of the macro factors calm down, the product investments start to pay off more and some of the unexpected fixes that you've had to do go away? Is that the right way of thinking about it? And then I guess I just want to follow up, you guys have given a directional sense of where ZYTIGA sales last quarter were. I think you suggested kind of in the mid-80s. I'm wondering if you can give us any directional sense or an absolute sense for ZYTIGA this quarter and also XARELTO since they are below your threshold, but obviously very strategically important.

Yes. What was the first question again? Catherine J. Arnold - Crédit Suisse AG, Research Division: Just 2013 as the new 2012 in terms of an inflection point.

Yes, I think what we've seen is we kind of -- I would say as I did, we've kind of rounded the corner a little bit in 2011. I think we'll see that 2012 is going to get better. 2013, I think we're going to see continual improvement. We'll going to start getting the McNeil products back and investments in those areas. We're going to see the continued, I think, improvement of the launches of the products going back to 2009 as well as the ZYTIGAs, INCIVOs and XARELTOs this year. So I think that the products are going to keep coming. Hopefully, we'll be looking at Bapis and some of these coming into the market. So as I said in the presentation, we've had to deal with these headwinds. The macroeconomic environment, I'm not going to begin to predict that because I think it's anybody's guess where that goes. You can -- the emerging markets are still growing nicely, but they're growing at a lower rate than they grew last year. Every quarter-to-quarter, they're ratcheting down somewhat. But there'll be nice growth in that area. So yes, I think J&J is on a very good trajectory in the right direction. There's going to be continued investment. As Dom said, we're going to have continued working in the remediation in the OTC area, but that's going to start to see more and more the light of day and these new products. So yes, I think if you look forward, we feel very good about the future, I guess. And 2012 we feel good about, I think we're feeling very good about going beyond that. ZYTIGA?

So ZYTIGA contributed just a little over 2.5 points of the 6.6 points that we had in the Pharmaceutical group. XARELTO, it's early to be breaking that out. But before you ask, I'll give you INCIVO as well. So INCIVO contributed about 2.5 points to the pharm OUS group.

And Catherine, as I said earlier, one point doesn't a trend make. But we felt really good about the most recent results that we've seen in XARELTO. We think we're really seeing some good stuff there.

David?

David Lewis, Morgan Stanley. Bill, a question for you. You made a statement in your prepared remarks about what you think healthcare spending will grow over the next 5 years, I believe. And it was around mid-single-digits. And you sort of joined other large global healthcare CEOs in talking about what you think healthcare can grow at. But investors don't seem to be sort of believing that number, whether it's because they think growth rate is going to be lower, but they believe there's going to be significant margin and mix pressure on that level of revenue. So I guess what I'm wondering is I think what investors really want to hear is regardless of what that number is, it's just not it's going to grow 5% or 6%, but there's going to be a change in the way that global healthcare companies begin to distribute healthcare, specifically in the U.S. and maybe it's in light of the Synthes transaction or potential bundling. But if you can help us understand, assuming that number is lower or the margin mix in that 5% growth is lower, how does J&J sort of lead global healthcare companies in changing the way healthcare is distributed in the U.S. to preserve those margins in light of upcoming pressures?

Well, I think some of the things I alluded to also in the talk are areas of looking at biomarkers trying to be able to look at ways to deliver personalized medicine, so you're going to have a much higher prediction -- predictor rate as to whether -- individuals will succeed or not succeed with those types of patients. I think we're going have to wait and see what's going to happen in the whole area of evidence-based medicine. There's a whole a lot of things that are going on right now that are putting more pressure, I think, on the industry to make sure that we're giving better clinical results and making sure that we can document the success that we can have in these areas. So I think that there's going to be a change. This is specifically about pharmaceuticals now. I think there will be a change in the way that we'll be looking at products. And I think as we've done and others are doing right now, we're looking at not trying to come out with a 12-proton pump inhibitor and coming out in areas like that. We're looking at drugs that really bring significant changes to patients and offer real advantages. And I think that in some of the markets, when you go into the developed world, I think there's just a whole tremendous opportunity of patients that are coming into the market that historically have not been there. And there's a huge resource -- by that, I'm talking about resources that the government is willing to spend for patients coming into the market. So I think when you look at it, that there's an opportunity. And I don't think all things are created equal. I think you have to make sure you've selected the right target audience and move forward in that area. I mentioned about the orthopedic business, elective surgery before. I think you're going to see that bottoming out. You're going to see patients coming back into the market. We have to realize we have -- the demographics play in favor of healthcare. And patients, as they get older, spend a lot more on their healthcare and their needs. And I think we're going to have to make sure that we have effective products that are going to create value for those patients and work with the governments to make sure that there's the appropriate reimbursement for those.

Okay. Maybe just a question for Dominic. In terms of the guidance, Dominic, I'm assuming that the guidance you provided assumes a Synthes structure that's roughly equivalent to the structure you announced many months ago. And I guess, maybe just want to get a confirmation on that. But if there is going to be a change in that structure, when do you think we're going to get that announcement? Is it going to be on EU approval? Is it going to be on acquisition close? And are we talking about a change in structure as you think about the opportunities that could move earnings more than 1% to 2%?

So just to be clear, the guidance that I provided excludes Synthes, so no impact at all to Synthes, as if the transaction didn't happen. Once the transaction closes consistent with our historical practice, we'll update our guidance to include the impact of Synthes. And at that time, we'll be as transparent as we always are and give you the impacts and changes from ultimate implementation of financing structure versus the previous estimate that we gave you. We'll detail that for you. But we'll do that at time of close.

Still think at this time the prior dilution estimate is the best dilution estimate you have to date?

Well, the prior dilution estimate was our most conservative estimate, right, and it was based on no efficiency gained by financing the transaction in any different way than was announced. Obviously, we're going to continue working to see if we can get that to be better, but we won't know and have any details on that until very close to closing as we're working through the entire closing and integration of the transaction.

Matt?

Matt Miksic, Piper Jaffrey. A couple of questions for Bill on Medical Devices, specifically. Assuming that we do eventually trough out and some of these volumes start to stabilize and improve, the Synthes acquisition increased what I would call your exposure to sort of the higher acuity end of devices. And I'm wondering, all the pressures on pricing, regulatory reimbursement, have these forces sort of caused you to think, reshuffle your priorities, either strategically, organically, across like the spectrum of chronic, degenerative, more acute devices in terms of your investments? And how so? And I have one follow-up.

Well, one of the major areas in Synthes, as we talked about, is the whole area of trauma, which if you want to, you can say it's more of the acute area. And it's an area where it's much less sensitive to a lot of the ebbs and flows. If you need the procedure, you need the procedure. We don't feel that there's any -- we're very excited about the acquisition. We think it continues for all the right reasons to strengthen our orthopedic business, put it into trauma. I think their presence in the emerging markets will also lend itself to some of the advances in our other areas moving into those. So we feel very good about Synthes. Their business has been very strong. So I don't think it's caused us to reassess our position there. And as I said, I think the demographics play so favorably, as well as the emerging markets play so favorably in the orthopedic business that yes we're going through a challenging time, but we think we'll be able to be in a real strong position.

Because I was asking more broadly, have the market forces, pricing reimbursement, tougher regulatory time line, is that beyond Synthes? Is that causing you to rethink chronic, acute, degenerative, focusing in any of those areas more or less?

No. I think the one area where it caused us more broadly than that to think about was in the drug-eluting stent area, where we've seen the implants or the stents going down as well as price being challenged quite substantially there, and we felt we'd be in a better position to invest -- take those resources that we'd invest in the stent business and invest elsewhere. But if you look at the endoscopic business, you look at the businesses that we're in, in Ethicon, you look at the power and the ultrasound business, I think we feel that we're still in a very good position, and we're going to continue to invest in those areas because we think the markets will be -- will work out really well for us.

And then a follow-up question, if I could, on your forward priorities. You mentioned regenerative medicine as one of the opportunities that you're looking at. I'm wondering if you could talk a little bit about sort of advanced surgical technologies beyond HARMONIC scalpel into robotics or other areas. Do you see those as opportunities going forward? What kind of role do you think that they play?

Robotics specifically -- and during part of my previous life at J&J, we looked at those areas. They made huge strides, they've gotten into lot of areas. But it's an area that we've opted not to go into. So we think that where we're positioned right now is where we ought to be, and hopefully that we'll continue to move in that direction.

Kristen?

Dominic -- Kristen Stewart from Deutsche Bank. Just want to clarify on Synthes. I think originally you said it was 1% to 2% dilutive. But I think originally you were excluding amortization, and now it sounds like you're going to be including that. Is that correct? And what does that do for dilution --

Well, the S4 that we filed discloses the amount of amortization, which on annual basis I think is $500 million or $550 million after tax. And I said in guidance, we're not going to change the way we account for amortization. But when we provide the impact of Synthes, we'll obviously be very clear about how much amortization, incremental amortization is included in that guidance at that time. It also depends on what time of the year we close, et cetera.

But the 1% to 2% originally excluded out amortization costs?

Yes, correct.

And then just thinking out, I guess, a little bit beyond 2012, just with 2013 with the device tax, can you maybe just talk a little bit about how you expect to manage through that, if you can? Obviously, pricing is a difficult environment, so any restructuring efforts that might overcome the incremental cost?

No. I think that the device tax in 2013 is going to come into play. We understand what it is, where we are and we'll continue to manage our business accordingly. So I don't see any difference that we're doing -- any different changes we're going to take.

So the last question, David?

David Roman, Goldman Sachs. Bill and Dominic, in your prepared remarks, you talked about accelerating pricing pressure in 2012. As you sort of -- can you maybe provide a little more perspective to what segments you see that maybe from a tiering perspective? And then maybe you can contrast that with where you think the best areas for innovation are. And do those, in fact, line up with the areas of the most pricing pressure? Can you actually offset that with new products? Or is it really going to be about moving the mix of businesses to the areas where there are greater opportunities for innovation?

Yes, I think the areas where we see innovation, and I think you have to look at it as how do you get into -- bring really true innovation into the marketplace, like ZYTIGA, I think, brought really true innovation. So I think it's going to be going into areas like Bapineuzumab for Alzheimer's, Canagliflozin for diabetes and bringing true innovation in those areas that are not going to be -- that are going to create -- where there are real needs, we have to continue to be moving into those areas. I think the same thing in the orthopedic area and the whole medical device area, to be able to deliver a drug through a lens, for example, is something that could be very innovative and help in those areas. So I think you're going to have to look at true innovation and move in an area that allows you to bring products that are going to create value for patients and are going to be able to offer value to the system and moving that way. So I think that's really the answer that we have to look at.

And then one quick follow-up for Dominic. Anything specific to note in the fourth quarter, is there a pretty sharp sequential set down in margins? And I know margins normally come down throughout the year, but anything specific to note given the relative move compared to history?

Yes, well, in the fourth quarter, just as a reminder, we did the collaboration with Pharmacyclics, which is about $0.04 to $0.05 dilutive just in the quarter. So that was a big jump. And you'll see a big jump in our R&D expense in the fourth quarter. That relates to the licensing payment, the upfront payment that we've made to Pharmacyclics in the quarter. Then we took the opportunity to invest behind the brands and we had some items that we want to clean up and get behind us as we move into 2012.

Final remarks from Bill?

Yes, I just want to say thanks. I think you can tell we're very excited about 2012 and beyond. And I think we're going to see a lot of good things happening. And we do look forward to seeing you all, I guess, at the Medical Device & Diagnostics Business Review in November. So thanks very much.