Johnson & Johnson (JNJ) Q3 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the Johnson & Johnson Third Quarter 2012 Earnings Conference Call. (Operator Instructions) This call is being recorded. (Operator Instructions) I would now like to turn the conference over to Johnson & Johnson. You may begin.

Good morning, and welcome. I’m Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson. This is my pleasure this morning to review our business results for the third quarter of 2012. Joining me on the call today are Dominic Caruso, Vice President Finance and Chief Financial Officer; Joaquin Duato, Worldwide Chairman, Pharmaceuticals Group; and Dr. Paul Stoffels, Chief Scientific Officer and Worldwide Chairman, Pharmaceuticals Group. A few logistics before we get into the details. This call is being made available to a broader audience via webcast accessible through the Investor Relations’ section of the Johnson & Johnson website. I’ll begin by briefly reviewing highlights of the third quarter for the corporation and highlights for our three business segments. Then Dominic will provide some additional commentary on the third quarter results and discuss guidance for the full year of 2012. Following Dominic’s remarks, Joaquin and Paul will provide a brief update on the pharmaceuticals business. We will then open the call to your questions. We expect the call to last approximately an hour and a half. Included with the press release that was sent to the investment community earlier this morning is a schedule showing sales for key products and/or businesses to facilitate updating your models. These are also available on the Johnson & Johnson website as is the press release. Please note this webcast includes slides. The slides are available on the website. Before I get into the results, let me remind you that some of the statements made during this review may be considered forward-looking statements. The 10-K for the fiscal year 2011 identifies certain factors that could cause the company’s actual results to differ materially from those projected in any forward-looking statements made this morning. The 10-K is available through the company or online. During the…

Thank you, Louise, and good morning, everyone. I would like to provide some additional comments about our third quarter results, highlight a few recent business and pipeline developments, and then provide guidance for you to consider in refining your models for the remainder of 2012. Then I will turn over the call to Joaquin Duato and Dr. Paul Stoffels who will provide an update on the pharmaceutical business and pipeline. Let me first begin by sharing my view of Johnson & Johnson’s third quarter results, which Louise has reviewed for you. Despite continuing marketplace and economic pressures, we reported solid sales growth in the third quarter of 6.5%, which was slightly higher than analyst estimates as published by first call. Foreign currency, in particular the weak euro, continues to negatively impact sales results. Third quarter sales on an operational basis excluding the impact of unfavorable currency grew 10.8%. Currency translation negatively impacted sales by 4.3%. Sales included the impact of the recently completed acquisition of Synthes, which contributed 5.8% to worldwide operational growth net of the divestiture of the DePuy trauma business. Excluding the impact of the acquisition of Synthes, the underlying global business grew by approximately 5% on an operational basis. Also, excluding special items this quarter, we delivered solid earnings per share of $1.25, which exceeded analyst estimates. Turning to market conditions, in the U.S., healthcare utilization rates, primarily hospital admissions and surgeries, show early signs of stabilization, and U.S. joint reconstruction volumes appear to have improved in the latest data that we have. While some positive signs can be seen, these signs are still too early to signal any meaningful recovery. Adapting to this change in environment is important and our leaders continue to apply financial discipline to our operations while investing in key growth opportunities. Let…

Thanks, Dominic, and good morning, everyone. My name is Joaquin Duato and I am the Worldwide Chairman of the Pharmaceuticals Group at Johnson & Johnson, a responsibility I share with Paul Stoffels. This is an exciting time for Johnson, a time of transformation for our business, a time of impacting the lives of patients with an unprecedented number of innovative medicines. Pharmaceuticals is a dynamic global market valued at $950 billion and expected to grow to more than $1.2 trillion by 2016. This growth is driven by volume increases in emerging markets and a spending uptick in developed nations. Our focus and efforts are paying off as we continue to build momentum with an industry-leading portfolio. Across our core therapeutic areas we are delivering robust growth and outpacing the markets where we compete. We have launched eight new products since 2009, achieving a strong track record of success and generating excellent results through best in class commercial capabilities. We are also expanding our global presence by broadening our geographic reach to include emerging markets and Japan. At the core of our success are the people of Johnson, committed to the values of Our Credo and caring for the world one person at a time. With 11.3% operational growth in Q3, we have changed the trajectory of our business achieving ten quarters of consecutive growth. We are transforming our pro portfolio. Our new products are projected to comprise 40% of our sales by 2016. You’ll note a healthy balance of mature brands, core growth products, and new launches. As you can see, we are driving growth across all of our key therapeutic areas, reflecting our underlying strength. Our Immunology franchise, our largest, is growing operationally at 19%. After acquiring the rights of REMICADE and SIMPONI in 150 territories, we are expanding…

Thank you, Joaquin, and good morning, everyone. It is my pleasure today to discuss with you our pipeline and R&D strategy, and give you an overview of our enterprise approach to innovation. As leading healthcare company in the world, we believe that innovation is a critical driver for future growth. A key mandate in my new role will be to further develop the innovation agenda for Johnson & Johnson. Our enterprise approach will focus on several key elements: An end-to-end R&D strategy focused on the highest needs and leverage deep medical expertise and scientific know how to select winners. Accessing the best science and technology through internal research or external innovation. By being agnostic to where the innovation comes from, we will access a diversity of innovation and meet a high threshold with products that exceeds market expectations. We will leverage our global development operations to increase efficiency, cost effectiveness and flexibility and ensure quality. As a broadly-based healthcare company focused on three different sectors, we have world class talent and expertise and capabilities in multiple areas of science and technology. One of my key mandates will be to leverage those capabilities across the three sectors for maximum impact on healthcare. In pharmaceuticals, we take a therapeutic area end-to-end approach for all compounds in our pipeline. We focus on five therapeutic areas: Neuroscience, Cardiovascular Metabolism, Immunology and Oncology, and Infectious Diseases. Within that’s therapeutic areas we focus on specific diseases with the most important and highest unmet needs. Our vision is to transform patients’ lives by discovering and developing innovative solutions in each of these disease areas. We do this by identifying the medical needs, accessing the best science internal or external, and combining this with operational excellence. In 2011, we advanced our portfolio in a significant way with approval…

Thanks, Paul. Stephanie, could you please provide the instructions for the Q&A session?

Thank you ladies and gentlemen. (Operator Instructions) Your first question comes from the line of Matthew Dodds with Citi.

Good Morning, Matt. Matthew Dodds – Citi: Morning. Quickly just for you, Dominic, then I’ll go to pharma. When you look at the gross margin, it was flat year-over-year, down a little bit quarter over quarter and you had a big performance in U.S. pharma. So I was just wondering why we didn’t see a little more there.

Right, so as Louise pointed out, Matt, the quarter includes this inventory step-up, from the acquisition of Synthes, which we’ve excluded in our earnings. And so what you saw when you exclude that for the quarter – I don’t know if you did that for the year-to-date basis – was just a slight uptick year-over-year of 20 basis points I think it was, Louise. And that’s related to the continued remediation efforts in the Consumer business. So I don’t think that gross margin excluding this impact from Synthes which will of course, you know, rotate off after all that inventory is sold, I don’t think that will be a big driver one way or the other to our earnings. Matthew Dodds – Citi: I must have missed that. I will look at that again. Thanks, guys. And Joaquin, quickly for you, can you give some comments on what you’re seeing in Western Europe? You talked a lot about emerging markets, Japan, and you showed EMEA. What are you seeing in Western Europe in terms of the volumes today and where you might be seeing some pressure?

For us, Matt, as I described in Western Europe, we are having a very positive evolution in the first half of the year. We had double-digit growth, and we are leading the industry in growth. And it’s based on the strength of our launched new products in particular, INCIVO, Zytiga, and Sepion, which is the name that INVEGA SUSTENNA has outside of the U.S. Having said that, we continue to see headwinds in most of the European countries and particularly Southern Europe, but also in Central Europe. The headwinds are in different areas. We see continued pressure on price on one side, and at the same time, we see stricter guidelines in the use of generics too, and also we see in many different countries HTA agencies coming up which are going to make access more complex and difficult. Overall, a complex situation, very fluid, and our view is that we have to take a long-term view on that. We are pleased with our results to date, and we are confident that our portfolio is the right one for this market environment Matthew Dodds – Citi: Thanks, Joaquin. Thanks, Dominic.

Next question, please.

Your next question is from Mike Weinstein with JP Morgan.

Morning, Mike. Mike Weinstein – JP Morgan: Good morning. Maybe Dominic, let me start with the big picture question before I go to pharma as well. Dominic, if we look at it from a top line perspective, the 5% organic growth this quarter is your best quarter in five years. Could you just give us your big picture thoughts on sustainability with JNJ’s stock going through a difficult period going through RISPERDAL and Siplomax and some of the challenges ACTO 798 so it’s been a long time coming. Can you just talk about your thoughts on NAPS or fact that this 5% level whether this is reasonable or sustainable range for the company? Thanks

Right. Good morning, Mike. Well you’re right we have been through some tough times which of course some of those are expected because of patent expirations and the like, but nonetheless, I think the focus that we had during those times to continue to invest particularly in our pharmaceutical pipeline has paid off for us. So if you look at the three businesses in particular, pharma of course is now as Joaquin said ten quarters of growth and accelerating that growth, and we’re excited about the way the products are performing in the marketplace. And as Paul mentioned, we have new products coming that we’re also very excited about. MD&D of course is challenged by the lower procedure volumes that continue, but offsetting that of course, we now have Synthes as a member of the Johnson & Johnson family of companies. And having a large presence in orthopedics, which we think will be in fact a growth area within Medical Devices given demographics and emerging market trends. So that should help us continue growth in that business along with new product innovation throughout all of MD&D. And the Consumer business is holding up well, you know, in a tough consumer environment generally. But of course we’re looking forward to the return of the OTC products, and we know that we’re delayed in that return. We want to do this right. But of course we see those returning over the near term horizon in 2013. And so all in all I think the business is on sound footing, Mike. I think the investments we made were the appropriate ones. They’re paying off. And the execution of the talented people of Johnson & Johnson is paying off. So I feel pretty good about where the business is right now, and obviously I can’t give you a forecast or guidance for next year. We’ll talk to you about that in January. But overall I feel pretty good that we’re on solid footing here. Mike Weinstein – JP Morgan: Okay. Let me switch to pharma. Paul, can you just cover two items for me? One is The Street’s been a bit cautious on canagliflozin and given the challenges in diabetes and getting products, not only through the FDA, but having successful commercial launches post-approval. Can you just talk about your confidence in the safety profile and the degree to which you’ve had discussions with the FDA on that? And then second, can you talk about in Hep C your strategy for an all oral regimen and where you think you take 435 from here? Thanks.

Okay. Thank you. The first, we’re pretty constant in canagliflozin and first the basics. If you look at the cancer, there was no evidence of any clinical meaningful imbalance in the incidence of cancer including breast and bladder in clinical trials with canagliflozin. I think we are pretty confident from that side that we have a safe compound. The urinary tract infections, if you look at our studies then, there was also in the pooled analysis is the incidence of UDI was a placebo for 100 milligrams 5.9, for 300 milligram 4.3. No real dose-related increase, and it’s known for this type of compound. And typically these products are all managed with OTC medication. So from a long-term safety perspective, we, as you know, we are doing the CANVAS study with a first part of the data which went to the FDA. We’ll have a second interim analyst in 2013, and then later on, when the study is finished, it’s an event driven trial, so we’ll see when the study will be finished. But we are pretty confident that in those data, the support is there for a filing and an approval. The data show – we think the data shows solid cardiovascular safety in the balance between the LDL increase if you look at the overall ratios LDL, HDL, sorry, they were absolutely okay. If you look at the combine that with the blood pressure decrease, the reduction in triglycerides, the weight loss, and the improved glycemic control, we think that the balance between efficacy and safety is very solid for canagliflozin. On 435, with 435 we have a best-in-class protease inhibitor, which we are – which we’ll submit in the first half of next year. Drugs are developed one by one, so the first indication will be in the combination with interferon and ribavirin. We are doing additional early studies on testing the combination with 7977 from Gilead as well as with NS5a from BMS. And in addition to that, we have our internal drugs, which we are developing for our combination. I think as you – I think it’s now absolutely clear that it’s going to go to interferon-free regimens. The task will be combining safe and effective drugs together to make sure that we have the efficacy and the safety. And as I said, drugs will be developed one by one. You have to show the efficacy and the safety of each of the drugs. And we’ll participate significantly in that field.

Thank you. Next question, please.

Your next question comes from Catherine Arnold with Credit Suisse. I think your line is open.

Catherine? Catherine Arnold – Credit Suisse: Hello, can you hear me?

Yes, we can. Hi, Catherine. Catherine Arnold – Credit Suisse: Okay. Hi. Good morning. First question’s for Dominic. I was wondering if you could clarify the relative intensity you might be considering as far as looking for franchises that maybe the company should exit that are weighing on businesses. Obviously I know that you have been very clear that you’re not planning on doing any significant restructuring and spin off type plan; however, as you exited stents and there may be other opportunities where your growth profile could further increase by you exiting certain businesses. I guess I’m wondering to what extent that is a conversation at the board table. And then a question for Paul. I just wondered, Paul, if you could give your commentary on the arthritis market and what you see as being most impactful, whether it’s oral agents entering the marketplace. You’ve obviously committed to that yourself and or bio similar entries into the marketplace. Thanks.

Okay. Thanks for the question, Catherine. Well, as far as exiting certain businesses, we consistently discuss portfolio choices. So our executive team along with all of our business leaders are consistently reviewing each of the businesses and trying to determine the ones that are performing well versus the competition, those that require more investment, those that require some more investment but we might not see the return, like in the case of drug-eluting stents. So we’re constantly reviewing that. We periodically have divestitures as you know in our results, and we typically use those gains as quite frankly a switch in portfolio emphasis by then reinvesting, you know, those gains in other parts of the business. So we continuously do that. And I think we’ll continue to do that. I think we can do some more pruning of the businesses as we look to the future and determine where to best place our bets. So suffice it to say, it’s a conversation that’s always ongoing and top of mind, and I think we’ll continue to do that going forward. And, Paul?

Yeah, let me address your question on first of all with SIMPONI, Celerra, and REMICADE. I think we have a leading franchise, and we are continuing to work with antibodies on new mechanism of actions here with ALV-3, L-6 we have additional new products coming there. At the same time, we are having a significant research activity internally on getting oral immunological agents. And while we didn’t have an advanced JAK, that’s why we made the deal on getting also a JAK inhibitor in our pipeline. It’s a selective JAK 3, and we think it has the potential to in preclinical showing safety and selectivity, so have a significant differentiation with the existing product. It’s also a once-a -day product which we think compares favorably with the Pfizer compound twice a day, and this field is still to play out about selectivity, and we have to learn about the longer term safety and efficacy of these products. So we continue to bet on the two ways: It’s the antibody space for new targets as well as the oral active agents. And Joaquin, if you can answer on the biosimilars.

Biosimilars, Catherine, we described before our exclusivity situation in the U.S. and Europe in the U.S. in 2018 and in Europe with our pediatric extension is accepted would be until February 2015. So those are our core markets with REMICADE. Certainly we continue to work to shape our policy around guidelines and product development and approval of biosimilars, particular around the interchangeability and extrapolation of indications. So it’s an area which we are working hard in order to try to protect patient safety as far as using biosimilars. For us it’s also very meaningful in this context, the fact that we file SIMPONI IV in rheumatoid arthritis and we file it in September, and we believe that SIMPONI IV, it’s going to be a very good option for patients. It has a 30-minute infusion time which compares favorably with REMICADE. It has a low rate of infusion reactions, and it has a patent life until 2024. So we are confident that SIMPONI IV it’s going to become an important option for patients, and it’s going to make SIMPONI the only anti-T and F, which is going to be available at this point in subcutaneous and intravenous formulation.

Next question, please.

Your next question comes from the line of Larry Biegelsen, Wells Fargo.

Morning, Larry. Larry Biegelsen – Wells Fargo: Morning, Louise and everyone. Thanks for taking the question. The 14.6% U.S. pharma growth was obviously very strong. Dominic, could you parse out some of the timing related items and give us what you think the underlying growth was there of the U.S. pharma business in the quarter?

Yeah, hi, Larry. I think there was some. As Louise mentioned earlier in her script, there was some inventory build in the quarter, not overall significant to the entire growth in the quarter. So we’re pleased with the quarterly results, and I would say although somewhat impacted by these pipeline builds, I wouldn’t consider them significant as a significant impact at all. Larry Biegelsen – Wells Fargo: And then one more for you, Dominic. Just the healthcare utilization trends in the U.S. and Europe for the med tech markets, maybe if you could, you know, give us just an update on what you saw. I know the data you typically use is based on the second quarter, but how do you – what was your sense of how things trended in the third quarter? You’ve said that future growth is a good proxy for procedure growth. What did you see there? And what are you hearing from the field? Just any color you can give us on procedure trends. Thank you.

Sure, Larry. So let me deal with the U.S. first. So the statistics we have again are one quarter back so I don’t want to project for the third quarter until we actually see the data. So with respect to second quarter, we saw overall utilization trends continuing to increase in both hospital admissions, hospital surgeries, physician office visits. They were all single digit increases, however. I don’t want to overstate the increase. We did see orthopedic procedures grow at around the mid single digit range, and that of course did translate into third quarter results for us as you saw with our orthopedics business and the joint reconstruction results. So that seems to be stabilizing because we’ve now seen a couple quarters of these low rates of growth, and of course they’re not exciting low rates of growth but they’re not declines which is what we saw for the previous nine quarters, and more growth in orthopedic procedures in particular. In Europe, we do see in the MD&D businesses some volume pressures particularly in Greece, Spain, Portugal, and early signs also in Italy. And just to give you a sense, the Europe business for Johnson & Johnson we reported 7% operational growth excluding Synthes that’s about 2% operational growth, and within the MD&D business, excluding Synthes, it was marginally declined in the quarter but only slightly. So we are seeing some pressure as we expected to see early in the year in procedure volumes in Europe as well. Larry Biegelsen – Wells Fargo: Thank you very much.

You’re welcome

Next question, please.

Your next question is from Rajeev Jashnani with UBS. Rajeev Jashnani – UBS: Hello?

Hello.

Hi, Rajeev. Rajeev Jashnani – UBS: Hello. My question was on canagliflozin also and following up on the response to a previous question, I was wondering if you can talk about cardiovascular safety and a little bit more detail given the LDL signal. It seems possible the FDA could look fairly closely at the interim look from the canvass trial or perhaps a composite of the CV data across the Phase III. Maybe you could talk about that and whether that data might actually show a cardiovascular benefit. And if not, just from a regulatory perspective, would it make sense to approve a drug at this time without showing that cardiovascular benefit? Thanks.

Well, it’s difficult for me to judge on what the regulators will do. But based on the information and what we have submitted, I think all the information is in favor of a good safety profile and a balanced cardiovascular risk. The benefits we think significantly balance the cardiovascular risk, and therefore I think we’ll have to see. We anticipate we’ll have an advisory panel before the approval so more debate will happen there and I think our people are very well prepared to address this question. And so I think it’s not appropriate for me to further go into this at this point. Rajeev Jashnani – UBS: Okay. I did have a couple of other form of follow-ups if I could. One on SIMPONI IV, I was wondering if you would comment on whether there might be any proactive switch strategy with REMICADE that the company could take on and also with respect to ZYTIGA and the rollout of chemo naive, I think you gave a sense for what the market opportunity may be there relative to chemo experience, maybe to talk a little bit about what the existing use of ZYTIGA is in chemo naive patients, and maybe some of the constraints that will get lifted from a payer perspective once you have formal approval. Thanks.

Thanks for the question. Regarding the ZYTIGA, as I said, we are waiting to see the FDA response in December. Certainly we are very hopeful about that indication. It’s going to significantly expand the patient population that is eligible for ZYTIGA treatment. And today our estimates of use in the chemoknife population are about 30% in the U.S., very low, very low in Europe. We are very pleased with the progress that ZYTIGA is having on the market. We are seeing very strong demand trends through September, and we continue to hear about the positive impact that it’s having in patients and the positive attitudes that physicians are having about ZYTIGA. So we are very confident that if granted, the approval in the pre-chemo population is going to further enhance the progression of ZYTIGA. Which, as I have said before, it’s been the most successful oral oncology launch ever. The other question, can you repeat it, Rajeev, the first one that you were asking? Rajeev Jashnani – UBS: Oh, it’s with respect to SIMPONI and the IV formulation and whether there might be a strategy to switch patients from REMICADE I guess both in sort of on a global basis.

Thanks. It’s a very good question. It’s certainly for us to tell you what is going to be the strategy with SIMPONI, particularly with regards to REMICADE. REMICADE, it’s a great option for patients. Physicians are very satisfied with the use of REMICADE. Today REMICADE, as I mentioned, has about 75% of the U.S. infusible market, so that reflects how satisfied physicians are with REMICADE. At the same time, we do believe that SIMPONI IV, it’s going to offer some advantages, like the reduced infusion time. And when you are looking at the clinical data, it’s going be a very strong clinical data package that we’re going to be able to present. So we are confident that we’re going to have a great option there. Now, how they are going to be positioned vis-à-vis each other, it’s certainly for us to speculate. We are pleased that we’re going to have two options, that’s what I can tell you. Rajeev Jashnani – UBS: Thank you.

Next question, please.

Your next question comes from Jamie Ruben, Goldman Sachs.

Hi, Jamie. Jamie Ruben – Goldman Sachs: To follow up on an earlier question regarding the company reshaping its portfolio. I think I heard you say you would consider pruning businesses, and would that include pruning entire divisions such as pharma or consumer? And then just a follow-up question on the pharma side. With INCIVO, I think, Louise, I heard you say that INCIVO represented about half the growth of I think the operational growth of infectious – of the infectious category. If you can just confirm that. And also, what types of patients are coming into treatment, and are you seeing warehousing of patients in Europe? And just as a bigger sort of strategy follow-up, just to follow-up on what you’re doing to leverage TMZ 435. Clearly, you have partnerships in place with Gilead and Bristol-Myers, but you don’t own the other regimens, and your competitors, Gilead, Abbott and Bristol, own the all-oral regimens. I’m just wondering if you can pontificate a bit on whether it’s important. Do you think, can you achieve success in Hep C through partnerships or do you feel you have to own all the regimens? Thanks.

Okay. Hi, Jamie. Let me take the first question about the portfolio and then turn it over of course to Paul on the Hep C question and other questions in the pharma business. When I referred to pruning our portfolio for businesses that might not fit or require more investment than we think would justify based on the return, I don’t view shifting out of pharma MD&D or consumer as pruning. That would be a pretty major decision. And I could tell you we’re not considering that now, and we feel very good about having a broad-based business in healthcare. We think that’s the way to be best positioned for where healthcare is going globally, and we believe having a broad portfolio is in fact the strongest set of cards we can have. So I would say the pruning refers to businesses that are not contributing to growth or for which investments are not worthy. And we always do that. We have done it over our history, and I would think we would continue to do it in the future as well. But not a wholesale reshaping of Johnson & Johnson. That’s not under consideration now. Paul? Or Joaquin.

I was going to address the question, Jamie, about the patients that are coming to therapy in Europe. So the patients that are coming to therapy come from two sources: One, patients that have advanced liver disease, and the other one, patients that have failed previous therapies. So that contributed to have an initial bolus of patients that was conducive to the strong start that we had in INCIVO in Europe. Are we seeing warehousing? Not at this point. I mean, at this point what we are seeing is what I would call a reduced urgency to treat based on the fact that this initial bonus of patients has already been treated. But we are not seeing warehousing at this point. As I described in my presentation, we had some seasonality patterns, and now we are starting to see a pickup in September and in October that we think is going to continue

With regard to 435, I don’t have the holy grail answer, but on every drug you develop one by one, every drug needs preclinical safety and preclinical safety needs safety and efficacy. And if you combine three drugs, you need to have a massive amount of information and also luck to make sure the three drugs are both all safe and effective. And I think at this moment drugs are developed one by one, showing efficacy and safety, getting approved by the FDA. We’ll see a change probably in having combinations approved. But I think we have a very solid foundation with a very well tolerated PI, best in class PI, once a day combinable with other drugs. There is very limited limitation. It’s a low dose. And we have shown very strong efficacy data in Phase II and now Phase III of all enrolled. So I think we are in a strong position to partner. We have our own internal compounds which we are doing combination studies with that also. We look for combinations with external partners. And the future will tell.

And just to confirm, I said it’s half the infectious disease worldwide operational growth that contributed. Okay? Next question, please.

Your next question comes from Derrick Sung, Sanford Bernstein. Derrick Sung – Sanford Bernstein: Hi. Good morning. Thanks for taking my question. I wanted to start out with a question on Consumer and then I’ll turn to pharma. On Consumer, I think I heard you mention that you’ve begun re-launching a number of products in OTC and that contributed to growth as well as some acquisition. And I was wondering if you could separate out the two for this quarter. But then just more broadly speaking, if you could also give us a sense for where you are in that re-launch of your OTC resupply. Are you a quarter of the way there? Halfway there? Kind of give us a sense for the progress.

Sure, Derrick. Thanks for the question. So Louise talked about the fact that we re-launched some products this quarter, and we acquired the rights for some Digestive Health products. So generally speaking, the growth is attributed about half to each. Okay? So about half of the growth came from the re-launch of some products, and half from the year-over-year comparison because of the new products we acquired in the Digestive Health space. As far as our progress, we continue to make progress with the consent decree requirements. We have actually met all of the milestones that we’re required to meet at the end of each quarter so far. We look forward to discussing with the FDA our progress in the near future. And we still are moving forward with completing all the remediation efforts. And as I said in previous discussions, it’s just difficult to predict the speed and ramp at which the products can leave the plant until we complete the steps required and get the review and approvals required under the consent decrees. But overall we’re making good progress and I’m pleased to say that some products have come back to the market already and more are planned in the month ahead and obviously throughout 2013. Derrick Sung – Sanford Bernstein: Okay. Thank you. And then for Joaquin and Paul, a number of your recently launched products are going to be facing some significant competition quite shortly, the ones that come to mind are ZYTIGA facing competition from innovation, you’ve got Tovacivativ the oral RA agent launching and potentially competing with your Immunology franchise and then while XARELTO looks to have picked up, it’s going to be facing competition from Eloqueez shortly. So I was wondering if you can kind of go through each of those products and talk about how you expect the competitive threat to impact your business and how you plan to respond to those competitive threats?

Thanks for the question. Let me start with ZYTIGA. So ZYTIGA as I said before, it’s been the most successful global oral oncology launch ever. It’s really transformed the post-chemo patients. When ZYTIGA was launched, 40% of the post-chemo patients were treated, now 75% of the post-chemo patients are treated. That’s the reflection of the positive benefit that it has for the patients and the very positive efficient experience so far. All our service indicate very high satisfaction with Zytiga by physicians and patients. As I said before, we have had a strong demand trends through October, and certainly we have seen the launch of Extendi there it’s very early on. Some of you have shown some data, IMS prescription data for the first four weeks, and it’s still very preliminary. What that data shows is that it is 10% below launch align Zytiga. Our service indicate that most of the use of Extendi it’s been used in patients that have progressed from Zytiga. So I think that that makes sense. And at the end of the day, it’s good for patients to have more options in these circumstances. We feel very confident of the trajectory that Zytiga is having. We also feel very good about the coverage and patients programs that Zytiga has. And I think that’s going to even play out more with the price that Ensaluata might have which is 28% higher than Zytiga. We are very much looking forward to the approval on the pre-chemo population that would significantly expand the eligible patient pool. So we feel good about how Zytiga is tracking and certainly looking forward to that approval. Moving to Xarelto, Xarelto has the broadest indication profile of the new oral anticoagulants, and it’s the fastest growing new oral anticoagulant. As I commented, it…

Next question, please. Derrick Sung – Sanford Bernstein: Great. Thank you very much.

Your next yes comes from Danielle Telsey with Leerink Swann. Danielle Telsey – Leerink Swann: Thank so much for taking the question. Quick question, Dominic, for you on capital allocation. Can you just give me a sense of what your strategy is going forward? Obviously on the dividend, one of – another large cap med tech company increased their dividend by about 30%, the stock reacted very favorably. Just curious as to whether that could be in the cards for J&J going forward and how you’re thinking about capital allocation. Thanks.

Yeah, sure, Danielle. Thanks for the question. Well as we have said before, the – our priority on capital allocation are first, you know, generate significant cash flows, which we do. And then use those cash flows appropriately, and we generally view the use of the cash flow to towards the dividend as the first priority. And with respect to that, I know others in med tech have increased their dividend significantly, but you probably know that med tech companies generally have been low dividend payers and pharma and consumer companies have been higher dividend payers. So just to give you some perspective on that, our blended competitive set, so if you took a company that had the same kinds of businesses as J&J has based on revenues, the competitive set blended dividend payout ratio is around 34%, and for Johnson & Johnson, our dividend payout ratio is 45%. So we’re already at a healthy dividend payout ratio compared to our competitive set. We then want to use the remaining cash that we generate to build our businesses, and we will look for value-creating opportunities to do that. Synthes is a good example of that. And then of course, as we’ve done in the past, we would then allocate any remaining capital back to shareholders in the form of share repurchases as we’ve done in the past, but we do view that as the third priority. So that’s the way we think about it, and I think the reference to the med tech sector is a good one, but of course our business competes in three sectors. So I think – just make sure you take a look at that when you compare our dividend payout ratio to those of others that we compete with. Danielle Telsey – Leerink Swann: Okay. Great. That’s totally fair. And then on operating leverage going forward, you came in – you showed a little bit more operating leverage on the SG&A side than we were looking for this quarter. Just curious how much of that might be attributable to more Synthes synergies than maybe folks have been looking for. Any way to quantify that impact? Thanks so much, guys

Sure. Well, Danielle, I don’t think that this particular quarter there’s much impact of Synthes synergies. We just began the integration process. We’re going to do that over some period of time. Our priority will be first, you know, no disruption to our customers, and then of course, as we move forward with the integration, we will take appropriate actions to create the synergies that are available to us. But in this quarter, no contribution really from that particular acquisition. I think just good cost management, and as I said in my comments, operating – pre-tax operating margins can vary from year to year and quarter to quarter depending on stages of development in the R&D cycle, launches of products, milestone payments in R&D collaborations, etcetera. So we’ll certainly give you a good indication of what you can expect for 2013 when we meet then. Danielle Telsey – Leerink Swann: Okay. Great. Thanks.

With respect to everybody’s time, we’ll take two more questions. Next question, please.

Your next question comes from Glen Novarro with RBC Capital Markets. Glen Novarro – RBC Capital Markets: First question is on orthopedics. Louise, I think you mentioned that orthopedic pricing was down. I wonder if you can clarify those comments and tell us what knee and hip pricing was down on both U.S. and worldwide basis. And then sticking on knees and hips, one of the smaller players reported last week and kind of talked about excessive or more enhanced seasonality. I wonder if you saw that in the U.S. and Europe. Then I had one follow-up on spine.

Okay. So in terms of worldwide price, we don’t do price and mix on a worldwide basis, but worldwide price, the U.S. was down about 1%, international was flat, which left the worldwide down about 1%. In terms of the U.S., I can give you price and mix. So in the U.S., the hip price was down about 4%, which is very similar to what we saw in the second quarter. But we did see a nice positive tailwind from mix, which actually brought us to about, net-net, about 2.5% negative price mix in the U.S. In terms of knees in the U.S., it’s down about 1% in price, but we did see a nice tailwind again in terms of mix, and net-net we’re up about 1% price mix in the U.S., and that’s similar. Glen Novarro – RBC Capital Markets: And then just on spine, one of the smaller spine players reported earlier, pre-announced earlier, and highlighted more payer pushback. And so we’ve been hearing about payer pushback for years. But I’m wondering in the quarter if you saw enhanced or increased payer pushback. Thanks

We did not see that in our business, though the payers have been asking for evidence in the spine world for many, many years. And I think that that’s just a continued trend. Glen Novarro – RBC Capital Markets: Okay. Thank you.

And Glenn, this is Dominic, I think pricing in the U.S. for spine where you see that did not accelerate in the third quarter. It’s been about the same as it was, negative mid-single-digit price in spine in the U.S., which is what we saw in previous quarters. Glen Novarro – RBC Capital Markets: So the takeaway is pricing is still down but stable, and payer pushback, no big change that we’ve seen recently?

No, I mean, you’re continuing to get pushback on it, but that’s a continuing trend. Okay? Glen Novarro – RBC Capital Markets: Okay. Thank you.

Next question, please.

Your next question comes with Matt Miksic with Piper Jaffray. Matt Miksic – Piper Jaffray: That’s me, actually. Sorry. Can you hear me okay?

Yes, we can. Matt Miksic – Piper Jaffray: I just want to be clear. That last comment was not me. Thank you so much for squeezing me in. One follow-up on pharma. I appreciate all the color on the call. I guess this is for Joaquin and Paul, I don’t know, Dominic if you may want to weigh in on this. Just taking a step back, you made some great progress on the pharma pipeline as you talked about. Looking at the R&D investments as you continue to expand indications for many of your key franchises, how should we think about the leverage and margin trends there for your pharma business as you roll these things out? It is sort of an intermediate long-term question, but would love to get your sense and any color on how we should think about operating margin trends for that division maybe as they compare to historical trends. And then I have one follow-up.

Okay. Matt, good question. One thing I’ll say about pharma R&D investment is it as you probably know at the higher end of the industry range for R&D investment. You know, obviously when I’m talking about a medians or above the median. The more successful companies do invest more in R&D, and from my perspective as a CFO, if our internal development and the licensing strategy that the pharmaceutical team continues to do well with continues into the future, we’re happy to be spending above-industry norms for R&D investment because that is, unlike many of our competitors, this is a very capital efficient way of developing the pharma business, right? Rather than a large capital infusion in the business. We’re talking about a continual level of R&D investment that has proven, as Paul has pointed out, to have a success rate that is above the industry norm. So I think that that should continue, and we’ve been the beneficiaries of it so far, and I think as long as we continue to see that as worthwhile investment and a strategy that will continue into the future, we should continue to see it be above industry norms. As far as the overall operating margins for the second sector, I’m not going to comment on specific operating margins overall for one sector, because as you know, and we have talked about this many times, we manage the business of Johnson & Johnson holistically, and we make decisions across each business depending on the needs and the opportunities of each business. So we’ll provide more color commentary on the overall operating margins when we next meet in January. Matt Miksic – Piper Jaffray: Fair enough. And then just one follow-up on the device side. It would be helpful if you can expand as you get through the Synthes integration, maybe how your efforts there are trending relative to your expectations in terms of – in terms of maintaining the continuity of that business, your efforts to retain elements of that business both on the trauma and the spine side. And you mentioned in Europe one of the elements I think you threw into one of the businesses, there was a competitive dynamic in the quarter. If you could maybe highlight where that was and the nature of that pressure, that would be very helpful, as well.

Louise, do you want to take that?

Okay. So the competitive dynamic in hips and knees were actually some lower-cost competition. So Dominic, did you want to -?

Sure. On the Synthes integration, it’s early. We closed the deal in mid-June, as I said, our first priority is no disruption to customers. But the updates that we’re getting tell us that things are moving along just fine. We’re integrating obviously the spine businesses, because they’re the two businesses that we had that were similar. So that’s where the bulk of the integration is occurring. And so far so good. We’re going to take this carefully. We’re going to be measured in the way we do this so that there’s very little disruption if any, and we’re confident that’s the right way to do it for the long term. The leaders are intact. We’re very pleased to have the Synthes leadership team join Johnson & Johnson, and as you all know, Michelle Orzinger, the previous CEO of Synthes now leads our entire combined orthopedics business. And on November 1st, you’ll get to hear more from Michelle and I’m sure he’ll give you some more color commentary on the how the accretion is going but so far we’re pleased

So some closing remarks from Dominic?

Sure. Thanks, Louise. And I also want to take a moment to thank Paul and Joaquin for joining us this morning and giving us an update on the exciting development in the pharmaceutical pipeline and in our pharmaceutical business. I look forward to speaking to you again on November 1st at our MD&D business review, and then again in January, early mid January when we review our fourth quarter and full-year results. So thank you for your time this morning and have a great day

Thank you. This does conclude today’s Johnson & Johnson Third Quarter 2012 Earnings Conference Call. You may now disconnect.