Good morning, and welcome to the Johnson & Johnson second quarter 2013 earnings conference call. All participants will be able to listen-only until the question-and-answer session of the conference. This call is being recorded. If anyone has any objections you may disconnect at this time. (Operator Instructions). I will now turn the call over to Johnson & Johnson. You may begin.

Good morning and welcome. I am Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson and it is my pleasure this morning to review our business results for the second quarter of 2013. Joining me on the call today are Alex Gorsky, Chairman of the Board and Chief Executive Officer and Sandy Peterson, Group Worldwide Chairman and Dominic Caruso, Vice President Finance and Chief Financial Officer. A few logistics before we get into the details. This review is being made available to a broader audience via a webcast accessible through the Investor Relations section of the Johnson & Johnson website. I will begin by briefly reviewing highlights of the second quarter for the corporation and highlights for our three business segments. Following my remarks, Alex will provide some additional commentary on our results and an update on our near term priorities and Sandy will provide an update on our consumer business and our global supply chain. Please note, the presentation for the company's, Sandy's and Alex's remarks are available on our website. Dominic will provide some additional commentary on the financial results and guidance for 2013. We will then open the call to your questions. We expect the call to last approximately one and a half hour. Included with the press release that was issued earlier this morning is the schedule of sales for key products and/or businesses to facilitate updating your models. These schedules are available on the Johnson & Johnson website as is the press release. Before I get into the results, let me remind you that some of the statements made during this review may be considered forward-looking statements. The 10-K for the fiscal year 2012 identifies certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking…

Well, hello everyone and thank you, Louise, and thanks to everyone for joining us on this call today. Now it is really my pleasure to review our results for the first half of the year and also the progress we made under near-term priorities. Now, you recall, in January, that I discussed the framework for managing our business. The success of our enterprise is built first on Our Credo, which unites Johnson & Johnson as a global enterprise. Our strategic operating principles continue to service well in the evolving marketplace and with our four growth drivers, we have a sound approach to sustaining and driving growth in today's dynamic global healthcare environment. At the mid-year point, we have achieved strong growth across our enterprise. A year ago, our team established a set of critical near-term priorities for moving the business forward. As part of our commitment to keeping you appraised of how we are doing against them, I am pleased to say that with the laser focus approach we have taken, we have made solid demonstrable progress in delivering on our financial commitments, restoring a reliable supply of OTC products to consumers, continuing the successful integration of Synthes and building on the strong momentum in our pharmaceutical business. Reflecting our broad base of leadership in healthcare, we have generated sales of $35.4 billion thus far in 2013, up a strong 9.9% operationally versus this time a year ago, 4.8% operationally, excluding the net impact of Synthes. Medical devices and diagnostics represents 40% of our total sales, generating $14.3 billion in sales year-to-date. Sales grew 12% operationally driven by the positive growth contribution of the Synthes acquisition. Excluding Synthes, overall growth in this segment was impacted by portfolio decisions to divest and exit certain businesses as well as the continued economic…

Thanks, Alex. I have been with Johnson & Johnson now a little over seven months. It has been a great beginning and the longer I am here, the more excited I am about our ability to have a meaningful impact on people's lives around the globe. I have had the privilege to work at a number of well-respected companies, both inside and outside of healthcare and across geographies. With that perspective, I am convinced that Johnson & Johnson is uniquely differentiated by its virtue of its broad portfolio, talented people and geographic reach to make a profound difference in health care. As you know, health care across the globe is changing as governments and consumers work to improve the quality of care and the rolls that providers, healthcare professionals and retailers also adapt and become more global. I have spent much of my time so far meeting our customers and colleagues around the globe and learning our business. I have been to our major business and manufacturing campuses in the US, Brazil, Ireland, Puerto Rico, Belgium, China, Singapore, Vietnam and Thailand. I have met with numerous retail and provider payer customers in the U.S. and in our key other regions, both, large global customers as well as small mom-and-pop operation. What is most striking to me is the talent and diversity of our colleagues around the globe. And equally impressive is experiencing our credo as the source of constancy and inspiration in a time of remarkable change inside our company and in health care across the globe. Our consumer brands are strong and resilient. Our breadth is a source of strength and competitive advantage. Although we have been challenged in recent years, our reputation with consumers, retailers, healthcare professionals and providers remain strong. As you know, I have accountability for…

Thank you, Sandy, and good morning, everyone. It is really great to have Sandy join us today on the call and it's a real pleasure working with her as a new member of our executive committee, I would like to now provide some brief comments about our results and also provide our guidance for you to consider in refining your models for the balance of 2013. I am pleased to say, we've had a strong first half of 2013. The breadth of our business, which provides balance and consistency to our overall performance, as well as the extraordinary achievements and dedication of our people in all of our locations around the world positions us well to sustain growth in this increasingly dynamic global health care market. While there are some indicators of general economic improvement, the healthcare market data we see in terms of utilization is still relatively flat over the prior year, with just a modest sequential improvement over the first quarter utilization data. Overall, however, we continue to drive growth in many areas of our business, especially in the pharmaceutical segment with the launch of new products addressing unmet needs. Alex and Louise already commented on our results for the quarter, so let me just mention the impact of special items this quarter. There were special items recorded in the other income and expense line during the second quarter of approximately $560 million on a pretax basis. That consisted of charges for litigation expense accruals related to various legal matters DePuy ASR hip program cost. And, as expected, continued costs associated with the global integration of Synthes. Excluding these special items, our adjusted earnings per share for the quarter of $1.48 exceeded the mean of the analyst estimates as published by first call. Now, let me provide some…

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

(Operator Instructions) Your first question is from the line of Mike Weinstein with JPMorgan.

I wanted to ask that, at a recent event which was the allowance of the patent application on ZYTIGA in combination with prednisone and could you give us your updated view on the life of that ZYTRIGA in the U.S. and how ZYTIGA is going to fit with ARN-509 and the Aragon acquisition and where do you see the position in the two products? Thanks

Hi, Mike, this is Alex. Thanks a lot for the questions. As you know, Janssen has got five years of data exclusivity in the U.S. from the date of approval which was April 2011 or until April 2016. We are also watching the Hatch-Waxman extension to December 2016. At this point in time, we believe that those are the correct dates of using. Obviously we are going to be looking at some of these other recent events closer to see what impact it may have. But at this time, we are sticking with December 2016. Regarding the Aragon, look we think it’s a great complement to our portfolio. If you look at the great job, frankly, that our team has been able to do with Zetia in the launch regarding the clinical backup, actually the actual approval of the compound, the ongoing clinical development, very impressive, the commercial penetration that we have seen, as well as the care programs for the patients, we think it represents a significant capability. Now when you complement that with the Aragon compound, it will certainly enable us to leverage all of those skills on to a next phase. We think that there could be potentially complementary utilization of those compounds together and again as one another example of us continuing to really make a difference for patients and for our business and is very exciting oncology area.

Two quick follow ups if I can. One, is there an update on the plans for the Clinical Diagnostics. And, two, Dominic, where are you with the completion of last year's ASR and could you just talk about thoughts on additional share repurchase following that? Thanks.

Sure, Mike. I'll take the first half of that question and then I'll ask Dominic to follow up on the second part. As you remember, earlier this year we announced that we were going to be exploring the future. The Diagnostics group at an enterprise level. And the initiation of this process was really part of a broader strategic planning process across Johnson & Johnson. Recognizing that we wanted to be very disciplined and decisive about what we are going to do with our businesses and our capabilities going forward. Now, as we stated back in January, we expect that this process could take anywhere from about 12 months to 24 months. We're on track for that. We're still in the early-stages and we think it's premature at this time to speculate about specific impact, but we are continuing to look at our options. Dominic?

Yes. Hi, Michael. On the ASR program, we expect it will be completed in early August, and we are near of the completion of it. As soon as we complete that programs then we will be permitted to recommence the share purchases that we normally do in a normal course of business, which as I think you all know, we repurchase all the shares that are issued in connection with any employee compensation programs, so we'll obviously commence that right after the ASR program is completed in early August. As far as any larger, more significant share buyback program, as we said before, we always evaluate that in the spirit of utilizing our strong cash flows, but quite frankly in the priority, we've always said, first our dividend, second to use in building our businesses to generate even more sustainable cash flows for the future, and then finally, considering an additional return to shareholders as appropriate given the first two.

Okay. Next question, please.

Your next question is from the line of Rajeev Jashnani, UBS.

My first question was on consumer business, Sandy. And, I was hoping you would talk a little bit about the margins in that business and clearly there is some cost associated with compliance that are ongoing now. But, maybe if you talk about how you see that playing out over the next few years and some of the investments you had to make on the brand. Thanks.

Thanks for the question. As you know, we are still in the process of remediating the OTC business, which is an ongoing effort. And, clearly, we will spend what it takes to ensure that we are completely compliant with the CD, and we are bringing all of the products back. Our expectation is that that will continue for the near-term. But, in addition to all of the remediation efforts, we also are going to ensure that we are investing sufficiently to bring these brands back and bring them back fully to consumers and retailers and that our current estimation is that we will probably be spending at a higher rate than our historical averages as we are bringing all of these brands back. So, that clearly in the near-term, will have some impact on our margins. But at the same time, we are also working very hard to you globalize our core brand portfolio, and by doing that that will improve our margins over time across the total consumer portfolio. And, we have also, the team has put a lot of effort in the last couple of years in reducing overheads and driving efficiencies throughout the business. So, I think what you will see that over time, we will start seeing improvements in our margins as we bring the OTC portfolio back and as we globalize the rest of our core portfolio. And our expectation is that, our business will have similar margin in the consumer sectors as you see in the other parts of the JNJ portfolio, as we bring all of these businesses back and we will continue to improve the margins over time.

Okay. Next question, please?

Your next question is from the line of Matthew Dodds with Citigroup.

Good morning, one for Alex and one for Sandy. Alex, if you look at the Pharma results, ZYTIGA, XARELTO and INCIVO were big drivers globally, but it looks like Europe accelerated again this quarter even if you back out adjustments one timers ZYTIGA, INCIVO. So, my question is whether one or two things that's changed in Europe is maybe going to gain all the share.

I am sorry, Matt. Would you repeat the last part of that question?

Yes. What's driving the share gains in Europe for kind of the base business not the new products, but the base? It seems like you continue to do better and better in Europe, in pharma.

Yes. Well, Matt, really its strong performance across both base and launch brands. So if you take a look, for example, of how we are doing in the CNS area, continued growth with those products. We have had, of course, a number of new launches on top of that. I think, overall, our team is just executing extremely well. So I really think it’s a mix, both of some of the core brands combined with the new product launches that’s driving that kind of performance.

Okay, then. Just to hear from Sandi. Sandi, one area you didn’t hit on was skincare, which is almost as big as OTC nutritionals and the last, I would say, three quarters even again, ex-divestitures, it looks like it slowed a little bit. Is that market share or market growth and is there anything coming there, innovation wise that could accelerate the growth?

Matt, thanks for the question. Actually, the overall skin care market, as a category is improving, but it is still not what it used to be at our historical level. However, our own business is doing relatively well. So our Neutrogena portfolio, in the U.S., we have gained 0.5 share point in the first half of this year. Our Aveeno business is up almost 8%. Our LPN business in Europe is growing close to 10%. Our Johnson's adult business is growing in the mid-single digit level. So those are all very positive things and we are feeling good about our businesses in Asia as well. The one thing that is impacting those that are in this category is the sun care business. The market category is down 11% in the first half of this year. We have actually been gaining share in the U.S. over 2% and we are now the number two global sun care provider in the world. So the impact of the sun care market clearly is having an impact on the overall business and while we are doing very well in it, a little over 2% is less than the historical rates that you would see normally in that business. So that’s a general sense of how we are doing in the skincare portfolio and that’s why you see a relatively low overall growth rate because of market growth. But our shares are actually growing in our core brands.

Next question, please.

Your next question comes from Kristen Stewart, Deutsche Bank.

I just want to take a step back, I guess, and just discuss what gives you, I guess, the confidence to raise the overall operational outlook for the rest of the year? Is it coming more, and obviously you had a good first half, but is there anything kind of in the end markets either within medical devices that gives you some increased confidence or are you just having a higher level of mix on more of the pharma side with some the performance there?

Hi, Kristen, this is Alex. Thanks for the question. I will start off and then I will ask Dominic to finish. But I think overall as we characterize our business, we are really pleased with what we have seen during the first six months. We have made a lot of progress around our top objectives that we have been very clear about from the very beginning delivering on our financial performance. Obviously accelerating the launch of our pharmaceutical products. As we look at that portfolio and particularly there is a couple of things, one is in spite of new competition, really all of our newly launched categories, we continue to see very good uptake. We think that’s driven, first of all, product profiles that really important for patients but they also have been very well-developed by our clinical development team. Two, by great commercial excellence. I think that’s demonstrated in our ability to differentiate but also in our ability to ensure access for these products through managed care Medicaid in the United States but also through tendering processes outside the United States. We have also seen good performance in our pipeline and development by bringing in through licensing and acquisitions but also continued progress in our own. So, all around, our pharma business, we believe, is in a good place and certainly positioned well for future growth. If we look at the MD&D, clearly we have been challenged by the macroeconomic situation that’s having an impact on demand around the world. If I start in the United States, what we have seen is fairly flat performance overall. By the way, if we look at some of the leading indicators, for example, if we look at hospital admissions, if we look at inpatient procedures, we see relatively flat to even slightly…

So, I wouldn't add anything else except that we are not reading into our performance any uptick in utilization trends generally speaking, so I think that that still remains to be challenging for the balance of the year. But as Alex said, individual product performance is really pretty exceptional especially in the Pharma business.

And then just really quickly just the breaking out of the Nutritionals from the OTC business, what was the rationale for that as Nutritionals is an area where you might look to divest or how should we just think about that separation?

Yes. We wanted to break it out, so actually for your benefit, so you can track the progress in our return of the OTC business. You know it's pretty significant in terms of our progress there. I think it sometimes gets buried by the groupies of different things in the same line, so really for your benefit in your modeling purposes we want to show you singularly what the U.S. an overall OTC business was doing. No other reason than that.

Next question, please?

Your next question is from Larry Biegelsen, Wells Fargo.

Good morning. Thanks for taking the question. One for Alex and one for Dominic. Alex, could you share with us your first and second quarter growth rates in emerging markets? Given the macroeconomic and political dynamics, could you give us your latest thoughts on the outlook in those markets for health care in general and your business? And, for Dominic, then after that I'll ask my question for Dominic.

Larry, this Alex. Larry, we are not splitting it out specifically for all emerging markets, but if we take a look at our BRIC markets, Brazil, Russia, India, China, what are saying is about 19% growth. You can see obviously that that's a significant multiple of what we are seeing in developed markets. Again, I think it's built on the fact that we've been in these markets for a substantial period of time, particularly if you take a look at our consumer and our MD&D business in places like China, but even our pharmaceutical business as well as the other businesses in places like Brazil, we made investments over the last several years in our consumer and our MD&D business for example with (Inaudible) [Elsker], Bioseal in China, and so we see these markets as very important for our growth. We continue to see good uptake in health care. It's something that we are watching very closely in light of the larger macroeconomic environment. But, overall, we believe that these markets represent a significant growth opportunity simply because more patients are receiving access to treatment. And, secondly, because we have solid positions in many of these areas.

That's helpful. Just to clarify the 19%, Alex, in the BRIC markets. Was that for Q2 or the first half of the year?

That was Q2.

And, it excludes Synthes.

Larry, and it excludes Synthes.

Okay. And, Dominic, you grew, I think, 4.8% year-to-date ex-Synthes. I think, Alex talked about earlier in the presentation. Correct me if I am wrong, but the updated guidance implies about 2% to 4% in the second half of the year. Is my math correct and is this just conservatism or is there any reason why you would expect the second half to be slower than the first half. Thanks.

Yes. So, we were looking at operational growth. Let's focus on that, because obviously currencies that have a negative impact on our sales growth. Operationally, for the first half, we had pretty strong growth, all related to the pharmaceutical business primarily and obviously the inclusion of Synthes. In the back half of the year, to get to about between 6% and 7% operational growth that I was referring to, we would expect about 4% overall growth for the back half of the year because the first half obviously was impacted by Synthes. So that’s that math I have, Larry, about 10% this quarter, roughly 10% for the first half of the year, between 6% and 7% for the full year, which implies about 4% in the back half of the year on an operational basis, excluding any currency impacts.

Next question, please.

Your next question comes from Derrick Sung with Sanford Bernstein.

My question, to start off with just a couple of housekeeping items. Was there any impact to sales this quarter from either in the pharma, the Medicaid rebate adjustment or in medical devices, any extra selling days that might have inflated sales growth rates?

So, Derrick, no Medicaid rebate adjustments in this particular quarter. We had a significant adjustment last quarter that we talked extensively about but nothing of that nature in this quarter. With selling days, we don’t know if there is any real significant impact for selling days this quarter.

Really no significant impact. It's about 0.2 days. That’s all OUS. It only really impacts our orthopedics business. Okay?

Great, and Louise, could you give us a sense for the breakout of pricing and mix, again for the orthopedic divisions?

Sure. So price worldwide, just price is about 1% decline and that’s consistent U.S., OUS and total and that’s as the same as the first quarter. Now if we get into the U.S. only, where I have a price and mix number. For hips, the price was down about 3.5% very consistent with the prior periods. Mix, however was up about 1.5%. So it netted to about a 2% decline. So that’s a little bit more favorable than the first quarter. When you go into knees, the price number was down about 1%. We did have favorable mix again. For now we are about 0.5% favorable and that is very consistent with what we had in the first quarter.

How about spine?

Okay, so in terms of spine, price was about 3% negative for the second quarter and mix was about to 2.5% positive, netting to about 0.5% negative, very similar trend on the total between the first and the second quarter. However, just a little bit of changes between price and mix.

Great, thank you. Just one more for Sandi, if I could. Sandi, what are your expectations for how much share you will gain, once you get your products back into the market, now that you have seen how the initial relaunch of your OTC products is going. I understand that’s 75% expectation for brands to market. But how much of that lost share do you recapture when you hit the market? Thank you.

Thanks for the question. Quite honestly, we were still in early days. Our intent and we are on track to bring 75% of those brands back this year. We have others that we will be bringing back next year. But as we begin to get into the stores and interact with consumers again, we have had very positive responses from not only retailers but that consumers and healthcare professionals. It is a little early to be able to answer that question, but what I can tell you is that in the first half of the year, we have seen with the limited on distribution, now we have full distribution, but in the first half we only had limited distribution, we have seen things like our Extra Strength TYLENOL share double in the first half of the year. We have seen significant growth with most of our other products that we have brought back to the market. But it’s a little early for us to actually give you a clear sense of what that number will be. Clearly, our intent and our desire is to get back to the share numbers that we had before we went in to the CD process and that’s what we are really focused on doing.

Next question, please.

Next question comes from the line of Jami Rubin with Goldman Sachs.

Just two questions to Dominic. I just want to follow up on an earlier question. That is the implied guidance for the second half of the year. Even if I assume the top end of the guidance, that still assumes a second half earnings growth of 4.5% versus 9% during the first half. So I can't imagine that having Synthes now fully annualized would affect the operational growth rate that much. May be it does, but if you just talk about what specific headwinds you expect in the second half that we did not see in the first half. Then, Alex, a question for you, as long as we have the opportunity to have you on the call, if you could talk sort of bigger picture about business development, Dominic said that your priority is, number one, the dividend. Number two, business development or maybe you have that mixed up. And then number three share buybacks. But now with Synthes having fully annualized, just wondering if you could talk to what your business priorities are in terms of specific businesses, what sort of size we should anticipate. How are you thinking about business development? Thanks.

So, Jamie, on the earnings part of the back half versus first half comparison, remember we did indicate that we expected this other income and expense line to be about $800 million for the year that's consistent with our guidance now, so no change there. But, of course, you with the Élan gain coming, all in one quarter, the vast majority of that has already happened in the first half of the year. So.

That contributes this quarter?

Yes. As you look at that, we released in April, we talked about the fact that we sold our Elan shares and we filed a registration statement concerning that and we indicated the estimated gain was going to be about $200 million from that sale we then sold some additional shares later in the year. So, think about it as a better $0.07 kind of number that we disclosed earlier, but to put one thing in perspective with this other income and expense line, your models, of course, have modeled one quarter of the $800 million, which is about what I had expected a model and this quarter we had within that line $400 million of other income and expense, right, because as the Élan gain in there. So, if you look at the impact just this quarter of the Élan gain versus the overall analyst models, I would say that that $200 million excess or roughly $150 million after-tax is worth about $0.05 compared to what the Street has been modeling.

Okay. And, Jamie, for your first question, I think the way that I would frame our overall position is look, we are going to continue to look for internal and external opportunities that we feel is going to drive our growth going forward. We've been very consistent in saying that when there are new technologies, new innovations that give us a platform to build, and I think a great example of that is what we have done in oncology over the past few years and our pharmaceutical business. There is a lot of unmet medical need and we've been able to do some great partnering to rapidly build what we feel is now a world-class platform in oncology both, from a pharmaceutical development but also from a commercial and access point of view. The next area that we look at of course is, what businesses could be complementary to our existing businesses. What may round out some of our current portfolios or allow, build on capabilities that we currently have and there are other opportunities perhaps, where we look at vertical integration. What we've done for example in our biosurgicals business is a great example of that with OMRIX, and we are excited about the potential that has is we are in the process of launching that on a global level, but that's the way we look at it. But, regarding our pharmaceutical business, look, I am really proud of the work the team has done there in taking agreement such as what we've done with Pharmacyclics, what we've done with (Inaudible), what we have done with other organizations in partnering and adding on to our portfolio to bring forward great opportunities for patients, but also for our business. In MD&D, obviously, the Synthes transaction was very large transaction. Michel and his team are doing a very nice job through the integration process, but we realize that that does take some time. We remain committed to having the broadest and most comprehensive orthopedics platform. We are seeing that happening right now as those businesses come together. In consumer, we think the consumer area [level]-one consumerism will also be very important as we go forward in healthcare. And, we have made some select acquisition they are particular in China over the past couple of years. We have also done some other divestments in our business as we really focus more in certain areas of our portfolio and as we have also done in MD&D, so I think that's overall our approach. We want to continue to look for technologies and innovations that really make a difference for patients, we want to continue to look for opportunities to that can be complementary add-on, give us additional customer offerings or if we see other brand-new areas that we think can really be transformational, obviously we would be interested in that as well.

Next question, please.

Your next question is from the line of Danielle Antalffy with Leerink Swann.

Good morning, everyone. Thanks so much for taking my question. I just wanted to touch on the diabetes business a little bit. You mentioned some of the impacts on competitive bidding. Can you talk a little bit, Alex, about your commitment to that business going forward and how we think about the business now in the context of competitive bidding? Louise, if you could remind us the impact of competitive bidding to the business? How much of the business is as opposed to Medicare?

Hi, Danielle, thank you vey much for the question. Look, overall, what I would say is that J&J and our diabetes companies, we still feel we are very uniquely positioned for strong leadership and success in the category based on a great track record that we have had in technology innovation scale and brand equity. If you just look at diabetes, of course, its one of the largest and most significant issues in healthcare today. I think there is somewhat around 370 million people with diabetes today, projected to go to almost 500 million by 2020. So the need is great. It is a very difficult area to control. Now what I would say is that with the recent launch of Invokana, our sales and marketing efforts are broadly targeting both endocrinologists and primary care physician to treat a vast majority of these Type 2 patients. Both Janssen and LifeScan Animas are partnering to accomplish this objective. It is the first time where LifeScan Animas have been involved in promoting an oral therapeutic agent of any kind. That really helps to expand their reach and it strengthens basically their commercial and clinical relevance beyond just glucose monitoring and insulin delivery among those healthcare professionals. Then when you compound that with the Calibra acquisition that we recently did, it’s the Wearable Insulin Patch technology, we feel that that’s going to be a very good opportunity for patients making it easier for them. If they are currently on basal only insulin therapy and they need an easy to administer mealtime dosing option, that certainly provides that. But while we look at all that, we also acknowledge the realities of the market and now with a competitive bidding process, the 72% reduction in pricing that we are experiencing in the United States, we are having to adapt our business model to meet that challenge. But again it’s a diabetes, we think, is a very important space of a lot of unmet medical need. We think we have a number of offerings across our MD&D, pharmaceutical and consumer segment that can address them. But clearly we will adapt to those changing dynamics as events unfold and as we predict they will unfold in the coming years.

And Medicare sales are just over 20% of the U.S. business.

Okay, great. Thanks so much. Then on Synthes, if I could dig a little bit deeper on that. You mentioned a stable or some positive momentum and fine procedures. I am wondering how much of that is underlying market growth versus specific to Synthes and how is Synthes doing relative to your internal expectations as far as sales force attrition goes and how are you managing that going forward? Thanks so much, guys.

Sure. Let me start with Synthes. Overall, look, we are really pleased with the way the integration is going. Taking on a company the size of Synthes with a reputation that scale its capabilities is no small undertaking. Bringing those together the way that our teams have, I think, they are really to be commended for it. We have got a multi-phased program in place to bring it together commercially, the entire research and development organization as well as all the supporting functional areas. When you look at, for example, our hip and knee performance in the United States, we saw growth in our hip area up 5%, again based on new products being introduced, things like (inaudible), CORAIL, other things, our knee business being helped by the introduction of the ATTUNE new knee system. If we compare those to the U.S. growth rates, we are estimating and this is first quarter data because we don’t have all second quarter data yet, of 1% in hips and slightly down in knees. We think that’s very favorable performance and again keeping those segments focused, keeping them delivering while going through the integration is no small feat. If we look at trauma, we are up 2% in the U.S. versus the market that we think is probably going around 6%. We have seen some loss of share due to the nail recall that we experienced early in the earlier. We think it's being managed well, we think we will see our way through that on a worldwide basis, so we think we are you growing commensurate with what we are seeing with the market, so continued strong emerging market growth, the globalization that we offer to some of those businesses we think is real opportunity. Now last, but not least in spine, on a worldwide basis what we see the market is down about 2%. We think we are down about 1%, so we think we are commensurate. In the U.S., we have seen the performance when we were down about 7% versus the market that was down about three. We were clearly impacted by some transitional issues with our sales force during that period. They put a comprehensive plan in place, where we think that we project that will do much better going forward. And more importantly, when you look at the offerings that our representatives have across the minimally invasive segment, degenerative, spine, a number of other areas combined with the rest of our portfolio is going to put us in a very good position in that marketplace. So, we remain very optimistic, pleased with the performance around the integration and feel that DePuy Synthes again is going to be good for patients and also be good for our business.

Next question please?

The next question is from the line of Tony Butler with Barclays Capital.

Good morning and thank you very much for the time. Really two questions and one is two parts. Alex, a question for you first, clearly some discussion not only in the press today, which has been in the press for some time about the ministry of public security looking into business practices principally in China. And, I am concerned that that you'd spread not only to Glaxo, but to other companies, including JNJ. Just simply looking business practices, can you comment on what you know today maybe going on what sort of investigations and whether or not your practices are being discussed. Then two product questions. One, clearly around the very strong growth of PREZISTA, up 80%, sequentially, Louise or Dominic, any commentary that you can make regarding that very strong growth, sequentially. Then second on XARELTO, if I understand 20% sequential growth, but you believe that's solely driven by DTC. Thanks very much.

Sure, Tony. Let me start up. Look, on the first question what I would is that, we are absolutely committed to ensuring that our businesses are run in a highly compliant manner around the world. And, we have a very active compliance program in place in the country such as China little on all the BRIC countries. We continue to update our policies and procedures as we get more information. At the same time, we recognize that these countries are very important markets going forward. By that there is still a lot of unmet medical need with patients. And, clearly, we know that these governments are also very committed to ensuring that they have a compliant environment at the same time they are getting access for their citizens to important health care options. So, we remain very diligent on it. We've made significant investments in these areas in compliance and we want to work closely with these countries and governments to ensure that we are working together in a collaborative way to ensure we have a very compliant environment going forward. Louise?

Charlie, more in PREZISTA, we have seen just the basic market share improvement over the quarter. I mean, PREZISTA is doing very well. Our sales team is doing an excellent job and the product has become quite frankly a mainstay in HIV therapy, so it's really just we saw pretty strong market share growth, sequentially. Then on XARELTO, we did do some DTC there, but I think that product as we've talked about before with the breadth of its indications is becoming much more recognized as a standard of care in that marketplace. And as Alex pointed out earlier, you know, we've now surpassed warfarin in the new to brand share. So, I think the breadth and our strategy around the breadth of that compound in the market that needs that kind of therapy that has both, exceptional efficacy and obviously safety is what's driving that growth. I wouldn't just pin it on overall DTC advertising. I would say just a breadth of the overall indications for the product as we expected. That's what our strategy was and looks like to playing out.

Yes, Tony, I would just add one other thing on to that because I think Dominic gave a really comprehensive answer. That is in addition to the clinical development program which resulted in numerous indications, it's really gives physicians a very broad application of the product. They have also done a great job done by our access team in ensuring broad formulary access in our managed care in places here in the United States. So I think now we have got more than 85% access of Tier 2 in both private as well as Medicare customers. That’s very important for them. It relates to an issue of affordability, of convenience and of course the reason that we are able to get that kind of access is because our team has done a great job of demonstrating the clinical and overall economic value of XARELTO to those patients and in those settings.

Next question, please.

Your next question is from the line of Glenn Navarro with RBC Capital Markets.

Thanks for taking my question. A question for Alex. Alex, I would like your view on the CapEx environment in the United States. It appears the environment remains challenging. I know you spend a lot of time visiting hospitals and hospital executives. Is the CapEx challenged environment a function of utilization? Is it a function of healthy health care reform? So just curious of your views. Then, as a follow-up, what do you think turns the CapEx environment to the positive in the U.S.? Thanks.

Hi, thank you very much, Glenn. Look, I would say, in discussions that I have had with hospital CEOs and with other people in the marketplace, I have seen a couple of things. One is, clearly there has been a recession now for, I believe, almost 10 to 12 consecutive quarters, where we see that admissions in the hospitals as well as numbers of procedures being flat to negative. Now clearly we are seeing some shift to the outpatient setting but when it comes to inpatient procedures and additions, that market is obviously being impacted by the macroeconomic conditions. I think secondly, people are waiting to see the full impact of the Affordable Care Act. They are still working their way through the details and how that might affect. There is certainly changes regarding risk bearing areas such as hospital acquired infections and other procedures. So I think that’s also having an impact. Third, we are seeing is that patients, frankly, and customers as being more demanding about the data that is supporting justification for new approaches, new procedures and innovation. So that’s the way I would describe the overall CapEx environment as it related to hospitals.

And just as one quick follow-up. Do you have a view on Europe? Europe has remained very challenging from a utilization and a capital point of view? That appears to be stable. Is that correct?

What I would say, Glenn, is it’s a bit of a tale of two cities. I think on one hand what we see in CapEx, particularly if you go to Southern Europe, it’s a very challenging environment and it's because of, again, the macro economic situation they are facing. I don’t think we have seen a pronounced decrease or improvement. We have seen it fairly steady quarter-to-quarter but we expect that to remain a very challenging environment going forward. On the other hand, what we have seen, is that when you introduce new innovations such as our pharmaceutical group has done, over the past 12 months they can really make a difference for patients that you can get reimbursement and get access for patients.

Next question, please.

Your next question is from Matt Miksic with Piper Jaffray.

Thanks, good morning. So, Alex, I very much appreciate the update in perspective. There is a lot to talk about here. But I was wondering if you could expand a little bit on your thoughts on innovation as you had just mentioned and earlier in the call, particularly as it pertains to MD&D and a few different factors, just the first, to a degree towards new technologies, smart instruments and your competitors in different areas of putting that out. You have put that out obviously effectively with Biosense Webster over time. Number two, whether these opportunities are greater in areas where you have an established business like orthopedics, like cardio or whether new platforms and opportunities are as attractive. Then finally, I you think you just mentioned again presenting innovations in a way that hospital and caregivers can recognize the value and are willing to pay for them. So, maybe just your broad thoughts as to factors pertaining to MD&D, and I have one follow-up for Sandy.

Sure. Matt, thanks a lot for the question. If I reflect on it at a very broad level, what I would say around MD&D is that, look innovation is going to continue to be important. However, I think that the bar will be raised on the data will be required to describe and represent that innovation, so let me give you a few examples. I think, overall what we are saying is incremental innovation while still clearly an important part of the overall portfolio and ultimately that can help you lead a path a significant breakthrough innovation is not being rewarded with, for example increased pricing or improved pricing in the marketplace and we would expect over time that we will need to have more transformational innovation or more significant innovation. We recognize that that's going to require additional clinical development and investments. At the same time, we think at Johnson & Johnson, we are uniquely positioned in that category. Given the broad breadth and scale capabilities that we have at our pharmaceutical group and in our medical device group. So, for example, what we've done in our biosurgicals area, as we are getting ready to launch Fibrin Pad, the way that we are having our cardiovascular team, even the for example, work with XARELTO, and some of the things that we are doing Biosense Webster, it gives us a unique opportunity for convergence. And, in fact, we see opportunities in some of these segments to look innovation differently and frankly raise the bar with innovation from a clinical point of view, but also from a regulatory point of view that's in the best interest of patients as well as for our business. We look at areas going forward. I think it's going to be a combination. We still think that in areas such as general surgery, when we look at biosurgicals, when we look at your areas such as energy, there's a lot of opportunity to make procedures less invasive, to simplify the procedures, particularly in emerging markets that will ultimately lead to better overall outcomes and reducing morbidity. We think in other areas, there is great technology opportunity. Such in Biosense Webster, so in the in the general surgery category, I think there is a lot of opportunity for growth in orthopedics. We are working on innovation with products like the ATTUNE Knee, like a number of things that we are doing in spine and hip as of late. We're also looking at innovation from a commercial model standpoint. What can we do around having a broader offering, a different kind of relationship and partnership with hospitals and other large payers, again in a way that's good for patients that helps to improve outcomes, but also is better for the institution and we think again there too we are uniquely position given the breadth, the depth, the scale and size of our business.

That's great. Thank you for that. And then for Sandy, and maybe Alex you may want to chime in on this as well, but around the quality and regulatory and we tend to have focused over the past couple of years on the pathway and the process for OTC in sort of managing through the OTC-specific challenges that have come up, but it would be very helpful if you touch a little bit on this with respect to the supply chain but it would be great to hear and maybe some of the changes you made proactive in ongoing at your other major businesses and facilities, and maybe if you could provide some examples or anecdotes, it would help illustrate the progress that you are making across the organization in terms of quality.

So, Matt, thanks for the question. As I mentioned in the opening remarks, our quality effort is across the enterprise, across all of our businesses, our manufacturing sites as well as all of our R&D sites, because they are under the scope of trying to ensure that we have the highest standard of quality for the safety and care of our patients and consumers. So, when we launched the quality initiative a number of years ago, the focus really was ensuring that we have got consistent quality standards. We went through a three-year cycle that were just ending the first of the cycle over a three year period, where we have gone through all of our manufacturing facilities, all of our core strategic suppliers as well as all of our R&D site to ensure that all of them are living up to the appropriate regulatory standards in those countries that also are standard that at J&J, we believe is one of the highest in the industry and its across all of our sectors. So there has been an immense amount of work and focus in ensuring that we have consistency across our operations, across our product lines and across all of the countries in which we operate. We have, obviously, as we gone through all of this work, we have identified corrective actions and we have immediately taken those corrective actions. We are harmonizing systems. We are putting in place processes and systems so that we have early warning. Systems in place to understand if there is, we think, may be something going on with a product, so we identify it early and we go out and correct it. In addition to that, an important component of all of this is how we are managing our global supply chain. So…

Next question, please.

Your next question is from the line of Jeff Holford with Jefferies.

Just wanted to get a little bit more of an update on the diabetes care businesses where you have been progressing to in terms of market share versus your key competitors and just what you think outside of reimbursement changes what the underlying growth rate here just for expectations going forward? Thank you.

Jeff, are you referring to which of our businesses? Our MD&D diabetes business or Invokana?

Sorry, MD&D diabetes.

Okay. We believe that we have been relatively flat in share this last quarter. We think that there may have been a slight downtick based upon some of the pricing changes that are being made and particularly intrusion of store brands and other offerings. Obviously it's something that we are watching very closely.

Jeff, I want to add, our estimation is that the overall market is declining there. So overall market trends are negative in the diabetes test strips. The market volumes are declining overall.

Next question, please.

Your next question is from the line of Bob Hopkins, Bank of America.

I know its getting late. So two very quick ones. Thanks for taking the call. First, there hasn’t been a lot of commentary on your general surgery franchises within medical technology. So I am wondering if you can just comment a little bit more specifically on of those businesses and what you are seeing there because the growth rate in general surgery and especially surgery did look like it was a little better than last quarter. So just a little bit of a commentary there on what you are seeing in those markets and what you are seeing competitively? Is the uptick more of a little better market or is it a little bit more little better market or is it little bit more or less share loss more you can think?

Sure. Look, there's a number of things driving our performance over there. I think, first of all, we saw modest growth overall in the specialty surgery category for the quarter. Our biosurgicals platform had solid growth, particularly outside the United States. We also saw good growth in the U.S. in our ENT business. And while the worldwide energy business continues to grow driven by the continued expansion in new emerging markets and new product launches, we were challenged in the U.S. with our energy business with low cost competitors, as well as some competitive pressures. So, that's the way I would described specialty surgery. In general surgery, of course, our business was impacted by what has taken place and women's health and our decision to exit some of those businesses, so that had negative. We look at suture and some of those basic platforms we are seeing very consistent growth with the overall market that we think it is basically up about 1% or 2%.

Okay. Then just one quick follow up on an earlier question on emerging markets. I know you talked a lot about how well position you think change is, but just in terms of the outlook for growth of the markets in emerging markets, especially as relates to MD&D, how confident are you that the current growth trends in the market can continue as we look forward over the couple of years. So, again, it's really question of gauging confidence in light of some of the things that have gone on in these economies, in your confidence and abilities of these market, specifically medical devices to continued growth, nice pace we've seen over the last year or so.

Sure. Look, I think there is a couple of forces and dynamics that will be impacting it. You know, first of all, you've got a significant increase in the middle-class populations in those countries. So, for example in China, I think most of the recent statistics would suggest you have about 150 million people in the middle-class. That could go as high as north of 500 million, close to 800 million people over the next 10 years. And, what we also know is that these people move up the economic ladder, they generally consume more health care. And, so we think that the urbanization trend, the trend towards an increasing middle-class does offer a significant growth opportunity. Now, of course, offsetting that will be pressure put on governments on how they are going to control overall healthcare spending. But if you look at the healthcare spending levels in places like Brazil, Russia, India and China, it's very low single digits. We think that it's an opportunity for them to invest in their society even have a more stable society as well as a more productive society, so we think that the growth opportunities there will continue. We recognize that it's going to take perhaps a different portfolio of products that are really targeted towards specific disease states areas of unmet medical need for those markets. It will take time for different commercial approaches, but overall we do think that emerging markets will be a major source of growth for the next several years.

With respect to everybody's time, we will take one more question and then we'll have some closing remarks by Alex.

Your next question is from the line of David Lewis, Morgan Stanley.

Good morning. Maybe two quick ones here, Louise, to keep on the time schedule here. First, Dominic, on the cash flow, free cash specifically got better in 2012 versus 2011, I believe. How do you feel about first half free cash generation. I know you don't give specific guidance, but if you just think about free cash versus net income, how do you expect back half '13 and '13 general to shape up relative to '12. And then I had a quick follow-up maybe for Louise, just on ibrutinib any timing expectations can could we see that approval for year end. Thank you.

David, we are pleased with our cash flow generation. And, for the first half of the year, free cash flow is little over $6 billion, so we expect to be well north of $12 billion, which is where we ended last year's free cash flow, so I think we will see '13 overall free cash flow generation better than we saw in '12, and that we are off to a good start already.

Yes. And, regarding ibrutinib, look the NDA, the new drug application for ibrutinib was submitted June 2013, which was announced recently and this was announced by the FDA. We do have the Breakthrough Therapy designation, which we are very excited about for the treatment of patients with chronic lymphocytic leukemia CLL, SLL, and we have received at least one prior therapy in patients also with mantle cell lymphoma MCL who have received at least one prior therapy. We got to two pivotal trials that we think are both the very strong and the FDA has not communicated the PDUFA date and the review period is not dictated in the existing breakthrough therapy guidelines from the FDA. Now that being said, we have requested a priority review designation which has an FDA goal for completion of six months after a two-month validation period but we really cannot comment beyond that at this time. All that being said, we think this is going to really offer a great option for patients and for physicians in a very difficult to treat area and be a tremendous extension of our emerging oncology portfolio and franchise.

So some final remarks, Alex?

Okay. So thanks for your time everybody. On behalf of Dominic, Sandi, Louise and myself and even more importantly from the 128,000 employees of Johnson & Johnson around the world, I would like to close today's conference call by thanking you for participating in the meeting. Your engagement in our business is much appreciated. We look forward to discussing our future results as we move through the rest of the year. So enjoy the rest of summer and thank you very much.

Thank you. This concludes today's Johnson & Johnson second quarter earnings conference call. You may now disconnect.