Johnson & Johnson (JNJ) Q3 2015 Earnings Report, Transcript and Summary

Good morning and welcome to Johnson & Johnson's Third Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode 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 would now like to turn the conference 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 third quarter of 2015. Joining me on the call today are Dominic Caruso, Vice President of Finance and Chief Financial Officer and Gary Pruden, Worldwide Chairman Medical Devices. A few logistics before we get into the details. This review is being made available via webcast accessible through the Investor Relations section of the Johnson & Johnson website at investor.jnj.com. I will begin by briefly reviewing the third quarter for the corporation and our three business segments. Next Gary will discuss our Medical Device business and the strategy for growth. Lastly, Dominic will provide some additional commentary on the results, review the income statement and discuss guidance for 2015. We will then open the call to your questions. We expect the call to last approximately 90 minutes. 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. Please note we will be using a presentation to complement today's commentary. The presentation is also available on our website. Before we begin, let me remind you that some of the statements made during this review are or may be considered forward-looking statements. The 10-K for the fiscal year 2014 and the company's subsequent filings identify certain factors that could cause the company’s actual results to differ materially from those projected in any forward-looking statement made today. The company does not undertake to update any forward-looking statements as a result of new information or future events or developments. Our SEC filings, including the 10-K, are available through the company and on our website. During the review, non-GAAP financial measures are used to provide information pertinent to ongoing business performance. These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results. Tables reconciling these measures to the most comparable GAAP measures are available in the schedules accompanying the press release and on the Investor Relations section of the Johnson & Johnson website. Now, I would like to review our results for the third quarter of 2015. Worldwide sales to customers were $17.1 billion for the third quarter of 2015, down 7.4% versus third quarter 2014. On an operational basis, sales were up 0.8% and currency had a negative impact of 8.2%. In the U.S., sales were down 0.6%. In regions outside the U.S., our operational growth was 2.1%, while the effective currency exchange rates negatively impacted our reported results by 15.8%. On an operational basis, both Europe and Western Hemisphere excluding the U.S., grew 2.7%, while the Asia Pacific Africa region grew by 1.2%. Growth in all regions was negatively impacted by hepatitis C competition. Excluding the net impact of acquisitions and divestitures, and hepatitis C sales underlying operational growth was 5.6% worldwide, 7.7% in the U.S., and 3.8% outside the U.S. Turning now to earnings, net earnings were $3.4 billion and earnings per share were $1.20 versus $1.66 a year ago. As referenced in the table reconciling non-GAAP measures, 2015 third quarter net earnings were adjusted to exclude after-tax amortization expense of $437 million and a charge of $377 million for after-tax special items. 2014 third quarter net earnings were adjusted to exclude a net gain of $144 million. Dominic will discuss special items in his remarks. Excluding amortization expense and special items for both periods, adjusted net earnings for the current quarter were $4.2 billion and adjusted diluted earnings per share were $1.49, representing decreases of 9.4% and 7.5% respectively as compared to the same period in 2014. Currency translation significantly impacted net earnings. On an operational basis, adjusted diluted earnings per share grew 1.2%. Turning now to business segment highlights, please note percentages quoted represent operational sales change in comparison to the third quarter of 2014 unless otherwise stated and therefore exclude the impact of currency translation. I will begin with the consumer segment. Worldwide consumer segment sales of $3.3 billion increased 3.1%, with the U.S. sales up 8.9%, while outside the U.S. sales grew 0.4%. Excluding the net impact of acquisitions and divestitures, underlying growth was 4% worldwide, 8.9% in the U.S., and 1.5% outside the U.S. Growth was driven by U.S. OTC and Skin Care, Women's Health outside the U.S. and Oral Care worldwide. OTC sales results were driven by strong U.S. growth of 22.4% with analgesics in the U.S. up nearly 29% due to increased share complemented by the reintroduction of Tylenol Arthritis including initial launch inventory. In the U.S., adult analgesic market share was approximately 12.5%, up from approximately 11% a year ago, while U.S. pediatric share was 44.5%, up from 41% a year ago. Additional contributors to growth in the U.S. were seasonal inventory build for ZYRTEC and in the initial stocking for re-launched digestive health products. Results outside the U.S. were negatively impacted by the timing of the seasonal inventory build for upper respiratory products. As we noted last quarter, the build occurred in the second quarter this year versus the third quarter last year. In U.S. Skin Care market share increases and a seasonal inventory build drove strong growth for AVEENO and NEUTROGENA. New product launches and successful marketing campaigns drove the results for LISTERINE in Oral Care and Women's Health products outside the U.S. Moving now to our Pharmaceutical segment, worldwide sales of $7.7 billion decreased 0.3% with U.S. sales down 4.5% and sales outside the U.S. up 5.5%. New competitors in Hepatitis C significantly impacted sales results. Excluding sales of Hepatitis C products OLYSIO and INCIVO, as well as the impact of acquisitions and divestitures, underlying growth worldwide U.S. and outside the U.S. was approximately 10.1%, 11.5% and 8.5% respectively. Important contributors to growth were INVOKANA/INVOKAMET, IMBRUVICA, SIMPONI, STELARA, INVEGA SUSTENNA or XEPLION, PREZISTA and PREZCOBIX, CONCERTA, XARELTO, and ZYTIGA partially offset by lower export sales of REMICADE. Strong momentum in market share increases drove results for INVOKANA/INVOKAMET. In the U.S., INVOKANA/INVOKAMET achieved 6.3% total prescription share or TRx within the defined market of type-2 diabetes, excluding insulin and metformin, up from 6% in the second quarter of 2015. TRx with endocrinologists was over 13% for the quarter and over 5.5% in primary care. INVOKANA has greater than 80% preferred access across commercial and greater than 90% for Part D plans. Strong patient uptake with new indications, approvals and demonstrated efficacy drove results for IMBRUVICA in the U.S. IMBRUVICA is the leader in both new and total patient regimen share in second line CLL and MCL. Outside the U.S., results were driven primarily by Europe with strong patient uptake, particularly in Germany, France, and the U.K. IMBRUVICA is now approved in 60 countries. STERALA and combine SIMPONI, SIMPONI ARIA achieved strong growth across all the major regions due to robust market growth combined with increased penetration of SIMPONI ARIA. INVEGA SUSTENNA or XEPLION achieved strong results due primarily to increased market share where CONCERTA growth was primarily due to a therapeutic equivalence reclassification of generics by the FDA last November. As expected during the quarter we saw generic entries for INVEGA tablets in the U.S. We have launched an authorized generic of INVEGA. Strong results for PREZISTA were driven by the launch earlier this year of PREZCOBIX. Continued share growth drove results for XARELTO sales with TRx for the quarter in the U.S. anticoagulant market of 15.8% up 1.5 points from a year ago. XARELTO is broadly reimbursed with over 90% of commercial and Medicare Part D patients covered at the lowest branded product co-pay. As an update, during the quarter we received several Paragraph IV notifications from generic manufacturers advising that they filed abbreviated new drug applications with the FDA seeking approval to market a generic version of XARELTO in the U.S. before the expiration of the relevant patents listed in the orange book. The composition of matter patent owned by our partner Bayer is expected to expire in December 2020. However a patent term extension has been filed, which if fully granted with extend the patent to mid-2024. Further if we are granted pediatric exclusivity, this will provide an additional six months to the existing marketing exclusivity or patent term. We together with Bayer will vigorously defend the patents and have filed suit against the generic applicants. Strong growth of the combined metastatic castrate resistant prostate cancer market at over 12.5% drove the results for ZYTIGA in the U.S. ZYTIGA’s share was 27.1% of that market down approximately one point on a sequential basis due to increased competition. Outside the U.S., ZYTIGA achieved strong growth in Asia and Latin America, which was partially offset by lower sales in Europe due to increased competition. REMICADE export sales were down over 40% with two-thirds of that decline attributed to sales to our partners in Japan due to an inventory draw down in preparation for our label expansion for a new indication. Additionally, the weakening of the euro and the loss of exclusivity in Europe has negatively impacted results. I will now review the Medical Devices segment results. Worldwide Medical Devices segment sales of $6.1 billion increased 0.9%. U.S. sales increased 2% while sales outside the U.S. increased 0.1%. Excluding the net impact of acquisitions and divestitures, underlying growth was 1.3% worldwide with the U.S. up 2% and growth of 0.8% outside the U.S. Growth was driven by Vision Care, Specialty Surgery, and Cardiovascular Care partially offset by lower sales in Orthopaedics and price declines in the diabetes care. Vision Care results was strong across the major regions driven by the introduction of new products. Market growth, share gains in certain segments and new product introduction drove the results for specialty surgery growth with worldwide bio-surgery growth of over 9%, energy growth outside the U.S. of approximately 6% and worldwide Mentor growth of nearly 13%. Cardiovascular care growth was driven by 9% worldwide increase in our electrophysiology business due to strong sales of the THERMOCOOL SMARTTOUCH Catheter. Solid growth in the U.S. for orthopaedics was offset by lower sales outside the U.S. Sales outside the U.S. were negatively impacted by softer demand and a reduction in inventory levels primarily in China. The introduction earlier this year of the TFNA nail drove U.S. trauma growth of approximately 5%. Additional contributors to the U.S. growth were strong double-digit sales of ORTHOVISC and MONOVISC, 3% growth in hips due to our primary stem platform and 2% growth in knees due to the success of the ATTUNE platform. In the U.S. positive mix from new product introductions partially offset negative price in the major categories. That concludes the segment highlights for Johnson & Johnson's third quarter of 2015. It is now my pleasure to turn the call over to Gary Pruden. Gary?

Thanks, Louise. I'm pleased to be here today to share with you the terrific work that's taking place at our Johnson & Johnson Medical Device Group and why we’re excited for the future. As you recall, Sandi Peterson provided an update on our consumer facing Medical Devices in the second quarter, so my discussion today is focused on our surgery, orthopaedics and cardiovascular businesses. I will provide our perspective on the market which we’re operating, our unique advantages, our performance through the third quarter and most important our strategy to win. Before we begin, I thought it will be helpful to provide some framing around the business and the quarter performance overall. Our medical device business excluding the consumer facing medical device business and OCD has grown 1.8% on a year-to-date operational basis. When we adjust for the women's health and Cordis business, in addition to several non-recurring impacts on our business, the underlying year-to-date operational growth was 2.8%. Our stated goal is to lead in the categories in which we compete. Today across our portfolio we have strong platforms such as Endocutters and Biosurgery that are outperforming market growth. We have substantial platforms which we see growing solely such as wound closure, where we have roughly an 80% share and we've identified areas that require further attention and infusion of innovation. We believe we have sound strategies to achieve our leadership goals. Our driving growth through enhanced innovation and excellence in execution, design to get us two or above market growth in the next 12 to 24 months. In Medical Devices we’ve been on the leading edge of industry consolidation. And our conviction has grown even stronger that our breadth, depth and scale can be leveraged to make it difference to those reserve. Throughout my remarks this morning, I will share examples of how the medical device businesses of Johnson & Johnson are stronger together and how together we will accelerate growth and innovation. We're competing in attractive global market growing at roughly 4% where we hold leadership positions in surgery, orthopaedics and cardiovascular electrophysiology. Demographics favored continued market growth as population's age, the incidence of chronic diseases grow and more people gain access to care globally. As both customers and providers seek to improve efficiency, effectiveness and manage escalating cost, consolidation has accelerated both within our global customer base and the industry. As one Medical Device Group, we enjoy unique market advantages today starting with the broad portfolio of medical offerings, surgery, orthopaedics and cardiovascular. And we have the financial and industry strength of Johnson & Johnson behind us that enables us to invest in growth platforms and bring comprehensive solutions to bear on global healthcare issues. In emerging markets, we have a substantial presence which delivered roughly 20% of our revenue through the third quarter of this year. Our annualized sales in China alone continue to expand and currently exceed $1 billion year-to- date. We have a strong leadership position in categories such as trauma, minimally invasive surgery and sutures that help us facilitate a tip-of-the- sword strategy to establish leadership scale in emerging markets where we can then expand our key growth platforms. And finally, we compete from a position of strength. The number one or two market positions in virtually every category in which we do business. As one Johnson & Johnson Medical Device Group aligned to a common strategy, we will accelerate the benefits of these advantages going forward Our sales year-to-date were driven by the strong performances our electrophysiology, endocutter, bio-surgery and international energy businesses, complemented by our solid results in joint reconstruction and sports medicine business. Partially offsetting this growth were lower sales of spine and women's health problems. Our 2015 results continue to be impacted by the relatively soft global market conditions. We are seeing the market in the U.S. improve but EMEA growth remains challenged and the emerging markets have slowed this year. We expect the soft market conditions and pricing challenges across the Board to continue. While we have strong category leaders across surgery, cardiovascular and Orthopaedics, we also have some opportunities to address platform challenges and reallocate resources to high growth opportunities in some of our platforms like trauma. In trauma we have seen mixed results in our performance. This has been an important area of focus since acquisition. However we have seen a lower level of innovation though due to a number of factors including the significant remediation effort to bring some of these up to Johnson & Johnson quality standards and the overall integration efforts during the last few years. Going forward, we are shifting more of our focus and resources to deliver new innovative products and target faster growing categories within the market such as elective foot and ankle. The recent success of our new Femoral Nail System TFN advanced demonstrates receptivity in this category to new and meaningful innovation. We also continue to strengthen the trauma franchise capabilities and high growth market such as U.S. and China. Additionally in trauma as across the entire portfolio, we recognize the value of strategic partnerships and helping us to achieve our aspirations. Through a new five year cooperation agreement between DePuy Synthes and the AO Foundation, we will continue to develop innovative products and solutions, train more surgeons to improve standards of care and treat more patients globally. With respect to the broader portfolio management, earlier this month we completed the divestiture of the Cordis business. Through portfolio of discipline we will continue to exit categories that do not fit our strategy and evaluate our portfolio to identify those growth categories or heavier R&D investment, external partnerships and L&A. In summary, we are sharpening our focus and investment on priority platforms that we believe will drive the majority of our growth. As I noted earlier, roughly 20% of our growth came from emerging markets and more than 50% of our revenue year-to-date has come from outside the U.S. In line with what you’re hearing broadly about the economic slowdown of emerging markets, we see that too. But we are maintaining nice growth across our business in these markets. Consistent with that, over the next five years we continue to expect emerging markets to drive this proportional growth opportunities as access to quality health care continues to expand. The World Health Organization estimates that nearly a third of the world's global disease burden could be addressed through surgery. Yet nearly 5 billion people continue to lack access to safe, timely and affordable surgical care. Our goal is to reach more patients and restore more lives. We aim to achieve this through meaningful innovation and efforts to expand access to care including continued physician training. We are confident that the results will be improved standards of care for patients around the world and sales growth above industry rates or maintaining industry leading competitive margins. We have a clear strategy to achieve this - accelerate growth in priority platforms through innovation and launch excellence, sustain growth in our core platforms, leverage our breadth and scale through novel commercial models and invest in areas of significant unmet needs. This is a strategy we believe will deliver more value for customers and patients and for our company and shareholders. Our strategy starts with our three industry categories of surgery, orthopaedics and cardiovascular. Across the portfolio, we have identified six priority growth platforms in which we disproportionately invest to accelerate growth. These are the areas where the medical need continues to be significant and our capabilities are strong. In surgery, our priority platforms are endocutters and energy. Not only are we getting good response from our customers on these platforms which you are seeing in the numbers, but we're winning top awards for the design of innovative solutions that benefit the user, the environment and the business. You can see that we flag robotics as one of our key growth platforms here in surgery and I'll provide a little more on that later. In orthopaedics we are prioritizing our knees and trauma platforms. Knee replacement is the single largest selective procedure in orthopaedics. Over the next six years, worldwide knee market is expected to grow at 3.8% CAGR to around $9 billion. We believe we're well placed for growth with products and instruments from our ATTUNE platform and in cardiovascular, electrophysiology continue to deliver strong growth and is a priority platform for us through our Biosense Webster business. Additionally across these broad categories, we're targeting four core platforms in which we'll sustain growth and continue to divest in innovation. You can see here that in surgery the foundation platforms in the space are bio-surgery and wound closure. In orthopaedics, our hip business is a key platform and finally sterilization and disinfection, a core capability that addresses the still significant unmet need for preventing infection, which drives successive cost and extends healing time for patients. Let me be clear, this focused strategy is not to say that we will not invest in other platforms where we compete. There remain important areas for our future. We expect the combination of our priority and sustained growth platforms to deliver a significant portion of our growth over the next five years. These platforms will be a major contributor to our ability to grow above market in the coming years. We're focusing on the nine key geographies where we believe we can drive the majority of our growth. These markets are being targeted based on strong healthcare utilization outlook, large unmet need within medical devices and a strong Johnson & Johnson presence footprint within these markets. Last year at our Medical Device Investor Business Review, we discussed 30 significant filings that were planned by the end of 2016. We're well on the way to achieving that goal, which provides a consistent means of product introductions all contributing to growth. Those new product innovations combined with our aggressive reallocation of resources I just discussed complemented by our novel commercial models, positions us well to grow faster than the market. We've identified five disease states, five areas of unmet needs where we think we can make the greatest difference through innovation, internally or externally sourced. They include surgical oncology, obesity, select cardiovascular disease, osteoarthritis and osteoporosis. We're exploring what will take a combination of products and end to end solutions to make the critical difference for physicians and patients addressing these needs and we'll take advantage of our strong balance sheet to invest in innovation that can make a difference in these areas as well as our priority technology platforms. We're taking a comprehensive approach to innovation and we're looking at this across a number of fronts including our go-to-market strategy. We're building novel commercial models that are adapting to market conditions and developing new strategic partnerships with our customers around the world. I'll expand on that area shortly. Our strategies are enhanced by the opportunity to leverage our scale and breadth. That begins with the core selling opportunities like the inclusion of DERMABOND PRINEO, our newest wound closure device designed for joint procedure, now in the bag of our joint reconstruction sales consultants. Needing time to closure in knee and hip replacement procedures, we're also implementing cross portfolio procedural development like the new OsteoView device, which leverages the harmonic technology from Ethicon to provide a soft tissue dissector, exclusively designed for spine procedures and to be sold by the DePuy Spine business. It extends further to our enterprise customer group, which works on key relationships with major hospital systems, who look to leverage unique Johnson & Johnson capabilities and our medical device agreements. Some great examples are a new relationship established with one of Germany's largest private hospital networks where we have a sole source contract for implants. Here in the U.S., we signed a five-year contract with the globally ranked academic medical center at Johns Hopkins. We're also executing an exclusive partnership with a large multinational hospital system to share risk and great value. These are just some of the most recent examples on how our clinical strength and organizational flexibility and scope provide an excellent roadmap for how we're engaging in a new way with customers today. Johnson & Johnson's substantial global footprint provides a foothold in key emerging markets and enables us to expand access to training to more surgeons and care for more patients. We are using that advantage to drive innovations that address unmet medical needs. Working with our partners in the pharmaceutical business, we recently announced that China lung center project which will work to bring our medicines, technologies and resources to bear, to address one of that country's leading cause of death and ultimately advance the scientific knowledge and practice of lung surgery around the world. Earlier this year we first shared with you the news about our collaboration with Google Life Sciences and surgical robotics. We continue to make progress on our goal of bringing to market a transformative surgical robotics platform. Our shared vision is to give surgeons advanced analytics and surgical access properly with an improved and flexible work flow dynamics in the OR and ultimately a reduced cost to serve. Through our Ethicon franchise we are contributing surgical know-how and developing advanced tools and instruments for superior, minimally invasive surgical technology. I'm pleased to share that we are in the development phase of the platform now and are working with respected global experts in the field of robotics to advance the effort. Additional information regarding our progress will be communicated in just the next few weeks. The global robotics market is roughly $2 billion and we expect procedures to grow at a double-digit growth rate. That said, today's robotics options are limited and requiring substantial financial and infrastructure investment and we believe that through technology advancements and agile application, our path in surgically assisted robotics is one that will best deliver what surgeons need. Our solution not only aims to give surgeons a better procedural experience by improving comfort and patient proximity, but delivers a superior surgical experience through greater access and precision with the ability to make more informed decisions through the entire procedure. We can see a future in which the surgeon is no longer isolated in the OR, but through our system we'll be able to connect to critical data, imaging and diagnostic information. Information that will help a surgeon make the best, most accurate decisions as and when they are needed. The system is being developed with both the healthcare provider and the economic buyer in mind. As one Johnson & Johnson medical device group, we are well positioned in our largest businesses to build on leadership position as these categories grow in response to changing demographics, evolving unmet medical needs, and expanding access to care. Across our portfolio, we are focused on the categories where we will grow and lead. We have exciting pipelines and a renewed focus on launch excellence that will deliver steady cadence of meaningful and differentiated innovation. At the same time, we seek to advocate for patients by advancing the standard of care through strategic partnerships and educational access and pushing the boundaries of medical device product innovation. We are deploying the comprehensive resources of Johnson & Johnson across the group which gives us unique leverage. And we're getting a positive response from customers. It is these strategic customer wins, combined with our more than 30 significant product launches that positions us to grow faster than our market and deliver value for the company and our shareholders. We look forward to telling you more about how our strategy is gaining traction at the medical device business review next May. Now, I'll turn it back to Dominic.

Thanks, Gary and good morning everyone. Let me just say that I really enjoy working alongside Gary in the management committee. He has clear strategies for accelerating growth through innovation and leveraging the breadth and scale of medical devices through novel commercial models. We are confident that we will see steady progress as the business under Gary's leadership implements very sound strategies for growth. Just this morning we announced a $10 billion share repurchase program. We are very well positioned to drive continued growth in shareholder value with our exceptional financial strength including our strong balance sheet and cash flow. We have a proven track record of returning capital to shareholders through our regular quarterly dividend complemented by share repurchases. At the same time, we continue to invest in internal growth drivers and strengthen our robust pipeline and we continue to be active in accessing external opportunities to deploy our financial strength to further drive long-term value creating growth. We anticipate commencing the share repurchase program in the near term and intend to finance it through the issuance of debt. Repurchase of stock through the program will be made at our discretion from time-to-time and the repurchase program has no time limit and may be suspended or discontinued at any time. Moving on to a review of the quarter, since Gary has just covered our medical device business, I would like to highlight several additional developments from this quarter in our pharmaceutical, consumer and the consumer medical device businesses. Our pharmaceutical business continues to deliver strong underlying growth and as we discussed at our pharmaceutical Analyst Day earlier this year, our future cadence of new product filings is very robust. This quarter we filed for marketing authorization in Europe for daratumumab, a treatment for patients with relapsed refractory multiple myeloma which received accelerated assessment from the CHMP. Daratumumab was also granted priority review in the US. We are also – we've also submitted a Supplemental New Drug Application to the US FDA for IMBRUVICA, for treatment of naive chronic lymphocytic leukemia and marketing authorization in Europe for once every three month formulation of paliperidone palmitate. In our consumer business, we are back to a consistent cadence of new products as we continue to reintroduce products back through shelves, as well as innovate across our beloved brands that you all know and use every day. In particular, the re-launch of TYLENOL Arthritis is doing very well. In our vision care business, we have anniversary pricing adjustments that have impacted growth rates and have also introduced new products such as 1-Day ACUVUE MOIST Multifocal, 1-Day ACUVUE DEFINE, LACREON and ACUVUE OASYS or one week overnight, and in the fourth quarter, we are launching ACUVUE OASYS 1-Day HydraLuxe, an important advancement in comfort for contact lens wearers. I'll take the next few minutes to review our financial performance in the third quarter and we'll also then provide guidance for you to consider in refining your models for the balance of the year. We continue to execute well on our portfolio management strategy, consistent with the plans we laid out for the year and we're pleased with the solid underlying sales results and continued solid earnings per share performance thus far in 2015. We are well positioned for continued growth in today's dynamic healthcare environment. Turning to the next slide. You can see our condensed consolidated statement of earnings for the third quarter of 2015. As we expected, direct comparisons to our third quarter of 2014 are challenging, due to the exceptional uptake of OLYSIO that we benefited from last year, as well as currency heads winds. Our sales results for the third quarter of 2015 on an operational basis, excluding the impact of acquisitions and divestitures, and excluding the impact of Hep C products were robust, up 5.6% for the quarter. This is in line with the annual guidance we set for 2015 and stronger than 2014 on a comparable basis. Please now direct your attention to the box section of the schedule where we have provided earnings, adjusted to exclude special items and intangible asset amortization expense. Adjusted net earnings were $4.2 billion in the quarter, which are down 9.4% compared to the third quarter of 2014 and adjusted earnings per share of $1.49 versus $1.61 a year ago are down 7.5%, having been significantly impacted by currency movements as you may have expected. I am pleased to say that the adjusted EPS results exceeded the mean of the analyst estimates as published by FirstCall. Excluding the net impact of translation currency, our operational earnings per share was $1.63 or up 1.2%. In the quarter we incurred after tax special charges of $377 million which included litigation expenses associated with previously disclosed matters as outlined in our 10-Q filing, as well as intangible amortization expense of some $437 million on an after tax basis, which in this quarter also included the write-down of an intangible asset related to a small acquisition we made several years ago. Now let's take a few moments to talk about the other items on the statement of earnings. This quarter's results reflect both the gain from our divestiture of the SPLENDA brand to Heartland Food Products Group which we closed at the end of the third quarter, and additional investments we made in the business. As we said before, we would use any gains from divestitures in 2015 to offset the lower earnings impact of not having the OLYSIO sales uptake we had in 2014 to provide some offset to currency headwinds, while also allowing continued investments for future growth. Cost of goods sold was 130 basis points higher than the same period last year impacted by both lower net sale prices as well as changes in product mix. Selling, marketing and administrative expenses were [20.7%] [ph] of sales. As a reminder, this line in the prior year period included the additional year of the branded prescription drug fee, which we treated as a special item last year. Adjusting for that, this line item was 28.4% of sales last year. So this year’s amount is 130 basis points higher as compared to the adjusted third quarter of 2014. As we have previously noted we're continuing to invest the drive growth in our key brands. Prior year percent of sales was artificially low as well since very little spending occurred in relation to OLYSIO sales. Our investment in research and development as a percent of sales was 12.6% in the quarter and 160 basis points higher than the prior year, as we continue to make important investments in our pipeline for future growth. Interest expense, net of interest income was a little lower reflecting higher earnings on our investment. Other income and expense was a net charge of $420 million in the quarter compared to a net gain of $1.3 billion in the same period last year. Of course, this line item includes several special items of both years. Excluding those special items other income and expense was a net gain of approximately $400 million compared to a net gain of approximately $40 million in the prior year period. This year's third quarter reflects the gain on the previously announced divestiture of SPLENDA. Excluding special items and intangible amortization expense, the effective tax rate for the nine months period was 21.6% compared to 22.1% in the same nine-month period last year. As I noted during our call in July, the effective tax rate for this quarter and for the nine-months this year does not yet reflect the benefit of the R&D tax credit, as that legislation has not yet been passed although we expect that it will be. The effective tax rate is lower in 2015 as compared to 2014 primarily as a result of the mix of foreign earnings to lower tax jurisdictions this year as compared to last year. Now I will provide some guidance for you to consider as you refine your models for 2015. Before I discuss sales and earnings, I will first give some guidance on items we know are difficult for you to forecast, beginning with cash, and interest income and expense. At the end of the quarter we had approximately $17 billion of net cash, which consist of approximately $37 billion of cash and marketable securities and approximately $20 billion of debt. This is a higher level of cash than we typically hold and we are actively looking for the right opportunities to use that capital to create greater value for our shareholders. As we have discussed before, we have a well known and disciplined capital allocation strategy that starts with paying dividends, followed by value creating M&A and then we consider other ways to return value to shareholders such as through a share repurchase program. To that end, as you know this morning we announced a $10 billion share repurchase program and we believe the Company shares on attractive investment opportunity and repurchasing our shares is an important part of our capital allocation strategy. Although we are continuing to evaluate external growth opportunities in line with this strategy, for purposes of your models assuming no major acquisitions or other major uses of cash other than the share repurchase program we just announced. We suggest you consider modeling net interest expense of between $450 million and $500 million just a slight tightening of the range from prior guidance. Regarding other income and expense, as a reminder, this is the account where we record royalty income as well as gains and losses arising from such items as litigation, investments by our development corporation, as well as divestitures, asset sales and write-offs. We would be comfortable with your models for 2015 reflecting net other income and expense, excluding any special items as a net gain ranging from approximately $2.3 billion to $2.4 billion. This is slightly higher than our previous guidance. As a reminder, this now includes the gain sort of divestiture of the U.S. rights to the NUCYNTA pain medicine earlier this year, the SPLENDA brand this quarter, and the Cordis business, which we closed just after the quarter and will be recorded in the fourth quarter. As I mentioned in previous quarters, a portion of other income and expense will flow through to increase operational earnings as we expect to use some of these gains in other income to compensate for the decreased income from OLYSIO in 2015 as compared to 2014, as well as to help us mitigate some of the impact of strong foreign currency headwinds this year for we also will continue to invest in our core business and opportunities for future growth. And now a word on taxes. Our guidance for 2015 anticipates that the R&D tax credit will be renewed by Congress although that has not yet occurred. We will therefore be comfortable with your models reflecting an effective tax rate for 2015 excluding special items of approximately 21% to 22% and this is consistent with our previous guidance. If the R&D tax credit is not approved, it would negatively impact the tax rate by approximately half percentage point. Turning to guidance on sales and earnings. As we’ve done for several years our guidance will be based first on a constant currency basis reflecting our results from operations. This is the way we manage our business and we believe this provides a good understanding of the underlying performance of our business. We will also provide an estimate of our sales and adjusted EPS results for 2015 with the impact that current foreign exchange rates could have on the translation of those results. We would be comfortable with your models reflecting an operational sales increase on a constant currency basis of between 1% and 2% for the year. This would result in sales for 2015 on a constant currency basis of approximately $75 billion to $76 billion. This is consistent with our previous guidance and now reflects the impact of the divestiture of the Cordis business offset by stronger performance in other businesses. Additionally by way of comparison to how we described our sales results in 2014, our operational sales growth for 2015 excluding the impact of all acquisitions and divestitures, as well as the impact of hepatitis C products, would be approximately 6%, a higher level of growth than the comparable 5% for 2014. As of last week, the Euro was lower by approximately 16% as compared to 2014 average levels and the dollar strengthened versus virtually all major currencies. Although we’re not predicting the impact of currency movements to give you an idea of the potential impact on sales, if currency exchange rates were to remain where they were as of last week for the balance of this year, our sales growth rate would decrease by nearly 7%, reflecting the weakening of the Euro and other major currencies against the U.S. dollar. Thus under this scenario, we would expect reported sales to reflect the change in the range between negative 5% and negative 6%, for total expected level of reported sales of between approximately $70 billion and $71 billion. And now turning to earnings, a significant factor impacting our earnings guidance for 2015 is the impact of currency movements on transactions which although hedged, is still somewhat negative incrementally versus the prior year. We expect transaction currency impacts to be negative to our gross profit by approximately 50 basis points in 2015 as compared to 2014. We would be comfortable with adjusted EPS guidance in a range of $6.75 to $6.80 per share on a constant currency basis reflecting an operational or constant currency growth rate of between roughly 5.5% and 6.5%. The midpoint is higher than our previous guidance as we’ve increased the lower end of the range reflecting some operational improvements in the business and our confidence at this point in the year. Again we're not predicting the impact of currency movements but to give you an idea of the potential impact on earnings per share, if currency exchange rates for all 2015 were to remain where they were as of last week, then our reported adjusted EPS would be negatively impacted by approximately $0.60 per share which is consistent with the estimate we provided in our previous guidance. Therefore our reported adjusted EPS would range from $6.15 to $6.20 per share. At this stage in the year, we are comfortable raising the lower end and tightening the range. So in summary, as you update your models for the guidance that I just provided, I would like to make a few key points. Although operational sales growth is expected to range between 1% and 2%, we are pleased to note that when excluding the impact of acquisitions and divestitures and Hep C product competition, our operational sales growth at the midpoint of our guidance is a solid 6% for the full year of 2015 as compared to 5% for 2014. And with regard to earnings, on a constant currency basis our guidance on operational EPS growth is strong in the range between 5.5% and 6.5%, which was higher than our previous guidance. And as we execute on our growth platforms, we're continuing to make investments in our business and we're prioritizing our portfolios. We remain focused on building our priority pipelines across the enterprise to position our company future growth and expanded leadership in markets around the world. Also I would like to thank the employees of Johnson & Johnson for what they do every day to make a difference to patients and consumers and for their continued significant contributions to growing our business. And now I would like to turn things back to turn things back to Louise for the Q&A portion of the meeting. Louise?

Thank you, Dominic. Manny, could you please provide the instructions for the Q&A session.

[Operator Instructions] With that, your first question comes from Larry Biegelsen of Wells Fargo. Please go ahead.

Good morning, everyone. Thanks for taking the questions. I'll start with the buyback. Maybe Dominic, you could talk about the timing. In the past you've done these pretty quickly. And it doesn't sound like, based on your comments, that it's a signal that the M&A targets out there aren't as attractive as you may have thought. Is that fair? Just from an EPS standpoint, by our math it's about $0.20. Then I had one follow-up.

Sure Larry, let me try to address each of those questions. So as far as the timeframe, it's an open-ended share repurchase program as we said. So there is no real particular timeframe, but just by way of reference the most recent share repurchase program that we implemented which was $5 billion in 2014 took about nine months to complete. So we continuously try to buy our stock at the appropriate prices throughout any trading period and just as a reminder, we're also simultaneously continuing to buy any stock that's issued in connection with our employee stock programs and that's about another $3 billion of cash utilized for that purpose. With respect to any read through on M&A activity this in no way has any negative impact on our outlook for M&A and our pursuit of value creating acquisitions to drive shareholder value. So we have the financial strength and flexibility to do both and we're very pleased to be able to continue to do that. As far as the EPS impact, again as you know this is always a tricky calculation because on a weighted average share calculation, but if it was fully implemented then a full year impact of a fully implemented $10 billion share buyback would be about two to three percentage points of incremental EPS growth. Now of course we won't see very much of that in '15 because we're just beginning and we'll see some of that show up in the 2016 earnings. We'll give you a better sense of that in January, but certainly by 2017 when it's fully implemented, we would see that total percentage positive impact that I just mentioned.

That's very helpful. And then I feel compelled to ask one about the rhetoric coming out of Washington, Dominic, on pharmaceutical pricing and price controls, which has gotten a lot of media attention recently. Where do you see that ultimately going? What's J&J's perspective? And, just lastly, in the early 1990s I think a lot of pharmaceutical companies, when Hillary Clinton was trying to reform healthcare, pledged not to raise drug prices by more than inflation. Is that something that J&J would reconsider? Thanks.

Sure, Larry. Let's see, well you're right. There has been a lot of rhetoric about pharmaceutical drug pricing and despite significant media attention on drug pricing, there really isn’t a consensus on policy solutions that would lower prices without negatively impacting innovation, that's the key point. I think every time we talk about drug pricing, we unfortunately miss the balance of the other side of the coin which is of course the innovation that comes from the pharmaceutical industry and the improvement in the health and well being lives of many people around the world. The pharmaceutical industry has and continues to be a constructive partner in any of these policy debates and we look for solutions to the issue along with policy makers. Just as a reminder, as part of the Affordable Care Act industry agreed to increased rebates in Medicaid and many other additional fees that I know you're all very familiar with and as the U.S. healthcare system evolves, I think we'll have more of a focus on outcomes and value and we're working with both public and private payors to develop innovative outcome based contracts. We think the real answer to this dilemma is to monitor and provide outcome based metrics and not simply focus only on price. As far as a pledge Larry, I think we're very responsible in our drug pricing and we tend to support the price for our drugs with strong economic data. So rather than pledge to a particular number, I think it's important that we continue to develop robust data that provides a solid foundation for the value that our products provide to healthcare systems. So we'll continue to do that.

Thank you for taking the questions.

Next question please.

Thank you. The next question is from David Lewis of Morgan Stanley. Please go ahead.

Good morning. Thanks for taking the question. Gary, I thought I would turn the question back to devices here for a second. Two areas I wanted to focus in on. The first is on your innovation sectors, Gary, you talked about four or five of those areas are within or adjunctive to your dominant franchises in ortho and surgical. Then you have this commentary on select cardio areas. So, my question is, Gary, first, why even focus on cardio, an area where you have less dominant breadth? Is it just because there's innovation there and you're going to be selective? Then I had a quick follow-up.

Thank you, David, and good morning. Yes, it's a great question. Listen we have I think been pretty consistent and when I had this conversation before that we see in cardiovascular there are interesting areas where there is a lot of growth opportunities and also unmet needs. I think we've talked about them before and said areas like CHF heart failure, structural heart are fast growing categories where there is a lot of unmet need and where we think we can add to our breadth that we have with the EP business currently. So as always we will be opportunistic in looking at opportunities both internally and externally to add to our portfolio. We think cardiovascular is a large category. Agreed we don't have the same scale as we do in surgery and orthopaedics, but we will look for opportunities to add to that scale with the appropriate types of investments that will create shareholder value in spaces where we think there is a lot of growth and opportunity. So we continue to look at that space. We've highlighted as we've done today remains an area where we've made some investments right because we do investments in small companies and technologies through our Johnson & Johnson Development Corp and we'll continue to evaluate the M&A field as well.

Okay. And then, Gary, the other interesting commentary this morning obviously was on robotics. I know it's very early days here but I wonder if you could just give us some high-level strategic thoughts. And two areas of focus. One would be, should we expect very significant capital systems to be sold from J&J through this partnership or should we see more less expensive capital systems than perhaps are out there today? And a related question is how do you think about cost effectiveness? How do you think about the cost effectiveness of any disposables that you sell versus robotics relative to existing robotic disposables? Thank you very much.

Thank you, David, and listen really good questions. Let me take the last one first. I think you saw in my presentation, cost to serve we see as an opportunity right. If you look at the robotics installed base as it is today, it's very much focused on the developed markets versus the emerging markets and that's because cost to serve is disproportionately out of balance. And we think that there are opportunities to have a much smaller footprint in terms of a technology, a lower cost to serve in terms of disposables as well as capital that we think can play across a broader range of surgical procedures in a cost effective way that improves the capability of the surgeon, provides real time data and analytics at their fingertips, greater OR flexibility and as mentioned there has an overall cost effectiveness which allows it to penetrate more procedures than what you see today.

Thank you. Next question please.

Your next question is from Kristen Stewart of Deutsche Bank. Please go ahead.

Hi. Thanks for taking the call. I was just wondering if, Dominic, you could go into a little bit further detail on some of the businesses that are contributing to basically give you confidence to increase the underlying guidance for sales.

Sure, Kristen. Well, the pharmaceutical business continues to do very well. The growth as you saw in the quarter, we exclude the impacts of OLYSIO was over 10%. So it's very solid growth. The consumer business is launching new products and getting those products back on the shelf and the cadence of new product introductions, as well as the uptake gives us encouragement that we're seeing very, very good results there. And some of Gary's businesses, although some are challenged as he pointed out, some continue to do very well, electrophysiology and others. So I think we're confident that despite losing a quarter of the sales from the Cordis business, the rest of the businesses are performing well enough to pick up that difference and we're comfortable maintaining our sales guidance for the year.

Okay. Then how should we just think about looking ahead in terms of Cordis being out, is there enough momentum to offset any dilution there or does the stock repurchase help offset some of that as we look ahead? Not giving guidance for 2016, but should we think of the share repurchase similar to what you did for the Ortho Clinical Diagnostics?

Well, there is two things going on here. I think one is of course the share repurchase will add incremental EPS growth that helps offset some dilution. But I think the real difference is we're not going to have the kind of headwind comparison that we had '15 versus '14 as we get into '16 and we feel that the momentum is strong going into '16. So I wouldn't characterize the share repurchase as solely related to offset the delusion of Cordis. I think it will be incremental to our EPS growth.

Okay. That’s all I have.

Thank you. Next question, please.

Thank you. Your next question is from Mike Weinstein of JPMorgan. Please go ahead.

Good morning. Thank you, guys. Dominic, with most of the cash, almost all of the cash, outside the US, and the incremental $10 million of US debt for the share repurchase, are you assuming that you'll be able to use at least a portion of that O-US cash for any meaningful M&A in the near term?

Mike, thanks for the question. We, as you know always look for tax efficient utilization of the OUS cash. As you know, we did that in the Synthes transaction a couple of years ago. So we'll do our best to structure any M&A activity in a way that can optimize the effective use of the OUS cash in a tax efficient manner. So we continuously work on that and our team is very good at developing strategies to do that, and - but more to come on that at a later time.

Understood. And is the $10 billion number the right number? Because it doesn't stress your ratings with the agencies.

Mike, I don't think $10 billion is necessarily related to stressing any credit rating. I think it - as we've said many, many times, we have a disciplined capital allocation strategy and share repurchases just happen to be third in line after M&A and dividends being first. So I think we're comfortable that doing $10 billion now, while we're still actively pursuing M&A activity is the right level to do now then we'll reassess that as that program begins to wind down. So I wouldn't necessarily think that this is a limit to what we can do at any time.

Okay. Then just one question for Gary, then I'll drop. Gary, one thing that stood out to me just this quarter, the pluses and minuses, on the minus side the O-US performance within the orthopaedic business, the spine business ex-currency was down 12%, trauma was down 6%. Can you shed any light on that?

Yeah, Mike. As mentioned, we had some one-time items that were occurring outside the US in our orthopaedics business. One, as Louise had mentioned in our, in China where we had a distributor inventory issue with some slowing of the markets there. We had some - make some corrections to distributor inventories which predominantly hit the trauma business but all of them. And then also in Brazil we saw some registration issues happen as part of the integration and that also had an impact in slowing the business as well. So those two predominant items had a disproportional impact in the quarter. We don't see those as ongoing issues. We are still excited about the opportunities for the business, specifically trauma in emerging markets we see as an opportunity and we will continue to focus our efforts there. So yes, we were disappointed in that, but we do see them as one-time items and we are working through that as we speak. But we still see a lot of opportunity for the business outside the United States.

Perfect. Thank you, Gary.

Thank you. Next question, please?

Thank you. Your next question is from Vamil Divan of Credit Suisse. Please go ahead.

Great. Hi, good morning, guys. Thanks so much for taking my questions. So just a couple if I could on the pharma side. So one you mentioned on your diabetes with INVOKANA some of the market share information. I was just curious, obviously the positive data from Lilly on their SGLT2 inhibitor outcomes data. Have you seen any initial impact or do you expect to see much of an impact within through the INVOKANA given that you guys are obviously the market leader there in that class. And then just second, on the long-acting injectables, again you shared some insights. Just curious if you can share some thoughts with the new competition, a couple new players now in that space, how you think that might impact your growth looking forward? Thanks.

Let me take the question on INVOKANA first. We do think that the positive benefits seen by the Lilly compound is most likely a class effect for SGLT2. It's too early to comment on any effect that we've seen. And we're also studying our compound regarding cardiovascular impacts. But that data is just a couple years away. But we do think there's a positive effect to the overall class as a result of the cardiovascular data that Lilly shared. With respect to long-acting injectables, Louise, any comments on market dynamics there, have you see, I haven't seen much already.

We are still seeing strong growth in that market and we've also just introduced Trinza, which is the three month formulation. So we think we're in a very, very good competitive position there. Thank you. Next question, please.

Thank you. Your next question is from Glenn Novarro of RBC Capital Markets. Please go you ahead.

Good morning, guys. Gary, two questions for you. First, if I look at the device business in terms of what you've done over the last few years, you've been divesting assets, cardio assets, the diagnostics business. As you go forward, as you look forward are there still businesses within your device portfolio that you think need to be divested because they are underperforming or do you see yourselves more as a net buyer of assets going forward? That's question one. And then question two. Gary, you highlighted you're going to be launching 30 new device products over the next year or so. When I look at the portfolio of products that you'll be launching, a lot of these I see as kind of singles, maybe double? And so I was wondering if you can look at that portfolio for us today, are there any products that actually could be bigger, what would be the products you think actually have the upside to get you back to market growth? Thanks.

Thanks, Glenn. Good questions. So first, in terms of divestitures, as you know and how Dominic talked about it, which is we have a companywide premise that we should be number one or number two in the categories where we're committed and have a clear technology path to getting through either a number one or number two position. And if we don't, we're going to consider our options. So we have a very formalized process that we go through with the management committee and looking at our opportunities and we take on divestitures opportunities carefully as we've done in both the OCD and the Cordis situation. We will continue to do that portfolio analysis on an ongoing basis. So I can't really say what's going to happen. But certainly we will continue to look at our portfolio in terms of opportunities. We will also though continue to look at, Glenn, opportunities to acquire new businesses that we think are accretive, that will add to our business growth and create shareholder value. So I think in a disciplined focused approach where we divest we will also look at opportunities to acquire. I think certainly accelerating our pace of tuck-in deals would be a good opportunity for medical device we seek, considering our scale in the market, especially in surgery and orthopaedics is large, and we anticipate accelerating that pace over the next 12 to 18 months. In terms of the second question which was around opportunities as you look at our portfolio, you’re right, we have a lot of – I’ll call it – we call it singles and doubles, I would say we have a couple triples in there especially in the EP space that we think that will be some really game-changers. The big one that I would highlight for you which would be very different than anything else will be robotics. Now the category as mentioned in my talk is $2 billion growing at double digit, we see disruptive opportunity happening in the next couple of years here for us to take a substantial share of the market going forward with a very different technology that’s integrated and delivers value for our customers. So, putting a lot of focus and efforts there which we think will be important and we are also looking at other opportunities for us from a L&A and M&A perspective to bring in exciting technology into our platform to accelerate growth as well. So we have a couple of areas that I would say where I think we got some really interesting things. Also I would say in the next MD&D day coming up in May, you will see a little bit of the pipeline where in some of the areas that I am excited about but probably too early to disclose right now. And we will give you a little bit more detail at that point in time.

Okay. Thank you

Next question please

Thank you. Your next question is from Danielle Antalffy of Leerink Partners. Please go ahead.

Good morning. Thanks so much for taking the question. Just to touch on the M&A topic for a second, Gary, you did touch on it a little bit, mentioned tuck-in acquisitions. But if we take a step back, two questions for you guys here. Number one, given the $10 billion share buyback announced today and the fact that that's priority number three, at least how you play it out, does that signal that your appetite for a large acquisition is maybe off the table and you will be focused more on the smaller, tuck-in type deals within pharma partnerships or in licensing deals? And then, number two, if you look across your businesses, where are the holes that you'd like to fill as you look at the markets that are higher growth that you don't currently play in?

Danielle, it’s Dominic here, thanks for the question. I wouldn't interpret the $10 billion share buyback as impacting our appetite for scale of any size at M&A at all. Our appetite for M&A of any scale has entirely to do with whether or not the acquisition is going to create value for shareholders. And as you know we are disciplined about that. It is true that over our history, we have done many-many acquisitions and the largest ones are a few and far between but that has to do with what Gary mentioned with business of our scale, we can bring in lots of tuck-ins or licenses for example in the pharma business where we can get the most value for our shareholders in the most capital efficient manner. But it doesn’t preclude us from that also looking for large scale acquisitions. As far as where we would look, in pharma we are focused on five therapeutic areas. I think we’ll remain focused there. In consumer, as you know we have our core platforms of Skin Care, Oral Care, OTC in particular, as well as emerging market and for medical devices Gary, why don’t I ask you to just comment on the areas of focus.

Absolutely. I think if you look at one of the slides in our strategy to win, our innovation focus areas, we are really focused on five key unmet needs. So one is in we see in surgical oncology, which the space is really evolving as we speak. Where we see more targeted interventions that using our combinations of approaches in terms of technologies may provide more minimum invasive outcomes for the patients in the long term. Second is really in the area of obesity and that is still a fast growing segment where we see a lot of opportunity. Especially as you start to think about more minimally invasive surgical procedures that produce outcomes similar or close to the surgical interventions today. I mentioned a select cardiovascular disease areas that we highlighted previously, and then obviously osteoarthritis and osteoporosis which offer many opportunities if you think about in terms of joints trauma and spine where we see interesting opportunities to get tuck-in deals that would help accelerate our growth. So, those are some areas that we’re very focused staying on right now. When you say spaces that we’re not in today, if you look at it, we are the largest most comprehensive medical device business with the footprint in surgery, orthopaedics and cardiovascular. We would obviously like to expand our cardiovascular footprint but we will do that in a strategic way where we can create some values. So there are very - lot of places that are nice adjacencies as I’ve outlined that we think we can create some value through tuck-in deals more larger acquisition as well.

Okay. Thanks very much. Next question please.

Thank you. Your next question is from Jami Rubin of Goldman Sachs. Please go ahead.

Good morning. Dominic, I'm surprised that you're putting a buyback as a third priority ahead of M&A. If you look at your PE multiple today it's about 14, 15 times, well below your pharma peers as well as your med tech peers. You have a massively under leveraged balance sheet, one of the few AAA-rated balance sheets out there. Investors clearly have been frustrated by the operating performance and the stock performance. And I'm just curious to know, if you're so excited about the growth outlook of the business, what could be a better investment than you buying back your stock? But not $10 billion. What I'm talking about is something much more substantial that would really make an impact on your growth rate, like a leveraged buyback up to $50 billion or even higher. If you could talk about that a bit. And also, just back to the M&A discussion, I think there's a lot of focus on getting your MD&D business back to growth. Can you talk about your thoughts on, most of the med device growth assets out there are trading at multiples well ahead of yours, and how you think about generating value by potentially acquiring some of those? Thanks very much.

Sure. Well Jami as you know, we’ve been very consistent with our capital allocation strategy and that's based on extensive research over many years. As you know share buybacks have some incremental benefit but the data as you know is mixed on the overall outcome. And just because we did a $10 billion share buyback doesn’t mean that we won’t do another one, another one and another one. So I wouldn’t necessarily limit it to just one that was announced today. Of course the big difference between M&A and share buybacks is the one thing that share buybacks don’t do of course is they don’t provide any incremental capability of the company, any incremental ability to innovate and be competitive in healthcare and that we places a priority over reducing the share count. It doesn’t mean that we can’t do both, I think we have the financial flexibility to do both and I think you will see us do both. As far as being under-levered, I think these go hand-in-hand. We want to maintain financial flexibility to do the kinds of transactions that we think are going to be value creating to shareholders when those opportunities arise. So we always maintain financial flexibility just as a simple way of the way we conduct our business. As far as getting back to growth in MD&D, through M&A and I'll obviously have Gary comment as well, when you talk about assets that seem to be highly valued, I think what's very important to realize is that none of the assets that are - that you may be referring is to highly valued has the scale and breadth of the kind of MD&D business that we have here at Johnson & Johnson. So our ability to leverage our scale and breadth, our scientific knowhow, our engineering knowhow, the overall presence in the hospital setting with contracting and the like is probably unparalleled and very few companies despite their current valuations have that built into their valuations and we think in our hands we can possibly create more value than the business on a standalone basis. Gary anything else do you want to add to that?

No, listen I think Jami, that is a challenge we’re taking on in medical device, right which is as many companies with really large portfolio we have a mix of platform performance versus the market right. We’ve got strong performance leaders in segments in surgery, cardio and ortho, but also have some opportunities where we need to accelerate our growth right in platforms like spine, trauma, energy and infection prevention. I think we understand how to drive that growth in those areas in energy and infection prevention. We have a pipeline of new innovations which we think will accelerate our growth. In Spine and trauma we need to accelerate that pace of innovation through internal innovation and externally sourced innovations as well. So I think we will look at opportunities both organic and inorganic to accelerate our growth rate, to drive that performance because I think that will be critical and important to the long time growth of the business. As Dominic mentioned, with the scale of the business at $22 billion, right, accelerating our growth rate by one or two points is a very large acquisition, which any of those acquisition of that nature we would want to do that very carefully and ensure that we are creating shareholder value.

Dominic, just if I can push back for a second, clearly the track record in buybacks, just given where stock price has been over the last 10 years have been mixed, but the track record with M&A has also been mixed, such as the Synthes deal which Gary talked about during his remarks. I'm just curious to know how you think about that. But thanks very much.

You're right. Not every M&A deal works out exactly the way you would predicted it would. I think we were very clear that we thought enhancing scale in orthopaedics was important and we did so at a time quite frankly was ahead of where you now see the competitive set doing. So I think we are very pleased having done that acquisition. We think of acquisitions as creating value over the long term and despite some market slow down we are still very confident in the growth of our overall orthopaedics business along with the trauma business that we acquired from Synthes just having the broader scale to create value. M&A can be tricky, we work very hard to do so and do the deals in a disciplined way and to gain value from these transactions over the long term.

Thank you very much. A – Dominic Caruso: You're welcome.

Next question please.

Thank you. Your next question is from Damien Conover of Morningstar. Please go ahead. Q – Damien Conover: Good morning. Thanks for taking the question. Two drug related questions. One question on XARELTO Still some pretty strong growth there but it seems like a little bit of a deceleration. I wasn't sure if some new indications are really needed to reaccelerate that growth. I know there's a couple coming up in heart failure and stroke over the next couple years. And then the second question was just on REMICADE. It looked like some declines there internationally, partly due to Japan. But I was also wondering if you could give any insights on what you're seeing in the European area with biosimilars. Thank you.

Sure, let me just say a few words on XARELTO. You may be referring to a little bit of slow down sequentially with XARELTO. I think that dynamic has to do with the donut hole that’s part of the affordable care act in terms of Part D reimbursement. So as it turns out, when people with Part D coverage reach the donut hole amount, they have more out of pocket cost to incur. We believe that's had a bit of an impact in the third quarter compared to the second quarter and that wouldn’t be necessarily just for our product. It would be seen across other products as well. Louise anything else to add?

Yes. And in addition, so over half of our sales are in Medicare Part D and as you enter the donut hole, the manufacturers out there actually pickup the portion number of the pricing by 50%. So we are seeing that impact. Regarding REMICADE in Europe we are going to leave that Merck's to cover. A – Dominic Caruso: I do think that although we won’t comment on Merck's territory, we do have REMICADE in Canada and we have seen a very little biosimilar impact there. We still are retaining about 90% of the business and again as we have said before, these are biosimilar and not generics and there is a lot that goes into physician's decision to switch a patient and as we have said many times before also, about 70% of the patients with REMICADE seem to be well controlled with their disease.

Thank you. Next question please.

Thank you. Your next question is from Jayson Bedford of Raymond James. Please go ahead. Q – Jayson Bedford: Good morning. Thanks for squeezing me in. Just wanted to ask you about emerging markets. Your comments were a little bit more temper than your prior comments. So I am wondering first if you could give us growth in emerging markets in the quarter?

The emerging markets grew by 4% in the third quarter and on a year-to-date basis they grew by 5%. Because there is some fluctuations between some of the tender business, et cetera in the emerging markets particularly Brazil and Russia. You're probably better to use the year-to-date numbers it’s about 5% year-to-date operationally. Q – Jayson Bedford: Okay. And I realized you mentioned the lower inventory in China on the ortho side but are you seeing the softness in emerging markets more in devices or consumers?

I think it’s very different dynamics in the emerging markets for consumers. So, for example the OTC businesses just as an example in Russia, we’re doing extremely well in emerging markets, in that emerging markets with our consumer business. Whereas in China, as you know we’ve had some issues there so we’ve seen some slower growth in the China emerging markets. In Medical Devices as Gary pointed out, that’s typically a robust market for us in Medical Devices. It’s our largest of the three businesses in emerging markets and in China in particular as Medical Devices and just particularly this quarter we had the inventory contraction that we saw from our distributors as the market has slowed down in China. So we think that’s sort of a one-time adjustment that we’ve just experienced this quarter. Q – Jayson Bedford: Thank you.

Gary you take that.

I look by splits the business from our surgical business to orthopaedics business, I look at China as a surrogate marker. Surgical business you still see good double-digit growth rates coming into the business. The realignment of issues in orthopaedics certainly offset that, same in Brazil we still see strong high single-digit, double-digit growth coming out of the surgery business but not so much in the ortho business due to the registration issues. So as in my comments in medical device it is slowed without question we’ve seen that but again access to care growth is still growing, raising the standard in the market in terms of the medical unmet needs is still an opportunity and we still see good growth coming there albeit tempered from what it was maybe over the last 18 months.

Thank you. Next question please.

Thank you. Your next question is from Jeff Holford of Jefferies. Please go ahead.

Good morning. Thanks very much. I've got two questions. The first one is around INVOKANA where IMS volumes seem to have really flattened off since the FDA notice on ketoacidosis in May. Can you just talk about the product's recent performance in the US, and what is driving this, and when you hope to see an improvement or address any of those concerns that might be out there? And then the second question is really just going back to some the M&A discussion that's been on the call. I think in the past, Dominic, you said a few times that large-scale M&A in pharma or biopharma is in the opposite direction from what you've always thought about. Is that still the case going forward, so we can probably take from that the way you talk about the ability to still do larger deals, that's most likely to be in the MD&D -

Yes. Jason you broke up but I – Jeff you broke up but I think I understand where you were going. Let me just take the M&A question first and then Louise you could actually provide some color on INVOKANA. So Jeff I don’t think you should read into the fact that we’re adverse to doing large M&A in any of the businesses, it just has to be value creating as I have said many, many times. When I say it is in the opposite direction of our pharma strategies you know, our pharma strategy which has been very successful has not been driven by large M&A in comparison to what you’ve seen in the industry and so we’re very clear that growing the business through searching for the best compound, the best innovation regardless of where it comes from and then incorporating that into our development engine and using the scientific expertise that we have in house is what has been a success story of pharma that doesn't mean it can also happen with the large M&A deal but it has been consistently very, very capital efficient and very successful in the way we’ve been doing it for the last couple of years. In terms of INVOKANA for ketoacidosis, you're right there was an FDA notice and it wasn’t solely related to INVOKANA and our clinical trials for INVOKANA ketoacidosis rate was very, very low. But Louise any other comments on that?

So Jeff I would like to point out that INVOKNANA did grow 91% in the quarter in U.S. I think that's pretty good. The markets consistently are growing about 7% I just looked at the trends and it’s very consistent for second and third quarter. As far as TRx's, we’re at 6.3% up from 6% in the second quarter, primary care is at 5.6% up from 5.3% and the endo at 13.1% is about the same as it was in the second quarter. So I think it’s doing very well.

Just as a follow-up, what I'm really referring to, when you look at the IMS data over the last two quarters or six months, there is a clear flattening off. Are you getting any feedback as to why that may be? I'm not talking about the year-on-year growth which is obviously very strong because the product's had a very strong ramp, but very much just the recent performance and what you're seeing there.

To give you sequential TRxs, so I think that's the most recent that we would have, and I'm also looking at the market growth for that is at 7%. So I think we're doing fine. And as Dominic said, it's a very low incident. It's 0.01 or 0.1 in our Phase III trials. So it’s very low.

Okay. Great. Thank you.

Next question?

And your next question is from Bob Hopkins of Bank of America. Please go ahead.

Thanks and good morning. Can you hear me okay?

Yes.

Hi, Bob. Good morning

Thanks and good morning. Gary, since we have you on the call I just have two quick questions for you. The first is a follow-up on the robotics side. I was just wondering if you can give us an indication of what announcement we're going to hear over the next couple of weeks. And then if you could also just give us a sense as to where you are with this collaboration with Google. You said it's in the development stage. Could you just give us some rough parameters of how you're thinking about commercialization? Is this one to two years? Two to three? Three to five? Just some rough sense there would be helpful. Thanks.

Thanks, Bob. So in terms of robotics, listen, I will leave the announcement to the new co of the company. They have some announcements that will be coming out in the next few weeks, so I'd like to leave the leader there to do it. As mentioned this is a partnership between ourselves and my partner, Andy Conrad at Google Life Sciences, so new company will make that announcement. In terms of the development stage, yes, we were in the phase where we are integrating right, our technology with the Google technology, right, in terms of from a systems engineering perspective, integrating informatics into the design of our robot. So we are looking, I would say you're on the earlier side of your range, right. I would say it's the next couple years. We'd obviously like to accelerate that, but we want to make sure that we stay true to our value proposition, which is we think what's available today is really the model that's more like the mainframe computer 50 years ago. We intend to go to the iPad version and that's what we want to launch. With a more integrated informatics diagnostics, right, that are available for the surgeon around the world as a lower cost to serve. So we think that it's better to do it right. There will be a lot of follow-on competitors that come in the next couple years that I think will be more big box players. That is clearly not our strategy. And we think this is an opportunity to be disruptive in a very unique partnership to create value for our customers, patients and also for the Johnson & Johnson shareholders.

Last and final question and then we'll have some final remarks by Dominic.

Thank you. Your final question is from Tony Butler of Guggenheim Partners. Please go ahead.

Yes. Thanks very much. I just wanted to, Gary, echo one of Bob's questions and that is simply around robotics. I'm very respectful of the reduced cost to serve. But the real question becomes in the end game outside of the intellectual capital the two companies put together and come up with a fix. The question really becomes is there enough capacity for capital expense from the customers in the future, as you alluded to earlier most of the big boxes are really in developed markets. But if you think about this globally which I'm sure you are, then the question becomes is there sufficient capital at institutions today, especially in China, et cetera, that can actually deploy a robotics technology in the future? And my last question really, Dominic, is back to M&A again, sorry. But it – I actually - you alluded to pharma and the partnerships you've created have been great. I think I actually would have assumed that the speed which those partnerships would occur would actually escalate in part because of your capital that you currently have, and because the landscape is changing, certainly especially true in oncology? Any commentary would be great? Thanks very much.

Robotics?

Yes. So thank you for the question. And listen, I think that question is an age old question that goes on which is, will there be enough capital to support innovation? I think the end of the day the answer is always yes. The other thing that I'll point out is, we don't believe that capital play here for our innovation is going to be $2 million per hospital. So we're going to provide a lot more flexibility in terms of that and also quite frankly depends on our go-to-market model, right, in terms of how we bring that to market. So I think you might find some unique ways in order to do that. We haven't quite decided on that at this point. But as mentioned we have decided in terms of our value proposition which will be a lower cost to serve, a smaller footprint and we do believe that if you produced innovation, right, that delivers meaningful outcomes and improvement for patients, there will be enough capital out there globally to support that.

Tony, with respect to M&A and pharma and your comment about the speed at which we can do partnerships and maybe you thought we would accelerate them, we're always actively involved in this space, not only in oncology, but in all the therapeutic areas that we operate in. And as you know we already have a pretty robust pipeline where we're going to be filing 10 new NMEs between now and 2015, some of those of course come from the various partnerships and licenses that we've done. So you'll continue to see us do that. I think accelerating those is something we always love to do, but we want to do the right deal with the right partner at the right value and getting the deal done right is probably more important.

Okay. Thanks, Dominic. Thanks, Gary.

Sure. You're welcome, Tony. Well, thanks everyone for tuning in today. Thanks, Louise and thanks, Gary, for giving us an update on our medical device business and strategies to accelerate growth. I'd just like to reiterate we're very pleased that we're able to announce a $10 billion share buyback program while we continue to actively look to put our financial strength to use to further accelerate our growth. So thanks again for tuning in today and have a very nice day. Bye-bye.